Cyprus looked poised to be the next eurozone economy to be bailed out, as its finance minister warned just days remain to meet a key deadline to shore up its banks.
The island and its financial sector are heavily exposed to the problems in Greece, the recipient of two bail-outs totalling €247bn.
Locked out of the debt markets, Cyprus is under pressure to apply for aid to help its second-largest lender. The Cyprus Popular Bank needs €1.8bn before a regulatory deadline this month.
“The issue is urgent. We know the recapitalisation of the (island’s) banks must be completed by June 30, and there are a few days left,” said Vassos Shiarly, finance minister, adding he hoped for “good terms” if Cyprus asks for aid.
Spain’s claims of a “no-strings” deal to rescue its banks have stoked hopes in other bailed-out nations that they can secure help on better terms.
In Greece, left-wing party Syrzia said the talks in Europe “open new perspectives for Greece and the eurozone”.
The Irish government argued that Spain “got the exact same deal that we got”, but the Sinn Fein opposition said Irish people “will be asking themselves why is there one set of conditions for us and another for Spain.”
Investors are most worried about a potential bail-out for Italy, as official figures on Monday confirmed the eurozone’s third largest economy shrank by 0.8pc in the first three months of the year.
This month, for the first time, the president, Demetris Christofias, the EU’s only communist leader, acknowledged that he could not “absolutely exclude” the possibility of turning to Brussels for financial assistance.
He had vehemently rejected any such recourse, fearing the EU would demand stringent austerity measures like those foisted on Greece, Ireland and Portugal.
Cypriot banks lost more than €3bn in last year’s “haircut” of Greek government bonds. That could be the tip of the iceberg because they also have up to €22bn in outstanding loans to Greece’s private sector – some €5bn more than Cyprus’s GDP.
Little wonder Cypriots are anxiously watching next weekend’s elections in Greece. A victory for anti-austerity parties could result in Athens crashing out of the euro zone, exposing the net private assets of Cypriot banks in Greece to devaluation.
The causes of Cyprus’s economic difficulties are the subject of bitter political controversy. The government argues the banking sector’s exposure to Greek debt is the sole source of its woes.