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13th Jun 2021

Draghi: Cyprus levy was 'not smart'

  • Mario Draghi: It took two attempts to get the Cyprus bailout right (Photo: Council of European Union)

European Central Bank chief Mario Draghi on Thursday (4 April) admitted that an initial plan to tax small savers in Cyprus was "not smart", but stressed that the island is "no template" for others.

Looking back on the events that both investors and ordinary Cypriots, Draghi said that the ECB had not been the source of the original (and subsequently rejected) idea to impose a tax on small savers, but did agree to it as part of an overall deal on 15 March.

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"That was not smart, to say the least, and it was quickly corrected the day after in the Eurogroup conference call," Draghi said during a press conference in Frankfurt after the monthly meeting of the ECB governing council.

He added that Cyprus was "no template" for other countries or banks in trouble and said that Eurogroup chief Jeroen Dijsselbloem was "surely misunderstood" when he was quoted suggesting this may be the case.

But the Italian central banker did observe some parallels between Cyprus and the other bailed-out countries: problems in their banking systems and the lack of common rules and mechanisms to deal with them.

With the setting up of a eurozone-wide banking supervisor (SSM) being held up by negotiations with the European Parliament, Draghi noted that "any delay on this front is extremely disappointing."

"There is no better way to prevent these crises than shedding light on the situation of the national banking systems via this international oversight. It was the same situation in Ireland, Spain, Greece as is today in Cyprus."

He also spoke in favour of involving the senior bondholders and the banks themselves in their own rescue - the so-called bail-in idea promoted by Germany and its hawkish allies - Finland, Austria and Netherlands - that finally prevailed in the Cyprus negotiations.

"A bail-in by itself is not a problem, it's the lack of rules known to all parties which can make a bail-in a disorderly event, and the lack of capital buffers. Absence of rules give this impression of ad-hoc-ary in these cases," Draghi said.

The quicker eurozone-wide rules are in place on how to deal with failing banks and who picks up the bill, the better, he indicated.

"We would like these rules not in 2018-2019 as it's foreseen, but way, way earlier - in 2015."

"It is very urgent that we have in place a European framework for resolution, restructuring and recapitalisation of the banking systems. These are the lessons I would draw from the Cyprus event," he said.

Asked if such legislation would find favour in Germany and its northern allies, Draghi said that most of these rules do not entail any "mutualisation of potential losses."

He also put the lid on any speculation about Cyprus' future membership of the single currency or a potential breakup of the eurozone noting that this is to "vastly underestimate" the political commitment behind the euro.

"It is not like a sliding door. It's a very important thing, it's a project in the European Union. So you have a very hard time asking people like me 'What would happen if...?' There is no plan B," Draghi said.

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