Thread: Cyprus to be model for future bailouts

March 25, 2013 3:49 pm

Cyprus to be model for future bailouts

By Peter Spiegel in Brussels

The €10bn Cypriot rescue marks a watershed in how the eurozone deals with failing banks, with European leaders now committed to “pushing back the risks” of paying for bank bailouts from taxpayers to private investors, the chairman of the group of eurozone finance ministers has warned.

Jeroen Dijsselbloem, the president of the eurogroup, said the relative market calm in recent months, coupled with the lack of market panic following the decision to force private investors and depositors to pay for the entire bailout of two large Cypriot banks, allowed the eurozone to go after private money more aggressively when banks fail.

“Taking away the risk from the financial sector and taking it on to the public shoulders is not the right approach,” Mr Dijsselbloem, who is also the Dutch finance minister, said in an interview with the Financial Times and Reuters hours after he finalised the controversial Cypriot programme.

“If we want to have a healthy, sound financial sector, the only way is to say: ‘Look, there where you take the risks, you must deal with them, and if you can’t deal with them you shouldn’t have taken them on and the consequence might be that it is end of story’,” he added. “That’s an approach that I think we, now that we are out of the heat of the crisis, should consequently take.”

This new approach would mark a radical change of course since the crisis began three years ago.

In both the Irish and Spanish banking sector rescues – which were similar to Cyprus in that massive bank failures risked plunging the governments into bankruptcy because of huge bailout bills – several categories of private creditors, particularly senior bondholders and uninsured depositors, were untouched.

Controversially in Ireland, taxpayers were forced to pay off senior bondholders in the wildly speculative Anglo Irish Bank. European Central Bank and other eurozone officials were reluctant to go after any private creditors other than junior bondholders for fear of exacerbating the flight of investors from the eurozone.

Mr Dijsselbloem acknowledged that “there is still nervousness” among some of his fellow finance ministers about the approach and whether it would scare off private investors in both eurozone sovereign and bank debt. He noted it was this fear that led officials to try first to impose a levy on Cypriot bank accounts last week rather than forcing the island’s two largest to close and then be restructured.

But he said that investor skittishness could ultimately make the financial sector healthier since it would raise the cost of financing for unsound banks.

“If I finance a bank and I know if the bank will get in trouble, I will be hit and I will lose money, I will put a price on that,” Mr Dijsselbloem said. “I think it is a sound economic principle. And having cheap money because the risk will be covered by the government, and I will always get my money back, is not leading to the right decisions in the financial sector.”

Mr Dijsselbloem said the shift also made it far less likely that the eurozone’s €500bn rescue fund, the European Stability Mechanism, would ever be used to directly recapitalise struggling banks, a policy that was agreed just nine months ago. “We should aim at a situation where we will never need to even consider direct recap.”

Asked what the shift in policy meant for countries like Luxembourg and Malta, which like Cyprus have large financial sectors compared with their overall economy, Mr Dijsselbloem said: “It means: deal with it before you get in trouble. Strengthen your banks, fix your balance sheets, and realise if a bank gets in trouble, the response will no longer automatically be: we’ll come and take away your problems.”

Among the most reticent to accept that message was the Cypriot government. Mr Dijsselbloem said it was not until “five to midnight” Sunday night thay Nicos Anastadiades, the Cypriot president, agreed to the closure of Laiki, the island’s second-largest bank, and the radical restructuring of Bank of Cyprus, the country’s biggest. In both banks, large uninsured deposits over €100,000 will be used to pay for the bailout; in Laiki, senior bondholders will also be “bailed in”.

“It actually took all of yesterday afternoon, yesterday evening, to accept the fact that this process was inevitable,” he said. “Simply the acceptance of this new reality - this is no longer a political choice, this is reality, the banks are falling over - took up to midnight.”

Mr Dijsselbloem said officials made it clear to Mr Abastadiades that Laiki was almost completely out of cash - its remaining reserves had dwindled to only a few million euros - before he agreed a deal.

“The cash machines were almost going to stop. There was absolutely no cash money left in the bank any more, they couldn’t fill the cash machines, it was just stopping,” he said. “A week ago you could have a political debate. There was still manoeuvring space for politicians, but in the present situation there was very little choice. You have to do this. You have to accept it.”

Cyprus to be model for future bailouts - FT.com

Cyprus wakes to bailout hangover

By Anthee Carassava
March 25, 2013, 1:51 p.m.

ATHENS -- Defending a last-resort deal with international lenders, bleary-eyed officials on Cyprus said Monday that they had managed to avert a devastating default for the tiny Mediterranean nation and kept it from being forced out of Europe's single-currency family.

Cypriots, though, woke up wondering whether the situation they faced this week was more troubling than the mess they confronted the week before.

As the fifth country in the troubled Eurozone to take a bailout, Cyprus put an end to a week of high-stakes negotiations when its president, Nicos Anastasiades, agreed to share the cost of a $20.5-billion rescue package by taxing bank stake holders.

It was the second time in nine days that Anastasiades, the European Union and the International Monetary Fund had agreed to a blueprint for a bailout. But while the first one, reached on March 16, fell apart three days later because of fierce opposition to a bank levy of up to 10% for big bank deposits, Monday’s agreement carried even stiffer terms and appeared final.

"We've put an end to the uncertainty that has affected Cyprus and the euro area over the past week," said Dutch Finance Minister Jeroen Dijsselbloem.

Cypriot leaders, however, were more reserved.

"It's not a bad deal," said Lefteris Christoforou, leading lawmaker of the ruling Democratic Party. "But the extreme scenario we had to contend with -- a disorganized default -- was worse."

While details of the deal remain to be ironed out in the coming weeks, Cypriots are taking stock of its complex essence.

On the streets, people complained of feeling helpless in the face of the international financial system.

"Nobody knows where we are heading," said Epifanos Epifaniou, 50, who used to drive a delivery truck in Nicosia and has been unemployed for six months. "People are playing games with Cyprus. We are alone. Nobody is supporting us,” he told Bloomberg News.

Under the plan, a financial catastrophe would be averted by winding down the country's second-biggest bank, the largely state-owned Cyprus Popular Bank, also known as Laiki, and shifting deposits under $130,000 to its biggest bank -- the Bank of Cyprus -- to create a "good bank," leaving problems behind in, effectively, a "bad bank..

Deposits above $130,000 in both banks would be frozen and put to use to resolve Laiki's debts and recapitalize the Bank of Cyprus. Laiki would then effectively be shuttered.

Small depositors with accounts under $130,000 would be spared from any form of bank levy, but restrictions on the movement of capital will be put in place to avert massive bank runs when much of the island’s financial system opens Tuesday.

On Monday, though, panic appeared to percolate through the balmy streets of Nicosia, the capital. Hundreds of Cypriots were seen lining up at ATMs, trying to withdraw whatever sums were left in their accounts -- a move that the country’s central bank tried to control over the weekend by imposing a $130 cap on daily withdrawals.

After a tumultuous week that fanned fears of a new financial crisis, European officials greeted the rescue deal with relief. Cyprus' best banking customer, Russia, sent mixed signals, with President Vladimir Putin promising to help with the crisis and Prime Minister Dmitry Medvedev lashing out.

Rich Russians hold about a third of the estimated $88 billion in deposits in Cyprus. Since the breakup of the Soviet Union, the tiny island has lured Russia's super-rich as a low-tax business haven, offering even citizenship in exchange for $20 million in bank deposits and direct investments.

Putin ordered the Finance Ministry to revisit its efforts to restructure Cyprus’ debt to Russia. In 2011, Moscow loaned $2.5 billion to Cyprus until 2016, at 4.5% annual interest.

Last week, the Cypriot finance minister, Mikhalis Sarris, spent three days in Moscow in talks to extend the payment of the current loan to 2022 and possibly secure a new loan. The talks then yielded nothing.

"Putin considers it possible to support the efforts of Cyprus' president and [European officials] aimed at overcoming the crisis," Putin’s spokesman, Dmitry Peskov, said to journalists Monday.

Medvedev, however, expressed fear that the bailout agreement might amount to "robbery" of Russian deposits.

"I think they are continuing to rob what's been robbed already," Medvedev said at a government meeting Monday. "We need to understand what all this story could materialize into ... and what consequences it could entail for the international finance and currency system."

Cyprus wakes to bailout hangover - latimes.com