Nicosia on guard as Greek euro exit rumors mount

Cyprus is bracing for possible economic damage from Greece as speculation mounts about a Greek exit from the euro area, said Cypriot Finance Minister Vassos Shiarly (photo), who described any impact as controllable.

?The situation in Greece may produce a knock-on effect on the Cyprus economy,? Shiarly told reporters on Monday in Brussels.

?It?s a manageable impact for us. We have to be awake to the consequences.?

Greece entered a second week of political deadlock as President Karolos Papoulias failed to secure agreement from parties on a unity government, raising doubts about whether the country will pursue budget cuts needed to remain eligible for emergency international aid.

With Cyprus?s main exposure to Greece coming through banks that bought Greek sovereign bonds, Shiarly said the Cypriot government?s focus is on ensuring that Cyprus Popular Bank Pcl finds as much as around 2 billion euros to strengthen its capital.

The Cypriot government wants to avoid tapping the European Financial Stability Facility to bolster Cyprus Popular Bank, the country?s second-biggest lender, and is pursuing other options, Shiarly said.

He declined to elaborate while saying an announcement is ?imminent.?

?Our current thinking is that we will not need to resort to the EFSF,? the minister said.

The government would also prefer to avoid taking out a bilateral loan, he said.

The total amount of loans granted by the three largest Cypriot lenders — Bank of Cyprus Plc, Cyprus Popular Bank and Hellenic Bank Pcl — to the Greek private sector was 22.7 billion euros as of December 31, compared with 15 billion euros in deposits.

The three banks posted losses exceeding 5 billion euros for 2011, caused mainly by write-downs on Greek government debt.