| BRUSSELS, March 26
BRUSSELS, March 26 In bailing out Cyprus and
taking funds from savers instead of taxpayers, the euro zone has
crossed a Rubicon with implications for future banking rescues
in other countries despite assertions that the crisis in the
island nation is unique.
CYPRUS: ONE-OFF OR TEMPLATE?
Eurogroup Chairman Jeroen Dijsselbloem caused uproar in
financial markets by saying in an interview with Reuters and the
Financial Times that the Cyprus solution gave a flavour of how
Europe would handle future bank crises, by making banks solve
their own problems rather than using European taxpayers' money.
Finnish Prime Minister Jyrki Katainen supported him, saying
that "bail-in" thinking should guide a planned European banking
union, but clarified that he did not necessarily mean depositors
should be hit in future.
ECB policymakers sought to calm the ensuing storm and
reassure savers throughout Europe by pointing out that Cyprus
was unique in that its banks were largely funded by deposits
rather than by issuing bonds and shares.
The European Commission 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 savers with
less than 100,000 euros ($128,600) would not be hit.
Under existing rules, shareholders and bondholders are the
first to take losses. The exception so far has been senior
bondholders. The European Central Bank blocked any "haircut", or
debt write-down, for them in Ireland's bailout programme but has
since dropped its opposition in future cases.
Dijsselbloem's comments made clear that the idea of using
the euro zone's European Stability Mechanism (ESM) rescue fund
to recapitalise banks directly, agreed by EU leaders last June,
is increasingly remote and may never come to pass.
His thinking gave some insight into how policymakers may be
looking at new ways to deal with banking crises in the future.
WHAT NEXT IN CYPRUS?
Banks are due to reopen in Cyprus on Thursday after a
closure of nearly two weeks, but withdrawals will be limited
"for a matter of weeks", its finance minister has said. The
government has yet to spell out restrictions on capital
movements and there are fears of a bank run.
The British security firm G4S that transports cash
for Cypriot banks is working round the clock, sending teams out
with police protection to stock bank machines and readying
guards for when banks reopen.
Cyprus Popular Bank will be among banks to reopen
for limited business even though it is due to be wound down
under the terms of the bailout deal, with insured deposits under
100,000 euros to be transferred to Bank of Cyprus.
The Cypriot parliament holds its weekly session on Thursday,
the first since the bitterly resented bailout deal, which may
inflict losses of some 40 percent on deposit accounts of more
than 100,000 euros in the two banks, many of them held by
Russians and savers from outside Cyprus.
Parliament does not need to ratify the bailout deal because
it already adopted bank resolution legislation last week.
However, its will have to approve privatisation laws for state
assets due to be sold under the EU/IMF programme.
The banks face big layoffs that may cause labour unrest.
Parliament, which rejected an earlier plan to impose a levy
on smaller bank deposits, may also seek to legislate to shield
pension funds, such as those of Cyprus Popular Bank workers,
Critics have accused Cyprus Central Bank Governor Panicos
Demetriades, a fierce critic of austerity in his former role as
an economics professor at Leicester University in Britain, of
mismanaging the crisis and questioned whether he is capable of
implementing the bank resolution that covers the bailout.
WHAT NEXT IN THE EURO ZONE?
The European Central Bank has vowed to do "whatever it
takes" within its mandate to save the euro, notably by buying
the bonds of troubled euro zone countries that accept an EU/IMF
assistance programme, but that pledge has yet to be tested.
Euro zone finance ministers say there is no other country
which needs a bailout after Cyprus joined Greece, Ireland,
Portugal and Spain in receiving emergency loans from the
currency area's rescue fund.
Ministers hope both Ireland and Portugal will manage to exit
their adjustment programmes and return to market funding this
year. Ireland has already issued its first 10-year bond since
2010. Portugal is some way behind but has also made its first
bond issue in January since the mid-2011 bailout.
EU governments and lawmakers agreed last week on the key
rules for a single banking supervisor for the euro zone, based
at the European Central Bank. The new supervisory body is due to
enter into force gradually by mid-2014.
The European Commission says it will propose laws this
summer for a single resolution mechanism for banks covered by
The EU executive has also promised proposals at a later
stage to connect national deposit guarantee schemes, although EU
paymaster Germany and its northern allies have opposed any joint
liability for deposit insurance. One possible model could be to
make national guarantee schemes take out reinsurance contracts
with the euro zone rescue fund.
NEXT SHOE TO DROP?
Slovenia's central bank chief Marko Kranjec said last week
he was sure his small euro zone country would not need a bailout
in the footsteps of Cyprus. Banks in Slovenia are nursing some 7
billion euros in bad loans, equal to about 20 percent of GDP,
but the banking sector's assets represent just 135 percent of
Slovenian GDP, compared to 800 percent in Cyprus.
Slovenia has experienced political instability, with a new
centre-left government taking office last week after the
previous conservative administration lost its majority in
parliament in January over a corruption scandal.
Dijsselbloem said on Tuesday there has been no sign of
higher-than-normal withdrawals of bank deposits in the euro zone
or of abnormal shifts in deposits from peripheral to core
countries following the Cyprus deal.
Analysts say European savers and companies may diversify
their holdings to keep accounts under 100,000 euros.
Both Luxembourg and Malta have higher ratios of banking
sector balance sheets to GDP than Cyprus, but neither is seen as
carrying the same risks.
Before the Cyprus bailout drama, market attention was
focused on political uncertainty in Italy, where centre-left
leader Pier Luigi Bersani is struggling to form a minority
government after a general election that gave the radical
anti-system 5-Star movement the balance of power in the Senate.
However, after an initial spike following last month's vote,
Italian borrowing costs have fallen again and markets seem
unfazed by the prospect, if Bersani fails, of another
short-lived technocratic government and an early return to the
The main threat to euro zone stability is now seen as the
absence of economic growth in southern Europe and the risk of
rising social unrest and political radicalisation over record
unemployment. Popular anger could topple Greece's fragile
governing coalition, analysts say.