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EU aims to take bailout pressure off taxpayers

27 March 2013, 00:07 CET
EU aims to take bailout pressure off taxpayers

Jeroen Dijsselbloem - Photo EU Council

(BRUSSELS) - The Cyprus debt rescue and its 'bail-in' provision to make large bank depositors pay part of the cost is largely in line with European Commission plans to ensure taxpayers no longer carry the can when banks fail.

The head of the eurozone finance ministers group, Jeroen Dijsselbloem, caused consternation Monday when he said that in future bank creditors and depositors would have to bear some of the burden, rather than taxpayers who have taken the hit in bailouts for Greece, Ireland, Portugal and Spain's banks.

The rescue for Cyprus worth 10 billion euros ($13 billion) was made contingent on closing down the country's second largest lender, Laiki (Popular Bank), while the biggest, Bank of Cyprus, will be restructured radically.

Large uninsured depositors -- those holding 100,000 euros or more -- will be 'bailed-in', meaning they will be forced to help pay for restructuring or winding down the banks and could lose up to 40 percent of their money.

"Taking away the risk from the financial sector and taking it on to the public shoulders is not the right approach," Dijsselbloem said Monday.

"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'."

Those remarks sent global markets into a tailspin, hitting bank shares hard and sparking concerns that depositors elsewhere could try to move their money out of eurozone banks.

Dijsselbloem's position, however, reflects proposals by EU Financial Markets Commissioner Michel Barnier submitted last year as part of plans to establish a "banking union" for the bloc which will regulate and oversee its financial sector.

The EU agreed late last year a Single Supervisory Mechanism as the first step towards the banking union which will also include a deposit guarantee regime and a bank winding up system.

Under the winding up regime, the banks are supposed to have in place plans to cope with any fresh crisis. If they continue to run into problems, the authorities will be able to step in and begin closing down a bank in difficulty.

There is also a provision for a "bail-in", whereby creditors and large depositors would have to pay to help save the bank, as opposed to a "bail-out" based on fresh capital provided ultimately by the taxpayer.

In December, the European Commission said such bailouts of the banks had cost 1.6 trillion euros between the onset of the global financial crisis in 2008 and end-2011, equal to 13 percent of the European Union's total annual economic output.

"We want to reach a situation where taxpayers no longer have to pay for the banks," said a spokeswoman for Barnier Tuesday.

In due course, the EU "will have a new toolbox to prevent a failure of a bank, to intervene" and to close down a lender once the new regulatory system is in place, she said.

"Everywhere in Europe we should be moving towards a normal market economy, where owners and investors suffer losses in the event of a bank failure," Finnish Prime Minister Jyrki Katainen said during a speech about Europe in Helsinki.

A European source said Tuesday that the aim was to avoid as much as possible recourse to the European Stability Mechanism, the eurozone's debt rescue backstop formally approved last year.

The ESM, with a notional strength of 500 billion euros, is funded by the European taxpayer and was supposed to be able to recapitalise banks directly from next year once the SSM was up and running.

The latest developments and comments suggest that the ESM option will prove to be an interim measure.

A Commission spokesman said Tuesday that work on recapitalising the banks with the ESM's help was continuing, with a view to next year's deadline.

In the meantime, Barnier is pushing to get agreement on his proposals this year but implementation is expected to take much longer, with a target date of 2018 already being mooted.


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