blowback from Greece's own woes which stem from [ii] during a period in which the Cyprus has been running large fiscal and current account deficits, too. Confusing, no? Remember that a lot of Cypriot's residents are of Greek descent. Plus, with a significant financial services industry by Eastern Mediterranean standards, it was only natural that its banks lent to many Greek concerns, all the while stocking up on Greek sovereign bonds. Having gorged its citizens on credit as well in that post-EMU accession euphoria alike many troubled economies doesn't help. The end result? Cyprus was made quite vulnerable to Greek default and its subsequent haircuts, the endgame of which is nearly upon us:
Cyprus said that it urgently needed European financial aid to boost its banks' capital, a step that would make it the fifth euro-zone economy to seek help from the region's bailout funds. Cyprus Finance Minister Vassos Shiarly said that the country's need for an international bailout was "exceptionally urgent" in order for it to recapitalize its banks, and that the issue would need to be resolved by the end of the month.What Cyprus will be seeking is a deal similar to that of Spain: as few as possible IMF-style conditionalities on how governments run their affairs but more EU discretion on restoring their banks' soundness--which again points to Cyprus' situation being a banking crisis first and foremost. Further, it will be interesting to see how this divided nation split between those of Greek and Turkish descent cope with resorting to the EU poorhouse. Clearly, many of the current woes stem a lot from the Greek faction, so finger-pointing naturally inflames longstanding tensions between Greek and Turkish Cypriots who still don't get along for the most part.
According to several European officials, the size of any bailout would be unlikely to exceed €3 billion to €4 billion ($3.8 billion to $5 billion), a sum that wouldn't strain the resources of the euro zone's bailout funds. The economy of Cyprus—an island of 800,000 people—is 1/60th the size of the economy of Spain, which said over the weekend that it would seek European funds to recapitalize its own banks.