Cyprus has formally requested financial assistance from the euro area's bailout funds to shore up its banks struggling from exposure to debt-ridden Greece, the government of eurozone's third-smallest economy said in a statement on Monday.
"The government of the Republic of Cyprus has today informed the appropriate European authorities of its decision to submit to euro area member states a request of financial assistance" either from the European Financial Stability Facility or its successor, the European Stability Mechanism, the Cyprus government said in a statement
"The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spill-over effects through its financial sector, due to its large exposure in the Greek economy," the statement added.
Although the statement did not specify the amount involved, it is understood that Cyprus Popular Bank, the country's second largest lender, faces a deadline to find at least EUR 1.8 billion, equivalent to about 10 percent of the nation's GDP, for recapitalization at the end of June.
Monday's request for financial assistance makes Cyprus the fifth eurozone country to seek a bailout loan from its partners in the single currency union to address its financial woes. Fellow eurozone nations like Greece, Ireland and Portugal have already availed such loans, while Spain formally requested a bailout from the European Union earlier on Monday to shore up its ailing banking sector.
Earlier on Monday, Fitch Ratings lowered the credit ratings of Cyprus to junk status, citing an increase in the capital required to be injected into the country's banks. The agency maintained the outlook at 'Negative.'
The agency said the downgrade reflected a sharp increase in the capital Cypriot banks will require, compared to its previous estimate. The increase is principally due to Greek corporate and households exposures of the largest three banks, Bank of Cyprus, Cyprus Popular Bank and Hellenic Bank, and to a lesser degree the expected deterioration in their domestic asset quality.
According to Fitch's preliminary estimates, in the event of a Greek exit from the eurozone, Cypriot banks could require significantly more capital than currently incorporated into Cyprus's 'BB+' sovereign ratings. The agency found the uncertainty surrounding the outlook for Greece as a material negative factor in the rating and outlook for Cyprus.
Noting that Cyprus' medium-term economic outlook is weak, the agency said the nation's economy is expected to stagnate this year and the next. It has also predicted that Cyprus' economy will recover only slowly due to macroeconomic imbalances and persisting headwinds from the eurozone and Greek crises.
Moody's Investors Service, another rating agency, had cut government bond ratings of Cyprus by a notch in March to 'Ba1' with a 'negative outlook', citing the possibility of the government providing support to banks due to their exposure to Greek debt.
Incidentally, Cyprus' economy remained in recession in the first quarter of 2012, with gross domestic product falling 0.3 percent. It was the third consecutive decline in the country's GDP.
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