Markets Rise on Bailout, but Official Europe’s Reaction Is Mixed

Global stock markets pushed higher Monday after Cyprus reached an agreement that allowed it to avoid a collapse of its financial system and a possible exit from the euro.

But reaction from European capitals was mixed. German officials greeted the deal with

In Athens, a government spokesman welcomed the deal, while the president criticized the European Union for taking too tough a line with the Cypriot government.

Ending weeks of fraught negotiation, Cypriot government officials reached agreement in the early hours of Monday with the so-called troika of lenders — the European Union, the European Central Bank and the International Monetary Fund — that opens the way to a €10 billion, or $13 billion, bailout of the island’s distressed financial sector.

“This effectively ends the risk of Cyprus leaving the euro,” Lee Hardman, a currency analyst in London with Bank of Tokyo-Mitsubishi UFJ, said.

The Euro Stoxx 50, a benchmark of euro zone blue-chips, was up 1.3 percent in midday trading, while the FTSE 100 index in London was up 0.9 percent. Trading in Standard & Poor’s 500 index futures pointed toward a modest bounce for U.S. stocks at the opening bell on Wall Street.

Yields on Italian and Spanish government debt, which move in the opposite direction of the price, fell sharply. Those moves, indicating a drop in the governments’ borrowing costs, were a sign that investors are less worried than they were last week that Cyprus’s problems might have a contagion effect on markets in other financially challenged euro zone countries.

The euro, at $1.2993, was up from $1.2983 late Friday in New York.

The deal, which officials said would not require the approval of the Cypriot Parliament, would lead to Laiki Bank, a troubled lender, being shut down, with its good assets being absorbed by Bank of Cyprus, the nation’s largest. Junior and senior bondholders would take losses, as would depositors in the bank with accounts holding more than €100,000. Foreign depositors, including Russians and Britons, hold an outsized share of the uninsured deposits.

Accounts of less than €100,000 would be protected. Outrage over the original bailout plan, which would have included a hit on insured deposits, contributed to Parliament’s rejection of the deal and caused fears across Europe that the conditions for bank runs were being created by short-sighted policy.

The agreement ensures, crucially, that the European Central Bank will continue providing funding to Cypriot banks. The E.C.B. had turned up the pressure last week, setting a Monday deadline for a deal and saying it would no longer provide the low-interest loans on which the island’s banks depend if a deal were not reached. The accord early Monday should remove any possibility of a near-term catastrophe.

European finance ministers said in a statement that the program would address the exceptional challenges that Cyprus is facing and restore the viability of the financial sector, with the view of “restoring sustainable growth and sound public finances over the coming years.”

Cypriot markets were closed Monday for a public holiday, leaving officials just one day to nail down critical details before banks reopen Tuesday.

The German finance minister, Wolfgang Schäuble, looking as exhausted as he did relieved, said Monday the deal encompassed everything that Germany had “believed was right all along,” naming the restructuring of Cyprus’ banks, introduction of standards against money laundering and increased transparency.

“I think it is a good result,” Mr. Schäuble told reporters in Berlin. He described the talks as long, difficult and intense, but praised the resulting agreement as fair to all parties involved.

Noting that Germany and others had lobbied unsuccessfully such a solution during discussions a week ago, Mr. Schäuble said that by the end of Monday’s discussions, “we were able to convince others of our position.”

The next step, Mr. Schäuble said, is to work together with Cyprus to reopen the banks in the country on Tuesday as smoothly as possible.

He further said he was in discussions with German parliamentary leaders to determine when lawmakers in Berlin would vote on the package, a step that is required before it can take effect.

Steffen Seibert, a spokesman for Chancellor Angela Merkel, said the German government would work for the agreement’s passage in the lower house, the Bundestag, noting that it addressed all key concerns raised by lawmakers in recent weeks.

Senior officials in Russia, however, responded with sharply critical assessments of the agreement.

“They keep stealing from the thieves, it seems to me” Prime Minister Dmitri A. Medvedev said, in comments carried by the Interfax news agency that were a paraphrasing of a Russian revolution-era slogan used to describe expropriating the wealth of the rich.

Mr. Medvedev, speaking in a meeting with a deputy prime minister, Igor Shuvalov, said the consequences of imposing losses on depositors should be studied carefully.

The restructuring of the two largest Cypriot banks may well cost Russian depositors more than the bank tax. The exact loss will not be known for some time. Estimates, though, are ranging from 30 percent to 60 percent of the value of large deposits in the most wobbly of the two banks, Cyprus Popular Bank.

Mr. Shuvalov, the deputy prime minister, saw a silver lining in the losses, saying the crisis would encourage Russians to keep money at home. “It is a signal,” he said, to bring money home. “We have very stable banks,” he said, Interfax reported.

There were mixed reactions in Greece, with the fragile coalition government issuing cautious messages of solidarity with the Cypriot government and the president, who has significant influence but limited executive powers, criticizing the European Union for its tough treatment of Nicosia.

Greece’s government spokesman, Simos Kedikoglou, indicated that the agreement was a necessary evil. “It is painful, but it averts the descent into chaos that a disorderly default and an exit from the euro zone would have brought,” he said, noting that the focus now should be on “helping Cyprus stand back on its feet.”

President Karolos Papoulias, speaking at a military parade in Athens to mark the 192nd anniversary of Greece’s independence from Turkish rule, said the Cyprus bailout was “unacceptable because it is selective.”

“The European Union must not choose its victims,” he said, “because it is dashing the dreams of European people that the E.U. can provide a shelter for the weak.” He added that he hoped this message was “received in all major capitals, and especially in Berlin.”

Ms. Merkel and Mr. Schäuble were the focus of scathing commentary in the Greek media for their tough stance in the Cyprus talks. Greek newspapers did not circulate on Monday, a national holiday, but Sunday’s editions carried headlines decrying the tough stance of Germany and the International Monetary Fund: “Cold-blooded execution,” “They’re drowning Cyprus,” “Economic Tyranny,” and “A rift in the euro zone from Germany’s attack on Cyprus.”

Of the 17 euro zone members, Cyprus, Greece, Ireland and Portugal have all received bailouts since the sovereign debt crisis began. The deal announced Monday marks the first time that junior and senior bondholders, as well as large depositors, have been required to bear part of the pain – possibly setting a precedent for any future bailouts.

Mr. Hardman, at Bank of Tokyo-Mitsubishi UFJ, said that the Cypriot deal raised the question: “Will this undermine the confidence of bank depositors in Europe as a whole?”

Analysts at Barclays in London said any fallout to other euro zone banks was “likely to be contained,” because Cyprus represented a unique case, with the size of the bailout at about 60 percent of its gross domestic product. But they said the decision to “bail in” the bondholders and large depositors might reverberate among the euro zone banks seen as the most risky, as “markets may expect that a similar template to the one used on Cyrpus could be deployed should any of those weak banks need to be resolved going forward.”

Source: New York Times