Cyprus joins the PIGS

As had been widely predicted, Cyprus has become the fifth eurozone country to seek a bail-out to shore up its ailing economy.   On a day when Fitch, one of the leading rating agencies, cut the Island’s credit to junk status, the writing was on the wall for the government in Nicosia, which yesterday confirmed that the knock on effects of the Greek debt crisis meant that the territory was now in deed of financial aid. 

Cypriot banks are heavily exposed both to Greek government bonds, which were heavily written down earlier this year, and to Greek private-sector debt, which will be badly hit if Greece exits the Euro.  

Market jitters regarding eurozone stability were not helped by Spain also formally requesting a banking rescue of up to €100 billion ahead of tomorrow’s summit, or by an announcement in Athens that Vassilis Rapanos, the man appointed to be the finance minister in Greece’s new coalition government, had quit on health grounds even before he had formally started the job.

Cyprus is one of the smallest of the 17 members of monetary union.  Although its expected bailout of several billion euros is relatively small compared to that required by the PIGS, it will be seen as symptomatic of the contagion of eurozone problems.  Foremost in the mind of the Cypriot negotiators will be to try to secure a bailout without having to agree to changes in taxation which may harm its international finance business.