Fears grow that Cyprus will be next in line for eurozone bailout

The toxic effects of Greece's economic crisis appear poised to engulf Cyprus, with speculation mounting that it is just a matter of time before it, too, is forced to resort to the European Union for rescue. The prospect of the nation becoming the fourth eurozone country to be thrown an economic lifeline by the EU has grown as officials have openly acknowledged the need to prop up a banking system badly hit by exposure to Greece. Over the course of the past week, Cyprus's president, finance minister and central bank governor have all admitted an urgent need to recapitalise Popular Bank, the island's second largest lender. Having been affected by non-performing loans in Greece and by the restructuring of the country's debt in March, the bank now needs a €1.8bn (£1.5bn) lifeline by the end of June – a deadline described as "an important crunch time" by Panicos Demetriades, the country's central bank governor. If the bank cannot raise the funds privately, the government – itself cash-strapped by its exclusion from international capital markets – will have to step in. Speaking to the Guardian from Nicosia, George Georgiou, a senior central bank official, said: "It is by no means a foregone conclusion that Cyprus will need a bailout." But another top-level central bank official conceded that Cypriot authorities were especially afraid of saying anything that might set off "panic and uncertainty." "The last thing we need is to panic depositors. We don't want another Northern Rock," the official said. "Right now, all options are being considered." After watching Greece slip into ever worsening recession as a result of spending cuts, tax increases and other belt-tightening measures demanded in return for rescue loans from the EU and IMF, Cyprus is clearly worried about the conditions that might be attached to offers of aid. "It's clear to us that, if we did proceed through the EFSF [European financial stability facility], there are certain conditional ties which might not be acceptable to us," the finance minister, Vassos Shiarly, told Reuters this week. "We had the experience of Ireland and therefore we are a little bit wary in case conditions are applied," he said, adding that a bailout was "not something that we are trying to avoid." On Thursday the central bank announced that, like Greece's ever contracting economy, Cyprus's GDP would also shrink by as much as 1.1% this year. "The decline of corporate profitability and of real private disposable income and the increase of unemployment have contributed to a negative climate," it said in a statement. President Demetris Christofias said that as the national financial system's exposure to Greece was worth more than Cyprus's GDP, his government had begun looking at contingency plans in the event of Athens exiting the eurozone. In late 2011, Cyprus was forced to accept an emergency €2.5bn loan from Russia to cover deficit shortfalls and tide it over this year. Although it was not the "preferred option", the country's finance minister refused to exclude the possibility of bilateral borrowing again. Rumour is rife that Christofias, the EU's only communist leader, may well turn to China this time for emergency funding. "We will never exclude any possibility, so if and when we apply to the EFSF at least we will know that, if we are pressed too hard through the EFSF, we do always have an alternative, if an alternative is available," said Shiarly.