Cyprus Resolution, A Template For Other Eurozone Problems

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Hours after the Cyprus bailout program was finalized, Eurogroup president and Dutch finance minister Jeroen Dijsselbloem told Reuters that the Cyprus rescue program reached Monday will act as a template to resolve any future Eurozone banking problems; they added that other countries will have to restructure their banking sectors, if required.

Cyprus Resolution, A Template For Other Eurozone Problems

Dijsselbloem said the idea is to push back the risks rather than let the trouble grow and then bailing out the banks using taxpayers’ money. The financial institutions must realize that the risks they are taking will come towards them — it will hurt them directly.

Now if a bank has a problem, it has to recapitalize itself. If the bank can’t do it, then Eurozone leaders will talk to the bondholders and shareholders to contribute in recapitalizing the financial institution. If there is further need, the uninsured deposit holders will be asked to contribute.

Accepting the final rescue program, Cyprus decided to close down its second biggest bank Laiki. The insured deposits (below 100,000 euros) in Laiki will be transferred to the deposit holders’ accounts in the country’s largest lender, Bank of Cyprus. The uninsured deposits (accounts with more than 100,000 euros) will suffer a combined loss of 4.2 billion euros.

The accounts of uninsured depositors in the Bank of Cyprus will be frozen while the country’s largest bank is recapitalized. The money required to strengthen the bank will be withdrawn from the accounts having more than 100,000 euros. According to the latest agreement, shareholders and bondholders will have to bear the restructuring cost first, then uninsured depositors. The rules guarantee deposits less than 100,000 euros.

Earlier, governments and taxpayers would have had to bear the costs. The leaders had agreed that the future rescue fund or European Stability Mechanism will be allowed to recapitalize the troubled banks directly. Dijsselbloem said if a country wants a sound, healthy financial sector, it has to deal with the risks it takes.

If they can’t deal with the trouble, then they shouldn’t take it in the first place. the Eurozone will no longer respond by coming and taking away the problem, the bank and the concerned country should deal with the trouble and fix the balance sheets.

The European Stability Mechanism will have a buffering capital of 700 billion euros, and the mechanism will recapitalize any regional bank that gets into trouble after mid-2014. But Dijsselbloem says European countries should aim never to use ESM.

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