Eurozone worries continue as Cyprus, the smallest EU member, is next in line to apply for financial assistance from the EU bailout fund.
An estimated sum of around 10 billion euros ($12.4 billion) is needed to sustain Cyprus’s troubled finances. It may seem surprising that, all of the sudden, Cyprus—which is considered a relatively stable small country known for its excellent vacation spots and beaches—is in trouble.
The underlining cause is that Cyprus placed most of its national investments into Greece before the crisis and, as a result, has lost around 74 percent of its investments in Greek government bond holdings. That effectively caused Cyprus’s credit rating to be cut to junk status by two of the major rating agencies.
Practically speaking, carrying the junk label on its rating means that Cyprus must pay 14 percent interest on new 10-year bonds—a price too high to pay for any country. It has, therefore, few options to look for money and one of them is the EU bailout fund.
“Certainly, I don’t take it as a given that we will negotiate our induction into the support mechanism. But I don’t want to exclude it entirely,” said Dimitris Christofias who has been Cyprus’s president since 2008.
The most affected of the banks is the Cyprus Popular Bank, which invested heavily in Greek bonds and has suffered great losses as a result.
“Cyprus is starting to feel the effects of the Greek crisis and may have no other recourse but to ask for European aid,” Alex Apostolides, an economics professor at Nicosia’s European University, told the Wall Street Journal. “There has been a narrowing of all other options that were available, to the point where going to the EFSF [European Financial Stability Facility] looks increasingly likely, almost inevitable,” he added.
