S&P Warns Risk of Cyprus Default 'Material and Rising'

Nicosia, Cyprus
Staton R. Winter | Bloomberg | Getty Images
Nicosia, Cyprus

Cyprus faces a "material and rising risk" of defaulting on its sovereign debt, especially if the euro zone and International Monetary Fund do not come up with aid, rating agency Standard & Poor's said on Wednesday.

Crippled by its exposure to Greece, Cyprus needs 17 billion euros ($23 billion) from the euro zone to recapitalize its banks and to finance the government over the next three years.

S&P's comments come as the island gears up for a runoff presidential election on Sunday pitting a conservative in favour of a swift bailout deal against a Communist-backed candidate who supports a bailout but with fewer harsh austerity measures.

"We see at least a one-in-three chance that we could lower the Cyprus sovereign ratings again in 2013, for example if official financial assistance from the (European bailout fund) ESM and/or IMF is not forthcoming, leaving the Cypriot authorities few choices apart from to restructure its financial obligations," S&P's head of EMEA sovereign ratings Moritz Kraemer said in a report.

"We could also lower the ratings if we believe the (Cypriot) authorities are not able to fulfill the conditions that would be attached to an official assistance program."

S&P currently rates Cyprus at CCC , well into non-investment grade "junk" bond territory, with a negative outlook.

(Read More: Question of Aiding Cyprus Puts Germany in a Bind)

Cyprus asked for international aid eight months ago after its banks suffered huge losses on exposure to a restructuring of Greek sovereign debt and due to difficulties in accessing international capital markets shut to it because of fiscal slippage since mid-2011.

Its bid for aid has been delayed, however, by an incumbent leftist government slow to negotiate bailout terms, by worries among lenders over the island assuming a mountain of debt it may not be able to afford to repay, and by German charges that Cypriots are lax on tackling money-laundering.