Cyprus to blame for bailout turmoil, Draghi says

FRANKFURT Thu Apr 4, 2013 12:31pm EDT

European Central Bank (ECB) President Mario Draghi arrives for the monthly ECB news conference in Frankfurt April 4, 2013. REUTERS/Lisi Niesner

European Central Bank (ECB) President Mario Draghi arrives for the monthly ECB news conference in Frankfurt April 4, 2013.

Credit: Reuters/Lisi Niesner

FRANKFURT (Reuters) - The European Central Bank put the blame for initial market turmoil over Cyprus's bailout squarely on the island's government on Thursday and pledged that taxing depositors would not become normal procedure.

ECB President Mario Draghi said Cyprus's bailout was "no template", a statement designed to ease market fears that bank deposits would in future be fair game for international lenders seeking to help struggling euro zone countries.

But he was also scathing about Cyprus's initial plan to impose a levy on insured as well as uninsured bank depositors.

"That was not smart, to say the least, and was quickly corrected (by euro zone finance ministers)," he said.

Draghi said the finance ministers and the International Monetary Fund had wanted Cyprus to help pay for its 10 billion euros ($12.84 billion) with a levy on wealthy depositors only.

Cyprus, however, had initially also sought to charge those with 100,000 euros or less even though they had a bank deposit guarantee. The move triggered a wave of concern in financial markets, fearing that investors elsewhere would be unnerved and start a bank run.

Draghi said depositors with guarantees should be sacrosanct, but that it was best not to touch any depositors if possible.

"You have a pecking order, ideally insured depositors should be the very last category to be touched. The (European) Commission draft directive (on banking) foresees exactly this.

"There isn't actually a specific distinction between categories of bondholders and uninsured depositors in the draft directive. But basically the point is that you, if you can, don't touch uninsured depositors," Draghi said.

He also said it would be of no help to Cyprus if it left the euro zone, as some have floated.

"What was wrong with Cyprus's economy doesn't stop being wrong if they are outside the euro," he said.

"So the fiscal budget stabilization, consolidation, the restructuring of the banking system would be needed anyway, whether you are in or out. To be out doesn't preserve the country from the need for action."

Draghi also sought to soothe concerns that charging depositors - called a "bail in" - would now be imposed on other troubled countries.

Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, caused a stir in March when he told Reuters that the Cyprus bailout, including depositor levies, could be replicated in future.

Draghi insisted this was not the case.

"Cyprus is no template," he said. "I am absolutely sure that the chairman of the Eurogroup has been misunderstood."

($1 = 0.7789 euros)

(Writing by Jeremy Gaunt, editing by Mike Peacock)

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Comments (1)
It is a sad day for the European Union when their Bankers cannot see a bigger picture as Investors.

Cyprus is very special, indeed. Geographically it represents the cross-road for three continents, (except as a backwater under 350 years of Ottoman occupation) and it has done so (for Europe) for thousands of years.

Taken in context, the ‘confidence’ issue (in Cyprus) is a sham because it was only under their own efforts (as Cypriots), once Independence was established in 1960, that a network of asphalt roads island-wide was built for the first time, as well as a drinking water infrastructure. Never mind the coup in ’74 which failed because the “Greeks” of Cyprus did not support it, and never mind the ‘Peace Operation’, so intricately entwined with it, which left 1/3 of the population homeless in less than two weeks, (the forgotten example of ‘cleansing’ before Bosnia), by the Turkish Army which occupies illegally more than 50% of its coastline, and its most productive land, still. Cypriots, are heroic in their efforts so far, and they have demonstrated their resolve to defend Universal Principals based on the Rule of Law, with ingenuity and resolve.

In such a weakened state, bullied only because “they” are small, will cooler heads prevail on the political front when Europe soon must face the real Cyprus Problem (and Turkey)? Like the banks (for a few Euros), will she allow the island to be torn in two because it is easy?

…solidarity, as Human Beings, that’s what Europe won a Nobel Prize for.

With such a poor result on this issue, Mr. Draghi should resign, at least the so called Troika should recognise it is not blameless in shaking Banking Systems the world over to their core with their narrow thinking. It is naïve to imagine that Cyprus, on its hands and knees, could do that; I feel more worried for the rest of us, not the Cypriots that so well somehow, have endured heavily their price for Freedom.

Apr 05, 2013 11:27am EDT  --  Report as abuse
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