Struggling eurozone member Cyprus has been ranked two notches lower at CCC+ near junk status by the rating agency Standard and Poors. Germany says it can help - but only if Nicosia adopts a "real" austerity budget.
The agency S&P said it saw a "considerable and rising" risk that Cyprus could default on its sovereign debt. It cited recessionary trends on the Mediterranean island and its exposure via Greek banks to Greece's crushing debt crisis.
It also warned that Cyprus' outlook remained negative, suggesting that further downgrades were possible, should its government be forced to rescue Cypriot banks.
"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," the agency said.
Bailout talks sluggish
The International Monetary Fund (IMF) had warned on Thursday that Cypriot talks with the IMF and European partners on a potential bailout were sluggish.
"We do not expect discussions to conclude this year," said an IMF spokesman in Washington. Finance ministers of the so-called Euro Group have scheduled their next consultations on Cyprus' fate for 21 January.
German Foreign Minister Guido Westerwelle told German ARD public television on Friday that Europe was ready to assist, but only went Cyprus adopted a "real austerity budget" and "real structural reforms" with "serious" intent.
A German board member of the European Central Bank (ECB), Jörg Asmussen, also told ARD that debt relief for Cyprus was "currently not a topic."
"We will receive the ultimate figures only in mid-January," Asmussen said. "Then one will have to consider all measures to make the debt level tolerable."
Cypriot economic shrinkage
On Wednesday, Cyprus' lawmakers approved a 2013 state budget containing spending cuts and tax increases.
Cyprus' 17.5 billion euro ($23 billion) economy is projected to shrink by 3.5 percent of gross domestic product (GDP) next year. Unemployment is forecast to reach 13.7 percent.
Nicosia asked for a bailout in June when its two largest Greek-exposed banks asked for assistance after failing to meet EU capital buffer criteria.
ipj/rg (AFP, AP, dpa, dapd)
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