Cyprus sought a financial lifeline from the euro area’s firewall funds, becoming the fifth of the euro’s 17 member states to request a bailout.
The goal 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,” the Cypriot government said yesterday in a statement distributed by the press and information office in Nicosia.
The request will be limited to support for Cypriot banks, which need less than 6 billion euros ($7.5 billion), in hopes of securing aid with fewer conditions than a full-fledged economic rescue package, according to a person familiar with the bailout talks. The government still believes it has a chance to get a loan from China or Russia, which it might use to improve its bargaining position, the person said, declining to be identified because the talks are confidential.
The east Mediterranean island, which takes over the European Union’s rotating presidency on July 1, follows Greece, Ireland, Portugal and Spain in seeking help to return to financial health. The third-smallest euro economy has been hurt by losses from Greece’s recession and debt restructuring.
Fitch Ratings Co. which downgraded Cyprus yesterday to below investment grade, cutting it to BB+ from BBB-, said that the recapitalization cost for the island’s banks is as much as 6 billion euros. “Cypriot banks will require substantial injections of capital in order to secure confidence in their financial viability,” Fitch said yesterday in a statement.
Following the Fitch move, Cyprus is now rated junk by all three major rating companies. It’s rated Ba3 by Moody’s Investors Service and a BB+ rating by Standard & Poor’s.
The International Monetary Fund, which has participated in previous euro-area rescue programs, has not received a financial aid request from Cyprus, Conny Lotze, a spokeswoman for the fund, said by e-mail. Cyprus plans to immediately send a formal letter of request to Luxembourg’s Jean-Claude Juncker, who heads the group of euro-area finance ministers.
Yesterday’s statement didn’t include a specific amount or discuss conditions for the aid being sought. The government said it has informed European authorities of its decision to submit a request for aid from the European Financial Stability Facility and its permanent successor, the European Stability Mechanism, which is due to come online July 9.
European finance ministers will “swiftly examine” the Cyprus request, Juncker said in an e-mailed statement yesterday.
Government spokesman Stefanos Stefanou said in a telephone interview that the government took the decision to file a rescue request yesterday at a council of ministers meeting.
“We have no indication about the possible terms of the rescue but we have to point out that we are not considered a case similar to Greece,” Stefanou said in a telephone interview, adding that Cyprus has already taken steps recommended by the European Commission to address economic imbalances.
Finance Minister Vassos Shiarly said via text message that following the submission of the aid request, European “experts” are expected to arrive to the island “soon,” though no date has been set.
The aid request from Cyprus comes after European finance ministers last week failed to agree on their strategy to contain the debt crisis, with creditor countries resisting leniency for Greece and playing down market concerns about the bailout of Spanish banks.
The euro-area officials offered no sign of granting the new Greek government extra time to meet deficit-cut targets and also quarreled over how to design a bank recapitalization for Spain that could be as large as 100 billion euros. Spain earlier yesterday formally requested a bailout for its banks and has begun negotiating details of how it can use the promised lifeline.
Europe’s deepening financial crisis has driven borrowing costs in Spain and Italy to euro-era records and has shut Cyprus out of markets since May 2011. The Cypriot government had previously said it would seek aid to recapitalize its banks, which suffered 4 billion euros in writedowns of Greek government debt. It also requested a bilateral loan from other nations, including Russia, in order to avoid resorting to a European rescue.
European authorities have pressed Cyprus to take a full bailout package worth as much as 10 billion euros, resisting the country’s attempt to limit any aid to its banking system, two officials said earlier this month.
This amount would cover both the 6 billion euros amount required by the Cypriot banks and the 2.2 billion euros in maturing debt next year.
The island’s government decided in May to underwrite the issue of 1.8 billion euros in preference shares of the second largest lender, Cyprus Popular Bank Pcl. Last year, the bank posted more than 3.6 billion euros in losses, mainly on Greek government debt writedowns.
Cyprus, which joined the EU in 2004 and the euro in 2008, defied European pressure to make a request before the Greek election on June 17, one of the EU officials said.
Finance Minister Shiarly said that Cyprus would bargain with the EU for more lenient terms accompanying an aid package. “We have to obtain financing to recapitalize the banks; this is unavoidable,” he said June 19. If euro-area cash comes with too many strings attached, Cyprus will have other options, he said. “Your negotiating position in talks with the European Union is much better when you have a bilateral loan already approved.”
Nezavisimaya Gazeta reported June 14, that Pavel Medvedev, an adviser to Bank Rossii Chairman Sergey Ignatiev, said he “wouldn’t be surprised” if Russia extended a second loan to Cyprus in as many years. Last December, Russia lent 2.5 billion euros to the island nation.