U.S. Treasury Calls for Responsible and Fair Cyprus Solution

The U.S. called for a “responsible and fair” resolution to the financial crisis in Cyprus, where a proposed tax on bank deposits roiled global markets.

The Treasury Department is “monitoring the situation in Cyprus closely,” and Secretary Jacob J. Lew has been speaking with his European counterparts, the department said in an e-mailed statement today. “It is important that Cyprus and its euro-area partners work to resolve the situation in a way that is responsible and fair and ensures financial stability.”

The Treasury’s comments are the department’s first on Cyprus since Lew’s counterparts in the euro area reached an agreement March 16 forcing depositors to share in the cost of the latest bailout. Lew, who was sworn into office Feb. 28, was following the crisis while en route to his first foreign trip as secretary, a two-day visit to Beijing to meet with leaders of China’s new government starting tomorrow.

The Treasury’s statement shows “concern that the plan may create instability beyond the borders of Cyprus to the rest of euro zone and even beyond the euro zone,” said Domenico Lombardi, a senior fellow specializing in global economics at the Brookings Institution in Washington. “You can read the concern between the lines.”

Lombardi is a former member of the executive boards of the International Monetary Fund and World Bank.

Market Reaction

The euro weakened to its lowest level this year as the levy on Cyprus’s bank savings renewed concern about Europe’s debt crisis. The 17-nation shared currency sank 1.1 percent to $1.2930 at 4 p.m. in New York. The MSCI All-Country World Index lost 1 percent, retreating from the highest level since June 2008. The Stoxx Europe 600 Index fell 0.2 percent, trimming a plunge of 1.2 percent. The Standard & Poor’s 500 Index retreated for a second day, losing 0.6 percent after dropping 1 percent earlier.

“They’re communicating that Secretary Lew is not just interested in what’s going on with the U.S. economy and fiscal problems, but also following things in Europe,” said Edwin Truman, a former assistant Treasury secretary for international affairs during the Clinton administration.

“The use of a word like ‘fair’ does suggest that they’re a little uneasy about the terms of this deal,” said Truman, a senior fellow at the Peterson Institute for International Economics in Washington. The deal “is bit Draconian and smacks people as unfair, and there’s some risk that it sets a precedent for other countries because we don’t know who will be next.”

Contagion Threat

Scenes of Cypriots lining up at cash machines raised the specter of capital flight elsewhere and threatened to disrupt a market calm since the European Central Bank’s pledge in September to backstop troubled nations’ debt. The terms of Cyprus’s bailout are negative for depositors across Europe, and may hurt bank ratings region-wide, Moody’s Investors Service said in a Credit Outlook report today.

Former U.S. Treasury Secretary Lawrence Summers today called the levy on bank deposits a mistake.

“The fact that this could have been the product and could have been endorsed by the International Monetary Fund on behalf of the global community, that this could have been what the European Union came up with, hardly gives confidence in their crisis-fighting skills,” Summers said in an interview on CNBC. “This was a tactical blunder alongside a strategy adrift.”