Eurozone crisis spreads as Spain fights bailout fears

BRUSSELS, Belgium – The eurozone crisis took a new twist on Wednesday, June 20, as a diplomat said Cyprus would soon request aid from Russia and EU partners, while Spain battled fears that it will need a full debt rescue.

European leaders also faced mounting pressure from G20 partners to restore growth, accelerate integration and resolve a more than two-year-old crisis that could engulf the 17-nation eurozone and undermine the global economy.

In Greece, at the heart of the debt nightmare, conservative leader Antonis Samaras was sworn in as prime minister of a coalition government determined to change the terms of its latest bailout to ease public anger over austerity measures.

As relative political stability settled over Athens, Spain was to formally request up to 100 billion euros ($127 billion) to recapitalise its ailing banks at a eurozone finance ministers meeting on Thursday.

But Spanish Budget Minister Cristobal Montoro insisted that his country would not need a full-blown rescue like Greece, Ireland and Portugal.

“Spain has not been rescued because it does not need to be rescued,” Montoro told the country’s parliament.

Taking a cue from Spain, Cyprus will probably request next week eurozone aid to save banks which could suffer heavy losses on their holdings of Greek debt, an EU diplomat said.

The Mediterranean island will “first try to get a bilateral loan from Russia” this week of up to 5.0 billion euros, the diplomat said on condition of anonymity.

Cyprus, which is to take over the European Union’s rotating presidency on July 1, has already secured a 2.5-billion-euro loan from Russia to cover its refinancing needs for this year.

Cyprus needs an estimated 4.0 billion euros to prop up its banks and help trim the budget deficit, which widened last year to double the EU limit of three percent of gross domestic product (GDP).

EU leaders, fresh from a G20 summit in Mexico, are gearing up for a series of meetings this month aimed at containing the crisis.

Groundwork

Finance ministers meet Thursday while the leaders of Germany, France, Italy and Spain gather in Rome on Friday. The talks are to lay the groundwork for a full EU summit in Brussels on June 28-29.

The aim of the summit is to come up with a growth strategy and bring down record unemployment, but governments are divided over whether to temper the austerity drive championed by Germany.

“I have no doubt that we will come to an agreement at the European summit in Brussels,” French Prime Minister Jean-Marc Ayrault, whose country disagrees with Berlin’s austerity-first mindset, told the German weekly Die Zeit.

German Chancellor Angela Merkel told reporters after meeting with Dutch counterpart Mark Rutte that there were no detailed plans for EU bailout funds to buy bonds issued by struggling countries to drive down their borrowing costs.

That is one idea that has been floated ahead of the summit.

“There are no concrete plans that I know of but there is the possibility in the EFSF and the ESM to buy bonds on the secondary market, bound up of course as always with conditions,” Merkel said.

The European Financial Stability Facility (EFSF) and another fund that has not yet begun to operate, the European Stability Mechanism (ESM) were set up to help heavily indebted eurozone countries.

EU Commission spokesman Amadeu Altafaj dismissed speculation that the funds could represent a long-term solution to the debt problems.

“It would be financial paracetamol,” Altafaj said in reference to a widely used treatment for headaches.

“It could soothe tension, pain and malaise… but it does not heal the root causes, the structural problems of the economies of Italy, Spain and others,” he said.

“It is not a substitute for structural and economic reforms that can boost confidence.”

Europe is coming under increasing global pressure to deepen economic and fiscal integration and stabilize the eurozone.

But a key report on the subject has yet to be shared among capitals, plans for a banking union are being considered only on a step-by-step basis, and most ideas for boosting financial firefighting capacity remain mired in disagreement. – Agence France-Presse