Cyprus to blame for bailout turmoil, Draghi says

FRANKFURT Thu Apr 4, 2013 9:13pm IST

European Central Bank (ECB) President Mario Draghi speaks during the monthly ECB news conference in Frankfurt April 4, 2013. REUTERS/Lisi Niesner

European Central Bank (ECB) President Mario Draghi speaks during the monthly ECB news conference in Frankfurt April 4, 2013.

Credit: Reuters/Lisi Niesner

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FRANKFURT (Reuters) - The European Central Bank put the blame for initial market turmoil over Cyprus's bailout squarely on the island's government on Thursday and pledged that taxing depositors would not become normal procedure.

ECB President Mario Draghi said Cyprus's bailout was "no template", a statement designed to ease market fears that bank deposits would in future be fair game for international lenders seeking to help struggling euro zone countries.

But he was also scathing about Cyprus's initial plan to impose a levy on insured as well as uninsured bank depositors.

"That was not smart, to say the least, and was quickly corrected (by euro zone finance ministers)," he said.

Draghi said the finance ministers and the International Monetary Fund had wanted Cyprus to help pay for its 10 billion euros with a levy on wealthy depositors only.

Cyprus, however, had initially also sought to charge those with 100,000 euros or less even though they had a bank deposit guarantee. The move triggered a wave of concern in financial markets, fearing that investors elsewhere would be unnerved and start a bank run.

Draghi said depositors with guarantees should be sacrosanct, but that it was best not to touch any depositors if possible.

"You have a pecking order, ideally insured depositors should be the very last category to be touched. The (European) Commission draft directive (on banking) foresees exactly this.

"There isn't actually a specific distinction between categories of bondholders and uninsured depositors in the draft directive. But basically the point is that you, if you can, don't touch uninsured depositors," Draghi said.

He also said it would be of no help to Cyprus if it left the euro zone, as some have floated.

"What was wrong with Cyprus's economy doesn't stop being wrong if they are outside the euro," he said.

"So the fiscal budget stabilisation, consolidation, the restructuring of the banking system would be needed anyway, whether you are in or out. To be out doesn't preserve the country from the need for action."

Draghi also sought to soothe concerns that charging depositors - called a "bail in" - would now be imposed on other troubled countries.

Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, caused a stir in March when he told Reuters that the Cyprus bailout, including depositor levies, could be replicated in future.

Draghi insisted this was not the case.

"Cyprus is no template," he said. "I am absolutely sure that the chairman of the Eurogroup has been misunderstood."

(Writing by Jeremy Gaunt, editing by Mike Peacock)

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