Cyprus will become the fifth eurozone member to seek financial assistance. With its banks heavily exposed to Greece’s crisis Cypriots can expect to be among the hardest hit when Greece exits the eurozone. The announcement from the Cypriot government came soon after Fitch cut the Cypriot government’s rating to “junk”. The new government in Greece has done little to reassure the markets. Shares fell in Italy, Greece, and Spain as the upcoming EU summit and new rounds of bailouts fail to foster optimism.
Just as Cyprus seeks relief a 100 billion euro bailout plan was agreed for Spain, bringing the amount spent on bailouts and other rescue measures to close to 500 billion euros. Spanish Prime Minister, Mariano Rajoy, tried to convince skeptics that the currency was safe, saying:
We must dispel doubts over the eurozone … The single currency is, must be, irreversible,
The upcoming summit will be the last chance European leaders have to reassure the markets before shares slide further and faster. It is rumored that at the summit closer fiscal union, the introduction of a “banking supervisor”, banking union, and debt sharing will all be proposed as solutions to the situation in the eurozone.
As per usual in euro negotiations the Germans are acting as the fulcrum. German politicians are hesitant to take on some of the responsibilities of governments that spent irresponsibly. Germany’s Secretary of State, Steffen Kampeter, has said, “debt is a national responsibility”.
Another German to speak out against the perceived wisdom of monetary relief and the sharing of debt is finance minister Wolfgang Schaeuble. Not only has Schaeuuble come out against writing Greece checks, he has also taken Obama to task for putting pressure on European governments to act:
Mr. Obama should focus on reducing the American deficit … It's higher than in the eurozone. You have to understand that people are always ready to give others advice quickly.
Speaking against endless bailouts Schaeuble said:
We have to fight the causes … Anyone who believes that money alone or bailouts or any other solutions, or monetary policy at the ECB -- that will never resolve the problem. The causes have to be resolved.
While the Germans might be opposed to pooling debt and granting further bailouts they are in the minority. Because a closer fiscal union and pooled debt seem to be the only options being seriously proposed it is hard to predict how seriously the markets would react if the Germans reject the plans discussed later this week.