It all looked good pretty good this morning: The broadly expected deal for Cyprus had been agreed overnight with a more appropriate distribution of the burden, including by protecting depositors below EUR100,000 and by instituting the “normal” waterfall principle of haircutting shareholders and creditor. And the market - understanding the combination of principles and practicalities when the debt work-outs take place - liked it! Markets rallied; further crisis averted.
But then new-comer to the European stage, recently appointed head of the Eurogroup (and recently appointed Dutch Finance Minister) Dijsselbloem decided to make sure we all understand the first principles of finance. He explained that “taking risk away from the financial sector and taking it on to the public shoulders is not the right approach … if we want to have a healthy, sound financial sector, the only way is … where you take the risk, you must deal with them”. He implied that the burden sharing in the Cypriot could become a model for future debt work-outs.
Apart from the odd time to spread doubt into a still fragile system, the first thing that strikes was the hypocrisy of his statement. After all, it is less than two months ago that the Dutch government nationalized SNS Reaal, saving its depositors and others at the expense of Dutch pensioners and other taxpayers. Should one therefore conclude that Mr. Dijsselbloem wants a healthy financial sector in other European countries, but not in the Netherlands?
But more importantly, why say that now? We may never know, but either seeing the market reaction (a massive sell-off) – or after having received a few friendly phone calls from more experienced colleagues, Dijsselbloem clarified that Cyprus was indeed a special case (in case we didn’t know), and that the Cypriot rescue package should not be seen as a template.
Nobody with any experience would think that the special case of Cyprus (in almost every respect) would ever become a template for other countries with normal financial sectors, and markets will probably correct some again tomorrow. But anxiety spreads when key European leaders make such statements. Poor communication with respect to the details of the Cypriot deal caused serious problems ever since last Friday when it was announced that even small depositors stood to lose, but I – for one – had hoped that the importance of clear and precise communication had be learned.
