UPDATE 2-ECB says Cyprus unique case, not model for future

Tue Mar 26, 2013 9:35am EDT

* ECB's Coeure disagrees with Eurogroup chief over Cyprus

* Coeure says Cyprus experience not a model for rest of EU

* ECB's Nowotny says Cyprus a special case

* EU: new law could include bail-in of uninsured deposits

* Finnish premier backs "bail-in" as part of banking union

By Catherine Bremer and Jan Lopatka

PARIS/PRAGUE, March 26 (Reuters) - The European Central Bank sought on Tuesday to quash suggestions that a rescue deal for Cyprus could shape future bank rescues in the bloc, insisting the country was a unique case.

The Cyprus bailout marked a departure from three years of euro zone crisis-fighting by penalising large bank depositors for the first time. Smaller accounts, holding less than 100,000 euros, were spared.

Jeroen Dijsselbloem, head of the Eurogroup of euro zone finance ministers, said on Monday that in future, the currency bloc should first ask banks to recapitalise themselves, then look to shareholders and bondholders and then "if necessary" to uninsured deposit holders.

"Now that the crisis is fading out, I think we need to dare a little more in dealing with this," he said.

The Dutch finance minister, who only took over as Eurogroup chief in January, later put out a statement that Cyprus was a specific case, that plans were tailor-made for each situation and no models or templates were used.

That came too late for the markets which had already turned tail as investors, worried that Cyprus set a precedent for tapping private bank deposits, lost appetite for the kind of rebound that has followed other euro zone rescue deals.

Policymakers from the ECB, which would be left to deal with the fallout from the Cypriot and future crises, pushed back against the suggestion that there could be more such 'bail-ins'.

"I think Mr. Dijsselbloem was wrong to say what he said," said Benoit Coeure, a member of the ECB's six-man Executive Board that forms the nucleus of the broader Governing Council.

"The Cyprus experience is not a model for the rest of Europe because the situation had reached a level which cannot be compared with any other country," he told Europe 1 radio.

Ewald Nowotny, a member of the ECB's 23-man policymaking Governing Council, reinforced Coeure's message.

"I think it has been made very clear that Cyprus is indeed a special case," he said. "It is no model for other instances. This has been made very clear, also today by the ECB."

MIXED MESSAGE

The waters were muddied further on Tuesday when Finland and the European Commission gave some backing to the idea that Cyprus deal would inform resolutions of future euro zone banking crises.

"My view is that this whole (banking union) should include bail-in thinking ... the owners and investors would take losses in case of a bank failure," Finnish Prime Minister Jyrki Katainen told a seminar in Helsinki.

A European Commission spokeswoman said it might be possible for large uninsured depositors to be "bailed-in" as part of the future resolution of a bank under a new draft EU law, but that savers with less than 100,000 euros at a bank would not be hit.

Calming words are the first tool the ECB has to reassure bank depositors their money is safe, and to soothe investors who would take fright at any sign of the Cyprus crisis spreading.

Now, a reassuring message to depositors may need to be supported with efforts to make sure the euro zone financial system is lubricated properly.

The ECB decided on Monday to give Cypriot banks access to emergency central bank funding - a step that will avoid a meltdown in the country's bloated banking sector.

In addition, the ECB already offers banks unlimited liquidity with loans up to 3 months, and reserves the option to give them more funding certainty over a longer horizon by laying on another 3-year funding operation, as it did a year ago.

The problem for Cyprus' international lenders was that there were few bank bondholders to impose a haircut on. A contribution to the bailout that the euro zone and IMF insisted upon had to come from elsewhere.

"I do not see why we would use the same methods elsewhere," said Coeure.

"The first lesson is that we need better control of banks," he said. "We need an independent European regulator, and that will be the case by mid-2014 and it will be the ECB, and we need to identify problems earlier in the euro zone."

In Prague, Nowotny told reporters that capital controls that Cyprus plans to prevent an outflow of money when its banks reopen this week should be short in duration.

"This is for transitional period," the Austrian central bank chief said. "Basically we all want to keep it as short as possible."

Nowotny also saw no parallel between Cyprus and Italy.

"You can not compare this. Most of the markets are very much aware that the Cyprus case is a special one. You can not compare it to Italy, also the markets do not see it this way," he said.

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Comments (1)
Duffminster wrote:
The fact that they are even back pedaling on this issue tells you that in fact it is planned as a template.

Mar 26, 2013 1:17pm EDT  --  Report as abuse
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