Cyprus looking for EU bailout of up to €10 billion

The small Mediterranean island, whose disproportionately large banking sector is heavily exposed to debt-crippled Greece, is formally applying for help from the EU's firewall funds.

NICOSIA // Cyprus, the fifth euro-zone member to seek emergency funding from Europe, may need a bailout of up to 10 billion euros (Dh45.8bn), over half the size of its economy, officials said yesterday.

The small Mediterranean island, whose disproportionately large banking sector is heavily exposed to debt-crippled Greece, said late on Monday it was formally applying for help from the EU's firewall funds.

That means more than a quarter of the 17 euro-zone members are now in the bloc's emergency ward, where Cyprus has joined Greece, Ireland, Portugal and Spain.

Cyprus has just four days to meet a deadline to raise at least 1.8bn euros - about 10 per cent of its 17.3bn euro GDP — to recapitalise Cyprus Popular Bank, its second-biggest lender.

The bank posted a record loss last year after taking a 76 per cent writedown on its Greek government bond holdings.

President Demetris Christofias, the EU's only communist leader, has been criticised by opposition parties for leaving the inevitable bailout request until the 11th hour. On July 1, Cyprus takes over the EU's rotating presidency from Denmark.

"It's a tragic coincidence," Cyprus's parliamentary speaker, Yiannakis Omirou, told state radio.

With a general election due next February, Mr Christofias has been deeply reluctant to seek EU aid, fearing Brussels would demand unpopular austerity measures like those foisted on Greece, Ireland and Portugal.

Educated in Soviet-era Moscow, he has repeatedly pledged any belt-tightening would not come at the expense of workers' salaries or benefits. His opponents accuse him of "reckless populism and ineptitude", while independent economists say Cyprus needs to slash spending on its "overpaid and overstaffed" civil service.

Rather than going cap-in-hand to Europe, Mr Christofias's government has tried - and is still trying — to secure bilateral loans from Russia or China. These would come with no demands for structural reforms but would, his critics say, have other undefined strings attached and rankle Cyprus's EU partners.

"Being viewed as Russia's satellite is a very high price to pay for avoiding unpopular [austerity] measures," a Cyprus Mail editorial said on Sunday.

The Cyprus government has not disclosed how much it will ask from Europe. But the finance minister, Vassos Shiarly, suggested his country, in addition to requesting aid to shore up its banking sector, would seek enough money to help with is budget deficit.

Cypriot newspapers said the amount could be anything up to 10bn euros - a figure unnamed European officials told Reuters was being considered in Brussels.

That sum would not affect the EU's economy, nor strain the bloc's emergency funds.

Cyprus has a population of just under a million and its economy is the third smallest in the euro zone after Malta and Estonia, accounting for just 0.2 per cent of the zone's GDP.

Spain, by contrast, is looking for 100bn euros to rescue its banks while Ireland secured an 85bn euro bailout in November 2010.

But a Cyprus bailout, however small, would deal another blow to the euro zone's credibility, while 10bn euros would be huge bill for the island.

Cyprus is particularly keen to safeguard its highly attractive 10 per cent corporate tax rate that underpins its large and lucrative services sector and has served as a magnet for thousands of foreign companies.

Moscow provided Cyprus with a 2.5bn euro loan last year and has a keen interest in maintaining the island as low-tax offshore financial centre for Russian businesses, who use it as a low-tax base to reinvest in Russia.