Euro zone overrates ability to curb contagion: Moody's

Wed Mar 27, 2013 4:50am EDT
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By Ana Nicolaci da Costa and Marc Jones

LONDON (Reuters) - The euro zone's awkward handling of Cyprus's bailout puts extra pressure on the bloc's downgrade-threatened sovereign ratings and shows policymakers overestimate their ability to contain the crisis, credit agency Moody's said.

Cyprus clinched a 10 billion euro bailout from international lenders this week, but its terms have broken with past taboos by seizing up to 40 percent of the cash held in the island's banks by wealthy individuals and firms.

Market analysts fear that could set a dangerous precedent for future rescue efforts and make the region more prone to bank runs if depositors in other debt-strained countries think their money is no longer safe.

"Policymakers appear very confident that market conditions are benign enough and that they have the tools to avoid contagion to other peripheral economies and their banking systems," Bart Oosterveld, managing director of sovereign risk at Moody's, told Reuters.

"We think that that confidence may well be misplaced."

While Spain and Italy have so far proven resilient, analysts fear the chaos in Cyprus has increased the risk of contagion if investors think the same will happen if other countries ever seek financial help.

The European Central Bank has sought to quash suggestions the tactics used in Cyprus could become a bailout blueprint.

But comments on Monday from Jeroen Dijsselbloem, the head of the Eurogroup of finance ministers, that it could be a model for dealing with future euro zone banking crises has left market concerns difficult to erase.   Continued...

A Moody's sign is displayed on 7 World Trade Center, the company's corporate headquarters in New York, February 6, 2013. REUTERS/Brendan McDermid