NICOSIA (Reuters) - Cyprus moved to the brink of a financial bailout on Monday, announcing emergency talks on the economy that may determine whether the country seeks aid from its EU partners or looks further afield.
The euro zone’s third-smallest economy needs to raise the equivalent of 10 percent of its GDP by June 30 to recapitalize its second largest bank, heavily exposed to debt-crippled Greece.
With its coffers emptying rapidly and hurtling towards an immovable deadline, the island suffered a further fiscal sovereign credit rating to junk status.
With a bailout widely viewed as all but inevitable, Cyprus has for weeks been trying to juggle its options between a bailout from Europe’s rescue funds, the temporary EFSF and the permanent ESM, or a bilateral loan from either Russia or China.
Government sources have told Reuters that President Demetris Christofias wanted to consult political leaders before taking a decision on where to borrow from, suggesting one was close.
They would meet on Tuesday afternoon, a press release from the presidency said on Monday.
If Cyprus - which assumes the rotating EU presidency on July 1 - signs up for the EU rescue program it will join the ranks of Greece, Ireland, Portugal and Spain, becoming by far the smallest EU state to receive aid.
But weekend trips by government officials to China suggested Cyprus was pulling out all the stops to avoid going to its EU partners.
In comments to the state broadcaster, Commerce, Industry and Tourism Minister Neoklis Sylikiotis confirmed discussions focused on a loan or a Chinese investment in the troubled lender, Cyprus Popular Bank.
“We have had some contacts... We have requested an answer in coming days,” Sylikiotis said.
Cyprus has displayed caution in going to its EU partners because of conditions attached to any aid.
It is fiercely protective of a corporate tax rate that is one of the lowest in the EU and, eight months before a general election, shows no appetite for the stringent spending cuts that any EU funding would tie it to.
“I think they want to avoid it (the EFSF) at least as the sole provider simply because they are afraid of the strings attached,” said political analyst Hubert Faustman.
It was unclear whether a loan from either country would be forthcoming, giving the Mediterranean island precious little leeway to rustle together 1.8 billion euros for Popular, hit by a writedown in its Greek sovereign debt holdings.
Officials say any aid via the EFSF would likely be restricted to the banking sector and not to broader budgetary requirements.
But in its report, Fitch said the recapitalization bill for Cypriot banks could potentially reach 4 billion euros. That amount, equivalent to 23 percent of GDP, also took into account rising non-performing loans from the domestic market, it said.
Fitch said it saw a heightened possibility of the Republic needing an EFSF bailout to recapitalize its banks, and a bilateral loan from the Russian federation to cover gross budgetary financing requirements until the end of 2013.
Reporting By Michele Kambas; Editing by John Stonestreet