Cyprus Becomes 5th E.U. Member to Seek Rescue

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PARIS — Cyprus on Monday said it was formally requesting a bailout from the European Union in a bid to bolster its struggling banks, making it the fifth euro zone country to request a rescue.

The announcement came after weeks of concern that the crisis in Greece and a potential Greek exit from the euro could bring down the economy in the small island nation, whose banks are heavily exposed to Greece.

The slim victory of a pro-euro party in recent Greek elections helped to temporarily alleviate that concern, even as economists said Cyprus could need as much as €10 billion, or $12.5 billion, to shore up its ailing banks and cash-strapped public sector.

Government officials would not specify how much Cyprus would be seeking from the E.U.’s bailout fund, saying negotiations were continuing. Leaders of the Union were scheduled to meet Thursday and Friday in Brussels, where they are expected to discuss the terms of Greece’s bailout.

Cyprus’s bailout request is a blow to the country as it comes just days before it is to take over the rotating E.U. presidency, a rare and proud moment in the international spotlight.

“The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spillover effects through its financial sector, due to its large exposure in the Greek economy,” the government said in a statement.

Cyprus needs to find €1.8 billion, or about 10 percent of its gross domestic product, to recapitalize its second-largest bank, Cyprus Popular Bank, by a June 30 deadline, according to Cypriot officials. In total, Cypriot banks have outstanding loans or other money at risk totaling €152 billion, or eight times the size of the country’s gross domestic product, according to the International Monetary Fund. Such exposure has made the country vulnerable to financial upheaval.

Cyprus has asked the European Union not to impose demands for harsh austerity and to focus the rescue package on the country’s banks, Cypriot officials say. The country has been so determined to avoid Draconian caveats — including calls from some countries that it suspend its 10 percent corporate tax rate — that it had recently sought aid from Russia and China.

Michalis Sarris, a former World Bank economist and finance minister who is now chairman of Cyprus Popular Bank, said Monday that Cyprus was in talks with China over a possible loan. China was potentially interested in a stake in a Cypriot bank, in return for a toehold in the country’s burgeoning gas industry, officials said.

But with time running out, officials said Cyprus, which has been shut out of international markets for more than a year, had little choice but to request aid from the European Financial Stability Facility.

Mr. Sarris said that extensive exposure of Cypriot banks to Greece and the country’s exclusion from international financial markets had made asking for a bailout a matter of urgency.

But he also said that Cyprus’s problems paled in comparison with Greece and that the country’s small size and its lack of relative profligacy compared with Greece made it better positioned to weather the crisis.

“The situation here is different from in Greece,” he said. “What we are looking at is a relatively mild adjustment that won’t inflict too much pain.”

While Cyprus’s problems threatened to add to the financial instability in Europe, more concerning for officials and investors is the fear that Italy, the third-largest economy in the euro zone, after Germany and France, will itself end up needing help.

Cypriot officials said Monday that they would continue to seek loans from Russia and China to buttress potential E.U. financial support. Cyprus last year secured a €2.5 billion loan from Russia at a below-market rate of 4.5 percent to cover its refinancing needs for this year.

Over the weekend, the Cypriot president, Demetris Christofias, the only communist leader in the European Union, railed against the 27-member bloc, noting in an interview with To Vima, a Greek newspaper, that the European Commission, the European Central Bank and the International Monetary Fund had operated like a “colonial force” by forcing austerity measures and unbridled free-market policies on bailed-out countries.