Cyprus on the brink of bail-out

With the Eurozone crisis, it seems as soon as one fire is put out another starts to burn.  No sooner has Spain secured agreement to a bailout than Cyprus suggests that it may have to do the same before the end of this month, both in respect of its banks and the territory’s general finances.


Cyprus is under huge pressure to apply for aid to salvage its second-largest lender, Cyprus Popular Bank, ahead of a 30^th June regulatory deadline. The bank is struggling financially due to its exposure to Greek debt, and has an estimated Euro 1.8 billion regulatory shortfall. Although this is not a large amount of money compared to the deficits being faced by banks in some other European jurisdictions, it is huge burden for tiny Cyprus, amounting to roughly 10% of GPD just to prop up this one bank.


Cyprus also has just over €2bn in short-term debt maturing next year, and at present it is difficult to see that it will be able to refinance this sum at acceptable rates.


Up until now, the Island has tried to avoid asking for a bailout, fearful that any such arrangement would come with many strings attached regarding austerity measures and, more seriously for its long term economic health, requirements to change its tax regime, which is currently one of the lowest in the European Union.  This would represent a significant threat to the offshore business which the Island conducts.


So keen is Cyprus to avoid interference in its tax regime, that it is rumoured to be attempting to negotiate with China or Russia to secure a private bailout without the need to resort to the EU, in the hope that the terms may be less onerous than would be applied by the EU.  It would not be the first time it has done this – the Island received a €2.5bn bilateral loan from Russia late last year, side-stepping its EU partners – but it is by no means clear that securing a second loan would be simple.


As most bailout discussions happen over weekends, to minimise market disruption, it is possible that the scenario could be discussed in earnest with the EU as early as next weekend.