By Constantine Callaghan
On the eve of Friday’s (June 29th) EU summit where it will assume the Union presidency, Cyprus won support from its eurozone partners and the IMF to help shore up the country’s banks after they were brought to their knees by heavy exposure to Greek debt.
Following the agreement on June 27th, Cypriot Finance Minister Vassos Shiarly said that the country’s exposure to Greece was “an unfortunate chapter in the economic history of Cyprus.”
The acceptance of a bailout, the total amount and precise conditions of which are still to be agreed, came after weeks of speculation and pressure and only days before Cyprus assumes the rotating EU presidency.
On June 25th, Cyprus’s economy was downgraded to junk status by the ratings agency Fitch; the third such agency to do so. Fitch suggested that the government may need as much as 6 billion euros to shore up its banks. Since 2011 the Mediterranean island has been shut out of international credit markets due to its junk credit rating.
In the wake of Fitch’s assessment, President Dimitris Christofias’s government applied for financial support, declaring that Cyprus had been subjected to “negative spill over effects through its financial sector, due to its large exposure in the Greek economy.”
By Saturday, the Mediterranean island needs not only to find 1.8 billion euros to recapitalise its second largest bank — Cyprus Popular Bank — but in an unexpected development, the country’s largest bank, Central Bank of Cyprus, said on Wednesday that it too needed “temporary capital support” estimated at 500m euros, bringing the total requirement to 2.3 billion euros.
Speaking to SETimes, George Georgiou, a senior official from the Central Bank of Cyprus, explained that the country’s largest bank backs the government’s decision to request financial support from either the European Financial Stability Facility or the European Stability Mechanism. But at the same time, Georgiou said that a bilateral loan from Europe would not exclude financial support from elsewhere.
Cyprus has looked to secure loans from China and Russia, hoping that it would help the island avoid what could be strict austerity measures and structural reform tied to a European bailout. In particular, the island would like to keep the 10% corporate tax rate.
The obvious candidate for a loan is Russia, who last December provided Nicosia with a 2.5 billion-euro loan. But in the wake of EU and IMF support for the country, Russian intervention appears increasingly unlikely.
On Wednesday, the Eurogroup announced that a programme for Cyprus would be implemented “addressing the financial, fiscal and structural challenges of the economy.” With the European bailout will come strict measures including “restructuring and downsizing” fiscal reforms and attempts to make Nicosia’s economy more competitive.
Georgiou told SETimes that an injection of capital into the banking sector from a European bailout would restore the ability to stimulate growth.
The Cypriot government said that no amounts have been discussed yet, but two eurozone officials told Reuters that the total bailout figure could be up to 10 billion euros, more than half of Cyprus’s annual GDP.