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Monday, Jun 25, 2012 6:15 PM UTC

Cyprus becomes next eurozone state to seek bailout

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Cyprus becomes next eurozone state to seek bailoutspeaks with during a meeting of eurozone finance ministers at the European Council building in Luxembourg on Thursday, June 21, 2012. As the cracks in the euro currency seem to grow even wider, finance ministers from the 17 countries that use the currency brainstorm Thursday on how to stabilize it. (AP Photo/Virginia Mayo)(Credit: Virginia Mayo)

NICOSIA, Cyprus (AP) — Cyprus on Monday became the fifth eurozone country to request financial aid from its partners in the European currency union as it struggles to shore up its banks, which took heavy losses on Greek debt.

The island nation’s government said in a terse statement that it required assistance following “negative spillover effects through its financial sector, due to its large exposure in the Greek economy.”

Government spokesman Stefanos Stefanou wouldn’t say how much Cyprus would ask from the European bailout fund, saying that the amount would be subject to negotiations in the coming days. The 27 leaders of the European Union will meet in Brussels on Thursday.

Analysts estimate the sum would likely be around €5 billion ($6.2 billion) but could reach €10 billion. That is a fraction of the bailouts given to the other countries — Spain has asked for as much as €100 billion for its banks.

Cyprus needs about €1.8 billion ($2.26 billion) – or about 10 percent of its gross domestic product – by a June 30 deadline to recapitalize its second largest lender, Cyprus Popular Bank. The lender is the most heavily exposed of the country’s banks to Greek government debt, which lost most of its value this year in a writedown.

Over the past weeks it became clear that the bank would not find the money from the private sector and would need to get it from the government, itself strapped for cash and unable to raise money in bond markets, where its borrowing rates are too high.

Stefanou said that despite its demand for European aid, the Cypriot government would continue negotiations for a possible loan from a country outside the EU, such as Russia or China.

“One doesn’t preclude the other,” Stefanou told the Associated Press. “Our efforts to secure a bilateral loan will continue.”

Finance Minister Vassos Shiarly said last week that clinching a loan from another country would strengthen Cyprus’ bargaining position with its eurozone partners in negotiating the terms that would come attached with a bailout loan.

“It could be a combination of sources of funding, on the understanding that the terms offered for these loans — either from the (EU bailout fund) or a bilateral loan are satisfactory and to the state’s benefit,” Shiarly said.

The Cypriot government has been apprehensive about turning solely to the EU bailout fund because of the tough spending cuts and tax increases that it may be forced to enact in exchange for the money, as debt-crushed Greece has had to.

The Cypriot economy has thrived on foreign businesses setting up shop in the island due to its low, 10 percent corporate tax rate which the government is keen to protect.

Greece, Ireland and Portugal, which have needed European bailouts to finance their government debt, are on strict austerity plans. Spain, which has demanded money to rescue its banks, is still negotiating the terms of its aid deal.

It’s not clear whether the Cyprus government will be able to fend off tough, EU-imposed austerity terms. A European Commission report last month said the island is “experiencing very serious macroeconomic imbalances which need to be urgently addressed,” including slashing spending on a bloated public sector and pension reform.

Earlier Monday, ratings agency Fitch became the third agency to downgrade Cyprus’ credit rating to junk status, estimating that the island will need another €4 billion ($5 billion) to recapitalize its banking sector. It cited the banks’ exposure to Greek debt as well as a rise in bad loans over the last year as the Cypriot economy has shrunk while unemployment has hit a record high of 10 percent.

Fitch predicts that Cyprus’ government debt will shoot above 100 percent of GDP, more than 12 points more than its previous estimate. The agency said that a government target to bring the budget deficit below 3 percent of GDP through another round of spending cuts and tax increases will be missed by as much as a percentage point.

Cypriot banks could suffer further losses from a possible Greek eurozone exit since they also hold an estimated €22 billion in Greek business and household loans.

Compounding the island’s banking troubles are projections that its economy will shrink by 1 percent of GDP this year.

___

Derek Gatopoulos in Athens contributed to this report.

More Menelaos Hadjicostis.

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