Reuters/Paris/Prague
The European Central Bank sought yesterday to quash suggestions that a rescue deal for Cyprus could shape future bank rescues in the bloc, insisting the country was a unique case.
The Cyprus bailout marked a departure from three years of euro zone crisis-fighting by penalising large bank depositors for the first time. Smaller accounts, holding less than €100,000, were spared.
Jeroen Dijsselbloem, head of the Eurogroup of eurozone finance ministers, said on Monday that in future, the currency bloc should first ask banks to re-capitalise themselves, then look to shareholders and bondholders and then “if necessary” to uninsured deposit holders.
“Now that the crisis is fading out, I think we need to dare a little more in dealing with this,” he said.
The Dutch finance minister, who only took over as Eurogroup chief in January, later put out a statement that Cyprus was a specific case, that plans were tailor-made for each situation and no models or templates were used.
That came too late for the markets which had already turned tail as investors, worried that Cyprus set a precedent for tapping private bank deposits, lost appetite for the kind of rebound that has followed other eurozone rescue deals.
Policymakers from the ECB, which would be left to deal with the fallout from the Cypriot and future crises, pushed back against the suggestion that there could be more such ‘bail-ins’.
“I think Mr Dijsselbloem was wrong to say what he said,” said Benoit Coeure, a member of the ECB’s six-man Executive Board that forms the nucleus of the broader Governing Council.
“The Cyprus experience is not a model for the rest of Europe because the situation had reached a level which cannot be compared with any other country,” he told Europe 1 radio.
Ewald Nowotny, a member of the ECB’s 23-man policymaking Governing Council, reinforced Coeure’s message.
“I think it has been made very clear that Cyprus is indeed a special case,” he said. “It is no model for other instances. This has been made very clear, also today by the ECB.”
The waters were muddied further yesterday when Finland and the European Commission gave some backing to the idea that Cyprus deal would inform resolutions of future eurozone banking crises.
“My view is that this whole (banking union) should include bail-in thinking ... the owners and investors would take losses in case of a bank failure,” Finnish Prime Minister Jyrki Katainen told a seminar in Helsinki.
A European Commission spokeswoman said it might be possible for large uninsured depositors to be “bailed-in” as part of the future resolution of a bank under a new draft EU law, but that savers with less than €100,000 at a bank would not be hit.
Calming words are the first tool the ECB has to reassure bank depositors their money is safe, and to soothe investors who would take fright at any sign of the Cyprus crisis spreading.
Now, a reassuring message to depositors may need to be supported with efforts to make sure the eurozone financial system is lubricated properly.
The ECB decided on Monday to give Cypriot banks access to emergency central bank funding — a step that will avoid a meltdown in the country’s bloated banking sector.
In addition, the ECB already offers banks unlimited liquidity with loans up to three months, and reserves the option to give them more funding certainty over a longer horizon by laying on another 3-year funding operation, as it did a year ago.
The problem for Cyprus’ international lenders was that there were few bank bondholders to impose a haircut on. A contribution to the bailout that the eurozone and IMF insisted upon had to come from elsewhere.
“I do not see why we would use the same methods elsewhere,” said Coeure.
“The first lesson is that we need better control of banks,” he said. “We need an independent European regulator, and that will be the case by mid-2014 and it will be the ECB, and we need to identify problems earlier in the eurozone.”
In Prague, Nowotny told reporters that capital controls that Cyprus plans to prevent an outflow of money when its banks reopen this week should be short in duration.
“This is for transitional period,” the Austrian central bank chief said. “Basically we all want to keep it as short as possible.”
Nowotny also saw no parallel between Cyprus and Italy.
“You can not compare this. Most of the markets are very much aware that the Cyprus case is a special one. You can not compare it to Italy, also the markets do not see it this way,” he said.
Property valuers suspend
work as price falls loom
Property valuers in Cyprus have suspended work as they come to terms with a financial bailout that is likely to deepen price falls of recent years, the chairman of the country’s Property Valuers Association told Reuters.
The association, which represents about 90% of valuers in the country, advised its members last week not to carry out valuations for banks or individuals until the terms of a financial bailout become clear, Charalambos Petrides said.
A €10bn ($13bn) rescue deal was agreed between Cyprus and the European Union on Monday after the country’s outsized financial sector ran into trouble with soured investments in neighbouring Greece.
Valuers are likely to resume work once the banks re-open tomorrow after a closure of almost two weeks designed to prevent a run on deposits.
Prices have already fallen by half for residential property in some parts of Cyprus and 35% for some commercial real estate since the last peak at the start of 2009, Charalambos said.
Any further falls will magnify the pain felt by the Cypriot economy as a whole, which has relied heavily on the second-home market among British and Russian buyers.
“This is a very big shock for Cyprus that could lead to double-digit price drops in some areas,” said Eri Mitsostergiou, a director of European research at property consultant Savills who has advised on development deals in Cyprus.
Charalambos said it was too early to predict how large falls would be.
In addition to Russian and British buyers who have dominated the Cyprus residential market, the island has seen emerging interest from the Chinese in the western coastal town of Paphos.
Many Britons sold their holiday homes in the wake of the financial crisis in 2009 and 2010 and Russians may head for the door after suffering losses on their bank deposits and as scrutiny on Cyprus as an offshore base grows, Mitsostergiou said.
Two top banks downgraded
The ratings agency Fitch downgraded yesterday the two biggest Cypriot banks to default category and placed the third biggest on negative watch following the announcement of a financial rescue plan for the eurozone country.
“Fitch Ratings has taken rating actions on the three largest Cypriot banks following the agreement the Eurogroup reached with the Cypriot authorities on Monday morning as a precondition to provide €10bn ($12.8bn) in financial assistance to Cyprus,” a statement said.
For the biggest, the Bank of Cyprus (BoC), Fitch cut its long- and short-term ratings by one notch from “B” to “Restricted Default” owing to “losses imposed on senior creditors” as part of a restructuring plan for the bank.
For number two Laiki, also known as Cyprus Popular Bank, Fitch cut its ratings from “B” to “Default” because in addition to the planned losses, the bank is to be completely wound down, with healthy assets and insured deposits transferred to the BoC and the rest placed in a “bad bank” to be dissolved over time.
Hellenic Bank, the third biggest in Cyprus, retained its “B” rating, but also remained on “rating watch negative” for a possible downgrade, Fitch said.