News Analysis: Cyprus Bailout Shows Strictness but Signs of Disarray

First, there will be no more bailouts without bail-ins, meaning investors and even some depositors in banks that get in trouble may have to pay at least part of the price of rescuing them. European leaders recognize that their voters will no longer tolerate having to pay to save other countries’ irresponsible banks and their clients.

Second, there is a strong message that if the euro zone is going to work, with a banking union that has credibility, there will be no more “casino economies,” little islands like Cyprus with banking sectors many times larger than their gross domestic product, that do not follow the rules and make everyone else vulnerable.

The package for Cyprus marks a victory, of sorts, for Germany and other hard-liners inside the euro zone that are determined to signal that banks and countries will be rescued only when they do penance for their past mismanagement, as determined by their rescuers. Supporters say this will preserve public support for the euro and encourage greater prudence down the road.

Critics, however, say the Cyprus bailout was so haphazardly handled that it underscored the chaotic nature of European decision making more than it sent an unmistakable message about a new approach to bailouts.

Many economists also say euro zone countries may have done themselves further harm by threatening to confiscate part of the savings of depositors in Cypriot banks. If large investors and even ordinary savers worry about a seizure of their assets whenever a bank gets in trouble, the private sector may grow more reluctant to steer funds toward troubled financial institutions, putting more pressure on the European Central Bank to pump in rescue funds.

Some researchers have also forecast that the Cyprus crisis will contribute to financial fears around Europe, which could end up costing Europeans far more in lost growth than they gain in savings from reducing the cost of bailing out Cypriot banks.

On Monday, after Reuters quoted Jeroen Dijsselbloem, the new head of the Eurogroup of finance ministers, as saying the Cyprus bailout could be a new template for resolving regional banking problems, stock markets in Europe and around the world dropped and the value of the euro dipped as well, giving up early gains. That appeared to reflect investor pessimism that requiring savers to bail out troubled banks would prove a good model for euro zone rescues.

The Cyprus crisis elicited a strong and uncompromising response partly for geostrategic reasons, specifically because the role of Russian money, laundered and otherwise, is becoming a major consideration. European Union officials, for example, speak privately of their deep suspicion that European position papers about negotiations with Russia were regularly leaked to Moscow from Cyprus, and European countries that are NATO members are unhappy with the laxity with which Cyprus deals with Russian spying and the way it holds up European cooperation with the alliance over Turkey.

Germany and other countries of northern Europe, either former Soviet colonies like the Baltic nations or sometimes anxious neighbors, like Finland, were not going to try to sell to their voters the idea of bailing out Russian oligarchs — and Russian officials with secret bank accounts.

Toomas Hendrik Ilves, the president of Estonia, said he and his European colleagues were shocked to hear Cypriot officials say, “Brussels is far away, and Russia is a good friend.”

Cyprus also lost sympathy by trying to protect depositors with more than 100,000 euros from too high a contribution — considered an effort to protect Russian money, for the most part — while proposing to tax depositors with accounts under that figure, which are supposed to be insured. “It meant only that they were in bed with the Russians,” said Mr. Ilves, who is blunter than most officials. “And German voters, let alone Estonians, were not going to accept bailing out Russian oligarchs.”

Politically, he said, “you can talk about solidarity with the poor Greeks, and that’s hard enough, but solidarity with thugs and money launderers is a different matter.”

However tiny, Cyprus also appeared to call into question, once again, the sustainability of the euro as a common currency for so many disparate economies.

Steven Erlanger reported from Paris, and James Kanter from Brussels.

Article source: http://www.nytimes.com/2013/03/26/world/europe/cyprus-bailout-shows-strictness-but-signs-of-disarray.html?partner=rss&emc=rss