Cyprus 'bail-in' not a special case after all

IMF executive director Christine Lagarde with Jeroen Dijsselbloem Photo: Reuters

You probably haven't heard of him, the Dutch Finance Minister, Jeroen Dijsselbloem.

But after days of officials insisting that the terrible problems of Cyprus are a special case, remarks he has just made suggest that in fact the impact could be much wider.

For the first time, ordinary, although only wealthy, investors in banks have had to take a very big hit in exchange for help from the rest of the eurozone in Cyprus.

A 'bail-in', instead of a bail-out.

After three years where other eurozone countries, taxpayers, and particularly German voters, have been on the hook to pump cash into European banks that are in trouble, it appears that what has happened in Cyprus is now the new model.

Dijsselbloem makes this abundantly clear: he calls it "pushing back the risks" away from the group, back to the country itself rather than the rest of the eurozone.

And his views matter because he is now the head of the Eurogroup of finance ministers, the money men who are making many of the decisions. The logic is quite clear, he says:

It means deal with it before you get in trouble. Strengthen your banks, fix your balance sheets and realise that if a bank gets in trouble, the response will no longer automatically be that we'll come and take away your problem.

We're going to push them back. That's the first response we need. Push them back. You deal with them.

If we want to have a healthy, sound financial sector, the only way is to say, 'Look, there where you take on the risks, you must deal with them, and if you can't deal with them, then you shouldn't have taken them on.

The difficulty is that it may in some cases be entirely impossible for countries to "deal with them".

Bigger countries with serious economic problems, Spain, for example, would not be able to just "deal with them" on their own.

It is all very well saying, "deal with it before you get into trouble", but many of the eurozone's economies are already in trouble and, it seems, the rules just changed.

More to the point, it is an entirely different approach to how other countries' banking sectors like Ireland's were dealt with.

And it seems to kill off the possibility that the eurozone rescue fund that officials and politicians sweated to agree and develop, would put money directly into banks that needed help to stay afloat, so-called 'recapitalising'.

Cyprus is a small country with many unique problems, but a serious precedent has been set here, that in the long run could have enormous effects.

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