ATHENS—Cyprus formally requested aid from Europe's bailout fund Monday as it scrambles to shore up its banking system, which has been hit by Greece's debt crisis.
"The government of the Republic of Cyprus has today informed the appropriate European authorities of its decision to submit to euro area member states a request of financial assistance" from the European Financial Stability Facility and the European Stability Mechanism, the Cyprus government said in a statement "The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spill-over effects through its financial sector, due to its large exposure in the Greek economy," the statement added.
The request, which has been expected for several weeks, means that Cyprus will be the fifth euro zone country to seek aid.
Earlier, Fitch Ratings downgraded Cyprus's government-debt rating to junk status, and warned of further cuts to come, saying substantial capital injections required by the country's banking sector will push the government to request a euro-zone-funded bailout.
Fitch was the last of the three major credit-rating companies to strip Cyprus of an investment-grade rating, limiting market reaction to the decision.
"Fitch judges that the scope for further capital raising [for Cypriot banks] from the private sector is limited and thus assumes that the capital will have to be provided by the government," it said. Fitch downgraded Cyprus to BB+ from BBB-.
Fitch said that the fiscal cost of bank support could potentially reach as high as €6 billion ($7.54 billion), pushing general government debt above 100% of its gross domestic product and leading the government to seek a loan from one of the euro-zone's bailout funds, either the EFSF or the ESM. By comparison, Ireland—another relatively small euro-zone country, and one that was bailed out—had a debt around 108% of its GDP in 2011.
Fitch said the government's financing has been secured for 2012. In 2013, Cyprus will have €2.25 billion of refinancing needs, it said.
Last week Cypriot Finance Minister Vassos Shiarly said Cyprus Popular Bank, the country's second-biggest bank, would need to be recapitalized by June 30. The country will reportedly also ask for a loan from Russia before requesting aid from its euro-zone partners.
Cyprus Popular Bank took heavy losses on its holdings of Greek debt in the debt restructuring in March, and now needs an estimated €1.8 billion to be restored to health.
Fitch also noted strains at the other two largest banks in the country, Bank of Cyprus and Hellenic Bank.