The largest commercial financial institution on the island, the Bank of Cyprus, has warned that the country risks becoming the fourth member of the Eurozone to need a bail out from the European Financial Stability Facility.

A BoC statement said "Time has run out. We are at that turning point at which history will judge us. It's time for immediate and effective action. With our inaction we are risking the ability of refinancing the state and the consequences will be instant and serious. There is an immediate threat of the country entering the European Union's support mechanism, with everything bad that entails."


This follows on from the governor of the Central Bank of Cyprus recently saying that a bail-out may be unavoidable.

The country is struggling with debt but has so far not taken the action the markets would like to see.

Although the Nicosia does not need to raise funds until the end of the year, the amount they then need would be some €2 billion. But bond yields are already in the region of an eye-watering 9%.

What has not helped is that on July 11th a cache of impounded Iranian munitions exploded at a naval base close to a power plant killing 13 people as well as causing major power shortages and up to €3 billion in damage, which could equate to 20% of GDP. The glimmer of light here is that Cyprus may get EU funds for infrastructure development.

The picture still looks no rosier when you see that their banks are sitting on about €5 billion in Greek debt as well as economic trade being heavily reliant on Greece. A Greek debt default would be disastrous for Cyprus.

Then there is the government. Last week President Demetris Christofias was left trying to rebuild an administration after the cabinet resigned leaving the country without a political resolution to its problems.

Rating agencies have been downgrading Cyprus over the last few months as well, the latest by Standard & Poor’s Corp on Friday followed Moody’s earlier in the week citing concerns over the size of its banks compared to GDP (600%) and the huge effect that the naval base explosion would have on the country’s prospects.

Should the country require a bail-out it would be small enough not to be much of a bother when compared to the other recipients and potential recipients. But it does send out the message to the world that EU debt contagion is still not contained.

It could also have a very adverse effect on the country’s ability to maintain its competitive banking services.

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