Eurozone shifts burden of risk from taxpayers to investors

By Peter Spiegel Brussels

The €10bn Cypriot rescue is a watershed for how the eurozone deals with failing banks, with European leaders now committed to “pushing back the risks” of paying for bank bailouts from taxpayers to private investors, the chairman of the group of eurozone finance ministers has said.

Jeroen Dijsselbloem, president of the eurogroup, was speaking hours after Cyprus reached an 11th-hour €10bn bailout deal with international lenders that avoids a levy on bank accounts but will force large losses on big deposits in the island’s two largest lenders.

European bank stocks and the euro suffered sharp losses following his comments amid concerns over the safety of bank deposits in any future bailouts. The single currency fell more than 1 per cent against the dollar, wiping out all its earlier gains following relief that a deal had been struck in Cyprus.

Shares in Italy’s two largest banks, UniCredit and Intesa Sanpaolo, fell 6 per cent, while shares in French bank Société Générale also lost 6 per cent.

Yesterday’s deal allowed the European Central Bank to keep its emergency lifeline open to Cypriot banks yesterday, preventing a meltdown of the financial sector that threatened the country’s euro membership.

Nicos Anastasiades, the Cypriot president, announced last night that the country would introduce capital restrictions to prevent capital flight. But he stressed that the introduction of the controls would be “a very temporary measure that will gradually be relaxed”.

Speaking to the Financial Times and Reuters, Mr Dijsselbloem said the relative market calm in recent months, coupled with the lack of market panic following the decision to force private investors and depositors to pay for the bailout of two large Cypriot banks, allowed the eurozone to pursue private money more aggressively when banks fail.

“Taking away the risk from the financial sector and taking it on to the public shoulders is not the right approach,” Mr Dijsselbloem, who is also the Dutch finance minister, said.

“If we want to have a healthy, sound financial sector, the only way is to say: ‘Look, there where you take the risks, you must deal with them, and if you can’t deal with them you shouldn’t have taken them on, and the consequence might be that it is end of story’,” he said.

“That’s an approach that I think we, now that we are out of the heat of the crisis, should consequently take.”

This approach would mark a radical change of course since the crisis began three years ago. In the Irish and Spanish banking sector rescues – which were similar to Cyprus in that bank failures risked plunging the governments into bankruptcy – several categories of private creditors, particularly senior bondholders and uninsured depositors, were untouched.