S&P downgrades Cyprus on default fears

Ratings agency Standard & Poor's (S&P) on Friday downgraded Cyprus further to 'junk' status amid concerns that the country could default on its debts. It said that the two-notch downgrade to 'CCC+' is due to a "considerable and rising" risk that the country, one of the 17 EU countries that uses the euro, may default. It also maintains its negative outlook on the country, meaning that further downgrades are possible.

S&P said it went ahead with the downgrade because the Cypriot government is running out of money while uncertainty remains over the terms of a bailout that the country is trying to negotiate with international lenders and its euro partners. The rescue loans will be used to salvage the country's banks, which are heavily exposed to debt-crushed Greece.

"With the government's financing options increasingly limited coupled with what we view as the hesitant attitude of Cyprus' eurozone partners toward sharing the cost of a severe banking crisis we view the risk of a sovereign debt default as considerable and rising," S&P said.

Unable to borrow from international markets, the Cypriot government this week had to tap the pension funds of the country's top three state-owned companies to cover salaries and benefits up until March when it's hoped the first batch of bailout cash will arrive.

Germany's foreign minister Guido Westerwelle said on Friday that there are "appropriate aid mechanisms" for Cyprus, but that the country must first make "serious reforms" and achieve "real budget savings." "If Cyprus is prepared to go down that path, then Europe is prepared to help," Westerwelle told public TV-station ARD.

S&P said some progress has been made putting together the bailout with the "troika" of international creditors the European Commission, the European Central Bank and the International Monetary Fund. It also acknowledged the country's efforts to shore up public finances with this week's approval of the 2013 Budget that incorporates troika-mandated spending cuts totalling almost 6 percent of the country's USD 23.2-billion gross domestic product.

But the agency said it doubts whether state-owned companies have much more money to help the government pay its bills if a bailout deal isn't finalised by March, while presidential elections set for February could complicate matters.

S&P said it's still unclear how Cypriot banks whose assets total more than five times the country's economy will get the money needed to replenish depleted capital-buffers.