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Cyprus bailout deal reached as long-term impact remains uncertain

European leaders yesterday hailed a last-minute bailout for Cyprus as an important step in defending their unified currency, but some officials and analysts questioned whether the deal raised new problems that could still threaten the survival of the euro.

The arrangement will grant Cyprus $13 billion in emergency loans from an international group of lenders but will force the country to shutter its second-largest bank and will push massive losses on large depositors there. The deal effectively wipes out Cyprus’s appeal as an international banking haven but saves Europe from cutting off support to one of the 17 nations that use the euro.

Cypriot banks closed for a 10th day yesterday and are not due to reopen until Thursday. With many depositors limited to withdrawing no more than $130 from an ATM, some analysts questioned whether the agreement would weaken faith in the currency union and whether a euro deposited in a Cypriot bank was worth as much as one deposited elsewhere.

The bailout set precedents – that European leaders will play hardball, bank accounts can be frozen, and deposits may be on the line in such a rescue package – that could exacerbate the possibility of bank runs in Spain, Italy and other vulnerable countries if the financial situation there deteriorates.

“Everybody in one way or another may emerge worse from the excruciating decision-making process we have been through,” said Sony Kapoor, managing director of Re-Define, an economic think tank. “There have been 10 days of insane uncertainty, which will have a serious long-term additional economic and financial cost.”

That uncertainty hit markets yesterday after Dutch Finance Minister Jeroen Dijsselbloem, who leads a group of finance ministers for the European Union, suggested that future bank rescues on the continent might follow the Cyprus model and penalize large depositors.

Dijsselbloem’s comments, in an interview with Reuters and the Financial Times, damaged confidence in other European banks and sent stocks tumbling. He soon backtracked, issuing a statement that “Cyprus is a specific case with exceptional challenges” and that future rescue programs will be “tailor-made,” with “no models or templates” used. Nonetheless, the Dow Jones industrial average shed 64 points, partly on concerns sparked by Dijsselbloem’s remarks.

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