Cyprus EU bailout bid accepted, IMF involved

NICOSIA Thu Jun 28, 2012 2:41am IST

(L-R) Italy's Prime Minister Mario Monti, Estonia's Prime Minister Andrus Ansip, Cyprus' President Demetris Christofias and Slovenia's Prime Minister Janez Jansa attend a European Union leaders summit in Brussels March 2, 2012 . REUTERS/Francois Lenoir

(L-R) Italy's Prime Minister Mario Monti, Estonia's Prime Minister Andrus Ansip, Cyprus' President Demetris Christofias and Slovenia's Prime Minister Janez Jansa attend a European Union leaders summit in Brussels March 2, 2012 .

Credit: Reuters/Francois Lenoir

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NICOSIA (Reuters) - Cyprus won support from its euro zone partners on Wednesday for emergency funding to prop up its banks, crippled by their Greek debt holdings, in assistance which will probably include aid from the IMF.

The Mediterranean island, whose economy accounts for just 0.2 percent of the euro zone, is the fifth country to be forced to seek protection from the crisis enveloping the bloc.

Heavily exposed to debt-laden Greece, Cyprus's banks nudged the island into seeking emergency aid from its EU partners on Monday, after being shut out of international debt markets for over a year.

"We have suffered a huge loss which led to this economic predicament," Cypriot Finance Minister Vassos Shiarly told reporters.

"It is an unfortunate chapter in the economic history of Cyprus but we will overcome it."

It is unclear how much aid Cyprus may require, but two euro zone officials put the potential bailout bill as high as 10 billion euros -- more than half of Cyprus's gross domestic product of 17.3 billion euros.

Cypriot officials have declined to specify how much the island may need.

ECB Executive Board member Joerg Asmussen told Reuters on Wednesday that the "Troika" of lenders, which includes the International Monetary Fund, would probably start work on its mission to Cyprus in situ next Monday, July 2.

"In my view it should be a wide-reaching programme," he said. "Structural questions should be part of the EFSF/IMF programme," he added, referring to the European Financial Stability Facility bailout fund.

TROIKA GETS TO WORK

The European Commission, the European Central Bank and the International Monetary Fund would look at the banking sector 'taking into account the need for support was primarily due to the need to recapitalise the banks', minister Shiarly said.

"If those needs affect the fiscal requirements they will process anything else related to that," he said.

Euro zone finance ministers, which approved Cyprus's request for assistance along with that of Spain on Wednesday, said in a statement that any support would come with a programme of 'determined action' to ensure fiscal adjustment and structural reforms.

A May 30 report from the European Commission had urged Cyprus to do more to address deteriorating public finances.

Cyprus says it is already taking steps in that regard; its budget deficit this year is expected to fall to 2.5 percent from 6.3 percent in 2011, and it has submitted legislation to parliament for a balanced budget from 2014.

"We stand ready to join the efforts of our European partners to help Cyprus return to stable and sustainable economic growth and restore a solid financial sector," IMF Managing Director Christine Lagarde said.

TUMBLE FROM GRACE

Cyprus's exposure to Greece is disproportionately large compared to its economy. After taking the hit from Athens' official debt write down, it is also carrying the risks of some 23 billion euros in private-sector Greek debt.

Once a darling of credit ratings agencies but still a magnet for Russian offshore money, it has tumbled rapidly from grace.

It was shut out of international financial markets last year when its borrowing costs became prohibitive, forcing it to secure a 2.5 billion euros bilateral loan from Russia because it was worried at the strings attached to aid from its EU partners.

It was also hit by its worst peace-time disaster when a cargo of decaying munitions accidentally exploded, destroying its largest power station which impacted economic output.

The longer term outlook is slightly better. It discovered huge natural gas deposits offshore in 2011, but these are unlikely to come on stream for several years.

And the cost of supporting its banks jumped unexpectedly on Wednesday after its largest lender said it too needed state support to meet a regulatory shortfall in capital by June 30.

In addition to 1.8 billion euros to help recapitalise Popular Bank CPBC.CY, its second-largest lender, Bank of Cyprus BOC.CY, said it would need "temporary capital support" of about 500 million euros - effectively jacking up the nation's exposure to its banks to 2.3 billion euros.

(Reporting by Michele Kambas, additional reporting by Eero Vassinen; Editing by Ruth Pitchford)

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