Published on TheNewFederalist.eu
Jeroen Dijsselbloem, the Dutch finance minister who has been chairing the eurogroup committee of finance ministers for two months, said after a long night meeting last Sunday in Brussels that the Cyprus model would be extended to other countries to avoid the injustice of having taxpayers shell out for the risky behaviour of bankers. On the contrary the Eurogroup subsequently issued a statement saying: “Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday. Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.” What a mess.
After the main fear for all Cypriot bank deposit holders, Cyprus’s central bank announced that only savers with more than €100,000 in Bank of Cyprus, the island’s biggest lender, would lose 40% of their savings as part of the radical restructuring and downsizing plan agreed by President Nicos Anastasiades and eurozone leaders in Brussels on Sunday in order to receive the 10 billion aid package need to avoid default. The losses to savers comes on top of the wipe-out of €4.2bn of deposits at Laiki or Cyprus Popular, the country’s second bank which is being closed down and its good assets transferred to Bank of Cyprus.
The European commission and influential MEPs involved in drafting new laws on resolving bank failures confirmed that the proposed rules would include “bail-ins”, which are favoured by Germany and would see investors and savers taking the hit instead of taxpayers. But such a rescuing management could fuel a mass bank run throughout the eurozone as millions of bank deposit holders in the most troubled countries, such as Slovenia, Spain and Italy, could fear to have a levy on their savings.
European Central Bank executive board member Benoit Coeure said on Tuesday that Eurogroup chief Jeroen Dijsselbloem was “wrong” to suggest on Monday that the restructuring of the Cypriot banking system will serve as a model for other countries. He has been promptly echoed by French President François Hollande who stated in a joint press conference with Spanish Prime Minister Mariano Rajoy that “the guarantee of bank deposits must be an absolute and irrevocable principle”, showing in so doing that even the French are afraid of such a model.
The European Commission did not help shed some light on the issue. “It is not excluded that deposits over €100,000 could be instruments eligible for bail-in,” said Chantal Hughes, spokeswoman for Michel Barnier, the European commissioner for the single market drafting the banking resolution legislation. Again what a mess.
Without wondering too much whether and to what extent a bail-in procedure is to be applied in case of bank default (and above all up to what limit bank deposits are guaranteed in any case), an aspect has not been discussed as deserved: the long waited European Stability Mechanism ESM. In June last year, an EU summit for the first time agreed that the eurozone’s bailout fund, the European Stability Mechanism, could be used directly to recapitalise ailing banks without the loans being added to government debt. It was a breakthrough engineered by France, Italy, and Spain but opposed by Germany, which has since sought to neuter the idea. Following the Cyprus deal, where none of the €10bn in bailout funds will be used to recapitalise banks, unfortunately the idea is not on the table any more. Nevertheless the EMS would be the only European response to the crisis of a member states, but again the solution is sought at intra-national level with the Eurogroup unsure of its own position. Definitely, what a mess, and what a pity.