Credit ratings agency S&P lowered Lebanon's debt grade a notch on Friday, but warned a further cut is possible should the government miss a payment to creditors.
S&P Global Ratings lowered the sovereign credit rating to CC from CCC with a negative outlook, the agency said in a statement.
Lebanon's debt burden had been among the largest in the world for some time but a liquidity crunch has brought the crisis home and banks have imposed tough restrictions on dollar withdrawals.
The government in Beirut faces a $1.2 billion debt payment on Eurobonds that reach maturity on March 9.
"We are lowering our ratings because we believe restructuring or nonpayment of Lebanon's government debt is virtually certain, regardless of the specific time to default," S&P said in a statement, citing "severe fiscal, external, and political pressures."
The rating could be cut further to selective default or 'SD,' "if the government signals that it will undertake a distressed exchange offer or if it misses its next interest or principal payment."
Lebanon's sovereign debt rating slid into junk territory long ago, but investor confidence has fallen further since a wave of protests erupted in October in a major challenge to the political establishment.
The Lebanese pound, which has been pegged to the dollar since 1997, has plummeted on the parallel market, further crippling the import-dependent economy.
Prime Minister Hassan Diab met this week with a delegation from the International Monetary Fund to discuss how to tackle the country's spiraling economic crisis.
The Lebanese premier asked the Washington-based crisis lender for advice, but has yet to ask for financial assistance.
S&P said that may reflect the "political unwillingness to accept harsh adjustment policies such as exchange rate liberalization."
Economists, investors and government officials are divided over what to do with the March bond payment.
Parliament speaker Nabih Berri, an influential player in a country where political and economic power are mostly held by the same elite, advocated debt restructuring.
S&P said that would be "tantamount to default."
Many analysts have argued that paying the bonds next month would only deepen the crisis by putting further strain on foreign currency reserves.
