THE EUROPEAN Central Bank yesterday put the blame for initial market turmoil over Cyprus' bailout squarely on the government, and pledged that taxing depositors would not become normal procedure.
ECB President Mario Draghi said Cyprus' bailout was “no template”, a statement designed to ease market fears that bank deposits would in future be fair game for international lenders seeking to help struggling eurozone countries.
But he was also scathing about the island’s initial plan to impose a levy on insured as well as uninsured bank depositors, even though the move was rubberstamped by the EU in the early hours of March 16. Draghi said the finance ministers and the International Monetary Fund had wanted Cyprus to help pay for its €10 billion with a levy on wealthy depositors only.
Cyprus, however, had initially also sought to charge those with €100,000 or less even though they had a bank deposit guarantee. “That was not smart, to say the least, and was quickly corrected (by eurozone finance ministers),” Draghi said. The move was not reversed by eurozone minsters however, it was rejected by the Cyprus parliament.
Draghi said depositors with guarantees should be sacrosanct, but that it was best not to touch any depositors if possible. “You have a pecking order, ideally insured depositors should be the very last category to be touched. The (European) Commission draft directive (on banking) foresees exactly this.
“There isn't actually a specific distinction between categories of bondholders and uninsured depositors in the draft directive. But basically the point is that you, if you can, don't touch uninsured depositors,” Draghi said.
He also said it would be of no help to Cyprus if it left the eurozone, as some have floated. “What was wrong with Cyprus’ economy doesn't stop being wrong if they are outside the euro,” he said.
Draghi also sought to soothe concerns that charging depositors - called a “bail in” - would now be imposed on other troubled countries.
Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, caused a stir in March when he told Reuters that the Cyprus bailout, including depositor levies, could be replicated in future.
Draghi insisted this was not the case. “Cyprus is no template,” he said. “I am absolutely sure that the chairman of the Eurogroup has been misunderstood.”
Dijsselbloem however clearly states that Cyprus would be used as a template but later backtracked when markets became spooked.
Draghi also rejected yesterday the notion that the ECB bankers wield inordinate power over elected officials, as for example in the case the ECB threatened to cut off Emergency Liquidity Assistance (ELA) to Laiki and Popular Bank unless a bailout programme was agreed.
“We acted exactly within our mandate,” the ECB chief said. “We would have been acting politically if we had not done this. ELA could be extended only to solvent and viable banks. In the absence of a programme, these banks would not have been solvent and viable, and at that time the governing council assessed there was no programme in place [for Cyprus]. On all other occasions, there was a programme in place.”
“Cyprus events show that we are ready to act within our mandate. When the governing council objected to ELA, it did that within its mandate. It did not replace what could have been fiscal action.”
Responding to another question, Draghi went on to say that ELA was the responsibility of the national central banks, not of the ECB – perhaps in a bid to shift blame away from the ECB for having okayed billions in emergency funding to Laiki while the bank was on the brink of collapse.
ELA funding, however, does need approval from the ECB, which is the ultimate financier. Moreover, in July last year – long before a preliminary bailout deal was clinched – Laiki was neck-deep in ELA, to the tune of some €9bn, and continued receiving these funds thereafter.
In May 2012, the state underwrote €1.8 billion to float the stricken bank. But in July of the same year, Cyprus’ sovereign debt was rated junk, meaning it could not be held as collateral for underwriting the bank, and it’s understood that at that point Laiki was therefore technically insolvent.
In June Nicosia formally requested assistance from the EU, and it’s likely that with this in mind the ECB agreed to continue providing emergency funds to Laiki. The ECB did threaten to cut off ELA in November, at which point the previous administration was forced to agree a draft memorandum for a rescue package.
ECB President Mario Draghi said Cyprus' bailout was “no template”