Cyprus appears to be on the brink of asking for an international bail-out less than a month before it takes over the European Union's rotating presidency, after the country's finance minister said the situation was "urgent".
Speaking to journalists today, finance minister Vassos Shiarly said: "The issue is urgent. We know the recapitalisation of the banks must be completed by June 30, and there are a few days left." However, he said no final decision had been made on whether to seek aid, and did not put a figure on any potential rescue.
Going for a bail-out would make Cyprus the fifth member of the eurozone to request support, after Spain said on Saturday that it needed loans of up to €100bn to shore up its ailing banks. But unlike Spain, Shiarly suggested that any rescue package for Cyprus would not be limited to recapitalising the banking sector, instead taking the form of a "comprehensive" support package.
"When one applies to the support mechanism you take into account all the facts, including needs which may arise in the coming periods," he said. "Consequently it would be a comprehensive request covering not only present circumstances and the recapitalisation of the banks but also future needs."
Cyprus, which has been shut out of financial markets for a year, has been hit badly by its exposure to Greece's economic crisis, and already last year took a €2.5bn loan from Russia. It now needs to find €1.8bn to support its second biggest lender, Cyprus Popular Bank – a rescue that according to Reuters
will cost the equivalent of 10 per cent of the country's gross domestic product. The government also has €2.2bn of debt maturing next year.
Bailing out Cyprus should not prove too difficult for the EU's rescue funds, the European Financial Stability Facility and the European Stability Mechanism, as it accounts for only 0.2 per cent of the region's GDP.
On July 1, the day after the regulatory deadline for bank recapitalisation, Cyprus will take over the EU's rotating presidency from Denmark. Writing for PublicServiceEurope.com this month
, Joseph Daul, chairman of the centre-right European People's Party in the European Parliament, said "Europe's destiny will be in the hands of Cyprus" during its six-month term, which comes "at a crucial time for all of us".
He warned that if Greece – which is due to hold key elections on June 17 – was forced out of the eurozone, Cyprus would be "gravely affected", and added: "A domino effect, leading to the break-up of the eurozone, could cost us up to 9 per cent of our collective GDP. No country is an island any more. We are all interconnected."
The Cypriot economy is forecast to contract 0.8 per cent in 2012, while unemployment reached 10 per cent in April. The government aims to bring a deficit of 6.3 per cent of GDP in 2011 down to 2.5 per cent this year.