Cyprus default risk is real: S&P

A key player behind bond market runs on Greek, Irish, Portuguese, Spanish and Italian debt over three years of eurozone debt doubts, the agency's assessment serves as a reminder that the crisis in the currency area is not yet over.

"We view the risk of a sovereign debt default as material and rising," S&P's experts wrote of the Cypriot government's prospects in a note to investors.

Negotiations have slowed on a June request from Nicosia for a bailout from eurozone partners, triggered in large part by Cypriot banking sector exposure to Greek debt write-downs.

No deal on a package likely to exceed 17 billion euros ($23 billion) is expected before mid-March at the very earliest.

Talks have been held up amid Cypriot resistance to privatisation demands from creditors, and problems with money-laundering blamed on Russian investors.

But mainly, the worry is that the bailout will push Cyprus' debt-to-output ratio beyond levels seen as sustainable by the International Monetary Fund.

S&P's said such a bailout could push the ratio above 140 percent of gross domestic product.

The agency said a bailout was politically controversial, not least because Cyprus' output represents just 0.2 percent of the whole eurozone economy.

It also warned that its experts believe that a September general election in Germany could throw parliamentary approval there into doubt.