S&P Cuts Rating on Cyprus by One Notch to Triple-C

A woman carrying her baby withdraws money at an ATM machine in the Mediterranean city of Limassol.
Barbara Laborde | AFP | Getty Images
A woman carrying her baby withdraws money at an ATM machine in the Mediterranean city of Limassol.

Standard & Poor's cut the sovereign long-term foreign currency credit rating on Cyprus deeper into junk status on Thursday, lowering the rating to CCC from CCC-plus as the country struggles with a banking crisis.

The European Union gave Cyprus until Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency bloc.

A bailout deal brokered between Cypriot President Nicos Anastasiades and the EU last weekend in Brussels was unanimously rejected by the Mediterranean island nation's parliament. The deal would have imposed a tax on Cypriot deposit accounts to raise 5.8 billion euros ($7.5 billion) that the EU required in return for a 10 billion euro ($13 billion) bailout.

(Read More: Scenes From the Cyprus Crisis )

"We believe that in the absence of a credible alternative source of capital and fiscal financing, the risk of a disorderly credit event is rising," S&P said in its statement.

Jeroen Dijsselblem, the head of the Eurogroup, which comprises the finance ministers of countries whose currency is the euro, on Thursday urged Cyprus to present a new proposal on the bailout.

The Cypriot government proposed to parliament on Thursday the creation of a "solidarity fund" based on revenues from hydrocarbon exploitation, bonds and other assets to help it raise the billions of euros needed to clinch an EU bailout.

(Read More: Russia Aid Not Looking Likely for Cyprus: Europgroup Chief)

"We expect that over the next few days Cyprus and the Eurogroup or other partners could reach an alternative agreement," S&P said before warning that there is the risk of renewed capital flight that would create the need for implementing capital controls.

Cyprus is currently rated Caa3 with a negative outlook by Moody's Investors Service and B by Fitch Ratings, also with a negative outlook. S&P also has a negative outlook on its new rating.

(Read More: Allow Bad Cyprus Banks to Fail, Restructure: Banking Expert)

The European Central Bank has provided a liquidity lifeline, allowing Cyprus' banks to operate. However, that lifeline known as Emergency Liquidity Assistance (ELA), will be cut on Monday if no new deal is in place.

If the ELA is cut and the Cypriot banks are unable to operate, large deposits could be wiped out. One senior EU official told Reuters this would probably force the country to abandon the euro.