(Reuters) - A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors, the head of the region's finance ministers said.
"What we've done last night is what I call pushing back the risks," Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times hours after the Cyprus deal was struck.
"If there is a risk in a bank , our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'. If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders," he said.
After 12 hours of talks with the EU and IMF, Cyprus agreed to shut down its second largest bank, with insured deposits - those below 100,000 euros - moved to the Bank of Cyprus, the country's largest lender. Uninsured deposits, those accounts with more than 100,000 euros, face losses of 4.2 billion euros.
Uninsured depositors in the Bank of Cyprus will have their accounts frozen while the bank is restructured and recapitalised. Any capital that is needed to strengthen the bank will be drawn from accounts above 100,000 euros.
The agreement is what is known as a "bail-in", with shareholders and bondholders in banks forced to bear the costs of the restructuring first, followed by uninsured depositors. Under EU rules, deposits up to 100,000 euros are guaranteed.
The approach marks a radical departure for euro zone policy after three years of crisis in which taxpayers across the region have effectively been on the hook for resolving problem banks and indebted governments via multiple rescue programmes.
That process, with governments and taxpayers bearing the costs and providing the back stop, had to stop, Dijsselbloem said. Recent financial market calm meant now was the time to make the change, although he conceded there was some concern that it could unsettle markets again.
David Fuller's view his sounds like an effective long-term policy
by Dutch Finance Minister Jeroen Dijsselbloem, who also heads the Eurogroup
of euro zone finance ministers. However, it roiled markets when reported by
Reuters and the Financial Times shortly after mid-day (GMT).
That is because there may now be some outflow of funds from Euroland's less financially secure banks. Also, there is some conjecture over possible economic reprisals from Russia, since oligarchs had some of the bigger deposits in Cypriot banks.
Cyprus's financial sector is yet another example of how amateurish the Eurozone has been, in terms of lacking effective economic governance. According to several of the reports I saw before last weekend, Cyprus's banks were particularly heavy investors in Greek government debt. That may be understandable on geographic and nationalistic grounds, but is also legitimate cause to question their financial acumen. Moreover, apparently Cypriot banks increased their purchases of Greek debt during the turmoil, gambling that they would be bailed out.
This later article from Bloomberg: Saving Cyprus Means Nobody Safe as Europe Breaks More Taboos, is also informative.
Meanwhile, Europe's perennial problem is its lack of GDP growth.