Cyprus formally requests bailout

26th June 2012

The tiny Mediterranean Island has informed European authorities in Brussels that it needs funds for both for its banking sector, which has been heavily exposed to Greece's financial sector and for its budget deficit.

The announcement means Cyprus follows Greece, Ireland, Portugal and Spain into the arms of the emergency rescue funds set up for the 17-member currency bloc.

According to Reuters, it had just four days to raise at least 1.8 billion euros – equivalent to about 10 percent of its gross domestic product (GDP) – to meet a deadline set by European regulators to recapitalize Cyprus Popular Bank, its second largest lender which saw its balance sheet hurt by bad Greek debt.

Finance Minister Vassos Shiarly said the country would also seek enough money to help with its budget deficit. The full amount would be decided over the course of weeks.

"The amount will be as much as it may be needed to cover the recapitalization and fiscal requirements," he told Reuters. "These will be established after careful review during the next few weeks."

And with its purse strings emptying swiftly and heading towards an unruly deadline, the country with a population of one million suffered a further sovereign credit rating cut on Monday by Fitch, to the non-investment, or junk, BB+ grade. Cyprus has already been shut out from raising funds on capital markets with its bond yields well into double figures.

‘Contagion'

Hugh Pym, the BBC's chief economics correspondent described Cyprus' problems as "classic contagion."

"Its banks have lost large amounts on Greek government bonds. They are also facing big losses on loans made to businesses in Cyprus, which have been hard hit by the deep recession in neighbouring Greece, its biggest trading partner."

Meanwhile, Jean-Claude Juncker, the President of Eurogroup, has welcomed the formal application for financial assistance that he received from the Cypriot government.

The Eurogroup will now swiftly examine the request and will provide a formal response to Cyprus, he said in a statement late on Monday.

The Eurogroup is also expected to give a mandate to the European Commission, in liaison with the ECB, to negotiate the necessary policy conditionality, which shall accompany the financial assistance. "This will include measures that will address the main challenges of the Cyprus' economy, primarily those of the financial sector and I expect that Cyprus will engage with strong determination in the required policy actions," the statement added.

 

More on Mindful Money:

Should central banks be policy makers of last resort?

Was the Spanish bank bailout botched?

Can the rest of Europe stand up to Germany?

To receive our free daily newsletter sign up here.

The Financialist

Leave a Reply

Your email address will not be published. Required fields are marked *