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03 June 2012

FT: Cyprus closer to seeking EU bailout

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Panicos Demetriades, Cyprus central bank governor, said it is increasingly likely that his country will seek European aid to deal with the impact of the Greek crisis on its own banking system.

Panicos Demetriades acknowledged that with a deadline of the end of this month to find at least €1.8 billion to recapitalise Cyprus Popular Bank, the country’s second largest lender, recourse to the EU was becoming more probable. “Clearly the closer you get to the deadline the less unlikely it becomes”, he said, adding that the country was facing “an important crunch time”.

Seeking emergency EU funds would be a bitter reversal for a country that until now has rejected European assistance, preferring instead to borrow from Russia, and which assumes the Presidency of the 27-nation bloc next month.

It also highlights continuing contagion from the Greek crisis, which has hit Cyprus particularly hard because the country’s banks have lost more than €3 billion in the writedown of Greek sovereign debt, and have more than €22 billion in outstanding loans to the Greek private sector. The latter dwarfs Cyprus’ gross domestic product of €18 billion.

Cyprus still hopes to avoid entering into a full economic adjustment programme, as Ireland, Portugal and Greece have done. Such a move would be widely seen at home as ceding fiscal sovereignty. But avoiding such outside controls is unlikely as EU officials have made clear any bailout funding, even if it is just to recapitalise banks, comes with the same “conditionality” as direct funding for sovereigns.

Full article (FT subscription required)

© Financial Times

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