In 2009 Cypriot authorities confiscated a cargo of weapons from Iran destined for Lebanon. These weapons were stored at a naval base near Vasilikos on the country's southern coast until July 11 of this year, when a grass fire reached the seized weapons cache. In the resulting explosion a nearby power plant suffered heavy damage. That power plant provided roughly half of the country's electricity needs, forcing rotating blackouts and electricity rationing. Months of reconstruction will be required. Cyprus traditionally exercises more cautious fiscal policies than many European states, even running a small budget surplus during the global financial crisis. Growth prospects in Cyprus have also been more positive and stable than in places like Portugal or Greece, with the country in recent years suffering only one recession — a mild one — in 2009. While the economy was not exactly booming before the July 11 disaster, it was at least growing. (click here to enlarge image) The Cypriot economy has its flaws, however. Cyprus is heavily dependent upon imports of everything from energy to manufactured goods to capital, burdening it with a substantial current account deficit. The government is weak and divided — and may be in the process of falling — which has prevented it from pushing through austerity measures. Taken together, the country is not on the edge, but it is not that far from it either. There is most certainly a short-term financial crunch. The budget deficit, which has climbed from 5.4 percent of gross domestic product (GDP) in 2010 to 7.1 percent in 2011, was well into the danger zone by EU standards even before the power plant incident. Now, with roughly half its electricity offline, the deficit can only climb while growth can only fall. Unsurprisingly, credit rating agencies are starting to make their concerns known. On July 27, Moody's Investors Service slashed Cyprus' credit rating by two notches citing the "material disruption" to the country's midterm growth prospects. There is open discussion in the country of the possibility of requiring a bailout; Cyprus would be the fifth European bailout should it choose that route, after Greece (which has received two so far), Ireland and Portugal. Any bailout would be wholly limited to the government sphere — a parallel banking bailout, as occurred in Ireland, would be unlikely. Ireland's financial centers have only been around since 1999 when the euro was created and thus were founded upon access to the same unrestrained flows of credit that caused the sovereign debt crisis. In contrast, Cyprus' banks have been around for decades and were vibrant before France and Germany had even conceived of the euro. Ireland's system destabilized and required a bailout to save the broader system, and now its banking sector is disintegrating. Cyprus' system may be somewhat less transparent, but for now it is stable. Cyprus' issue is a "real" economy problem, not an imported financial concern. In fact, the biggest imported problem would be Cypriot banks' exposure to Greek government debt, but so long as Greece is under bailout provisions, the Greek government cannot default and Cypriot investments in Greek debt are secure. With Cyprus' national debt being only 61 percent of GDP, any financial receivership that Cyprus might need to enter into would be relatively short, and with an economy of only $23 billion it would not be a significant burden on the European Union's bailout program. The four European bailouts to date have totaled roughly 432 billion euros (about $600 billion), while Cyprus' total national debt is only 10.8 billion euros. Cyprus' case is different from Ireland's, where the entirety of the banking sector is going to contract dramatically; from Portugal, which has not experienced meaningful growth in a decade; and from Greece, where the government and population have become used to living on borrowed money. The Cypriot government is overextended, but the overextension is not a long-standing one. Cyprus certainly needs financial help, but there is no reason at present to expect it will require assistance for a prolonged period of time.