ECB policymaker Benoit Coeure has stated that depositors in Cypriot banks should not be forced to take losses across the board as part of a eurozone rescue of Cyprus, but he did not rule out making the biggest depositors share some of the burden. Speaking at a Reuters Summit on the future of the eurozone, Coeure said it was essential to ensure that Cypriot debt was reduced to a manageable level and that the cost of the bailout was fairly shared and not just footed by taxpayers.

Germany, Finland and some other eurozone countries are pushing for bank depositors and other investors in Cyprus to carry some of costs of a bailout, both to shield their taxpayers and because of suspicions that wealthy Russians and others have used the island to stash possibly illicit funds. Opponents of such a move are concerned it could trigger a bank run and further undermine trust in the eurozone, rekindling the worst of the debt crisis. 

In a statement yesterday responding to the reports, DISY repeated categorically Cyprus’ stance that there would be no haircut on deposits. Eurozone finance ministers will discuss the package for Cyprus at a meeting in Brussels on Monday, with Germany and France pressing for a decision by the end of March. "All solutions should be explored," Coeure said. "I wouldn't include a general bail-in of depositors as part of the solution given the risks that it would pose for financial stability. So I think the possible bailing-in of depositors across the board is not an option that can be envisaged given this hasn't been done in any country. It would be entirely new and I don't think it's time to make experiments now."

Pressed to say if that left open the possibility of a narrower bail-in of deposits above the EU-guaranteed threshold of 100,000 euros, he said: "There needs to be an appropriate burden-sharing in the programme because we need to achieve debt sustainability. But no bail-in across the board. "I don't pre-judge any instruments because the vocabulary matters and there are many ways to achieve burden-sharing." Asked if that was his personal view or that of the ECB board, Coeure said: "I'm pretty sure that (Mario Draghi) is comfortable with the way I've phrased it. No bail-in across the board of depositors."

Having bank account holders bear some of the costs is a risky strategy not only because there is no precedent in the previous bailouts in the eurozone debt crisis, but also because it raises the risk of a run on Cypriot banks. Cyprus has a bloated banking system with deposits that reached more than €70 billion, although latest figures show that deposits reached their lowest levels in three years in January, according to a statement released by the Cyprus Central Bank. 

Last month saw a significant outflow of deposits from the domestic banking system, with €1.73 billion taken out of banks, representing a 2.5 per cent reduction compared to December. January deposits dropped to €68.42 billion from €70.15 billion the month before, marking the lowest level in three years. Around a third of the deposits in Cyprus are from non-residents, including many Russian and British businesses. One proposal for having depositors foot the bill would involve freezing any amounts above 100,000 euros with the total held in an escrow account and used either to shore up the capital of the banks or as collateral for loans.

Cyprus, which elected a new, conservative president on Sunday, is adamantly opposed to the bailing-in of depositors or bondholders, concerned that it will destabilise its already shaky economy and undermine its business model. But there may be no way to avoid such a move if the European Central Bank, the IMF and the European Commission, together known as the troika, agree that such a step is necessary to make Cypriot public debt manageable.

Source: Cyprus Mail