Cyprus Contagion ‘Great Worry,’ Blanchflower Says

March 20 (Bloomberg) -- Former Bank of England policy maker David Blanchflower said the risks of spillover effects from turmoil in Cyprus are a concern.

“The contagion is a great worry,” he said in an interview with Tom Keene on Bloomberg Television today. “If you can’t solve a small problem, you’ve made it clear to the markets that you can’t deal with big ones.”

A rescue package to keep Cyprus in the euro was thrown into limbo after the nation yesterday rejected an unprecedented levy on bank deposits. Germany and its euro-area allies maintained pressure on the island’s politicians today to raise a planned 5.8 billion euros ($7.5 billion) by drawing funds from Cyprus bank accounts in return for 10 billion euros in external aid.

Officials from the so-called troika of the European Central Bank, the International Monetary Fund and the European Commission are in Cyprus discussing further capital controls and the possible extension of a bank holiday through the end of the week, a European official familiar with the talks said on condition of anonymity because the discussions are confidential.

“The prescription is that we’ve got to go sort this out because the banks eventually have to open,” said Blanchflower, who now teaches at Dartmouth College in New Hampshire. “My big worry is -- exactly what happened in Ireland -- firms who had money in those banks started to pull them out.”

To contact the reporters on this story: Scott Hamilton in London at shamilton8@bloomberg.net; Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net