Cyprus bailout costs may reach over half of economy

European officials claim that a Cyprus bailout may reach 10 billion Euros which is over half the size of its annual GDP. Cyprus has officially requested aid from the EU.

One Euro zone official told Reuters news agency:“The exact number has not been decided yet. It was to be 6 billion for the state financing and 2 billion for the banks but that is optimistic – it is more likely to be seven and three – up to 10 billion euros in total," one euro zone official told Reuters.

To add to Cypriot woes the rating of Cyprus sovereign debt has been downgraded to junk status. The agencies said that the country will need up to 4 billion Euros to recapitalize its banks.

So far the Cypriot government itself has not said how much it will ask of the EU. This Thursday the EU leaders will discuss the issue at a meeting in Brussels. Spain has also asked for 100 billion Euros to support its banks.

Russia has already loaned Cyprus 2.5 billion Euros. For more see this article. For more than a year Cyprus has withdrawn from international capital markets. Interest on its ten year bonds are over 16 per cent!

Spain may be forced to borrow 50 billion U.S. from European Stabililty Fund

Today (June 9) finance ministers from the Eurozone are holding a teleconference on an expected request from Spain for aid. The teleconference was planned after the IMF (International Monetary Fund) issued a report Friday which estimates Spain requires an injection of at 50 billion U.S. dollars to bail their banks out. The IMF did a stress test on the banks.

An Al Jazeera reporter said:"Reports we are getting from various sources suggest that there will be this conference call from Brussels between the 17 finance ministers of the eurozone, the so-called eurogroup. The Spanish finance minister will be among them," "What we believe they will be discussing is the sort of size and shape of the terms attached to a possible bailout for Spain, to inject fresh capital into its banks."" So far Spain has insisted that it does not need a bail out. Spain worries that it will be required to commit to even more austerity measures and will lose control of financial policy. However, given the situation borrowing such a huge amount of money through bonds would be horrendously expensive if even possible.

On Thursday Fitch rating agency cut Spain's sovereign debt rating by three more points to BBB because of the banks exposure to bad loans. The Al Jazeera correspondent concluded with good reason:"It is becoming increasingly clear that the government here doesn't really have a choice; that IMF bill is in for the banks, according to its audit around $50bn, and other institutions put the figure much higher than that. The Madrid government simply doesn't have that kind of money and this banking crisis has to be solved,"

Spain is expected to ask for money from the European Financial Stability Facility. It has available 440 billion euros so would be easily able to provide the money. The big question would be what the conditions would be for receiving the funds. For more see this article.

European, U.S. stocks fall as Italy bond yields rise

   Ten year Italian bonds rose above the 7 per cent danger level to 7.01. Also, the European Central Bank's balance  sheet soared to 3.55 trillion dollars a record as it loaned money to financial institutions to keep credit flowing.
   Oil prices also trended lower even though Iran was making noises about blocking oil shipments through the State of Hormuz.
   Earlier Italy's cost of borrowing had declined and this helped stock markets improve but the so-called Monti effect after the new technocratic Italian prime minister seems to have worn off. The chief portfolio strategist for Wells Fargo Advantage Funds said: "The banks are not borrowing from the ECB in order to spur lending. It’s to shore up their own balance sheets. That could lead to a credit contraction in the euro zone."  Unless the banks feel confident in lending they will simply hoard the money they are being loaned  and this in effect defeats the policy of the central bank which was attempting to ease credit. For much more see this article.