ECB head decries first Cyprus bailout plan as 'not smart'

Proposals to make small savers in Cypriot banks pay for the bailout fund that saved the financial sector were 'not smart' according to the president of the ECB.

by Michael Northcott
Last Updated: 19 Aug 2013

Mario Draghi, the president of the European Central Bank has said that the idea to make small savers pay into the bailout deal for Cyprus’ banks was not concocted by either the ECB, the European Commission of the IMF. The Cypriot authorities in fact tabled it before being ‘swiftly corrected’. That’s his story anyway, and he’s sticking to it.

Draghi decided to give his comments on the Cyprus situation after the ECB announced its intention to keep eurozone interested rates at 0.75% for another month, which means the ninth consecutive month that they have remained unchanged.

So what happened with Cyprus in the end, and what is Draghi’s view? Well eventually, the island’s government agreed a 10bn euro international bailout, which targeted savers with deposits of more than 100,000 euros. They have had to pay a one-off levy which will be converted into shares in the bank which they will still own. Smaller deposits will be completely unaffected.

Draghi said that the initial plan ‘was not smart to say the least’, and pointed to the fact that people with smaller deposits than that threshold were in fact insured depositors and therefore should never have been considered in the first place. He said: ‘You have a pecking order, and here the insured depositors should be the very last category to be touched. The [European] Commission draft directive foresees exactly this.’

Interestingly, and despite the fact that everyone saw it as such, Draghi insisted that the Cyprus situation was not a blueprint for what might happen with larger countries if they need similar but scaled-up assistance. But he was unequivocal that Cyprus exiting the euro would not have been a better idea. He said: ‘What was wrong with Cyprus’s economy doesn’t stop being wrong if they are outside the euro.

‘So, the fiscal budget stabilisation, consolidation, the restructuring of the banking system would be needed anyway, whether you are in or out. To be out doesn't preserve the country from the need for action.’

Still, there are some signs here and there that economies are picking up. The UK services sector is doing OK, Japan is about to try a massive fiscal stimulus, and the Bank of England also kept interest rates on hold at 0.5% today. As ever, we can only watch and wait for something to improve…

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