The European Investment Bank (EIB) is to provide a new trade finance guarantee facility to Cypriot banks.

The scheme will see the EIB guarantee letters of credit issued by Cypriot banks to overseas banks for the international trade of local SMEs. The scheme could be worth €150mn to the Cypriot trade economy and is identical in structure to the one the bank created for Greece in June.

Cyprus has been one of the biggest casualties of the European sovereign debt crisis, with the government’s credit rating being downgraded to junk status last year.

The country received a €10bn sovereign bailout in March of this year and, in return, closed the Cyprus Popular Bank, the country’s second largest. The government agreed to cover any deposits of under €100,000 in the bank, a move that many viewed as an attempt to pass the burden of the bailout onto people using the island as a tax haven.

Antonis Papageorgiou, an officer at the EIB who helped structure the facility, tells GTR that its aim is to reignite confidence in Cyprus among international banks. It is also designed to increase security for Cypriot SMEs involved in trade.

Currently, much of the trade done by small businesses is done on either an unsecured basis (since LCs have been difficult to obtain, as foreign banks are unwilling confirm), or using cash as collateral, meaning many SMEs have experienced a huge squeeze on their working capital.

The facility will initially be open to a few Cypriot banks, though they’ve not been named. Papageorgiou says, though, that it will eventually be open to any bank that requires it.

The Greek facility, he says, has had a slow take-up among banks to date. The EIB hopes the situation will change over the coming months.