IIF: Cyprus aid may stress bank funding elsewhere

Banks in Portugal, Spain and Italy may come under funding pressure after a deal earlier this week in Cyprus rescued the island’s financial system at the expense of bank creditors, the Institute of International Finance said on Wednesday.

European governments and the International Monetary Fund agreed on Monday to loan Cyprus 10 billion euros as long as the country liquidated its second-largest bank and forced losses on bank bondholders and deposits of more than 100,000 euros.

“This new approach is apt to put funding stresses on banks in weaker economies – especially Portugal, Spain and Italy,” the Washington-based association of the biggest commercial and investment banks said in a report.

“Instead of severing the link between bank and sovereign balance sheets, the Cyprus deal will have deepened these links: Banks exposed to weak sovereigns will have their depositors and creditors haircut, pulling down the economy and public finances.”