Rehn Says Cyprus Aid Should Safeguard Financial Stability

The European Union needs to safeguard financial stability as it designs a rescue package for Cyprus and its banks, European Union Economic and Monetary Affairs Commissioner Olli Rehn said.

“The European Commission is not in favor of haircuts,” Rehn said in an interview today in Brussels, referring to imposing losses on creditors. “We are in favor of a solution that takes into account the concerns of financial stability.”

Help for Cyprus also will need to reduce the nation’s debt burden to sustainable levels, Rehn said. Talks with European authorities, which have been ongoing for nine months, may wrap up during March, he said.

Cyprus has been stuck in bailout negotiations since it became the fifth euro nation to seek aid in June. The Mediterranean island, which is in the process of electing a new president, needs a bailout of as much as 17.5 billion euros ($23 billion), 10 billion euros of which would be for its banks, Finance Minister Vassos Shiarly indicated in November.

Euro-area finance ministers have kept all options open, including imposing losses on depositors in the Cypriot banks. Rehn declined to comment on specifics. “I don’t want to go into the discussion of the likely content of the package on Cyprus,” he said.

Any lifeline to Cypriot banks probably will need to pass through the government, as the euro area is still weighing how and whether the European Stability Mechanism can lend directly to banks. Such aid also will only be possible once the European Central Bank assumes its new role as supervisor for banks in the 17-nation euro zone and other willing nations.

Bank Plan

Rehn said the EU will consider the lessons learned from the U.S. financial crisis as it moves ahead with the further plans to create an agency to shut down or restructure failing banks. He said it was too soon to say whether the EU will create a central fund or rely on national resources.

“This is a work in progress, and I’m sure that we will find a way to ensure that we have a credible backstop once the European Resolution Authority will be set up,” Rehn said. “There are different ways and means of achieving that.”

Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Timothy F. Geithner have both offered input as the EU studies how the U.S. handles failing banks, Rehn said. He said the EU will need to adapt financial repair methods to its situation, while also absorbing useful advice.

“If you face a financial crisis and you face loss of confidence then you’d better have a big bazooka, in order to show that you are ready to do whatever it takes,” Rehn said.

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