Europe Officials Seek to Contain Cyprus Damage

The Cyprus bailout “was the solution to a problem that had become desperate,” Benoît Coeuré, a Frenchman and a member of the E.C.B.’s governing council, told Europe 1 radio. “Cyprus was in bankruptcy, that is something that doesn’t exist anywhere else in the euro zone.”

“The situation was so unique that it needed a unique solution,” he added. “But I don’t see any reason to employ the same methods elsewhere.”

In the €10 billion, or $13 billion, agreement announced Monday between Cyprus and its three international lenders, only insured accounts up to €100,000 were protected from taxation to help fund the bailout, with estimates that uninsured depositors with larger accounts could face losses of up to 40 percent. The lenders, known as the troika, are the E.C.B., the European Commission and the International Monetary Fund.

Mr. Coeuré criticized the head of the Eurogroup of euro zone finance chief, Jeroen Dijsselbloem, for suggesting on Monday that the Cyprus model, in which losses were forced on large depositors, might be used as a “template” any for future bailouts.

“He was wrong to say what he did,” Mr. Coeuré said. “The experience of Cyprus is not a model for the rest of the euro zone, because the situation there attained a magnitude that is not comparable to any other country.”

Mr. Dijsselbloem later retracted his words, saying in a statement that Cyprus was “a specific case with exceptional challenges,” and that bailouts were “tailor-made to the situation of the country concerned and no models or templates are used.”

But the damage was done: Global stock markets gave up early gains Monday as Mr. Djisselbloem’s words bred new anxiety about the supposed sanctity of euro zone bank deposits. And the Cypriot government decided to extend a bank holiday until Thursday, fearing a possible run by nervous depositors.

The island’s faltering banks suffered a new indignity on Tuesday, as Fitch Ratings said it was cutting its credit grades on Cypriot banks because of the losses imposed by the bailout deal on senior creditors. Fitch said it was cutting its rating on Cyprus Popular Bank, to “default,” as that bank, also known as Laiki, is shut down.

Fitch also cut its rating on Bank of Cyprus, the island nation’s biggest bank, to “restricted default,” a grade Fitch said means the bank has experienced a payment default on a bond, loan or other material obligation but has “not entered into liquidation or ceased operating.”

Laiki’s soured assets are being hived off into a so-called bad bank. Its good assets are being transferred to Bank of Cyprus, which is being recapitalized by converting uninsured depositors’ claims into equity. Fitch said it expects the losses on Bank of Cyprus’s uninsured deposits “to be material.”

Article source: http://www.nytimes.com/2013/03/27/business/global/europe-officials-seek-to-contain-cyprus-damage.html?partner=rss&emc=rss