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Eurozone crisis spreads as Spain fights bailout fears

The eurozone crisis widened Wednesday as a diplomat said Cyprus would soon request aid from Russia and EU partners, while Spain battled fears it will need a full debt rescue.

business Updated: Jun 20, 2012 22:10 IST

The eurozone crisis widened Wednesday as a diplomat said Cyprus would soon request aid from Russia and EU partners, while Spain battled fears it will need a full debt rescue.

European leaders also faced mounting pressure from G20 partners to restore growth and accelerate integration to end a crisis threatening to tear apart the 17-nation eurozone and undermine the global economy.

In Greece, at the heart of the debt nightmare, conservative leader Antonis Samaras was sworn in as prime minister of a pro-euro coalition government bent on changing terms of its bailout to ease public anger over austerity measures.

And as a relative political stability returned in Athens, Spain was to officially request up to 100 billion euros ($127 billion) to recapitalise its ailing banks at a meeting of eurozone finance ministers on Thursday.

But Spanish Budget Minister Cristobal Montoro insisted that his country would not need a full-blown rescue like Greece, Ireland and Portugal before it.

"Spain has not been rescued because it does not need to be rescued," Montoro told the country's parliament.

Taking a cue from Spain, Cyprus will probably request next week eurozone aid to save its banks, which are heavily exposed to the Greek economy, an EU diplomat said.

The crisis-hit Mediterranean island will "first try to get a bilateral loan from Russia" this week totalling between 3.0-5.0 billion euros, the diplomat said on condition of anonymity.

Cyprus, which is taking over the European Union's rotating presidency as soon as July 1, has already secured a 2.5-billion-euro low-interest loan from Russia to cover its refinancing needs for this year.

Estimates are that Cyprus needs around 4.0 billion euros to prop up its banks and help narrow the budget deficit, which widened last year to double the EU ceiling of three percent of gross domestic product (GDP).

EU leaders, fresh from a G20 summit in Mexico that ended Tuesday, are gearing up for a series of meetings this month focused on containing the crisis, which has put the economies of Spain and Italy at risk.

Finance ministers meet Thursday while the leaders of the eurozone's Big Four of Germany, France, Italy and Spain gather in Rome on Friday. The talks will lay the groundwork for a full EU summit in Brussels on June 28-29.

The aim of the summit is to come up with a pro-growth strategy to bring down record unemployment, but governments are divided over whether to tone down the austerity drive championed by Germany.

"I have no doubt that we will come to an agreement at the European summit in Brussels," French Prime Minister Jean-Marc Ayrault, whose country disagrees with Berlin's austerity-first mindset, told the German weekly Die Zeit.

"The governments know what is at stake. We have to ensure Europe's financial stability and press ahead with our efforts to bring down debt and deficits," he said.

"And we now have to take the road that leads to growth and jobs."

Europeans are also under pressure to deepen economic and fiscal integration within the 17-nation eurozone.

But a key report on integrating eurozone economic and monetary union has yet to be shared around capitals; plans for a banking union are being considered only on a step-by-step basis; and ideas for strengthening financial firefighting capacity remain mired in disagreement.

The United States, the International Monetary Fund and the European Central Bank have all urged greater banking integration in Europe.

Another idea, allowing the eurozone rescue fund to buy Italian and Spanish bonds to lower the countries' soaring borrowing costs, was described by the European Commission as a temporary solution.

"It would be financial paracetamol," said EU economic affairs spokesman Amadeu Altafaj in reference to a widely used pain medication.

"It could soothe tension, pain and malaise... but it does not heal the root causes, the structural problems of the economies of Italy, Spain and others," he said.

"It is not a substitute for structural and economic reforms that can boost confidence."

First Published: Jun 20, 2012 22:08 IST