Thursday

28th Mar 2024

Euro chief spooks markets with Cyprus comments

  • Dijsselbloem - drawing conclusions too quickly for markets' liking (Photo: consilium.europa.eu)

Eurogroup chief Jeroen Dijsselbloem on Monday (25 March) spooked markets when he said that Cyprus' bailout is a template for future eurozone bank re-structurings - comments he later modified.

In an interview with Reuters and the Financial Times, the Dutch finance minister suggested that the just-agreed Cyprus deal in which shareholders, bond holders and uninsured deposit-holders will face substantial losses will be replicated in future eurozone bank bailouts.

Read and decide

Join EUobserver today

Get the EU news that really matters

Instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

“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?" he said.

“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 added.

Following German pressure that Cyprus should contribute to its €10 billion bailout, much of the money is to come from a so-called bail-in.

Uninsured depositors in the country’s second largest bank, to be wound down, may face 100 percent losses.

Those in Bank of Cyprus, the largest lender, could face a haircut of 30-40 percent.

Dijsselbloem’s comments provoked an immediate negative reaction on financial markets.

By the close of business, the euro was dropping against the dollar amid concerns that large-scale savers - with more than €100,000 in the bank - will move their money out of weak euro countries,

Dijsselbloem later issued a clarification saying that Cyprus is a “specific case with exceptional challenges."

The media interview also appeared to signal the end of talk of using the European Stability Mechanism (ESM), a €700 billion eurozone fund, to directly rescue banks and stop governments taking on the debt.

Ireland and Spain have been holding out for direct bank recapitalisation, also seen as a key plank in the eurozone’s plans for a future banking union.

But according to Dijsselbloem, the likelihood of more bail-ins could mean such a path will never be followed.

"We should aim at a situation where we will never need to even consider direct recapitalisation," he said.

"If we have even more instruments in terms of bail-in and how far we can go on bail-in, the need for direct recap will become smaller and smaller,” he noted.

His comments appear to fit in well with thinking in Berlin, where the terms of the Cyprus bailout have been welcomed and which has always been reluctant to see the ESM providing a direct lifeline to banks.

Success of Cyprus deal depends on 'social consensus'

The success of the Cyprus bailout deal will depend on the social consensus around it, says Brussels, with the island's GDP expected to dive as the size of the banking sector is drastically cut.

Opinion

EU Modernisation Fund: an open door for fossil gas in Romania

Among the largest sources of financing for energy transition of central and eastern European countries, the €60bn Modernisation Fund remains far from the public eye. And perhaps that's one reason it is often used for financing fossil gas projects.

Latest News

  1. Kenyan traders react angrily to proposed EU clothes ban
  2. Lawyer suing Frontex takes aim at 'antagonistic' judges
  3. Orban's Fidesz faces low-polling jitters ahead of EU election
  4. German bank freezes account of Jewish peace group
  5. EU Modernisation Fund: an open door for fossil gas in Romania
  6. 'Swiftly dial back' interest rates, ECB told
  7. Moscow's terror attack, security and Gaza
  8. Why UK-EU defence and security deal may be difficult

Stakeholders' Highlights

  1. Nordic Council of MinistersJoin the Nordic Food Systems Takeover at COP28
  2. Nordic Council of MinistersHow women and men are affected differently by climate policy
  3. Nordic Council of MinistersArtist Jessie Kleemann at Nordic pavilion during UN climate summit COP28
  4. Nordic Council of MinistersCOP28: Gathering Nordic and global experts to put food and health on the agenda
  5. Friedrich Naumann FoundationPoems of Liberty – Call for Submission “Human Rights in Inhume War”: 250€ honorary fee for selected poems
  6. World BankWorld Bank report: How to create a future where the rewards of technology benefit all levels of society?

Join EUobserver

EU news that matters

Join us