CYPRUS BECAME the fifth country to succumb to the debt crisis in the euro zone as it sought emergency aid yesterday to prop up banks heavily exposed to Greece.
The country’s request for aid came three days before a crunch summit in Brussels on the debt debacle and only one week before it assumes the rotating presidency of the EU for the first time.
Like Spain, which issued its formal request for a European bailout yesterday, Cyprus has not asked the International Monetary Fund for help.
The request underscores the escalation of the crisis, now well into its third year, although the loan package is likely to be small in comparison with the aid programmes for Ireland, Greece, Portugal and Spain. The request from Cyprus means that almost a third of the 17 euro zone member states are now being bailed out.
The Cypriot government is understood to be seeking emergency loans for its banks exclusively, thereby avoiding intrusive European scrutiny of its day-to-day financial affairs.
Spanish and Italian borrowing costs rose again yesterday after Spain’s economy minister formally issued a request for up to €100 billion in aid ring-fenced for its banks.
The spike in Spanish borrowing costs is seen to reflect serious doubt about the viability of a plan which assumes the country will retain access to private debt markets for regular state borrowing.
EU leaders are expected to discuss a call to pool the risk in their banking systems at their talks in Brussels but German chancellor Angela Merkel reiterated her rejection of debt mutualisation yesterday.
Dr Merkel, who meets French president François Hollande for pre-summit talks in Paris tomorrow, said joint borrowing by European governments would be “economically wrong and counterproductive”.
She said there should be no imbalance between liability and control between governments.
“For instance, we would do a European deposit insurance immediately if it doesn’t lead to common liability but to improved oversight possibilities and standards,” she said.
Her remarks – ahead of a joint report by EU leaders Herman van Rompuy, José Manuel Barroso, Mario Draghi and Jean-Claude Juncker – were a clear sign that no breakthrough is in prospect this week in the hunt for a solution to the crisis.
The report from the “four wise men” – the chiefs of the European Council, the European Commission, the European Central Bank and the euro group of finance ministers – was still being finalised last year and was expected to be circulated to governments in time for a meeting today of ministers for Europe.
They were expected to ask governments to discuss a pooling of the risk in their banking systems, pan-European banking regulation and the development of fiscal union within which the EU authorities are given greater powers to intervene in national budgets.
It is understood, however, that the report will not examine the specific legal “form” of any changes.
A Cypriot government spokesman declined to quantify how much aid the country was seeking. It is known that Cyprus Popular Bank, the country’s largest, needs a €1.8 billion capital infusion by Friday to meet European rules on the amount of capital banks must hold. However, Cyprus might well need more than that.
The country received a €2.5 billion bilateral loan from Russia last year but the restructuring of the Greek national debt in February damaged its banks, which had large holdings of Greek sovereign bonds.
The country has made no secret in recent weeks of its probable need for external aid but it is known to have examined whether it might receive another Russian loan as an alternative to EU aid. A loan from China was also mooted. Neither the Russian nor the Chinese option has been definitively ruled out at this point, it is understood.
