By Michael Northcott Monday, 11 February 2013

Image via Wikimedia Commons

Image via Wikimedia Commons

Saver-bashing rescue plan proposed for Cypriot banks

New proposals for a financial bailout of Cyprus would force uninsured depositors in the country's banks as well as investors in the government's bonds to take heavy losses.

The now-perennial issue of how to solve financial meltdown crises in Europe is showing no signs of abating. Cypriot ministers who are trying to agree a rescue plan to follow the presidential elections later in February have made new proposals, which are being called a ‘bail-in’ of investors and deposits. 

Their idea is that depositors and people who have bought sovereign bonds would be forced to take losses as an alternative to getting a full-blown bailout injection from elsewhere in Europe. Remember all that talk about moral hazard back in the day? This is what it means.

The plans were outlined in a confidential memo, seen by the FT, which had been written ahead of a larger meeting of eurozone finance chiefs today. It is thought that this particular method would cut the country’s sovereign debt by around two-thirds, bringing it safely away from the brink of meltdown. 

Cyprus has been under pressure to come up with a palatable way of preventing its own financial collapse, as ECB board member Joerg Asmussen has said that he wants to see some sort of solution within weeks. He said that there would be ‘high financial and political costs’ associated with not acting quickly to prop up the Cypriot economy. 

But he has found himself at loggerheads with the German government, which wants to wait until it has held its own general election in September before discussing the possibility of providing more bailout money. There is also the question of whether any Cypriot banks fall into the 'too big to fail' category. Probably not, seems to be the feeling here. 

A further difficulty in squeezing any more money out of other European states is political: governments are worried about the idea of stumping up more cash for Cyprus when it is so popular as a tax haven with Russian oligarchs, and allegedly plays host to substantial money-laundering activities.

Nonetheless, Asmussen told the Germany newspaper Handelsblatt: ‘There must be no doubt about this: if Cyprus gets no external help, it will slide into default. I expect the aid programme for Cyprus will be in place by the end of March.’

On balance, it’s looking like private lenders and retail banking customers are likely to be the losers here: we sense that Germany is fresh out of political support for doling out more cash to countries in crisis. And if Merkel wants re-electing in September, you can bet she won’t be signing any more cheques this year…

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