Bankrupt Cyprus Applies for EU Bailout

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Cypriot President Demetris Christofias

The Cypriot government has issued a statement confirming that it has officially made an EU bailout bid, citing heavy exposure to debt-stricken Greece. This makes it the fifth state within the currency union to ask for help.

The request comes just days before a deadline to recapitalize 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's statement said.

Government spokesman Stefanos Stefanou wouldn't reveal how much Cyprus would ask for, saying the amount is subject to negotiations. The 27 EU leaders are meeting in Brussels on Thursday and Friday, where the subject will be discussed.

Analysts estimate the sum is likely be around €5 billion ($6.2 billion), but could be as high as €10 billion ($12.5 billion). It is a fraction of the bailouts given to other EU countries, with the latest sufferer Spain asking for as much as €100 billion ($125 billion) for its banks.

Earlier, US ratings agency Fitch downgraded Cyprus to "junk" status. The move was prompted by the amount of rescue money that would be needed to bail out its Greece-exposed banks. The ratings agency estimated that the country will need another €4 billion to recapitalize its banking sector.

The government spokesman said Monday that Cyprus would continue negotiations for another possible loan from a country outside the EU, such as Russia or China. "One doesn't preclude the other," Stefanou told AP. "Our efforts to secure a bilateral loan will continue."

However, Cypriot Finance Minister Vassos Chiarly recently said he would prefer eurozone assistance to aid from Russia, which has already given Cyprus a €2.5 billion loan.

The island nation joined the eurozone in 2004 and began using the common currency four years later.

The eurozone crisis has reached a tipping point, especially in the case of Cyprus, says crisis researcher Jerome Roos. “The mutual dependence of banks and states on one another has reached the point where the state is no longer capable of propping up its own banks, and the banks are no longer capable of propping up their own government,” he told RT.

“So basically what needs to happen is that external forces need to come in to prop up the Cypriot government so it can continue bailing out its own banks.”

If the Cypriot government were to continue bailing out its banks without external help, its credit rating would go so far down that it would lose access to foreign credit markets, Roos explained.

One of the main threats to Europe’s economic stability are the big banks, which have become too reliant on rescue. “The banks have been taking enormous risks knowing that if they take losses, if something goes wrong, if the fire spreads, they’ll be bailed out eventually. It’s a moral hazard issue.”

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