The rating agency cut its long-term rating on Greek government debt to triple-C from B, leaving Europe’s weakest state just two notches above default. S&P blamed toxic bailout politics, saying strings appear likely to be attached to the next round of official funding for Greece in an event that would “result in one or more defaults under our criteria.”

The comment comes as Greece’s deteriorating finances threaten to vault the Continent into a new financial crisis. Greece is running out of money as its economy contracts under pressure from an austerity program started last year as a condition of a previous bailout. The country will need 153 billion euros ($220 billion) between now and 2014 just to roll over maturing debt, S&P said.

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But getting another round of funding will be even more painful this time round. Tight-fisted German policymakers want private investors to share in the pain – a notion that seems reasonable enough to everyone but European central bankers, who fear a restructuring of Greek debt will cause a global bank run like the one that followed the 2008 collapse of Lehman Brothers.

As adamant as the European Central Bank has been on that subject, recent comments from German officials suggest “some official creditors will see restructuring of commercial debt as a necessary condition to such additional funding,” S&P wrote. Any change that would result in less favorable terms to creditors would be viewed “as a de facto default,” the rating agency said.

The markets have begun treating a Greek default as a fait accompli, with the credit default swaps market reflecting a 73% probability that Greece will fall behind on payments within five years. Moody’s downgraded Greece last week, putting the odds of default over the next five years at 50-50.

Greece is expected to receive a new infusion of funding from the European Union and the International Monetary Fund next month. The sums in this second round could exceed $100 billion.

But officials haven’t agreed to terms, in part because bailout-phobic taxpayers in Germany and other so-called core European countries want to impose conditions that would recoup some costs from existing private sector bondholders.

The Germans’ take makes sense – it was the private sector that funded Greece’s spending spree, after all – but will do nothing to ease fears that we are headed for a replay of September 2008.

The ECB, which has taken on hundreds of billions of euros of Greek, Portuguese and Irish government debt as it props up those countries’ banks, has opposed any debt restructuring or maturity extension on the grounds that doing so could lead to a new funding crisis for Europe’s banks.

This dispute has only intensified in recent days, adding to reasons for the downgrade.

“Risks for the implementation of Greece’s EU/IMF borrowing program are rising,” S&P said, “given Greece’s increased financing needs and ongoing internal political disagreements surrounding the policy conditions required by Greece’s partners.”

S&P said it expects the EU to force Greece to accept debt maturity extensions at next week’s meeting of European ministers. But even if Europe punts next week, “the likelihood of such an action over the next year has increased materially,” S&P said.