The small Euro zone island economy of Cyprus may become the next trouble spot in the E.U. debt crisis as Cyprus government bond yields hit a record high of 707 basis points today as investor demand for its debt is shrinking.
Analysts believe Cyprus cannot continue financing itself over the long term if it has to return to the market at current yields and borrowing costs.
Meanwhile, Cyprus’ exposure to Greek debt and a munitions blast on 11th of July that could cost the island as much as 3 billion euros in damages, has caused ratings agencies to downgrade the country’s credit rating.
Cyprus may soon have to seek an international bailout, becoming the fourth state in the euro zone to request a rescue if it does not take urgent action to repair its finances. Even though the Cypriot economy would only require a very small amount to rescue it (should it need to dip into the EFSF rescue fund) it is just a reminder of how fast the Euro zone debt crisis can spread from one economy to another.
On Friday, Standard & Poor’s downgraded Cyprus by one notch to BBB+ and warned that another cut was possible, citing the government’s inconsistent commitments to spending cuts as well as exposure to Greece.