March 11 (Bloomberg) -- European leaders grappling with political deadlock in Italy and spiraling unemployment in France will turn to a financial rescue for Cyprus in an effort to stave off a return of market turmoil over the debt crisis.
European Union leaders will meet for a March 14-15 summit in Brussels to discuss terms for Cyprus, including the island nation’s debt sustainability and possibly imposing losses on depositors. That comes as Italy struggles to form a government after an inconclusive Feb. 24-25 election and as concern over the French economy mounts with unemployment at a 13-year high.
“We haven’t turned the corner yet, but we’re on a good path,” German Finance Minister Wolfgang Schaeuble told Austria’s Der Standard newspaper in a March 8 interview. “It would be wrong at this point to change course.”
The European Central Bank’s pledge to intervene in bond markets and the prospect of an economic recovery by the end of the year are holding the three-year-old sovereign debt crisis in check. Still, gridlock in Italy has raised the specter of renewed turmoil in the euro area’s third-largest economy, while growth has ground to a halt in France, the second-largest.
European bonds held steady last week, with Spanish debt advancing for a fourth week and Italian yields sliding. Spanish 10-year yields declined for the ninth straight day, sliding 3 basis points to 4.73 percent at 9:12 a.m. in Madrid. Italian yields with the same maturity climbed 3 basis points to 4.63 percent.
The euro retreated last week after a U.S. report showed a falling jobless rate. It traded at $1.3012 at 9:14 a.m. in Frankfurt to bring the decline against the greenback this year to 1.4 percent.
In Cyprus, European leaders have yet to reach an agreement with the International Monetary Fund and the new government amid concern about the presence of Russian wealth on the island and a rescue package that could approach the size of the Mediterranean nation’s 18 billion-euro ($23 billion) economy.
Nicos Anastasiades, who took over as Cyprus’s president on Feb. 28, will attend his first EU summit meeting this week. Over the weekend he said proposals to impose losses on depositors as part of a bailout package are “out of the question,” according to the Greek state-run Athens News Agency.
“After rumors of depositor haircuts, there was some outflow of deposits, not though to a degree which caused particular worry,” Anastasiades told ANA March 9.
A bailout for Cyprus, which would be the fifth rescue for a euro nation since the crisis began in 2009, may involve a debt target of 100 percent of gross domestic product in 2020, according to three EU officials who spoke on condition of anonymity. Cyprus said in January that a rescue could push its debt-to-GDP ratio to a peak of just under 140 percent in 2014.
IMF Managing Director Christine Lagarde has said any plan for Cyprus should address debt sustainability in addition to offering the country a path back to markets and economic growth. The IMF and European leaders struggled last year to overcome similar differences over a rescue package for Greece.
“We’re all aware that there’s a complicated situation in Cyprus,” Schaeuble told Der Standard.
Italy’s political establishment continues to seek a way to form a government after the country’s credit rating was cut one level by Fitch Ratings, which cited the possibility that the deadlock could further damage the country’s economy.
“The increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy amidst the deep recession,” Fitch said in a statement on March 8. “The ongoing recession in Italy is one of the deepest in Europe.”
Democratic Party leader Pier Luigi Bersani and his allies secured a majority in the lower house of parliament. They failed to win the Senate, where, former Prime Minister Silvio Berlusconi and comedian-turned-politician Beppe Grillo were able to establish blocking minorities.
Should Italian President Giorgio Napolitano avoid calling a new election, he may consider setting up a national-unity government, accepting a minority Cabinet under Bersani or seeking another so-called technical government along the lines of that overseen by outgoing Prime Minister Mario Monti.
Italy’s “urgent problems” need to be addressed and will require “a serious effort of cohesion” and a stable government, Napolitano said in Rome on March 8.
Meanwhile, concern is mounting over France, where President Francois Hollande is struggling with a jobless rate that’s exceeded 10 percent. PSA Peugeot Citroen, Renault SA and Alcatel-Lucent SA are slashing payrolls after the economy slid back into a recession last year and risks doing so again after contracting 0.3 percent in the last quarter of 2012.
The sputtering economic performance will likely scupper France’s plan to scale back its budget deficit to 3 percent of GDP this year. The European Commission expects a shortfall in France of 3.7 percent and unemployment to climb to 10.7 percent.
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