Cyprus seeks eurozone bailout

Cyprus becomes fifth eurozone country to ask for outside financial help after it is caught in backwash of Greek crisis

guardian.co.uk, Larry Elliott and Giles Tremlett, Monday 25 June 2012

Vassilis Rapanos, the man appointed to be finance minister in Greece's new
 coalition government, quit without formally taking up his office. Photograph:
AFP/Getty Images

Cyprus has become the fifth eurozone country to seek outside financial help to shore up its ailing economy after a day of heavy selling on financial markets prompted by fear that this week's European summit will end without a blueprint to rescue the single currency.

The government in Nicosia admitted that it had been caught in the backwash from the crisis in neighbouring Greece as it formally applied to Brussels for assistance.

On a day when Fitch cut Cyprus's credit rating to junk, a statement said: "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 section, due to its large exposure in the Greek economy."

The news followed an announcement in Athens that Vassilis Rapanos, the man appointed to be finance minister in the new coalition government, had quit without formally taking up his office, while the prime minister Antonis Samaras was not fit enough to travel to the Brussels summit after an eye operation.

Markets were also unsettled by comments by Angela Merkel which doused hopes that this week's talks would agree to radical proposals for a full eurozone banking union, common eurobonds and the use of Europe's bailout funds to recapitalise banks directly. The German chancellor said sharing debt liability would be "economically wrong".

Although the German finance ministry believes a euro collapse could result in a 10% contraction in Europe's biggest economy, Berlin is insisting that eurozone member states must give up full autonomy over their budgets and the running of their banks in return for a deal.

In London, the FTSE 100 index closed down 63 points at 5451, the French CAC dropped 64 points to 3027 and Germany's Dax finished 112 points lower at 6152. The biggest falls on European bourses were in Milan, where the FTSE MIB slid 549 points to 13,114 and in Madrid, where the Ibex shed 252 points to 6624. With rumours that Moody's was poised to downgrade Spain's banks for the second time in a month, Wall Street's Dow Jones Industrial Average fell by more than 160 points in morning trading, while the price of Brent crude dropped below $90 a barrel due to concerns that the global economy is heading for a synchronised slowdown.

Cyprus is one of the smallest of the 17 members of monetary union and is expected to need a bailout of several billion euros to finance its debt payments and rescue its banks. It follows Greece, Ireland, Portugal and Spain in seeking formal help from the bailout funds set up by Brussels in response to the sovereign debt crisis.

Spain finally made its formal request for bailout money from the European Union on Monday, with a letter that failed to mention the amount needed and left markets guessing many of the details of how the country's troubled banks will be rescued.

The slow process of putting together the bailout of up to €100bn should see a memorandum signed at a meeting of eurozone finance ministers on 9 July.

Spain asked for the money to go to its FROB bank rescue fund, increasing the national debt.

But the country's foreign minister, José Manuel García-Margallo, added to confusion about the bailout process on Monday, saying Spain had not given up on its battle to have the money go directly to banks, without adding to the national debt. "The question of whether the money will go directly to the banks or to the state is still open," he said.

It was unclear how much of the €100bn bailout money Spain would finally ask for, and when it would be needed. El País newspaper suggested on Mondayyesterday that the government would ask for money as the needs of each bank became clear.

With a further round of stress tests on individual banks not due until September, some of the money might not be requested until after that.

Officials from the Spanish government and the Bank of Spain have repeatedly said the bailout funds are not needed urgently. They have also stressed that the €62bn top figure provided last week by two independent auditors of Spain's banking system would cover against a severe downturn in the next three years – suggesting their request may not go much higher than that.

Monday's letter requesting the loan said the amount "would be sufficient to cover capital necessities as well as an additional margin of security".

Analysts warned Spain against aiming too low. "It is essential that the loan provided exceeds by a certain margin the estimated capital requirements for the banks," said Vincent Forest of the Economist Intelligence Unit. "Anything too far from the announced €100bn could fail to reassure investors, and create further volatility and instability."

EU commissioner Olli Rehn said a deal on loan terms could be concluded within weeks.