House of Cards: Cyprus Asks For Bailout

House of Cards: Cyprus Asks For Bailout

The country of Cyprus has joined the members of Europe looking for a financial bailout. Cyprus asked for help from the European Financial Stability Facility or its successor, the European Stability Mechanism.

The second largest bank in Cyprus, Cyprus Popular Bank, has until the end of June to meet their $2.7 billion debt, and the capital required by other banks in Cyprus could reach up to $6 billion. Russia has already given Cyprus a $3.7 billion loan, but the finance minister of Cyprus, Vassos Chiarly, recently said he would prefer aid from Europe instead.

In the last 24 hours, Fitch, the influential ratings firm, downgraded Cyprus’s sovereign-credit rating to junk level. This is significant because the European Central Bank typically only allows other banks to borrow from it if the government bonds used as collateral are rated as investment grade.  Now that Fitch has downgraded the bonds to junk level, following the other two major ratings firms, Cyprus has no bonds for collateral to use in order to request assistance. The only way that Cyprus can request assistance from the ECB is to get the funds from their own central bank, which is why they are appealing for bailout money.

The proviso for Cyprus to get the money, of course, is to abide by the ECB’s guidelines and impose austerity measures. Portugal, Greece, and Ireland have all followed that pattern already. Cyprus wanted to get the assistance without imposing structural reforms, as Spain has, but officials of the ECB in Brussels believe that Cyprus has not been as responsible as Spain in trying austerity measures.

The crisis in Cyprus has been exacerbated by the financial debacle in Greece, which was articulated in the Cypriot request:

“The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spillover effects through its financial sector, due to its large exposure in the Greek economy.”

One of the issues facing Cyprus is that its banks hold over $30 billion of debt from the private sector in Greece  which would be forfeited if Greece bolts from the Euro.