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Associated Press

00:00 EDT Tuesday, June 12, 2012


Cyprus, which has the 15th-smallest economy in the euro zone, acknowledged Monday that it is considering applying for an emergency loan package for its banks similar to the one Spain sought. The Cypriot government needs €1.8-billion ($2.3-billion) by June 30 to give to Cyprus Popular Bank, its second-largest lender. It has for the past year relied on a Russian loan to pay its bills.

If it did ask for a European loan, Cyprus would become the fifth country in the currency union to seek outside financial help.

The government's finances are in decent shape and the economy is not in recession. Its problem is its banks, which were heavily exposed to Greek government debt. They took huge losses on those investments when Greece wrote off about three-quarters of the value of its bonds in March as part of an international rescue package.

The country's Finance Minister, Vassos Shiarly, is hoping the country would - like Spain - not be forced to slash government spending or take other so-called austerity measures in exchange for a bank rescue.

The main Cypriot stock index jumped 5 per cent on Monday as the bank shares rose on hopes they would get a financial lifeline.


Once it became clear that the rescue money for Spain's banks would not solve that country's problems, investors began worrying about one of its euro partners - Italy. Its economy is larger than Spain's, and it didn't suffer through a real estate bust so it's banks are in better shape. But its economy is shrinking, making it difficult for the government to chip away at a mountain of debt.

Italy released data Monday that confirmed the country is in recession and has little likelihood of making a big recovery this year.

The government of Premier Mario Monti is trying to push through reforms to make the economy more competitive, but it is facing opposition.


The greatest uncertainty hanging over Europe this week is Greece, which holds a national election Sunday.

A political party that has a real chance of winning, the radical left-wing Syriza, has campaigned on a plan to refuse to live up to the terms of the country's $170-billion (U.S.) international aid package. If it were to do so, Greece could lose access to the money that is keeping the government solvent and be forced to leave the euro.

A Greek exit from the euro would raise fears that another European country such as Portugal or Italy might be next.

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