S&P downgrades Cyprus

Cyprus's need for external financial help took on an added urgency on Wednesday evening, as New York-based S&P cut the country’s sovereign debt rating by three notches.

S&P cited the lack of an agreement with international creditors as a reason for the drop in status.

"The government has not yet negotiated a support package, while external and fiscal risks have risen," the agency said in a statement, adding that the prospect of a general election next year heaped further doubt as to whether a deal was possible.

Efforts to reach agreement have so far been hampered by public resistance to the terms of a proposed austerity package. The troika of lenders - The European Union, the European Central Bank and the International Monetary Fund - wants Cyprus to make 975 million euros ($1.28 billion) in spending cuts over three years.

"We believe that electoral considerations ahead of the presidential poll, scheduled for February of 2013, have contributed to policy inertia," S&P said.

Some optimism, some pessimism

Earlier in the day, Cypriot Finance Minister Vassos Shiarly said troika representatives were expected on the island next week. "I am sure we will have a positive conclusion to our request for aid," said Shiarly.

S&P added in its statement that Cyprus faced the prospect of a further downgrade. The country has been particularly hard-hit by the exposure of its banks - in desperate need of recapitalization - to Greek debt.

S&P warned that the risk of bad banking debt might result in a restructuring of the country’s finances, involving possible losses for investors. Cyprus asked international creditors for financial help in June, in response to the crisis within its banking sector.

rc/mz (AFP, AP, Reuters)