Cyprus bailout package may be half its economy

Written by Reuters | Nicosia | Updated: Jun 27 2012, 07:55am hrs
Cyprus, the fifth euro zone country to seek emergency funding from Europe, may need a bailout of up to 10 billion euros, over half the size of its economy, officials said on Tuesday.

The Mediterranean island, with a banking sector heavily exposed to debt-crippled Greece, said on Monday it was formally applying for help from the European Unions rescue funds. Cyprus is the euro zones third smallest economy but it joins Greece, Ireland, Portugal and Spain in seeking EU rescue funds to try and stay afloat, and is the latest sign that policymakers have failed to stop the debt crisis spreading.

European leaders will meet at a summit on Thursday and Friday, but they are not expected to come up with a lasting solution to the regions problems that have also sent Italys borrowing costs soaring.

Two euro zone officials said that a package of up to 10 billion euros was being considered for the 17.3-billion-euro Cyrpriot economy.

The exact number has not been decided yet. It was to be 6 billion for the state financing and 2 billion for the banks but that is optimistic it is more likely to be seven and three up to 10 billion euros in total, one euro zone official said. A second official confirmed the amount was likely to be up to 10 billion euros, a massive bill for Cyprus.

While the sum is easily within the range of the European Financial Stability Facility (EFSF) bailout fund, it may lead to demands for collateral or for private bondholders to take a write-down as they did in Greece.

Greeces second 130-billion-euros bailout is equal to about 60% of the countrys gross domestic product and private bondholders were asked to contribute to making debt servicing more manageable through a debt restructuring.