Could Cyprus soon become the fourth European state to need a bail-out? As in Spain, the banks are threatening to sink the public finances. The banking system has assets worth nine times the country’s GDP of around €18bn. Loans to the private sector in Greece are worth €22bn.
As Michalis Persianis in The Wall Street Journal notes, nonperforming loans among lenders have jumped to 20% of the total as Greece’s economy has tanked. The banks have already lost more than €3bn from the restructuring of Greek debt, which has left Cyprus Popular Bank needing a bail-out.
Private investors are unlikely to cough up the near-€2bn needed as they have become increasingly worried about the economy, given its close links to Greece. So Cyprus may soon find itself with liabilities worth 10% of GDP and as Cypriot bond yields head into double digits, raising money to cover this hole in the budget is becoming prohibitive.
With the IMF expecting the economy to shrink next year, there is scant hope of growth eroding Cyprus’s debt pile. Cyprus may be able to arrange a loan from Russia, which has helped in the past, or China, with whom it is now negotiating. But with a Chinese loan looking unlikely to be agreed in time, it seems likely Europe will have to step in.