Bailout request

Cyprus is taking over the EU's rotating presidency on July 1st, but this week President Dimitris Christofias told European authorities that he intends to apply for international financial assistance. His government will need three to four billion euros of short-term loans from the eurozone's rescue fund in order to shore up its banks, which have been heavily exposed to the Greek economy. The tiny island nation of one million people has been part of the eurozone since 2008 - and its banks have lent around 25 billion euros to Greece.

In the medium-term, the rescue package may stretch to up to ten billion euros, according to sources from the European Commission in Brussels. The Cypriot government has tried for weeks to tap into other funds - and had asked Russia for a further loan. But the ratings agencies have consistently downgraded Cyprus - so that the country could no longer afford to borrow money on the international bond markets.

Unlike Spain, Cyprus will have to submit to regular checks from the so-called Troika - the EU, the European Central Bank (ECB) and the International Monetary Fund (IMF).

Contagion

Spain made its official request for an emergency loan only yesterday. The cash injection will be used to prop up ailing banks sitting on bad real estate loans. Auditors now estimate the immediate need at some 60 billion euros ($74 billion). Last week, the eurozone gave Spain a precautionary credit line of 100 billion euros. Details of the deal must now be negotiated.

It's still unsure whether the money will come from the previous bailout fund, the European Financial Stability Facility (EFSF), or from the EU's permanent rescue funding program, the European Stability Mechanism (ESM), which will operate from mid-July. Recapitalizing the banking sector from EFSF funds has already occurred in Greece, Ireland and Portugal.

The rules do not allow money to be paid directly to banks, and so it's the Spanish state which will receive the rescue package. It was the German Chancellor Angela Merkel who insisted this rule be observed, "because only the Spanish government can tell the Spanish banks what to do."

Spain, for its part, wanted to avoid asking for the bailout and would have preferred direct payments be made to the banks. That would have meant the EFSF would have become a shareholder in the banks. But the Eurozone fund, based in Luxembourg, doesn't have either the structures or the staff for that. All the same, Spain has avoided becoming a "program recipient" like Greece, Ireland and Portugal, because the money is not directly intended to relieve the national budget.

Troika to assess Spain

Usually, before the installments of a loan can be given out, a troika consisting of representatives from the EU Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) assesses whether a country meets the conditions required to receive a loan.

According to German finance minister, Wolfgang Schäuble, Spain will also have to undergo such an assessment. The finance ministers of the eurogroup have explicitly invited the International Monetary Fund to add its know-how, even though Spain, initially at least, does not intend to receive money from the IMF, which generally imposes strict conditions.

Spanish finance minister Cristobal Montoro admitted last week that his country can't access the necessary funds on the markets at the moment and that it needs its European partners' help. The European Commission has already stressed that Spain has to continue reducing its excessive budget deficit. The sum that Spain now has to borrow from its European partners to rescue its banks will be added to its existing deficit. That has meant that Spain's credit rating has fallen even further since its application for help.

Most severe case: Greece

Since May 2010, Greece has been receiving emergency loans from members of the EU, the EU Commission and the International Monetary Fund. The two rescue packages for Greece which have already been agreed make up between them a credit line of 240 billion euros. According to the EFSF, around 107 billion euros of EU money has actually been paid out. The IMF has contributed an additional 30 billion euros.

Greecehas to adhere to strict budgetary conditions, monitored by the troika, which checks progress before it makes funds available. Earlier this year, Greece's private creditors agreed to take a cut in their debts, which effectively gave the country a 35-billion-euro boost.

Now, the new Greek government wants to relax the conditions and lengthen the period for repayment. That would increase the cost of the rescue and probably make a third rescue package necessary.

Bad real estate loans weigh heavy on Ireland

Much like Spain, Ireland is suffering from the effects of a real estate bubble bursting, which led to a banking crisis. The Irish state took over all of the banks' risks - and that turned out to be too much for it to manage. With the country unable to get money on the markets to finance its debts, Ireland received a credit line of 85 billion euros from the EU Commission, EFSF and IMF. Some 35 billion was used just to rescue the banks. In return, the Irish government committed itself to strict austerity measures. Unlike Greece, Ireland is adhering to these conditions. But the Irish government is now trying to reduce the interest rates on the loans supplied by its European partners, and to extend the terms. It's forecast that Ireland will be in a position again to finance its public debt on the markets by late 2013.

Further cuts for Portugal

Portugalgave in to pressure from the financial markets in May 2011, when it made its request for aid from the eurozone. Portugal will be able to access 78 billion euros in emergency loans overall by mid-2014. One third of the funds are being made available by the International Monetary Fund. Portugal is sticking to its lenders' conditions, but it used up more than half the credit line in the course of one year. And so Portugal may have to ask for help again before 2014.

Alongside the emergency loans from the EU and IMF, the European Central Bank has bought government bonds on a massive scale to help ailing states. This was intended to keep interest rates for Italy and Spain at a bearable level. All in all, the ECB has invested 200 billion euros in the controversial program. Now the Italian prime minister, Mario Monti, has called on the ECB to buy more Spanish and Italian bonds in order to reduce the interest rate again. The ECB, which is independent, is very reluctant to do so. Benoit Coeure, a member of its board, has said he would rather the joint EU rescue fund bought the bonds.

Since the beginning of the global financial crisis in 2008, the EU Commission has even given out loans to member states that don't have the euro as a currency. Hungary, Lithuania and Romania have together received 14 billion euros in budget aid.

Author: Bernd Riegert / nh, jlw
Editor: Michael Lawton