Cyprus applies for EU rescue loan
By Sarah Collins | Tuesday 26 June 2012
Cyprus has become the fifth eurozone member - and eighth EU state - to seek a rescue loan. In a statement, the government linked the request to the severe losses borne by Cypriot banks after a €206 billion Greek bond swap wiped more than half the value off their holdings of Greek sovereign debt. “The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spillover effects through its financial sector, due to its large exposure to the Greek economy,” a statement from the Cypriot government said, on 25 June.
The request came ahead of a 30 June deadline to recapitalise the country’s banks, and the same day as Spain formally applied for an EU aid package of up to €100 billion for its ailing banking sector - a bailout Cyprus is hoping to emulate. Bank-specific loans provide for more intrusive financial supervision and bank restructuring but make no explicit link between aid payments and EU debt and deficit targets.
The Cypriot government said that it had informed EU authorities about its intention to tap either of the eurozone’s two rescue funds - the European Financial Stability Facility, which part-funds the Irish, Greek and Portuguese bailouts, or the European Stability Mechanism, which is due to come into force on 9 July. Eurogroup head Jean-Claude Juncker said finance ministers will “swiftly examine the request” but that conditions attached to the aid would “address the main challenges of Cyprus’ economy, primarily those of the financial sector”. They will likely meet this week, before a summit of EU leaders begins, on 28 June.
Cyprus, which is to assume the EU’s six-monthly rotating Presidency on 1 July, needs at least €2.5 billion to shore up Cyprus Popular Bank (also known as Marfin or Laiki Bank), which has to meet an end of June recapitalisation deadline imposed by the EU’s banking watchdog, the European Banking Authority, last year. The bank needs to meet an emergency 9% capital ratio imposed on Europe’s largest lenders to help them guard against future losses.
Government sources say that they are still in negotiations with both Russia and China on a bilateral loan to help reduce the cost to the EU. Cyprus received a first, €2.5 billion loan from Russia after it was shut out of European financial markets last year. Fitch Ratings, the last of the big three agencies to junk Nicosia’s credit score, on 25 June, said the government could need as much as €4 billion - 23% of the country’s GDP - to cover Greek exposures in the country’s largest banks: Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank.
The government also needs to finance a deficit that rose to 6.3% of GDP last year - twice the EU’s limit - and pay down a debt pile that spiked to 71.6% last year and is continuing to rise. Cypriot banks have €21.8 billion in outstanding loans to the Greek private sector and hold €1.7 billion in Greek sovereign and bank bonds - figures which outstrip the country’s GDP.