THE GRAB on bank deposits that accompanied Cyprus’ bailout could be repeated elsewhere in the eurozone, and the bloc’s banking union may not be strong enough when it is introduced, Standard & Poor’s said yesterday.
“We believe that the events in Cyprus highlight the increased reluctance of financially stronger eurozone countries to make their taxpayers’ funds available to recapitalise banks outside their home jurisdictions,” the credit ratings agency said in a report.
“For this reason, although the key features of the Cypriot banking system are not shared by other eurozone countries, we consider that the bail-in may indeed create a precedent.”
Speaking at the London School of Economics, Athanasios Orphanides, who headed Cyprus’ central bank during much of the run up to the crisis, slammed the handling of the situation by both the island’s government and eurozone leaders.
“I read this (deposit grab) as another Deauville,” Orphanides said, referring to the groundbreaking agreement between German Chancellor Angela Merkel and then French President Nicolas Sarkozy to impose losses on Greek bondholders.
“It is not yet clear what has been done to the banking sector in the periphery… The issue is how this may play out going forward.”
S&P’s report also raised concerns that the eurozone’s plans for a banking union – designed to break the link between costly bank bailouts and unmanageable sovereign debt levels – may fall short of requirements.
The union is due to come into force by mid-2014 but there has been substantial backsliding on the original blueprint, with Germany in particular resistant to committing taxpayers’ money to supporting banks outside its borders.
S&P credit analyst Richard Barnes said the increasingly “minimalist”-looking plans would “do little to make the eurozone a more cohesive monetary union or address banks’ direct and indirect dependence on the creditworthiness of their national governments.”
“Unless the banking union delivers greater integration than currently appears achievable, the creditworthiness of banks will likely remain dependent on their home sovereigns’ creditworthiness. Therefore, they would remain vulnerable to any further deterioration in the operating environment,” he added.