Cypriot banks closed for a 10th day Monday and are not due to reopen until Thursday. With many depositors limited to withdrawing no more than $130 from an ATM, some analysts questioned whether the agreement would weaken faith in the currency union and whether a euro deposited in a Cypriot bank was worth as much as one deposited elsewhere.
The bailout set precedents — that European leaders will play hardball, bank accounts can be frozen, and deposits may be on the line in such a rescue package — that could exacerbate the possibility of bank runs in Spain, Italy and other vulnerable countries if the financial situation there deteriorates.
“Everybody in one way or another may emerge worse from the excruciating decision-making process we have been through,” said Sony Kapoor, managing director of Re-Define, an economic think tank. “There have been 10 days of insane uncertainty, which will have a serious long-term additional economic and financial cost.”
That uncertainty hit markets Monday after Dutch Finance Minister Jeroen Dijsselbloem, who leads a group of finance ministers for the European Union, suggested that future bank rescues on the continent might follow the Cyprus model and penalize large depositors.
Dijsselbloem’s comments, in an interview with Reuters and the Financial Times, damaged confidence in other European banks and sent stocks tumbling. He soon backtracked, issuing a statement that “Cyprus is a specific case with exceptional challenges” and that future rescue programs will be “tailor-made,” with “no models or templates” used. Nonetheless, the Dow Jones industrial average shed 64 points to close at 14,447.75, partly on concerns sparked by Dijsselbloem’s remarks.
The upheaval was a reminder that bank deposits are only as safe as the country in which they reside and showed how far Europe remains from ensuring that problems such as those in Cyprus do not escalate out of control. European leaders have been working on a unified banking system to help improve the resiliency of the currency union, which contains 300 million residents. The situation in Cyprus, a nation of about 840,000, may have weakened the broader project in the long run, some analysts said.
Bleary-eyed European finance officials who negotiated far into the wee hours of Monday emerged later in the day to say that they had stared down financial crisis and averted it. Many European leaders confronting furious electorates at home had been reluctant to use taxpayer money on a bailout of a country suspected of being a money-laundering hub for wealthy Russians.