Cypriot banking bailout 'world's biggest on economy'

Cyprus is threatened with the biggest banking bailout relative to the size of its economy as lenders teeter on the edge of collapse because of their Greek investments.

Cypriot banking assets of about 152 billion euros are equivalent to 835 percent of gross domestic product, according to London-based brokerage Exotix Ltd. Greek branches loaned out 23 billion euros -- 130 percent of the island’s 17.7 billion-euro GDP -- and Greece’s debt writedown cost them about 70 percent of their 5 billion euros of government bonds, according to Exotix.

While Cyprus has “numerous positives,” including a debt- to-GDP ratio that at 71.6 percent is lower than Germany’s, according to Exotix, on June 25 the need to recapitalize its banks forced the government to become the fifth euro member to ask for a bailout. Cyprus did not specify an amount and European Union officials in Brussels said they expect the initial request to total about 10 billion euros.

“The huge issue for Cyprus and holders of its government’s bonds is who will foot the bill for bank recapitalization,” said Gabriel Sterne, an economist at Exotix and the author of a report on the island’s situation.

“If Greece deteriorates and if Cyprus ends up on the hook for the losses there, in a worst- case scenario the cost will exceed their entire GDP.”


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