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June 25, 2012, 2:20 p.m. EDT

Cyprus requests European bailout

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By William L. Watts, MarketWatch

FRANKFURT (MarketWatch) — Cyprus, with its banking system ravaged by exposure to Greek sovereign debt, on Monday became the latest victim of Europe’s debt crisis by requesting aid from its euro-zone partners, in a widely anticipated move.

In a statement, the Cypriot government said it informed European authorities of its decision to submit a request for financial assistance from the European Financial Stability Facility, the temporary euro-zone rescue fund, and its successor, the European Stability Mechanism.

“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 to the Greek economy,” the statement said.

Cyprus is the fifth euro-zone country to request aid from its regional partners. The move had been anticipated for weeks as the country struggled to shore up a banking sector hard hit by its exposure to Greece.

The euro /zigman2/quotes/210561242/realtime/sampled EURUSD -0.0170% remained under pressure, trading at $1.2500 versus the dollar, down from around $1.2565 in North American trade late Friday. Read about the latest action in currencies.

Earlier Monday, Fitch Ratings cut Cyprus’s credit rating to junk status at BB+ from BBB- and maintained a negative outlook on the nation’s rating, citing expectations that Cypriot banks will need further, substantial capital injections.

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Fitch said that in addition to the 1.8 billion euros ($2.3 billion) required to recapitalize Cyprus Popular Bank, the country’s banks could require as much as an additional 4 billion euros in additional capital — an amount equal to 23% of the tiny country’s gross domestic product.

The ratings firm said that while the bulk of the losses suffered by the banking system are due to Greek exposure, the reported nonperforming-loan ratio for domestic loans also had risen substantially over the past year as the country’s economy contracted and unemployment rose.

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William L. Watts is MarketWatch's European bureau chief, based in Frankfurt.

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