Cypriot banks’ high exposure to Greek sovereign bonds could force the island nation to seek European financial support if Greece defaults on its debt and possibly leaves the euro after parliamentary elections next week.
The Moody’s rating agency warned over the weekend that if Greece leaves the single currency union and remaining nations in the euro fail to stem the resulting market anxiety, Cyprus will likely be shut out of international funding markets and downgraded.
Cyprus is the most directly exposed to a Greek exit from the euro area or a further default by Greece given the immediate impact on the value of Cypriot banks’ remaining holdings of Greek government debt and their other Greek exposures. Any further problems in the Cypriot banking sector would directly affect the sovereign, which is effectively propping up the sector.
The Cypriot government is desperately trying to raise €1.8 billion on financial markets to inject into the ailing Cyprus Popular Bank which has loaned heavily to Greece. The size of the planned bailout is equivalent to 7 percent of the country’s gross domestic product.
The problems in Greece have a strong impact on the Greek Cypriot economy which is deeply intertwined with the mainland. It is expected to contract by up to 1.1 percent this year. More than one out of ten Greek Cypriots is out of work.