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Cyprus Program Isn’t Template for Euro-Area Rescues, EU Says

Cyprus Program Isn’t ‘Template’ for Euro-Area Bailouts, EU Says
Demonstrators wave a banner which reads "Demetriades go home," right, during a protest by bank workers outside the Cypriot central bank in Nicosia, Cyprus, on March 26, 2013. Photographer: Simon Dawson/Bloomberg

European governments vowed that the swoop on bank accounts to finance Cyprus’s aid package won’t set a precedent for future rescues, pushing back against the impression given by Dutch Finance Minister Jeroen Dijsselbloem, according to a confidential document obtained by Bloomberg News.

“The Cypriot program is not a template, but measures are tailor-made to the very exceptional Cypriot situation,” according to the document, agreed yesterday by representatives of euro-zone finance ministries and intended as a guide for explaining Monday’s decision to the public.

Dijsselbloem, who chaired the meetings on the Cypriot package, triggered declines in European markets on Monday by telling Reuters and the Financial Times that future bank cleanups should be handled nationally and questioning the need for the use of European money to recapitalize ailing lenders.

While the Dutch minister issued a clarification later that day, several governments pushed for a confirmation at European level that the controversial tapping of Cypriot bank accounts won’t be part of the standard crisis-management toolkit.

Dijsselbloem became Dutch finance minister in November and took on the added European coordinating role in January. His spokeswoman, Simone Boitelle, declined to comment on the document, known as “Terms of Reference” in Brussels jargon.

Forced Losses

After a tumultuous week in which an initial aid plan fell apart, European governments and the International Monetary Fund agreed Monday to loan Cyprus 10 billion euros ($13 billion) as long as the country liquidated its second-largest bank and forced losses on bank bondholders and deposits of more than 100,000 euros.

Clashes over Cyprus, which makes up barely 0.2 percent of the euro-zone economy, captured the growing unwillingness of northern European governments after three years of crisis-fighting to spend taxpayer money to shore up what they see as mismanaged economies and banking systems in the south.

At the center of the storm was Dijsselbloem, who on Feb. 1 unveiled a 3.7 billion-euro Dutch taxpayer-funded takeover of SNS Reaal NV, the fourth-largest bank in the Netherlands, a casualty of real-estate losses.

Russian Inflows

In dealing with Cyprus, there was never a question of putting European money into the teetering banking system. Thanks largely to inflows from Russia, Cypriot banks had amassed assets worth around eight times the island’s economic output, more than double the average for the euro area.

What set Cyprus apart was “a large banking sector which has accumulated huge losses on its loans and investment portfolio, creating exceptionally high capital needs compared to the capacity of the sovereign,” yesterday’s euro-zone document said.

Dijsselbloem attracted ire by playing up the potential for future “bail-ins” of bank bondholders and depositors, and by criticizing the overbanked economic structures of other European countries. Luxembourg, which transformed itself into a financial center after the demise of the coal and steel industry in the 1970s, felt unfairly targeted.

In a statement today, the Luxembourg government said it is “concerned about recent statements and declarations” on financial systems and the “alleged risks” of over-dependence on banks. It pointed to the “very high solvency ratios” of the mostly international banks, insurers and asset managers operating on Luxembourg soil.

Luxembourg relied on financial services for 23.5 percent of its gross domestic product in 2011, the highest in Europe, according to the European Union’s statistics office. Finance generated 8.9 percent of Cyprus’s output, with the EU average at 5.7 percent.

Yesterday’s euro document recalled summit-level decisions to shore up the monetary union “based on deeper integration and reinforced solidarity, including the full implementation of our new enhanced economic governance framework, as well as further steps toward the completion of the banking union.”

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