The ratings agency cited the risk of a Greek exit from the eurozone , which would have devastating consequences for Cypriot banks. It also pointed to the already strained state of the government's finances and the limited access it has to capital markets.
"We need a bailout," said Marios Zachariadis, a professor of economics at the University of Cyprus. "Whether we request a bailout from the eurozone, or a direct loan from Russia or China, we definitely need one."
Cyprus is also reportedly considering a bilateral loan from Russia or China.
The nation has already borrowed from Russia and another loan would enable the government to avoid the politically unpopular austerity measures that an official EU bailout would entail, said Zachariadis. But he said a traditional EU bailout would be better since a steady stream of funds would boost confidence in the Cypriot economy.
Cyprus's woes stem from the exposure its banks have to Greece.
Banks in Cyprus have already lost an estimated 4 billion euros in the restructuring of Greek government debt. The sector is also on the hook for about 7 billion euros in loans to Greek banks, which would probably be written off if Greece exits the euro.
Taken together, this 11 billion euro exposure is equivalent to about 60% of Cyprus's gross domestic product, said Zachariadis.
"The concentration of risk that our banks undertook is reminiscent of the Wall Street story of a few years ago," he said.
Cyprus Popular Bank, the nation's largest lender, alone needs 1.8 billion euros.
The upside is that the amount of money Cyprus needs to shore up its banks, about 4 billion euros, is comparatively small. Just take a look at Spain, which is in the process of negotiating a bank bailout that could total up to 100 billion euros .
"These are not huge numbers for the EU, and somehow this makes it easier," said Zachariadis.
In addition, Zachariadis said Cypriots are relatively "compliant" and therefore unlikely to reject austerity. "This is what makes us more boring than the Greeks, but it also makes things easier," he quipped.
Source: CNN Money