International rating agency Standard & Poors on Thursday cut Cyprus' credit grade by one notch to BBB, or two notches above junk status, over concerns about its banks' exposure to Greece's debt and delays in shoring up its public finances.

The agency also kept the eurozone member on CreditWatch negative, meaning that further downgrades are possible.

The Finance Ministry explained that the reason for the S&P downgrade hinged on the increased risk that Cypriot banks may incur greater losses from a steeper drop in the value of their Greek sovereign bond holdings as part of a Greek debt restructuring.

The ministry said that S&P also pointed to delays in adopting further measures to shrink the country's large deficit.

This is the latest in successive credit downgrades by all three major credit ratings agencies for the small island of 1 million people in recent months. The main reason cited is the exposure to Greek sovereign debt by the country's two largest banks _ Bank of Cyprus and Marfin Popular Bank _ estimated at a combined (EURO)5 billion ($7.02 billion).

Moody's and Fitch ratings agencies have downgraded Cyprus to Baa1 and BBB respectively, while both have slapped the country with a negative outlook.

Bank of Cyprus and Marfin Popular said Thursday that they can cover needed capital buffers and are moving to boost their liquidity through a combination of measures including issuing convertible securities and profits.

The banks said a European Banking Authority stress test shows they require additional buffers of around (EURO)1.47 billion ($2.06 billion) and (EURO)2.1 billion ($2.95 billion) respectively.

The buffers are needed to raise banks' core Tier 1 capital ratio to at least 9 percent by the end of June under new EU rules aimed at staving off any debt crisis-induced credit crunch.

The Finance Ministry said according to S&P, key to Cyprus' credit rating stabilizing is for Cypriot banks to withstand steeper losses on their Greek bond holdings without resorting to state support.

Moreover, the (EURO)18 billion ($25.27 billion) Cyprus economy which S&P projects will see flat growth this year and next, mustn't deteriorate as a result of the situation in Greece.

The government also needs to push through a package of spending cuts and tax hikes worth (EURO)840 million ($1.17 billion) incorporated in the 2012 draft budget, despite opposition to a planned sales talks increase from 15 to 17 percent.

Finance Minister Kikis Kazamias said the measures are expected to shrink the deficit from the current 6.5 percent of gross domestic product to 2.8 percent next year.

"The government intends to take immediate and determined action and take all those necessary measures to achieve both fiscal consolidation as well as dealing with the financial system's challenges, in cooperation with the Central Bank," the Finance Ministry said in the statement.

The downgrades have impeded Cyprus from tapping international markets for loans as interest rates on its bonds have shot up dramatically. The island is turning to Russia for a (EURO)4.5 billion ($6.32 billion) loan with a 4.5 percent interest rate to meet its short-term fiscal needs and to refinance maturing debt.

The Finance Ministry said S&P regards the Russian loan and an ongoing search for offshore natural gas deposits as positives, but not enough to buttress fiscal consolidation.