Dijsselbloem forced to reassure markets about euro-zone banking

Euro group president Jeroen Dijsselbloem was forced to issue a statement yesterday evening after comments he made about a change in euro-zone banking policy caused a storm on markets.

In an interview with a number of news agencies conducted hours after a €10 billion bailout for Cyprus was agreed he said the bailout approach to Cyprus, which included bailing in uninsured depositors of more than €100,000, as well as senior bondholders, could become a template for future bailouts.

Euro-zone authorities have repeatedly stressed that Cyprus was a unique situation.

Mr Dijsselbloem was quoted as saying the euro zone was committed to “pushing back the risks” of paying for bank bailouts from taxpayers to private investors.

“Strengthen your banks, fix your balance sheets and realise that if a bank gets in trouble the response will no longer automatically be that we’ll come and take away your problem,” Reuters quoted Mr Dijsselbloem as saying.

'Not the right approach'
"Taking away the risk from the financial sector and taking it on to the public shoulders is not the right approach," Mr Dijsselbloem said, suggesting a major change in euro-zone policy towards the financial crisis.

Significantly for Ireland, Mr Dijsselbloem said the change of policy meant the euro zone's European Stability Mechanism rescue fund would be less likely to be used to recapitalise struggling banks.

"We should aim at a situation where we will never need to even consider direct recap," he said. Ireland was seeking retrospective direct recapitalisation for AIB and Bank of Ireland from the fund.

His comments sent markets tumbling, having risen strongly in early-morning trading on the back of agreement on the Cypriot bailout. The euro fell to a four-month low, while Italian and Spanish bond yields widened. Shares in Italian banks UniCredit and Intesa Sanpaolo fell by as much as 6 per cent.

The suggestion that uninsured depositors are likely to contribute to banking bail-ins in future would mark a major change in euro-zone policy. Ireland, for example, was required to repay private investors, mainly senior bondholders, in Anglo Irish Bank.

In a statement released yesterday evening after European markets closed, Mr Dijsselbloem said Cyprus was “a specific case with exceptional challenges” that required the bail-in measures agreed upon.

“Macroeconomic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used,” the statement said.

'Cyprus-specific case'
Mr Dijsselbloem also attempted to clarify his comments yesterday evening on Twitter. "Cyprus specific case. Programmes tailor-made to situation, no models or templates used," he tweeted.

A spokeswoman for Dijsselbloem said his quotes were accurate but the suggestion that Cyprus was a template was taken out of context.

Markets initially strengthened yesterday after an agreement on the Cypriot bailout package agreed overnight in Brussels. The three-year programme unveiled for Cyprus includes a €10 billion EU-IMF bailout and a radical proposal to restructure the country's banking sector which would see deposits of more than €100,000 being hit.

Under the proposal, the country's second-largest bank, Laiki, is being shut down and split into good and bad banks. The bank's good assets and insured deposits will merge with Bank of Cyprus, while the uninsured deposits of more than €100,00 will be housed in the bad bank and run down over time.