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Cyprus sees chances of EU bailout increasing
Cyprus' central bank chief says EU bailout increasingly likely to help manage troubled banks
By The Associated Press

NICOSIA, Cyprus (AP) ' Cyprus looks increasingly likely to have to ask for EU bailout money to help rescue its troubled banking sector, the island's Central Bank governor has said.

Panicos Demetriades said that Cyprus, which is part of the 17-country eurozone, is struggling to find '1.8 billion ($2.23 billion) to inject in the second-largest lender, Cyprus Popular Bank, by a June 30 deadline.

"Clearly, the closer you get to the deadline, the less unlikely (asking for EU bailout money) becomes," Demetriades told the Financial Times in an interview.

The bank is the most exposed to Greek debt and suffered huge losses after writing down the value of its Greek government bond holdings.

The government last month underwrote a '1.8 billion equity issue to help the bank raise capital from private investors, meaning it will have to put up the cash itself ' an amount equal to a tenth of the island's entire economy ' if the bank can't find the money.

However, state coffers are running dry because Cyprus is unable to borrow from international markets after two of the world's top three credit ratings agencies downgraded the island's creditworthiness to junk status. Cyprus is relying on a Russian loan just to pay its bills this year.

The chairman of Cyprus Popular Bank, Michalis Sarris, also suggested an EU loan now seemed more likely.

"It's hard to see where (the capitalization) is coming from, if not Europe," he told the Financial Times.

Demetriades said it could still be possible to recapitalize Cyprus Popular Bank through private money or a loan from another country.

Cypriot President Dimitris Christofias said last week that the government is looking to clinch such a loan, but didn't elaborate.

Christofias, a former leader of the leftwing party AKEL, said that it's not certain the island would ask for EU bailout money, but that he couldn't rule it out.

He said turning to the EU bailout fund wouldn't necessarily mean having to impose harsh wage cuts and steep tax hikes as bailed-out Greece, Portugal and Ireland have had to.

Cyprus is keen to safeguard its low, 10 percent corporate tax regime, a major selling point for its large financial services sector.

The government is set to unveil more spending cuts this month to meet a promised deficit target of 2.5 percent of GDP for this year, but Christofias has said the measures wouldn't affect workers' salaries and benefits.

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