Cyprus joined the European Union in 2004 and is a member of the Eurozone, adopting the common currency in 2008. The island of Cyprus is the largest in the eastern Mediterranean, but has been divided into a Turkish and a Greek region since 1974 when Turkey occupied the north of the island. Unification talks are underway and whilst the whole island is part of the EU, full rights only apply to those who can show themselves to be citizens of the internationally recognised part of the island (the Turkish enclave is only recognised as a sovereign state by Turkey itself).
Unsurprisingly, there are strong financial links between Cyprus and Greece and this means that the woes that have befallen Greece are having a knock-on effect in Cyprus. Exposure to the Greek debt crisis is such that Cyprus is having to ask its EU partners for a bailout. The scale of the bailout is modest in comparison to other packages and estimates place it as between €5 billion to €10 billion – the funds being needed to recapitalise its banking sector. The loan will be discussed at the EU summit meeting later this week.
Fitch’s ratings agency has just joined Standard and Poor’s and Moody’s in reducing Cyprus’s credit rating to junk status. Whilst this does not preclude Cyprus from raising money on international markets, it makes it very much more expensive. Given that Spain is likely to receive up to €100 billion to recapitalise its banks, it is highly unlikely that Cyprus would not get a sympathetic hearing for its request – the cost of a refusal would be immeasurably higher in terms of damage to the credibility of the single European currency.