Fears that bank accounts could be raided in any future eurozone bailouts spooked markets on Monday, as Cypriots prepared for some of their banks to reopen for the first time in 10 days following a deal to secure a €10bn lifeline.
Markets took fright after the head of the group of eurozone finance ministers indicated that the Cyprus rescue could be a template for similar situations. Cyprus is the first of five bailouts in the eurozone where depositors have been hit.
"What we've done last night is what I call pushing back the risks," Jeroen Dijsselbloem, the Dutch finance minister, told Reuters and the Financial Times after clinching an agreement for Cyprus. "If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders," he said.
Bank of Cyprus and Laiki, the two largest domestic banks, will remain shut until Thursday while the latter is split into a good and bad bank and a levy – of potentially 40% – is imposed on accounts of more than €100,000.
A big percentage of those deposits belong to Russians. On Monday the Russian president, Vladimir Putin, said there would be a deal to rework the terms of a €2.5bn loan to the Mediterranean island, which had become attractive for its low tax regime and lax vetting laws.
Cyprus president Nicos Anastasiades made a televised address in which he admitted that measures would be in place to stop money pouring out of the banks when they reopen. "The central bank will implement capital controls on transactions. I want to assure you that this will be a very temporary measure that will gradually be relaxed," he said.
Markets were initially buoyed by news of the "painful" bailout for Cyprus, clinched late on Sunday night following threats by the European Central Bank to switch off liquidity to Cypriot banks, which, carried by international deposits, had grown to eight times the €17bn economy.
But markets reacted badly later in the day after Dijsselbloem's remarks. As markets tumbled, he issued a clarification insisting that bailout programmes were "tailor-made" and that "no models or templates are used".
Love it - the markets react well at the news of a "painful" bailout deal for Cyprus, but then when they discover accounts over $130,000 may be subject to a 40% "tax" and that deal serves as a template for future bank bailouts, the markets plunge.
Until the Eurogroup reassures that this is not a template for future bailouts at all, people should ignore what they had said just a few hours before.
In the dictionary under full of shit, I saw a picture of Jeroen Dijsselbloem.
Well, it's great to see that accounts under $130,000 weren't touched, but the remarks made by Jeroen Dijsselbloem really caused chaos today:
The good news for the eurozone was that the markets reacted well to the bailout deal for Cyprus. The bad news was that the rally lasted barely until lunchtime. By then investors were running scared at the prospect that the terms imposed on one of the single currency's smaller members would be the template for rescue packages for bigger countries.
Credit for the change of mood goes to Jeroen Dijsselbloem, who chairs meetings of eurozone finance ministers and who decided it would be a good idea to go public with the idea that Cyprus was not such a special case after all.
For the past week the message has gone out that there are no comparisons between a country that allowed itself to become the tax haven of choice for high-rolling Russians and other, better-managed, members of the eurozone.
Then, in a couple of interviews, Dijsselbloem said Cyprus would be used as the model for future bailouts.
The comments were an open invitation to any investor with more than €100,000 in a eurozone bank to remove it without delay, which some then did.
By the end of the day shares in Europe were tumbling, the euro was dropping against the dollar and the cost of insuring European banks against default was rising, forcing Dijsselbloem to issue a clarification of his earlier remarks. Confirming that European politicians could not organise a booze-up in a brewery, Cyprus was back to being a special case once again.
Very much business as usual, in other words. Confusion reigns as the eurozone stumbles from crisis to crisis, with the markets already bracing themselves for the next bailout.
What a mess - a disaster waiting to happen in the near future.