The economy of the Republic of Cyprus was hit by several huge blows in and around 2012 including, amongst other things, the exposure of Cypriot banks to the Greek debt haircut, the downgrading of the Cypriot economy into junk status by international rating agencies and the inability of the government to refund its state expenses.[130]

In September 2011, the small island of Cyprus with 840,000 people was downgraded by all major credit rating agencies following the Evangelos Florakis Naval Base explosion in July and slow progress with fiscal and structural reforms. At the same time yields on its long-term bonds rose above 12%. Despite its low population and small economy Cyprus has a large off-shore banking industry that was shaken to its foundations during the financial turmoil. With a total nominal GDP of €19.5bn ($24bn[131]) the country was unable to stabilise its banks, which had amassed €22 billion of Greek private sector debt and were disproportionately hit by the haircut taken by creditors.[132][133][134]

The Cypriot Government was reported to have been requesting a bailout from the European Financial Stability Facility or the European Stability Mechanism on June 25, 2012, citing difficulties in supporting its banking sector from the exposure to the Greek debt haircut.[135] Representatives of the Troika (the European Commission, the International Monetary Fund, and the European Central Bank) arrived to the island in July for investigation over the financial problems of the country and submitted the terms of the bailout to the Cypriot government on the 25th of July.[136] The Cypriot government expressed disagreement over the bailout terms, and continued negotiation with Troika representatives concerning possible alterations to the terms throughout the following months.[137] On the 20th of November the government handed its counter-proposals to the Troika on the terms of the bailout,[138] with negotiations continuing. On the 30th of November it was reported that Troika and the Cypriot Government had agreed on the bailout terms with only the amount of money required for the bailout remaining to be agreed upon.[139] The bailout terms were made public on the 30th of November.[140] They include strong austerity measures, including cuts in civil service salaries, social benefits, allowances and pensions and increases in VAT, tobacco, alcohol and fuel taxes, taxes on lottery winnings, property, and higher public health care charges.[141]

On 16 March 2013, the EU and IMF agreed a €10 billion deal with Cyprus,[142] and announced an unprecedented one-off levy of 6.7% for deposits up to €100.000 and 9.9% for higher deposits on all domestic bank accounts.[143]