After Cyprus, eurozone faces tough bank regime - Eurogroup head
BRUSSELS |
(Reuters) - A rescue programme agreed for Cyprus on Monday represents
a new template for resolving euro zone banking problems and other
countries may have to restructure their banking sectors, the head of the
region's finance ministers said."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.
After 12 hours of talks with the EU and IMF, Cyprus agreed to shut down its second largest bank, with insured deposits - those below 100,000 euros - moved to the Bank of Cyprus, the country's largest lender. Uninsured deposits, those accounts with more than 100,000 euros, face losses of 4.2 billion euros.
Uninsured depositors in the Bank of Cyprus will have their accounts frozen while the bank is restructured and recapitalised. Any capital that is needed to strengthen the bank will be drawn from accounts above 100,000 euros.
The agreement is what is known as a "bail-in", with shareholders and bondholders in banks forced to bear the costs of the restructuring first, followed by uninsured depositors. Under EU rules, deposits up to 100,000 euros are guaranteed.
The approach marks a radical departure for euro zone policy after three years of crisis in which taxpayers across the region have effectively been on the hook for resolving problem banks and indebted governments via multiple rescue programmes.
That process, with governments and taxpayers bearing the costs and providing the back stop, had to stop, Dijsselbloem said. Recent financial market calm meant now was the time to make the change, although he conceded there was some concern that it could unsettle markets again.
"If we want to have a healthy, sound financial sector, the only way is to say, 'Look, there where you take on the risks, you must deal with them, and if you can't deal with them, then you shouldn't have taken them on,'" he said.
"The consequences may be that it's the end of story, and that is an approach that I think, now that we are out of the heat of the crisis, we should take."
If adopted by the euro zone, Dijsselbloem's template could also sound a death knell for a plan hatched nine months ago when the euro zone debt crisis was threatening to blow the currency area apart.
Then, euro zone leaders agreed that the bloc's future rescue fund should be allowed to recapitalise banks directly, thereby breaking the debilitating link between teetering banks and weak governments forced to bail them out. That may now never happen.
Asked what the new approach meant for euro zone countries with highly leveraged banking sectors, such as Luxembourg and Malta, and for other countries with banking problems such as Slovenia, Dijsselbloem said they would have to shrink banks down.
"It means deal with it before you get in trouble. Strengthen your banks, fix your balance sheets and realise that if a bank gets in trouble, the response will no longer automatically be that we'll come and take away your problem. We're going to push them back. That's the first response we need. Push them back. You deal with them."
ESM
The marked change in attitude, which Dijsselbloem agreed was a shift in strategy for EU policymakers, has consequences for how banks are recapitalised and for how financial markets react.
One of the major steps the euro zone has taken over the past three years has been to set up a rescue mechanism with guarantees and paid in capital totalling up to 700 billion euros - the European Stability Mechanism.
The expectation was that the ESM would be able to directly recapitalise euro zone banks that run into trouble from mid-2014, once the European Central Bank has full oversight of all the region's banks.
The goal of the ESM and direct recapitalisation was to break the so-called "doom loop" between indebted governments and their banking sectors. Now, Dijsselbloem says the aim is for the ESM never to have to be used.
"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.
"I think the approach needs to be, let's deal with the banks within the banks first, before looking at public money or any other instrument coming from the public side. Banks should basically be able to save themselves, or at least restructure or recapitalise themselves as far as possible."
Dijsselbloem, 46, who took over as Eurogroup president only in January, said he had discussed the new approach with financial market participants and said he expected that they would adjust to the new regime over time.
"Now we're going down the bail-in track and I'm pretty confident that the markets will see this as a sensible, very concentrated and direct approach instead of a more general approach," he said.
"It will force all financial institutions, as well as investors, to think about the risks they are taking on because they will now have to realise that it may also hurt them. The risks might come towards them."
(Writing by Luke Baker, editing by Mike Peacock)
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DIJSSELBOOM: Eurogroup President Spooks Markets By Saying Cyprus Deal Is A New Template
Reuters/Eric Vidal
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.
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