Euro zone chief casts doubt on debt relief

The chief of the euro zone finance ministers has questioned whether the ESM bailout fund will ever be used to rescue banks directly, casting fresh doubt over the Government’s demands for more debt relief in Europe.

The remarks by Dutch minister Jeroen Dijsselbloem set off a wave of renewed volatility in financial markets – with heavy losses in Italy and Spain. The Government has insisted, however, that it continues to make progress in its campaign to deploy the ESM to help meet the cost of rescuing Allied Irish Banks and Bank of Ireland.

“We will continue to work with our European partners to ensure Ireland is in a position to avail of the new recapitalisation tools that are being developed,” said a spokesman for the Department of Finance.

The Cypriot deal broke new ground by imposing big losses on large-scale bank depositors and senior bondholders, who were protected in bailouts for Ireland, Greece, Portugal and Spain. Unlike the agreement which collapsed last week, Cypriot depositors with less than €100,000 will not lose any money.

Mr Dijsselbloem's suggestion in an interview with Reuters and the Financial Times that the new plan would be a model for the future was at odds with claims by other European leaders that the Cypriot arrangement was unique to the country.

He later backtracked, but his remarks drew a distinctly cold response in Dublin. Senior Government sources said there had been no discussion about repeating the Cypriot formula.

The Department of Finance spokesman said this second statement “fully reflects” European policy. “The 29th of June agreement to break the links between the banks and the sovereign is the stated policy position of euro zone heads of state and governments,” he said.*

In his interview Mr Dijsselbloem said: “We should aim at a situation where we will never need to even consider direct recapitalisation".

“If we have even more instruments in terms of bail-in and how far we can go on bail-in, the need for direct recap will become smaller and smaller . . . let’s deal with the banks within the banks first," Mr Dijsselbloem said.

Mr Dijsselbloem later rushed out a statement saying Cyprus was a specific case requiring bail-in measures. “Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.”

As confusion reigned in the markets following Mr Dijsselbloem’s comments, Cypriot president Nicos Anastasiades addressed the nation for the first time since agreeing the €10 billion bailout package for the country. In a 10-minute TV address he asked Cypriots for their patience, while the crisis is resolved, and pledged to appoint investigators “to find out where responsibility lies” for the crisis.

Yesterday, Cypriot residents were coming to terms with the bailout package agreed in Brussels in the early hours of Monday morning. The European Central Bank confirmed yesterday it will continue to supply liquidity to Cyprus’s banking sector.

All Cypriot banks, except the two biggest banks Laiki and the Bank of Cyprus, are set to reopen today and there will be no limitations on financial transactions.

*This article was amended on March 26th 2013