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FACTDROP: Cyprus requests eurozone bailout


Cyprus requests eurozone bailout

Πηγή: FT
By James Wilson, Daniel Dombey and Peter Spiegel,
June 25 2012

Cyprus has become the fifth eurozone country to seek an international bailout amid mounting economic problems and fresh challenges for its banks after a credit-rating agency downgrade.

Bowing to eurozone pressure, the cash-strapped government of President Demetris Christofias said it had asked for help, just days before a deadline to recapitalise one of the country’s largest banks.

“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 in the Greek economy,” the government said in a statement on Monday.

Cyprus has been locked out of capital markets for more than a year and had been seeking further help from Russia which has already lent the island €2.5bn.

The close relationship between Moscow and Nicosia, which takes over the EU’s rotating presidency on July 1, has prompted some concern elsewhere in the EU.

Britain had considered making a bilateral loan to Cyprus because of its close ties to Cyprus and in view of the strategically important British military base on the island, but decided against it.

Some Cypriot economists say the country could need as much as €10bn to cover the banking sector’s exposure to Greek private sector debt and other needs as well as the capitalisation requirements of Cyprus Popular Bank, the country’s second-biggest lender. The government has more than €2bn in debt coming due next year.

“This is long overdue” said Stelios Platis, a prominent Cypriot economist. “The delay going to the EFSF (the eurozone rescue fund) was damaging for Cyprus and the banking sector … We have to contain the spillover effect from Greece.”

Fitch’s decision to cut Cyprus’ sovereign rating to “junk” status on Monday meant the country lost its investment grade status with all three of the largest rating agencies, highlighting the narrowing options for Mr Christofias’ government.

Eurozone officials have made clear that a Cypriot request for assistance would almost certainly have to mean the Christofias government agreeing to a wide-ranging package of reforms for the economy.

Cyprus had wanted aid solely to recapitalise the country’s troubled banks, with fewer structural reform conditions – akin to the aid being sought by Spain, which on Monday formally requested up to €100bn for its financial sector. However, officials in Brussels are said to be less impressed with Cypriot reforms than with Madrid’s fiscal consolidation efforts and the government’s statement requesting help suggested Cyprus was reconciled to a full bailout.

Cyprus’ banks have been hobbled by their extensive exposure to the Greek economy and the need to writedown holdings of Greek sovereign bonds. Cyprus Popular Bank, the island’s second-biggest lender, needs a €1.8bn recapitalisation by June 30 to meet EU bank capital rules.

Aggravating Cypriot banks’ challenges, the Fitch downgrade forces the European Central Bank to stop accepting Cypriot government bonds as collateral. Any banks that have borrowed from the ECB using such collateral will now have to find alternative assets to pledge or, in the case of Cypriot banks, seek temporary aid – so-called “emergency liquidity assistance” – from the country’s own central bank. Cypriot banks are already thought to be getting several billions euros of ELA.

The ECB can still accept government bonds as collateral as long as they are rated as investment grade by at least one agency, but this is not the case with Cyprus.Once Cyprus formally negotiates a eurozone bailout it is likely the ECB’s governing council would agree to waive these collateral rules, as has already happened for Greece, Ireland and Portugal, which have already sought eurozone financial help.

Fitch said Cyprus’s banks could still need up to €4bn in fresh capital on top of the amount needed for Popular Bank. That was a sum equivalent to about 23 per cent of Cyprus’ gross domestic product, the agency said, and was likely to have to come from the government.

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