Cyprus could need bailout after blast

Cyprus may need foreign financial aid unless drastic action is taken to deal with the impact of an explosion which decimated its largest power station, central bank governor Athanasios Orphanides has warned.

Already under market pressure because of its links to debt-laden Greece, economists have warned the island could face a bill of up to €1 billion after the blast a week ago knocked out half of its power supply.

"To avoid the worst, including admission into (a) support mechanism and all that that entails for the economy ... further and more drastic measures must be taken immediately," Orphanides said in the July 18 letter sent to Cypriot president Demetris Christofias and copied to political party leaders.

"Weighing up all the facts, the unfavourable international environment, the difficulties in resorting to external borrowing and the additional economic impact from the recent events, I believe that the economy is in a state of emergency, comparable to that of 1974," Orphanides wrote.

Orphanides is a member of the Governing Council of the European Central Bank. It is the first time he has suggested Cyprus may need to enter a support mechanism, even though the island's borrowing costs had been rising before the blast.

A copy of the one-page letter obtained by Reuters was forwarded to Christofias before an emergency meeting with party leaders on Monday to assess the impact of the July 11 blast.

He was referring to the Turkish invasion of northern Cyprus in 1974 after a brief Greek inspired coup.

The explosion of confiscated Iranian munitions last Monday left 13 people dead and triggered rolling power cuts on the island. Calls have also mounted for the resignation of Christofias, who has seen his foreign and defence ministers quit in the wake of the disaster.

With a budget deficit of 5.1 percent of GDP and overall public debt of around 60 percent, Cyprus is in much better fiscal shape than euro zone bailout recipients Greece, Ireland and Portugal.

But financial markets have worried the island, whose annual output of around 17.4 billion euros is just 0.2 percent of the euro zone economy, will be downed by its dependence on a Greek economy and banking sector struggling with its debt crisis.