Cyprus may need bailout
Cyprus may need bailout

Eurozone member Cyprus has conceded there is a serious possibility it may need an EU bailout to save its banking system, which is heavily exposed to Greek debt.

"The possibility of addressing the financial stability mechanism to support the banking system, due to the problems created by excessive exposure of banks to Greece, is a serious possibility," deputy Government spokesman Christos Christofides told reporters on Tuesday.

He said the government was looking at various ways to support the banks, which included finding a loan "from elsewhere".

Cyprus has already secured a 2.5 billion euro low-interest loan from Russia to cover its refinancing needs for this year.

The recession-hit economy is struggling with record unemployment, austerity measures and trying to rein in a deficit twice the EU accepted limit of three per cent of GDP.

The Government is committed to getting its bloated deficit to below three per cent this year from 6.4 per cent in 2011.

But it is reluctant to introduce deeper public cuts to drastically slash the deficit.

"Cyprus will not go to the support mechanism because it has a fiscal deficit of 2.5 or three per cent - if we finally apply. This must be crystal clear, it will be to support the banking system," Mr Christofides said.

But it is the exposure of its banks to toxic Greek debt that threatens to destabilise a relatively large financial system that the government has not got enough cash to prop up in its bid to recapitalise against a worsening of the euro crisis.

The government has already underwritten a 1.8 billion euro capital issue for the island's second largest bank, Popular, which is the most heavily exposed to Greek debt.

On Monday, the European Commission said it remains "confident" Cyprus can avoid resorting to a eurozone bailout if it keeps reforms on track.

But central bank Governor Panicos Demetriades told the Financial Times in an interview published on Sunday that Cyprus was nearing an EU bailout request to deal with the impact of the Greek crisis on its own banking system.

The West Australian

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