Tuesday

5th Jul 2022

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.

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“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.

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