Rating firm Moody's said Friday it would review Cyprus for a possible downgrade, citing dragging bailout talks with international lenders on an aid package.
Just five weeks after its last ratings cut, Moody's said the review on Cyprus's B3 government bond rating was due to rising liquidity risks for the eurozone country, closely linked to debt-crippled Greece.
"The slow pace of negotiations with the troika and the resulting uncertainty regarding the likelihood and timing of a support package which raises liquidity risks" was a key trigger for the review, Moody's said in a statement.
The second factor was signs that Cyprus's budget deficit "will be significantly larger than expected."
"The key difference between the drivers underlying today's rating action and Moody's previous actions on Cyprus is the increase in the country's liquidity risk in a short period of time," it said.
Moody's chopped its grade for Cyprus's debt by three notches on October 8 to B3, citing the impact of the meltdown in the country's banks following Greece's financial crisis.
The rating firm noted that Cyprus had requested a European Union bailout in June, but negotiations only began in mid-November.
The so-called troika of international lenders -- the European Commission, the European Central Bank and the International Monetary Fund -- are trying to thrash out with the Cypriot authorities the extent of public-sector cuts required in return for financial aid.
"Given that politically controversial measures such as significant changes in the structure of public expenditures... and privatizations are high priorities for the Troika, Moody's points to the risk that negotiations could potentially be prolonged," the firm said.
In particular, it said, the fact that Cyprus's presidential election is scheduled February 17 significantly raised the risk of a delay in reaching a deal on the rescue program and disbursement of aid until late in the first quarter of 2013.
Moody's said Cyprus's rating could be downgraded if there is evidence that the government's access to short-term funding would not be enough to meet its funding needs or if it fails to reach a deal with the troika "in a timely fashion."
The rating also could be lowered if a troika agreement includes much larger recapitalization needs for the embattled bank sector than what Moody's currently estimates.
Cyprus has been unable to borrow from international markets since last year when credit rating agencies lowered its sovereign rating to junk status.