Analysis: Cyprus rescue raises new questions about euro's long-term survival

Mon Mar 25, 2013 10:56am EDT
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By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters) - The messy deal to bail out Cyprus has averted the latest threat to the break-up of the euro but at the cost of raising new questions about the single currency's long-term viability.

Savers in other euro zone banks appear so far to be taking the freezing of balances over 100,000 euros in Cyprus's two biggest lenders in their stride. Perhaps they judge that events in a tiny, far-away island with outsize banks and a reliance on deposits from Russian oligarchs hold little relevance for them.

Yields on Italian and Spanish bonds held broadly on Monday, reflecting a belief that the European Central Bank's promise to buy struggling euro members' bonds if need be - a program known as Outright Monetary Transactions (OMT) - will prevent a spillover from Cyprus.

"This certainly plays into the hands of northern European creditor countries, who have long taken the view that fears of contagion, in particular post-OMT, are wildly exaggerated," said Nicholas Spiro of Spiro Sovereign Strategy in London.

"For the time being there is no contagion: the markets, rightly or wrongly, still believe in the credibility and effectiveness of this bond-buying scheme."

Although big outflows from Italian or Spanish banks were unlikely, Spiro said the troika of the International Monetary Fund, the European Commission and the ECB had set a dangerous precedent by initially agreeing to tax Cypriot deposits below the European Union's 100,000 euro guarantee threshold.

European central bankers in private, and German banks in public, expressed confidence that the repercussions of Cyprus's bailout would be contained.

"The banking sector in the country was too large and did not have a sustainable business model. Cyprus should thus be regarded as a one-off case, and is therefore not comparable with other European countries," said Andreas Schmitz, president of the BdB association of German lenders.   Continued...

A structure of the Euro currency sign is seen through a sunflower in front of the European Central Bank (ECB) headquarters in Frankfurt July 11, 2012. REUTERS/Alex Domanski