German finance minister Wolfgang Schäuble has said recent experiences in Iceland and Ireland had shown why Cypriot bank investors should accept losses to finance a recovery programme.
Imposing a levy on bank deposits was crucial to limiting the size of the external programme financing to €10 billion, he said, thus maintaining debt sustainability and keeping the International Monetary Fund (IMF) on board.
He said it was preferable to tap the high level of foreign capital in Cypriot banks, including from Russia, before expecting European taxpayers to underwrite the programme cost.
“Whoever invests their money in countries where they pay less tax – perhaps where there is less financial oversight – carries the risk when the banks of this country are no longer solvent,” said Mr Schäuble on national radio. “That was the case in Iceland and in Ireland a few years ago.”
Icesave bank
In January, a European court ruled that Iceland was within its rights in not repaying around €6.4 billion in British and Dutch depositor savings from the collapsed Icesave bank.
A spokesman for the German finance ministry declined to specify yesterday the costs covered by foreign investors to Ireland.
The amount of unsecured debt at the end of Ireland’s two-year blanket bank guarantee in 2010 was about €5 billion.
During negotiations on Ireland’s adjustment programme, the ECB rejected any moves to impose losses.
“Not only had Ireland already issued its state guarantee by that time, but the decision to renege on the Irish signature would have made very little difference financially but with a huge potential downside in terms of future ability of the state to borrow,” said the spokesman.
“The [programme] assistance, however, enabled Ireland to honour its pledge.”
Minister for Jobs, Enterprise and Innovation Richard Bruton, touring Germany yesterday, agreed that the sovereign decision of the last government to impose the bank guarantee in 2008 had “shunted a lot of the burden onto the taxpayer”.
“I know what happened in Ireland – the way our banks were supervised, for instance – was defective but it is not all Ireland’s fault,” he said.
“There are two sides in every transaction and those who funded the expansion in Ireland’s banks did so with their eyes open.” Mr Schäuble said yesterday that he had pushed for depositor involvement, but only on account holders with more than €100,000 on deposit.
The Cypriot president Nicos Anastasiades had rejected this proposal, Mr Schäuble surmised, to keep foreign capital in Cypriot banks at attractive terms. "It's always striking how a country with a relatively small population attracts high bank deposits of foreign investors," said the German minister. "This business model is bankrupt."
Risk and opportunity
An official at Dr Schäuble's ruling Christian Democratic Union (CDU) said there was a parallel between the two large banking sectors in Cyprus and Ireland.
“In the future European banking union, risk and opportunity will be more closely interlinked, with those who invest carrying any cost,” said the official.
“That was not the case in Ireland but that is history.”
