Cyprus said Monday it would seek a European bailout to handle fallout from the Greek crisis, becoming the fifth eurozone country needing rescue funds hours after Spain formally requested help for its banks.
Despite the spreading crisis, German Chancellor Angela Merkel dashed any lingering hope in financial markets that Europe would issue common eurozone bonds to underpin its single currency.
Cyprus announced it would apply for EU funds as it hopes to raise at least 1.8 billion euros ($2.25 bl) – equivalent to about 10 percent of its domestic economic output – by the end of this week to recapitalize Cyprus Popular Bank.
“The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spill over effects through its financial sector due to its large exposure in the Greek economy,” a government announcement said.
Nicosia has to satisfy European regulators by June 30 about the health of Cyprus Popular Bank, which has suffered heavy losses on Greek debt.
Greece’s own crisis deepened on Monday when its new finance minister, who was only appointed last week, resigned because of ill health, throwing the government’s drive to soften the terms of its EU/IMF bailout into confusion shortly before a European summit.
Cyprus, one of the eurozone’s smallest economies, has a disproportionately large off shore financial sector heavily exposed to Greece. Greece, Ireland and Portugal have already taken EU rescues for their sovereign finances, and Spain is looking for an EU bailout for its banks. The euro and shares fell Monday due to investors’ skepticism that an EU summit this week would act decisively on the bloc’s debt crisis.
At the two-day Brussels summit, starting Thursday, leaders will discuss a cross-border banking union, closer fiscal integration and the possibility of a debt redemption fund.
But Merkel, who leads Europe’s biggest economy and the main contributor to its rescue funds, said sharing debt liability within the 17-nation euro area would be “economically wrong and counterproductive.”
France, Italy and Spain have pushed hard for steps towards mutualizing debts and liabilities through a joint bank deposit guarantee, a common bank resolution fund and issuing common eurozone bonds. The conservative German leader adamantly rejects such ideas and is keen to squash them before the meeting.
“When I think of the summit I feel concerned that yet again we will have too much focus on all kinds of ways of sharing debt,” Merkel told a conference in Berlin.
Critics say that by refusing any such collective solutions, Berlin risks unleashing speculative attacks on Spanish and Italian bonds, hastening rescues which the eurozone’s rescue funds are too small to manage.
Spanish and Italian bond yields rose Monday as doubts spread that the EU summit would take any decisive action to stem the crisis, which began in late 2009. The euro fell against the dollar and investors sought shelter in U.S. government debt.
Spanish Economy Minister Luis de Guindos asked for up to 100 billion euros ($125 billion) in a letter to Eurogroup chairman Jean-Claude Juncker, saying the final amount of assistance would be set at a later stage. The letter formalizes Spain’s request for the bailout, agreed on June 9.
He confirmed his intention to sign a Memorandum of Understanding for the package by July 9 and said the amount should be enough to cover all banks’ needs, plus an additional security buffer. The EU’s top economic official, Olli Rehn, said a deal on terms for the loan from Europe’s bailout funds could be concluded within weeks.
“The policy conditionality of the financial assistance, in the form of an EFSF/ESM loan, will be focused on specific reforms targeting the financial sector, including restructuring plans which must fully comply with EU state aid rules,” he said.
The rescue is intended to help Spanish lenders recover from the effects of a burst real estate bubble and a recession, which have piled up bad loans and sinking property portfolios.
Prime Minister Mariano Rajoy told business leaders he would soon take new measures to revive economic growth and create jobs. He said the government remained committed to cutting the public deficit.
Two independent audits last week put the Spanish banks’ capital needs in the economic downturn at up to 62 billion euros ($77.5 bl), and a fuller audit will be delivered in September.
Some market economists believe the rescue is merely a prelude to a full bailout for the Spanish state, which saw its borrowing costs soar to euro era record levels above 7 percent early last week, although they have eased to below 6.5 percent.
A working document prepared by top EU officials calls for the gradual introduction of a banking union, starting with supervisory power for the European Central Bank and developing a deposit guarantee scheme based on pooling national systems, with a levy-funded bank resolution fund.
Berlin has so far rejected any joint deposit guarantee or resolution fund, as well as proposals that eurozone governments should assume joint liability for each other’s debts. Finance Minister Wolfgang Schaeuble hammered home the message in weekend interviews, saying that throwing more money at the crisis would not solve the problems, telling Greece it must try harder rather than seeking to soften bailout terms.
He cited Ireland and Portugal as countries that were succeeding in their EU/IMF adjustment programs and said Greece had not made a sufficient effort.
Merkel and French President Francois Hollande will have one more try at narrowing their differences before the summit on Thursday and Friday. The German leader has shown no sign of relenting in her refusal to take on new liabilities for German taxpayers until other eurozone states agree to hand more sovereignty over economic policies to EU institutions.