FRANKFURT: The recent deal to rescue Cyprus and its banks from financial collapse has renewed fears about Europe’s shaky financial system and where trouble might next appear.
Many banks across Europe have been struggling for more than three years as losses on government bonds and bad loans piled up.
Some governments, meanwhile, have taken on more debt trying to prop up their lenders to the point where they have needed bailing out themselves.
In Cyprus’s case, its banking sector became much bigger than the country’s government could afford to rescue — seven times the size of the country’s economy.
When the banks were hit by large losses and Cyprus could not afford to bail it out on its own, the country turned to the other 16 European Union countries that use the euro.
Rather than making Europe’s taxpayers foot the entire bill for bad banking, Cyprus and the other euro zone countries agreed to make the banks’ bondholders and big depositors contribute to the rescue. One bank, Laiki, is to be split up, with its nonperforming loans and toxic assets going into a “bad bank.”
The healthy side will be absorbed into the Bank of Cyprus. Savers with more 100,000 euros in both Bank of Cyprus and Laiki will face big losses — possibly as much as 80 cents on the euro.
Daniel Gros, director of the Center for European Policy Studies in Brussels, said the Cyprus deal “could be a strategic change.”
Depositors and investors have taken note of the Cyprus deal and are warily looking around at other countries where the financial sector appears too big or too unstable.
The STOXX Europe 600 Banks index have fallen 7 percent since a first bailout deal, later rejected, was reached March 16.
Even some of the more financially disciplined countries in the euro zone can raise concerns: The Netherlands had to take over SNS Reaal, the country’s fourth-largest bank, after it suffered heavy losses. And in Germany there are banks under pressure from competition and losses on bad loans.
However, most of the countries that are gaining scrutiny in the aftermath of the Cyprus bailout do not have economies on the same scale as the euro zone’s financial leaders.
Cyprus President Nicos Anastasiades says the risk of bankruptcy has been contained and the country has no intention of leaving the euro, in a speech laden with criticism of Europe’s currency union for “experimenting” with the island’s fate.
Anastasiades said the restrictions on bank transactions — unprecedented in the currency bloc since euro coins and banknotes entered circulation in 2002 — would be gradually lifted.
He gave no time frame.
The imposition of capital controls has led economists to warn that a second-class “Cyprus euro” could emerge, with funds trapped on the island less valuable than euros that can be freely spent abroad.
In a speech to civil servants in the capital, Nicosia, Anastasiades hit out at banking authorities in Cyprus and Europe for pouring money into a crippled Cypriot bank that now faces closure under the 10 billion euro ($ 13 billion) bailout plan that averted the immediate risk of financial meltdown.
“How serious were those authorities that permitted the financing of a bankrupt bank to the highest possible amount?” Anastasiades said.
“I don’t want to say more,” he added. “Now is not the time to say who bears more or less of the blame.”
Anastasiades clinched the last-ditch bailout in Brussels five days ago, but has faced a backlash from Cypriots angry at the price that came with it — the winding down of the island’s second-largest bank, Cyprus Popular Bank or Laiki, and an unprecedented raid on deposits over 100,000 euros that could spell the end of Cyprus as a hub for offshore finance.
The country faces steep job losses and a prolonged and deep recession.
The president, barely a month in the job and wrestling with Cyprus’s worst crisis since a 1974 war split the island in two, accused the 17-nation euro currency bloc of making “unprecedented demands that forced Cyprus to become an experiment.”
But he added: “We have no intention of leaving the euro. In no way will we experiment with the future of our country.”
European leaders have insisted the raid on big bank deposits in Cyprus is a one-off in their handling of a debt crisis that refuses to be contained.
