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Cyprus, like all other Eurozone countries, has been struggling with debt and recession. However, due to the recent crisis in Greece it is looking more and more likely that Cyprus will be the next country requesting a bailout from the Eurozone, like Greece, Portugal and the Republic of Ireland have before them.
Cyprus has a total of 23 billion euros (US$29 billion) tied up in the Greek financial crisis. The second largest lender in Cyprus, Cyprus Popular Bank, lost 1.8 billion euro (US$2.2 billion) in Greek investments. The Cypriot government has since underwritten the 1.8 billion euro equity issue to help the bank raise capital from other investors, but if the bank is unable to raise the money from other investors by June 30, 2012, the government will have to put up the funds itself – an amount equal to a tenth of the Cypriot economy.
Talks about Greece leaving the euro currency are also making Cyprus more nervous. If Greece leaves the euro they will most likely switch back to the drachma. However, Greece will no longer have the advantage of other countries to appreciate the value of their currency even though they have a bad economy, meaning the drachma will be severely devalued in relation to the euro.
This devaluation will cause Greece to default on their loans to other countries including not only the bailout to the Eurozone, but also to Cyprus. President Demetris Christofias stated, “[Greece leaving the Eurozone and the euro currency] is something I hope will never happen.”
Cyprus and its banks have not been able to borrow on international markets since June of 2011 after two of the world’s top three credit raters gave Cyprus a junk status.
Since then Cyprus managed to borrow 2.5 billion euros (US$3.1 billion) from Russia which it has used to survive for the past year. Cyprus is trying to find another independent investor or country to loan them the 1.8 billion they need to save Cyprus Popular Bank and their economy. According to the Telegraph, Cyprus is in talks with China for another loan and possibly another undisclosed investor as well.
The European Commission has recommended that Cyprus make significant changes to its economy. Some of these changes include fixing its public finances, recapitalizing its banks, reforming labor and service markets, revitalizing the energy sector, updating education policy, and correcting pension and healthcare systems. Cyprus will release a new plan that will hopefully help them reach their deficit goal of 2.5% of GDP this year. Cyprus also hopes to keep its low 10% corporate tax to encourage financial investments.
If Cyprus is unable to receive another investment from an independent nation or investor or Greece leaves the euro, it will need to request a bailout from the Eurozone.