Greek Cyprus nears bailout

ISTANBUL - Anatolia News Agency

A Greek Cypriot and European Union flag fly next to a building in the city center of Nicosia.

Eurozone member Greek Cyprus conceded that there is a serious possibility it may need an EU bailout to save its banking system, which is heavily exposed to Greek debt.

 “The possibility of addressing the financial stability mechanism to support the banking system, due to the problems created by excessive exposure of banks to Greece, is a serious possibility,” deputy government spokesman Christos Christofides told reporters.

He said the government was looking at various ways to support the banks, which included finding a loan “from elsewhere.” Greek Cyprus has already secured a 2.5 billion euro ($3.2 billion) low-interest loan from Russia to cover its refinancing needs for this year.

The recession-hit economy is struggling with record unemployment, austerity measures and trying to rein in a deficit twice the EU accepted limit of three percent of GDP.

Goal of reducing gap

The government is committed to getting its bloated deficit to below 3 percent this year from 6.4 percent in 2011. But it is reluctant to introduce deeper public cuts to drastically slash the deficit.
“(Greek) Cyprus will not go to the support mechanism because it has a fiscal deficit of 2.5 or three percent -- if we finally apply. This must be crystal clear, it will be to support the banking system,” said Christofides.

But it is the exposure of its banks to toxic Greek debt that threatens to destabilize a relatively large financial system that the government has not got enough cash to prop up in its bid to recapitalize against a worsening of the euro crisis.

The government has already underwritten a 1.8 billion euro capital issue for the island’s second largest bank, Popular, which is the most heavily exposed to Greek debt.

On June 4 the European Commission said it remains “confident” Greek Cyprus can avoid resorting to a eurozone bailout if it keeps reforms on track. But central bank Governor Panicos Demetriades told the Financial Times in an interview published on May 3 that Greek Cyprus was nearing an EU bailout request to deal with the impact of the Greek crisis on its own banking system.

Demetriades acknowledged that with an end-June deadline to find the money to recapitalize Popular Bank, the country was at “an important crunch time.” In its annual recommendations published last week, the commission said Greek Cyprus was facing “multi-dimensional challenges.” Estimated banks exposure to Greece exceeds 23 billion euros way above the 17 billion euro GDP Greek Cyprus generates.

Neither the government nor its commercial banks have been able to borrow from international money markets since last June due to the island’s debt being reduced to junk status by two of three international credit agencies. The economy contracted by 1.4 percent in the quarter of 2012 from a year earlier, according to official estimates. The dip marked the fourth successive quarter the economy has failed to grow. The finance ministry predicts that growth will contract another 0.5 percent in 2012, which is lower than the European Commission’s 0.8 percent forecast.