Cyprus bailout spooks markets

Tim Wallace
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MARKETS plunged yesterday after the head of the Eurogroup warned that Cyprus’s bailout could pave the way for similar deals that bail in bank depositors and hit shareholders hard.

The crisis showed little sign of easing last night, with the Cypriot central bank saying that banks would now stay shut until Thursday.

Earlier in the day, investors had initially given a cautious welcome to the deal to save the Mediterranean island from bankruptcy – clinched in the early hours of Monday morning – as it granted a degree of certainty.

But peripheral stocks and bonds lost early gains when investors rushed back into safe haven assets after Jeroen Dijsselbloem warned the new style of rescue package could be used again in future.

“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,” he said.

“I think the approach needs to be, let’s deal with the banks within the banks first, before looking at public money or any other instrument coming from the public side. Banks should basically be able to save themselves, or at least restructure or recapitalise themselves as far as possible.”

Dijsselbloem’s proposal marks a change from previous bailouts where depositors have been left untouched.

In Cyprus insured depositors in troubled banks and all savers in other lenders kept their money, while those with uninsured deposits in the failing banks took sizeable haircuts.

A bad bank is being set up and the remains of second-largest lender, the Popular Bank of Cyprus – or Laiki – will be merged with the Bank of Cyprus. The Eurogroup president’s remarks sent markets tumbling.

Spanish shares fell 2.27 per cent on the IBEX35, while the Euro Stoxx 50 dropped 1.21 per cent. Italian bank shares fell 5.23 per cent, while the state’s 10-year borrowing costs edged up to 4.61 per cent. Safe haven assets saw inflows with German 10-year borrowing costs down to 1.38 per cent and the UK’s down to 1.85 per cent.

Dijsselbloem later tried to play down his comments. “Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon,” he said.

“Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.”

Meanwhile shares in failed Spanish lender Bankia have been valued at €0.01 by the bailout fund ahead of the planned recapitalisation of the entity.