Monday, June 25, 2012

Cyprus today became the fifth member state to seek access to funds from the European Union’s bailout fund. The Cypriots join Spain, Ireland, Portugal, and neighbours Greece.

The move was triggered after the Cyprus Popular Bank, the nation’s second-largest bank, asked the government for recapitalisation. The bank has been hit hard, as has the wider Cypriot banking sector, by exposure to Greek economics. A Greek restructure of €200 billion in debt has caused the bank a €3.65 billion loss, and money is being lost on loans domestically and to Greek customers.

Cyprus Popular Bank chairman Michalis Sarris today revealed talks are also underway with China about a possible loan. Low taxes and regulation have attracted large amounts of foreign money to Cyprus, including much Russian money, producing a banking sector far larger than most nations that size. Russia and China are both viewed by officials as possibilities to seek loans from, and Russia last year agreed to a €2.5 billion loan to allow Cypriot financial restructuring.

The bailout request comes within days of Cypriot president Demetris Christofias giving an interview to Greek newspaper To Vima in which the EU’s only communist leader criticised international bailout policies. He complained the European Commission, European Central Bank, and International Monetary Fund acted like a “colonial force” by forcing nations receiving bailouts to agree to austerity measures.

Cyprus, due to take over the rotating EU presidency this week, hopes to limit the scope of its bailout to the banking sector. This is similar to Spain, and unlike the other bailed-out nations. Ratings agency Fitch today relegated Cyprus to “junk”, a reflection of how much money may be required.

“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,” read a government statement. Former President George Vasiliou, an economist, recently claimed markets were failing to recognise the differences between Greece and Cyprus: “Cyprus’s problems are the result of a Greek tragedy, and the ratings agencies are not distinguishing between Greek-speaking people, whether we are in Athens or Nicosia”.

Cyprus has recently discovered large natural gas fields, and unemployment at 10% is below the likes of Greece (22%) and Spain (24%). Cypriot officials predict a growth in the economy, although the International Monetary Fund expects a contraction. There are also concerns a Greek withdrawal from the euro would damage confidence in investors, but Vasiliou predicts “if Greece has to exit the euro, it will not be the end of Cyprus.”