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Eurozone Debt Crisis: Why Cyprus Needed the Fifth Bailout

By , Contributing Writer, Money Morning •

U.S. stocks were rattled Monday as two more countries asked for bailout packages in the ongoing Eurozone debt crisis.

Shortly after word came that Spain had formally requested a bailout package for its ailing banks, Cyprus chimed in and also asked for aid.

The Mediterranean country has become the fifth Eurozone nation to hold out its hand for an international rescue. While the smallest of the bunch to seek relief, Cyprus highlights the European Union's increasingly stressed resources as it wrestles with weakening economic conditions.

The aid request followed Fitch's downgrade Monday of the island's stressed banks to "junk" status. The credit cut means the country has lost it investment status with the trio of the largest and most influential rating agencies.

Fitch said in a statement, "Cypriot banks will require substantial injections of capital in order to secure confidence in their financial viability."

Cyprus, saddled with Greek private sector debt, could need as much as 10 billion euros ($12 billion) in bailout funds.

"Classic contagion, "BBC's chief economics correspondent Hugh Pym said of Cyprus' troubles.

The Latest Eurozone Debt Crisis Bailout

Cyprus is only three days away from its deadline to recapitalize Cyprus Popular Bank, the country's second-largest lender that was largely exposed to Greek debt.

Cyprus had to raise 1.8 billion euros, or 10% of its domestic output, to meet the deadline set by European regulators.

In a statement Monday, the Cyprus government said, "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."

Cut off from capital markets for more than a year, Cyprus has been knocking on Russia's door for additional support. To date, Russia has lent the financially struggling island, with a population of roughly 1 million, about 2.6 billion euros.

While Britain has mulled helping because of its significant military base on Cyprus, it has axed the idea.

"This is long overdue," Stelios Platis, a well-known Cyprus economist, told the Financial Times. "The delay going to the EFSF (the Eurozone rescue fund) was damaging for Cyprus and the banking sector...We have to contain the spillover effect from Greece."

The fresh requests from Spain and Cyprus will be highlighted at the June 28-29 summit of European finance ministers.

Reports have hinted that the meeting's discussions will include a proposal for a sole European banking supervisor, closer fiscal union among the 17-member nations and a common system for guaranteeing bank deposits.

Investors are skeptical that much will be accomplished at the summit. Trading is expected to be volatile in the days ahead as concerns surround the Eurozone debt crisis and increasing bailouts.

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