Cyprus has told European authorities it intends to apply for a bailout, making the country the fifth eurozone country to request international aid.
According to Cypriot authorities, the bailout is required to shore up its flagging banking system, which is heavily exposed to the Greek economy, the BBC reports.
Its banks have suffered due to their exposure to Greek government bonds, and are facing heavy losses on loans made to Cypriot businesses hit hard by Greece's recession.
The news comes ahead of a two-day EU summit later this week, where authorities are expected to finalise a plan to rescue the euro.
Shares in Italy, Spain and Greece fell sharply yesterday amid concerns policymakers will be unable to reach agreement. Spain's Ibex index closed 4% down yesterday, ahead of Moody's downgrade today of a raft of Spanish banks.
A Cypriot government spokesperson told the BBC €1.8bn was needed to recapitalise its largest bank Cyprus Popular Bank. The negotiations are set to take place over the next few days.
Cyprus will not only be seeking help from the EU but is said to be negotiating possible loans from Russia or China. Cyprus has already borrowed €2.5bn from Russia.
Credit ratings agency Fitch said Cyprus would need €4bn to shore up its banking system, the equivalent of nearly a quarter of its GDP. The agency recently moved to cut the country's credit rating to junk status.
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