NICOSIA (Reuters) - Cyprus, the fifth euro zone country to seek emergency funding from Europe, may need a bailout that is more than half the size of its 17.3 billion euro economy, euro zone officials said on Tuesday even though the government declined to speculate on the amount.
The Mediterranean island, with a banking sector heavily exposed to debt-crippled Greece, said on Monday it was formally applying for help from the European Union’s rescue funds.
Cyprus is the euro zone’s third smallest economy but it joins Greece, Ireland, Portugal and Spain in seeking EU rescue funds to try to stay afloat, in the latest sign that policymakers have failed to prevent the debt crisis from spreading.
European leaders will meet at a summit on Thursday and Friday but they are not expected to come up with a lasting solution to the region’s problems that have also sent Italy’s borrowing costs soaring.
Work on determining exactly how much aid Cyprus needs will start next week when officials from the European Commission and the European Central Bank - and probably the IMF too - travel to Nicosia, one source involved in the plan told Reuters.
Vassos Shiarly, Cyprus’s finance minister, said the amount it may require for a bailout had not been determined. He said that any figures was “speculation” and that IMF involvement was still under discussion.
Two euro zone officials said that a package of up to 10 billion euros was being considered.
“Neither ourselves or the people we are talking to have raised the question of the amount,” Shiarly said. “This is a matter which will be determined during the process which will follow.
“No amount has ever been discussed,” Shiarly told reporters.
But one euro zone official said: “The exact number has not been decided yet. It was to be 6 billion for the state financing and 2 billion for the banks but that is optimistic - it is more likely to be seven and three - up to 10 billion euros in total.”
A second official confirmed the amount was likely to be up to 10 billion euros.
While the sum is easily within the range of the European Financial Stability Facility (EFSF) bailout fund, it may lead to demands for collateral or for private bondholders to take a write-down as they did in Greece.
Greece’s second, 130 billion euros bailout is equal to about 60 percent of the country’s gross domestic product and private bondholders were asked to contribute to making debt servicing more manageable through a debt restructuring.
The ECB announced on Tuesday that Cyprus government bonds were no longer eligible as collateral for refinancing operations after the downgrade of the island into speculative grade territory meant government securities no longer met the creditworthiness requirement.
Fitch became the last of the three ratings agencies to downgrade Cyprus to junk on Monday, just hours before the government announced it was resorting to a bailout.
For weeks, the country had kept markets guessing on whether it would resort to bilateral lending or seek aid from its EU partners.
The ECB measure is likely to be lifted if the bailout Cyprus has requested is approved.
Cyprus’ most urgent needs is to plug a 1.8 billion euro regulatory capital shortfall in its second largest lender by June 30.
“For Spain it’s about sectoral help for the banks. Cyprus is, in terms of volume, rather an island that we must help because it has been so handicapped by the Greek deficit at the moment,” Austrian Finance Minister Maria Fekter said.
Cyprus is thought to have applied to the EU for aid after attempts to secure loans from either China or Russia. Those efforts, however, will be ongoing.
“We will continue efforts to secure a bilateral loan, which can be used accordingly,” government spokesman Stefanos Stefanou said.
Cyprus has been shut out of international capital markets for more than a year, with yields on its 10-year benchmark bond at over 16 percent on Tuesday. Sidestepping EU aid earlier, it secured a 2.5 billion euro loan from Russia in late 2011.
That loan amount is expected to cover its needs in 2012, but not in 2013, when Cyprus has 2.25 billion euros in refinancing, including a euro medium term note (EMTN) redemption.
President Demetris Christofias, whose administration has been slammed by opposition for dragging its feet in both applying to the EU and taking measures earlier to shore up the island’s economy, bristled at a question from a journalist on Tuesday on whether “the Island was up for sale”.
“Cyprus is not for sale. The Cypriot people have their dignity. And don’t challenge me with such provocative questions please,” he said.
Additional reporting by Jan Strupczewski in Brussels, Gernot Heller in Berlin and Georgina Prodhan in Vienna; Editing by Paul Simao, Anna Willard, John Stonestreet