Monday, June 25, 2012

Spain, Cyprus Request Bailout Aid .

Spain and the small island state of Cyprus formally became the fourth and fifth countries to request aid from the euro zone's bailout funds Monday, extending a casualty list in a protracted regional debt crisis that is threatening to break up the 17-nation currency bloc.

Spain struck an agreement this month with the 16 other euro-area members to ask for as much as €100 billion ($125.7 billion) from European Union bailout facilities, specifically to recapitalize a number of regional banks that have been devastated by the explosion of a real-estate bubble.

Neither Spain nor Cyprus specified Monday how much each will ask for, and Spain didn't provide new details on conditions that are likely to be attached, according to a copy of the request sent by the Finance Ministry. However, it said it hopes to complete an agreement on terms by July 9.

Two external consultancies hired to estimate the banks' actual capital needs have put them at no more than €62 billion.

Both the government and the International Monetary Fund have argued vehemently for the aid to go directly to the banks, rather than being channeled through a Spanish government that can ill afford to add to its debts.

Markets have worried that any new euro-zone assistance would create a new class of debt senior to the bonds currently outstanding. That has led them to demand bigger premiums for holding Spanish debt, making it even more difficult for the country to tap markets.

The yield on the benchmark 10-year Spanish bond rose to 6.59% Monday from 6.19% on Friday.

Spanish assets took a fresh beating Monday, before Moody's Investors Service lowered its long-term ratings on 28 Spanish banks by one to four notches. The IBEX 35 index shed 3.7%, pulled down by losses in local banking stocks. Moody's cut Spain's sovereign-debt rating by three notches on June 13.

"Doubts about the preferred nature of this [euro-zone] debt persist," Spanish Deputy Finance Minister Fernando Jiménez Latorre said at a news conference. "In coming weeks, these doubts will be resolved."

Germany and others have objected that giving the aid directly to banks would give them less control over how the funds are used, and argue that it isn't allowed by the bailout funds' current charters.

Officials such as EU Monetary Affairs Commissioner Olli Rehn say it would be weeks before a final deal can be agreed between Spain on the one side,and the European Commission, the Eurogroup and the European Central Bank on the other.

Spain's banking problems have transformed the scale of the euro zone's debt crisis: the Spanish economy is larger than that of the other four casualties—Greece, Ireland, Portugal and Cyprus—put together, but markets have judged that even such a large economy doesn't have the wherewithal to fix things—not least because one in four of the workforce is officially unemployed.

The government had only belatedly bowed to the inevitable.

"With this step, Spain has tried to contribute as much as possible to the re-establishment of confidence in the euro zone," Premier Mariano Rajoy said Monday.

While Cyprus's woes are small by comparison, they, too, are a painful reminder of the excesses of the government and private-credit booms that have led the euro zone to its current state.

As with Spain, Cyprus's request for assistance had been long expected. It comes after weeks of unsuccessful negotiations with Russia for a loan similar to a €2.5 billion one that kept it afloat at the end of last year.

"The purpose of the required assistance is to contain the risks to the Cypriot economy, notably those arising from the negative spillover effects through its financial sector, because of its large exposure in the Greek economy," the Cyprus government said.

Eurogroup President and Luxembourg Prime Minister Jean-Claude Juncker later said the Eurogroup would mandate the European Central Bank and the European Commission to negotiate conditionality for the aid.

He hinted that an element of budget financing would be included in the package, saying it would only "primarily" address the challenges of the financial sector.

Cyprus Popular Bank PCL—Cyprus's second-biggest bank—has asked the government to recapitalize it after the bank was hit by a €3.65 billion loss stemming from Greece's recent €200 billion debt restructuring.

The bank also has been facing mounting nonperforming loans in Greece—as well as in Cyprus—as the Greek economy grinds through a fifth year of recession.

The government's support will cost it at least €1.8 billion, or 10% of expected gross domestic product this year, blowing the government's deficit-reduction plans hopelessly off course.

Cypriot Finance Ministry staff said they expect the total financing needs to come to €10 billion, but one official said: "The European Commission will crunch the numbers and decide the amount."

Cyprus's government debt is now rated as junk by all three of the world's major ratings firms.On Monday, Cyprus lost its last investment-grade credit rating when Fitch Ratings cut its assessment of the country by one notch to double-B-plus from triple-B-minus.

Fitch said the capital shortfall in the banking system alone could reach €6 billion, or 33% of GDP.

One of the biggest problems for Cyprus is that its financial sector is so large relative to its underlying economy, thanks to the huge amount of foreign money—much of it Russian—it has attracted with a regime of light taxation and regulation. The foreign liabilities of the banking sector were more than three times the size of annual output at the end of 2011.


I am going to invest my money on ink, paper, and the spare parts for printing presses.


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