Cyprus' president said Friday that he has tasked officials to draw up plans on how the country would deal with Greece's possible exit from the eurozone.
Dimitris Christofias said that conditions would be "chaotic" if debt-drowned Greece quits the euro and that the impact of such a move would be felt not only by all other countries using the currency, but all of Europe.
"I have raised it with the Cabinet, that we should consult with technocrats and finance ministry officials on this possibility and draw up a plan on how to deal with this situation," Christofias told a news conference.
Cyprus is particularly vulnerable to a Greek euro exit because of its large banking system's huge exposure to Greece which is estimated at 144 percent of the island's gross domestic product.
Christofias wouldn't rule out the possibility that the government may tap the European Union's bailout fund to recapitalize the island's second-largest lender, Cyprus Popular Bank, which is the most heavily exposed to Greece.
"Certainly, I don't take it as a given that we will negotiate our induction into the support mechanism. But I don't want to exclude it entirely," Christofias said.
Cyprus Popular, which sustained record losses after taking a 74 percent write down on its Greek government bond holdings, is struggling to meet a June 30 deadline to replenish its capital reserves.
The government moved last month to underwrite a (EURO)1.8 billion ($2.22 billion) equity issue to help the bank raise the money privately. But it would have to put up the cash if the bank can't find it on its own, raising fears that the island could resort to the EU bailout fund.
Christofias said Cyprus could ask for a bailout money to recapitalize Cyprus Popular without having to enact harsh austerity measures just as bailed-out Greece, Ireland and Portugal have had to do in return for rescue funds.
"But we will fight so we won't even need the bank support mechanism," Christofias said.
Cyprus has been unable to borrow from international markets after two of the three international credit ratings agencies downgraded the island to junk status.
It has relied on a low-interest Russian loan to get by this year. Christofias said the government is looking to clinch another such loan, but wouldn't elaborate.
The government will unveil another austerity package later this month to meet a promised deficit target this year of 2.5 percent of GDP.
The European Commission urged Cyprus earlier this week to further rein in spending and meet its deficit target as the economy is projected contract this year by 0.8 percent of GDP before rebounding to a meager 0.3 percent in 2013.