PARIS — After striking an unprecedented deal in March to make many bank depositors help pay for an international bailout, Cyprus on Monday received 2 billion euros, the first installment of that money, aimed at buttressing the economy after the near-collapse of its banking sector.
European officials say the release of the funds, equivalent to $2.6 billion, was recently approved by a working group of the 17 eurozone finance ministers, who gathered Monday evening in Brussels for their regular monthly meeting. Cypriot efforts to stabilize the economy may be on the agenda. A second allocation of up to 1 billion euros will be transferred by June 30, officials said.
That session was a prelude to the planned meeting of all 27 European Union finance ministers in Brussels on Tuesday, where the focus is expected to be on proceeding with a European banking union that could stabilize the European financial system and avoid future debacles like Cyprus. Officials on Tuesday were to consider a single set of rules for dealing with failing banks throughout Europe, as well as discuss continuing efforts to curb tax havens.
The thorniest issue revolves around whether some depositors in any other European country should be made to suffer losses if their banks require an international rescue, as happened in Cyprus in an unprecedented and still controversial provision for a eurozone bailout.
In exchange for a 10 billion-euro emergency aid package, Cyprus in March agreed to EU demands to effectively confiscate up to 60 percent of any depositor’s holdings above 100,000 euros held in two of the country’s largest banks, Bank of Cyprus and Laiki Bank. At the same time, Laiki Bank was forced to fold, merging into Bank of Cyprus.
On Tuesday in Brussels, part of the debate will involve where depositors should be placed in the hierarchy of creditors in the future rules on shutting down failing banks. The main focus is what to do with depositors holding more than 100,000 euros. Some countries want all EU members to have the same rules, while others want the flexibility to decide where savers should be in the hierarchy.
The president of the European Central Bank, Mario Draghi, said at his recent monthly news conference that ordinary depositors should be hit only after people who took risks by buying bonds in banks were forced to take losses. “If it can be avoided,” he said, “uninsured depositors should not be touched.”
In Cyprus, the issue came to a head after Germany and some other EU countries insisted on finding a new way to pay for a bailout of troubled Cypriot banks, which held large deposits from wealthy Russians. Some of the money was suspected of having questionable origins, meaning it would be hard for Berlin to justify using German taxpayer funds to clean up Cyprus’ mess. In the end, EU and Cypriot officials agreed that wealthy depositors would effectively have to help foot the cleanup bill.