European finance ministers left open the possibility of saddling bank depositors and bondholders with some of the costs of an aid package for Cyprus, potentially unsettling markets as the bailout negotiations drag on.
Dutch Finance Minister Jeroen Dijsselbloem declined to rule out a “bail in” of Cypriot depositors, even after concern over the treatment of bank account holders prompted the first signs of capital flight from the island.
“All the questions on the elements” will be dealt with by late March, Dijsselbloem told reporters after chairing a meeting of euro-area finance ministers in Brussels yesterday. “That is my answer to all these questions, I’m afraid.”
By leaving the treatment of bank depositors in doubt, European governments risked replaying earlier clashes over imposing losses on bondholders. Creditors used that tactic for Greece and then pledged never to do so again because it shattered market confidence.
A week after Nicos Anastasiades took over as Cypriot president, finance ministers said the pieces of an aid package have yet to fall into place and probably won’t do so until late March.
Concern that accounts in Cyprus aren’t safe led to a drop in bank deposits to 68.4 billion euros ($89 billion) in January from 70.2 billion euros in December, according to the country’s central bank.
The new Cypriot finance chief, Michael Sarris, denounced proposals to tap bank accounts, saying the idea stems from the presence of Russian money in the country.
“There is no way we can entertain the idea of any kind of haircut to any kind of deposits,” Sarris said. “This would be an accident in the euro zone not caused by markets, but a self- inflicted wound, a self-inflicted catastrophe, not only for Cyprus, but for the euro zone and perhaps even beyond.”
German insistence on forcing losses on bondholders --raised as a future possibility in late 2010 and imposed on Greek bonds in early 2012 -- lessened confidence in peripheral markets and helped perpetuate the debt crisis.
Recalling that episode, Greek Finance Minister Yannis Stournaras said that “nobody wants a domino effect in Europe.” Luxembourg Finance Minister Luc Frieden said “the question will be asked generally about deposits’ safety. I don’t think this is a good solution.”
Dijsselbloem yesterday passed up several opportunities to rule out depositor losses. It was a sign of the difficulty of putting together a lending package that doesn’t saddle the Cypriot government with debts it cannot pay back.
In a replay of last year’s standoff over Greece, the International Monetary Fund is insisting that European loans for Cyprus come with steps to reduce the country’s debt burden, estimated by the EU at 86.5 percent of gross domestic product in 2012 and slated to rise after the bailout.
The European Commission, which has opposed depositor losses as potentially destabilizing, said that Dijsselbloem didn’t intend to alarm clients of Cypriot banks.
“It cannot be interpreted that way,” Economic and Monetary Commissioner Olli Rehn said in an interview after his joint press conference with the Dutch finance minister. “We are all very aware that it’s imperative to ensure financial stability in Cyprus and the entire euro area.”
Cyprus, which accounts for 0.2 percent of the 17-nation euro-area economy, is testing the crisis response as Europe is mired in a recession and a political vacuum in Italy poses bigger potential dangers for the health of the euro.
A team of officials from the so-called troika of IMF, European Commission and European Central Bank will travel to Cyprus today to restart talks on a planned rescue, ECB Executive Board member Joerg Asmussen said late yesterday.
The Mediterranean island bowed to one condition for a rescue package by agreeing to an independent, bank-by-bank assessment of its enforcement of legislation against money laundering. The audit can begin on March 12 and end later this month, Sarris said.
Tougher money-laundering controls “have to be put into practice,” Austrian Finance Minister Maria Fekter said. “We have to have the facts on the table so we can put the package together.”
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