Financial markets dropped yesterday after the influential head of the eurozone's finance ministers appeared to suggest that the Cypriot bailout deal was a model for future European rescues.
Stock markets had opened strongly following news that a bailout for Cyprus – which included a levy on savers with assets over €100,000 – had been agreed. But the comments from Jeroen Dijsselbloem saw the euro fall more than a cent against the dollar and shares in a number of banks slump as traders rushed to sell their stakes in institutions in the eurozone's most indebted economies.
In France, Societé Générale shares fell 5.7 per cent to €25.82, while Italy's UniCredit dropped 5.3 per cent to €3.39. Spain's Bankia, which has recently been through a recapitalisation programme of its own, fell 37.5 per cent to €0.15. "What we've done last night is what I call pushing back the risks," Mr Dijsselbloem told Reuters. "If there is a risk in a bank, our first question should be 'OK, what are you in the bank going to do about that? What can you do to recapitalise 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 recapitalising the bank, and if necessary the uninsured deposit-holders."
Mr Dijsselbloem's spokeswoman moved swiftly to "clarify" her boss's comments, claiming that the issue of Cyprus being used as a template had been taken out of context. Later, Mr Dijsselbloem himself issued a statement insisting that Cyprus was a "specific" case faced with "exceptional challenges", though by that stage the damage had been done.
The day began optimistically after more than 12 hours of talks in Brussels between Cyprus's President Nicos Anastasiades, leaders of the Troika (International Monetary Fund, the European Central Bank and the European Union) and eurozone finance ministers ended in the early hours of yesterday morning with a deal that will see Cyprus Popular Bank (also known as Laiki), the country's second largest, shut down. Its toxic assets – and any deposits above €100,000, below which funds are insured by the European Union – will be transferred into a Northern Rock-style bad bank.
The remainder of its funds will be merged into the Bank of Cyprus, whose customers with assets above €100,000 will have their accounts frozen and be forced to pay a tax of anywhere between 30 and 40 per cent of their savings. The funds generated from the tax will be converted into shares in the bank which, added to money from a series of privatisations and tax increases, will raise the €5.8bn required by Cyprus to trigger a further €10bn bailout from Europe.
The talks were at times fractious, with Mr Anastasiades reportedly asking IMF chief Christine Lagarde at one point whether she was looking to remove him from his job. But a deal was agreed just hours before the ECB's deadline that would have seen emergency funding for the banks withdrawn. Without the money, both would have gone bust and the island would have been forced out of the euro.
German Chancellor Angela Merkel praised the deal, saying: "The result that was found is right." She said the structure "makes those who helped cause these undesirable developments play their part", a reference to the wealthy Russian investors at whom the levy on deposits is targeted.
But not everyone was so welcoming. The outcome of the talks was described as "painful" by President Anastasiades last night, who also expressed his disappointment at the attitude of Cyprus's European partners. The chairman of the Cypriot parliament's finance committee, Nicholas Papadopolous, told the BBC earlier in the day: "We are heading for a deep recession. They wanted to send a message that the Cypriot economy ought to be destroyed, and they've succeeded." Analysts from SocGen predicted Cyprus could lose 20 per cent of its GDP over four years.
In Nicosia, the deal was met with despair. Giannis, a 78-year-old businessman, wiped the tears from his eyes as he wondered how he'd repay the loans he took out to boost his business. "I've survived many storms in my life, but this one will be the toughest," he said.
The island's banks – with the exception of Laiki and Bank of Cyprus – were due to reopen today but last night the Central Bank said they would remain closed until Thursday. Limits have been set on the amount account holders can withdraw, and "temporary" capital controls will be imposed to prevent a bank run.
The deal will not need approval by Cyprus's parliament as it is classified as bank restructuring, not a tax, but several eurozone states, including Germany, still need to vote it through.