Brussels, 04/04/2013 (Agence Europe) - On Thursday 4 April 2013, Mario Draghi, head of the European Central Bank, explained the ECB's view of the financial bailout for Cyprus and the future EU bank wind-up rules. The ECB has decided to leave interest rates unchanged.
“Cyprus is no template,” said Draghi, adding that he was “absolutely sure that Dijsselbloem has been misunderstood' (the head of Eurogroup, Jeroen Dijsselbloem, changed his mind after saying that Cyprus was a model bailout (see EUROPE 10815). Draghi said the first deal “was not smart, to say the least, but was quickly corrected the day after in a Eurogroup teleconference. The ECB presented a proposal where no bail-in of insured depositors was foreseen.” The initial Cyprus deal raided small savings (those less than €100,000) even though they were supposedly covered by the EU savings guarantee rule (see EUROPE 10808).
The Cypriot financial bailout includes the wind-up of the country's second-biggest bank, Laiki, and a restructuring of the biggest bank, the Bank of Cyprus. This is the first of a series of financial bailouts in the eurozone, and raids the savings of people holding more than €100,000 to halve the size of the Cypriot banking system.
Draghi says the use of bail-in tools is not a problem, but “you have to be able to resolve it without using people's money and without destroying payment systems. What makes a bail-in a problem? Lack of rules, lack of other bail-in-able capital buffers, that makes it a disorderly event. One particularity of Cyprus was that such bonds were quite limited in comparison with the size of assets.”
Draghi approves of the hierarchy of investors whose savings will be raided to rescue banks (rules set out in the draft regulation harmonising national bank resolution systems). Last in the queue of investors whose savings will be seized are those with less than €100,000 in savings so that, Draghi said, the new EU bail-in rules should not come into force in 2018, as the Commission suggests, but well before, in 2015, for instance, as demanded by Germany, Denmark, Finland and the Netherlands (see EUROPE 10818).
Would it be better for Cyprus to leave the euro? “What was wrong with the Cyprus economy does not stop outside the eurozone. Restructuring of the banking system would be needed anyway. Exit entails many big risks, and there is a much more difficult environment outside.” Should countries with a big financial industry compared with the size of their economy change their economic model? Draghi answered: “Recent experience shows that in countries where the banking sector is several times bigger these are countries that on average have more vulnerabilities. Financial shocks hit them more. We've seen this everywhere, beginning with the UK. You need to run them in a more conservative way: no deficit, high capital buffers, high buffers of bail-in-able assets.”
Bank supervision system. The head of the ECB called for rapid entry into force of the eurozone bank supervisory mechanism under the aegis of the ECB, planned for spring 2014: “There is no better way to prevent this crisis than to shed light on the situation of national bank systems through this oversight. Any delay will be extremely disappointing,” referring here to Germany's last-minute demand for changes that could well delay introduction of the legislation (see EUROPE 10817)
Interest rates. On Thursday, the ECB decided to leave eurozone interest rates unchanged. Draghi said there had been lengthy discussion about this, but consensus that there would be no change in rates in the next few weeks. He said the ECB was ready to act, but refused to comment on whether interest rates will be adjusted in May. Annual inflation in the eurozone stood at 1.7% in March according to the European statistics office Eurostat, well below the target.
Faced with the gloomy economic prospects, Draghi said the ECB's monetary policy would remain accommodating as long as was necessary, and he urged member states to continue with their structural reforms (boosting competitiveness and adjusting the labour market, for example) and continue to reform the financial industry. (MB/transl.fl)