By Nick Mann | 26 June 2012

Cyprus has become the latest European Union country to request bailout funds from the eurozone member states to recapitalise its banks.

The Cypriot government said the money was needed to contain risks to the country’s economy, in particular as a result of its ‘large exposure’ to the Greek economy.

In a separate statement, the Central Bank of Cyprus said the decision to request support from the European Financial Stability Fund had been triggered by the need to recapitalise Cypriot banks that had not been able to raise enough private capital to meet a European Banking Authority deadline of June 30.

Cyprus’ second bank, the Cyprus Popular Bank, needs €1.8bn in capital – equivalent to 10% of Cyprus’ gross domestic product. Ratings agency Fitch yesterday said the Cypriot banking sector could require a further capital injection of up to €4bn – equivalent to 23% of the country’s GDP.

The central bank said: ‘In these challenging economic times, in which pressures on public finances are already considerable, it is vital to restore the banking system’s ability to promote economic growth as soon as possible.’

‘It is also necessary to take all appropriate steps to contain possible future contagion emanating from the operations of Cypriot banks in other countries.

It added: ‘Financial support from our European partners will help to ensure that these objectives are achieved in a timely and orderly fashion, while safeguarding the stability of our financial system and the economy as a whole.’

If Cyprus does receive support from other eurozone members, it will become the fifth eurozone country to do so. It follows Greece, Ireland, Portugal and, most recently, Spain, which yesterday requested up to €100bn to bail out its banking sector.

Bank rescue packages are expected to figure heavily at a meeting of EU leaders in Brussels later this week.