Eurogroup’s Dijsselbloem: Cyprus Bailout Template for Future Eurozone Crises

Wednesday, 27 Mar 2013 11:08 AM

By Dan Weil

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If a banking crisis breaks out in other European countries as it did in Cyprus, bank depositors may lose some of their money, just as in Cyprus, if that’s what is needed to save the euro, says Eurogroup President Jeroen Dijsselbloem.

“If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?’” he told the Financial Times and Reuters.

“If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank and if necessary the uninsured deposit holders.”

‘Financial War’ Could Wipe Out 50% of Your Wealth’

Many commentators worry that the Cyprus crisis will spread to other vulnerable economies in Europe, such as Italy and Spain. Dijsselbloem seems to be setting up the Cyprus bailout as a template for other nations.

“If we want to have a healthy, sound financial sector, the only way is to say, ‘Look, there where you take on the risks, you must deal with them. And if you can’t deal with them, then you shouldn’t have taken them on,’” he said.

“The consequences may be that it’s the end of story, and that is an approach that I think, now that we are out of the heat of the crisis, we should take.”

Dijsselbloem’s advice for other eurozone countries with highly leveraged banking sectors?

“[D]eal with it before you get in trouble. Strengthen your banks, fix your balance sheets and realize that if a bank gets in trouble, the response will no longer automatically be that we'll come and take away your problem. We're going to push them back. That's the first response we need. Push them back. You deal with them."

In any case, it’s quite uncertain how successful the Cyprus bailout will be, as it might not be enough to guarantee the viability of the Bank of Cyprus, the nation’s largest bank.

“If you are not hugely conservative with regard to valuing Bank of Cyprus’ loans, the bank will be bankrupt in 12 months,” Adam Lerrick of the American Enterprise Institute told The New York Times.

Declassified: ‘Financial War’ Could Wipe Out 50% of Your Wealth’

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