Cyprus's debt ratings have been downgraded to "default" after it announced it would delay paying back 1bn euros ($1.3bn; ?860m) of bonds.
Standard & Poor's lowered the island's credit ratings to "selective default" from CCC/C.
Cyprus will swap government bonds maturing in 2013 through to the first quarter of 2016 with new debt that matures at between five and 10 years.
The EU country has to do the bond swap to meet the terms of its bailout.
S&P said on Friday that the "exchange materially changes the terms of the affected debt and constitutes what we consider a distressed exchange".
"We view the extension of maturities without what we find to be adequate offsetting compensation as the exchange of new debt on less favourable terms to the existing debt."
Earlier this year, Cyprus secured a loan package worth 10bn euros from its EU partners and the International Monetary Fund. This included a tax on large deposits and thorough banking reform, which will raise 13bn euros.
An early proposal to raise money through a levy on all Cypriot bank deposits - including those below 100,000 euros - caused panic in financial markets and was quickly withdrawn.
Cyprus's rescue followed bailouts of Greece - twice - as well as Ireland, Portugal and Spain's banks.
After the bond swap, due on Monday, S&P said its debt rating was expected to rise back to CCC+. That still means the country's debt is considered speculative and "currently vulnerable and dependent on favourable business, financial and economic conditions to meet financial commitments".
But it added that the "government will still need to deal with" with 950m euros worth of short-term debt that is due soon.
That is the equivalent of 5% of the country's whole economy.
Source: http://www.bbc.co.uk/news/business-23117965
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