The idyllic island – also the Eurozone’s smallest economy – had earlier seen its credit rating slashed to junk status by Fitch.
Rating agency Fitch cited the level of cash required to bail out Cyprus’s own financial sector, cutting its top line rating to BB+ from BBB-.
The developments were not unexpected, with the Cypriot state requiring at least €1.8bn (£1.4bn) – around 10 per cent of its own GDP – by the end of the week, just to recapitalise Cyprus Popular Bank, the country’s second biggest lender.
“The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spill over effects through its financial sector, due to its large exposure in the Greek economy,” the government announced.
The bailout could will also be used for cover fiscal shortfalls, finance minister Vassos Shiarly revealed.
The news followed formal confirmation that Spain, one of the Eurozone’s larger economies, was accepting a European Union offer for more cash.
Spain’s economy minister Luis de Guindos said in a letter that his government would accept up to €100bn and hoped to finalise the package by 9 July.
De Guindos sent the letter to Jean-Claude Juncker, chairman of the Eurogroup – which comprises of finance ministers from euro area governments. However, he did not specify how much money Spain will seek to recapitalise the country’s indebted lenders and said the final amount and conditions of the assistance were still under discussion
Spain could require an immediate injection of up to €110bn, the think tank Open Europe announced yesterday. The group warned that the amount could then continue to rise, unless the country reforms its banks and experiences an upturn in its economic performance.
“If not carefully managed and subject to the right conditions, this package could merely serve to deepen the dangerous loop between Spanish banks and government,” Open Europe’s Raoul Ruparel said.