Cyprus on the Brink, Spain and Italy Suffering

The Bank of Cyprus warned on August 1 that “there is an imminent threat of Cyprus joining the European Union’s support mechanism, with whatever drawbacks that will entail,” as rising costs of borrowing in Italy and Spain indicate that Europe’s financial crisis has not yet been solved.

“There is no more time left,” said the bank. “We are at a crucial crossroad where we will be judged by history. It is time for immediate and effective action.”

Last Friday, Standard & Poor’s cut Cyprus’s credit rating to bbb+. The day before, Cypriot President Demetris Christofias dissolved the cabinet, saying a new one would be appointed shortly.

The political and economic turmoil comes after an explosion at a naval base on July 11 blew up the country’s main power station. It is expected to cost €1 billion to repair.

Meanwhile, on August 2, Italy’s cost of borrowing reached its highest level since the euro was introduced 11 years ago. Share prices for three of Italy’s biggest banks, Unicredit, Intesa Sanpaolo and Monte dei Paschi, sank so fast that trading was suspended. The interest rate on Italy’s 10-year bonds is 6.3 percent.

Spain is also suffering—the interest on its equivalent bonds reached close to 6.5 percent. “If yields reach 7 percent, a country has effectively lost the support of the international markets,” warned Britain’s Guardian newspaper.

This would send Spain and Italy to the German-run European Financial Security Facility for help—meaning they would have to comply with Germany’s conditions. The worse the European financial crisis becomes, the more nations will be willing to do to get this help from Germany.

Expect Europe’s financial crisis to continue—pushing the continent toward further integration, and toward Germany.