BRUSSELS — Inflicting losses on banks' shareholders, bondholders and even large depositors should become the 17-country eurozone's default approach for dealing with ailing lenders, a top European official said Monday.
Banks' owners and investors must be held responsible "before looking at public money or any other instrument coming from the public side," said Jeroen Dijsselbloem, who chairs the Eurogroup gatherings of the 17 eurozone finance ministers.
The eurozone countries and the International Monetary Fund earlier Monday granted Cyprus a 10 billion euro ($13 billion) bailout that foresees dissolving the country's second-largest bank, wiping out its bondholders and inflicting significant losses – possibly up to 40 percent – on all deposits larger than 100,000 euros ($130,000).
EU officials have previously stressed that this measure, a so-called bail-in, was a "unique step" in Cyprus. That's because of the size of country's banking sector – almost eight times the economy's annual output – and the capital structure of its lenders, which rely almost exclusively on deposits instead of bonds.
"If there is a risk in a bank, our first question should be `Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?' If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders," he said in an interview with the Financial Times and Reuters.
Dijsselbloem's office confirmed the remarks.
In the past, nations like Ireland have dumped billions of taxpayers' money into rescuing their banks, fearing that forcing owners and depositors to take losses would roil markets and spread uncertainty. That has drawn howls of outrage as pension cuts and tax hikes were used to spare rich overseas investors from losses.
European officials had that in mind when they decided, in Cyprus' case, to shrink and restructure the banking sector, reducing the amount of money European and Cypriot taxpayers would have to pay.
But forcing losses on large deposits could encourage investors to pull money out of weaker southern European economies to more stable nations in the north, like Germany.
That concern was evident in markets. The euro currency, used by more than 330 million Europeans, rose against the dollar to about $1.30 in the morning on the agreement on a bailout for Cyprus, but tanked below $1.29 – its lowest since November – following Dijsselbloem's remarks. European stock market indexes also lost their earlier gains, with bank shares hardest-hit, particularly in financially weak countries like Italy and Spain.
Dijsselbloem said the new approach was more just because it was about safeguarding taxpayers' money and force losses on banks, their owners and investors instead.
"The consequences may be that it's the end of story, and that is an approach that I think, now that we are out of the heat of the crisis, we should take," he said in the interview.
Later Monday, after the whirlwind of nervous market reactions, Dijsselbloem issued a terse clarifying statement, saying "Cyprus is a specific case with exceptional challenges which required the bail-in measures."
"Macro-economic adjustment programs are tailor-made to the situation of the country concerned and no models or templates are used," he added.
Deposits in Europe are guaranteed by a state-backed deposit insurance scheme only up to 100,000 euros ($130,000). The bailout program for Cyprus marks the first time in Europe's three-year-old debt crisis that large deposit holders – wealthy savers, business people or institutions – will be forced to take losses.
If holders of large deposits were to start moving their savings away from banks in southern Europe, those lenders could quickly be in need of additional capital, possibly pushing them to seek support from their governments. But nations such as Portugal, Spain, Italy or Greece already have huge public debt loads, which would make it difficult for them to recapitalize their banks.
With his comments, the Dutchman, who took the helm of the Eurogroup only in January, also dashed hopes that Europe's rescue fund might one day provide rescue loans directly to banks. The ESM is in theory due to be able to directly prop up ailing lenders once the bloc has moved toward a so-called banking union, including centralized oversight by the European Central Bank, sometime next year at the earliest.
That was meant to be a key component of Europe's response to its debt crisis as it would break the link between weak banks dragging down the finances of already heavily indebted governments.
"We should aim at a situation where we will never need to even consider direct recapitalization," he told the Financial Times and Reuters. "If we have even more instruments in terms of bail-in ... the need for direct (recapitalizations) will become smaller and smaller," he added.
Eurozone nations that have been net contributors to bailout packages – such as Dijsselbloem's native Netherlands, Germany or Finland – have been skeptical about direct bank recapitalizations through Europe's rescue fund, the European Stability Mechanism. They fear their taxpayers' money will be used to bail out banks in other nations whose governments failed to properly oversee their lenders in the first place.
Juergen Baetz can be reached at http://www.twitter.com/jbaetz