NEWS, 13.06.2012.

Cyprus may ask for bailout before Greek elections

 

Cyprus' Finance Minister warned Wednesday that the eurozone country could seek a European Union bailout to help recapitalize its banking sector before crucial elections in Greece this Sunday.Vassos Shiarly said that the Greek elections — seen as a vote on whether the debt-wracked country stays or leaves the eurozone — are a key factor to Cyprus' decision whether to become the fifth eurozone member to ask for EU bailout money."The chosen time (to seek a bailout) will be decided in cooperation with all European Union partners, either within the eurozone or the Union as a whole," Shiarly told a business forum in the capital, Nicosia."We also know that the deadline by which the recapitalization of banks has to be completed is very, very close ... But because the problem that may arise from the (Greek) elections this coming Sunday is perhaps of the highest importance, this is also taken into account in our overall assessment."Shiarly cited the example of Spain, which last weekend asked for a loan lifeline of up to (EURO)100 billion ($125 billion) from the 17 countries that use the euro to shore up Spanish banks."In most cases action is taken and the appropriate moment, meaning when the markets are closed," he said.Unable to borrow from international markets because of its junk credit rating, Cyprus has until June 30th to come up with (EURO)1.8 billion ($22.5 billion) — a tenth of its budget — to support Cyprus Popular Bank, its second largest lender which is most exposed to Greek debt and is unlikely to raise the money on its own.Shiarly and other Cypriot officials have said that the money could either come from the EU bailout fund, or through a loan from another country.Either way, time is running out for the tiny country of 850,000 people with strong cultural and business ties to Greece as the possibility over an anti-bailout party victory in Sunday's vote could further harm Cyprus' economy.Greece is holding the June 17 repeat election following an inconclusive May 6 ballot in which voters turned to smaller, mainly anti-bailout groups that have promised to renege on Greece's austerity commitments that were made in exchange for international bailout money.France's new President Francois Hollande on Wednesday warned that the election outcome could see them pushed out of the eurozone if anti-bailout parties emerge victorious.Fitch ratings agency on Wednesday warned that Cypriot banks would suffer most from a Greek euro exit given their direct exposure to Greek loans and the country's economy through their large branch networks there.Cyprus has vowed to stick to a 2012 deficit target of 2.5 percent of gross domestic product and is drafting additional spending cuts and tax rises to fix a 1 percent deviation. More importantly, Cyprus wants to be seen by its EU partners as living up to its promises in the hope of clinching favorable terms on a possible EU bailout, such as protecting its low 10 percent corporate tax — a key selling point for its large services sector.Cyprus President Dimitris Christofias repeated Wednesday that the measures won't come at the expense of wage earners or pensioners.

ITALIAN FEARS OVER SPAIN CONTAGION

 

Italian premier Mario Monti has seen nearly seven months of confidence-building efforts by his government wiped out as a debt auction revealed that the country's borrowing rates are back near levels last seen in December.A sale of 12-month bonds, a warm-up for Thursday's weightier long-term debt auction, demonstrated the speed with which market jitters spread from Spain following Madrid's weekend concession that its banks need a bailout.Italy paid an interest rate of 3.972% - up from 2.34% in a similar auction last month - to borrow 6.5 billion euro (£5.23 billion) in 12-month money from bond markets. Though demand was strong, the high rate suggests investors worry Italy may need a rescue of its own if Spain takes one.
"Contagion is back with a vengeance, and Italy is bearing the brunt of the fallout from Spain's request for external assistance," said sovereign debt expert Nicholas Spiro. Markets, he noted, are no longer differentiating fiscally-stronger Italy from Spain, "which is a sign that panic has set in".Just before the sale, Mr Monti urged politicians to speed the pace of reforms in a bid to persuade sceptical investors - whom he referred to as "observers that don't nurture an innate sympathy for our country"- that Italy was willing to make the necessary sacrifices to escape the debt crisis.Although Italy's deficit is relatively low, at 3.6% of GDP compared with Spain's 8.5%, the economy is not growing and overall debt is huge, at 1.9 trillion euro (£1.5 trillion). To lower that debt, the economy needs to become more competitive.That has been Mr Monti's task since taking office in November. His technocratic government passed a package of tax rises and spending cuts in December, and has been moving ahead with structural reforms but has found resistance from both lobbies and politicians alike.
The premier also made it clear that a broad European action plan is needed to avoid a spread of market panic from Spain to other countries like Italy, calling for concrete measures to be agreed at a June 28 EU summit.Mr Monti backed measures such as eurobonds, jointly issued European debt that would spread risk across countries, but which Germany has firmly opposed.He said they would not need to be introduced this year, but plans should be put in place.