• EU council chief Van Rompuy (r) greets Cypriot President Christofias (Photo: consilium.europa.eu)

Cyprus becomes fifth eurozone country to seek bailout

26.06.12 @ 09:29

  1. By Valentina Pop
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BRUSSELS - Cyprus on Monday (25 June) became the fifth euro country to ask for help from the zone's bailout funds, hours after Spain formalised its request for a bank rescue.

"I welcome the formal application for financial assistance that I have received today from the Cypriot authorities," Eurogroup chief Jean-Claude Juncker said in a statement, adding that the eurozone finance ministers he presides over will respond "swiftly."

A "necessary policy conditionality" accompanying the bailout - meaning a reform plan - will be drafted by the EU commission and the European Central Bank.

"This will include measures that will address the main challenges of Cyprus' economy, primarily those of the financial sector and I expect that Cyprus will engage with strong determination in the required policy actions," he noted.

Earlier that day, Cyprus suffered another downgrade by Fitch ratings agency, which slashed its rating to BB+ - a "junk" category meaning investors need to take extra risk insurance against a possible Cypriot default.

It remains unclear whether it will be a full-blown bailout, as was the case for Ireland, Portugal and Greece, or limited to the banking sector, as with Spain.

The amount has not been specified either, but EU officials quoted by Reuters say it may be around €10 billion.

The Cypriot banking system has been severely hit by the Greek crisis and the associated debt-restructuring deal.

The tiny country has just four days to raise at least €1.8 billion - equivalent to about 10 percent of its domestic output - to meet an EU deadline in recapitalising Cyprus Popular Bank. The island's second largest lender saw its balance sheet swamped by bad Greek debt.

Cyprus had earlier angled for a bilateral loan from Russia, with which it has close economic ties.

Last year it received €2.5 billion loan from Moscow following an act of negligence, when 13 people were killed and almost a seventh of the country's GDP was wiped out in an explosion that destroyed the country's main power plant.

Spanish troubles

Meanwhile, Spain was the first country to ask for a partial bail-out from the eurozone bail-out funds, a novelty under the funds' new rules allowing for sectoral bail-outs.

But in the two weeks that passed since it first announced its intention to seek up to €100 billion in aid, Spain has seen its borrowing costs go above the seven-percent threshold considered bail-out territory.

This has fed speculation the Spanish state itself will need to be bailed out.

Adding to the problems, Moody's ratings agency on Monday downgraded by one to four notches 28 of Spain's 33 rated banks. The move comes after all three big ratings agencies slashed Spain's sovereign rating close to "junk."

At a summit on Thursday, EU leaders are set to look at ways of cutting the link between banks and government debt.

Many Spanish banks having amassed Spanish bonds on their books, while the government itself is dependent on the banks to lower its borrowing costs. But Germany so far has been opposing these moves.