August 1, 2011 / 11:08 AM / 7 years ago

UPDATE 1-Cyprus lender Bank of Cyprus sees bailout threat

LONDON, Aug 1 (Reuters) - * Largest lender says bailout threat imminent

* Bailout will damage Cyprus standing as financial centre

(Adds detail)

NICOSIA, Aug 1 (Reuters) - Cyprus’s largest lender, Bank of Cyprus BOCr.AT said on Monday Cyprus faces an imminent threat of entering an EU support mechanism which would damage the island’s reputation as a financial centre.

“With our inaction we are risking the ability of refinancing the state and the consequences will be immediate and serious. There is an imminent threat of Cyprus joining the European Union support mechanism, with whatever drawbacks that will entail,” Bank of Cyprus said in a statement.

The unusual warning from Bank of Cyprus, an economic heavyweight on the east Mediterranean island, follows Central Bank Governor Athanasios Orphanides’s warning to authorities two weeks ago that a bailout was likely without immediate action to correct fiscal imbalances. Moody’s and Standard and Poors downgraded Cyprus last week.

Bond yields have spiked; The yield on a 10-year government bond issued to international investors in February 2010 was bid at a prohibitively high level of 9.7 percent on Monday. Cyprus is not a regular with international debt issues, and trading in its bonds is thin.

Last week government spokesman Stefanos Stefanou said entry into a support mechanism “was not a given”.

But problems have been amplified by the accidental destruction of Cyprus’s largest power station by a cache of munitions stored close to the plant on July 11, and political wrangling over a fiscal consolidation package, discussed extensively before the blast.

Cyprus has shied away from international markets this year and opted for domestic borrowing instead. Bank of Cyprus said it was ready to support state projects, but said a credible gameplan was needed to get finances back on track.

The lender, which is 10 percent owned by a Russian investor, said any entry into a support mechanism would damage the island’s reputation as a financial services centre. Cyprus offers a series of tax breaks to international businesses — an issue which could come into broad debate if the island is forced to seek a bailout.

“Actions must be such to make clear to markets that Cyprus can and is determined to take all necessary measures needed to administer its finances and continue to grow. Each day of inaction increases problems and risks. Which is why we must act today, not tomorrow,” Bank of Cyprus said.

(Writing by Michele Kambas, editing by Ron Askew)

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