DIJSSELBOOM: Eurogroup President Spooks Markets By Saying Cyprus Deal Is A New Template
Reuters/Eric VidalCyprus finally got a deal done with the EU to bail out its troubled banking system last night.
Instead of levying a nationwide "tax" on bank deposits, the plan follows a more typical restructuring approach, seeing shareholders, bondholders, and uninsured depositors in the country's two biggest banks take heavy losses in restructurings.
This way, Cyprus will avoid increasing its own public debt stock as much as it would have done if it were to take loans from the troika to finance the full amount of the bailout.
Officials at the IMF and German politicians like this approach because it is seen as a more sustainable approach to tackling the sovereign debt issues that plague many peripheral countries in the euro area.
Today, in an interview with Reuters and the Financial Times, Dutch Finance Minister and President of the Eurogroup of euro zone finance ministers Jeroen Dijsselbloem said that the Cyprus deal will serve as a template for future bank restructurings in the euro zone.
Reuters reporter Luke Baker has the scoop:
"What we've done last night is what I call pushing back the risks," Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times hours after the Cyprus deal was struck.
"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?'. 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 said.
European bank stocks are extending their losses today on the news.
However, that appears to be somewhat by design.
FT correspondent Peter Spiegel published more comments from the interview with Dijsselbloem that seem to indicate this:
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.”
In short, though euro area leaders have stressed that the Cyprus deal was a special case, it's becoming increasingly clear in the wake of negotiations that this is the new normal for euro zone bank restructurings.
Citi Chief Economist Willem Buiter argued extensively in a recent piece that this sort of thinking – if it represents a shift in the way the euro area handles restructurings – could be the best thing to happen to the euro zone in years.
Since the report hit the newswires, the euro has extended its losses against the U.S. dollar and is now down 0.75 percent today. The S&P 500 is also making new intraday lows. The index is currently trading down below 1554 and is down 0.2 percent on the day.