EU’s Olli Rehn sees two lessons from Cyprus, admits mistakes were made
European Economic and Monetary Affairs Commissioner Olli Rehn on Wednesday said that that there are “at least to key lessons” to be learned from Cyprus, which recently clinched a 10-billion-euro bailout deal with international creditors, saying, however, that the “process that led us to this agreement has been very difficult, and not without mistakes.”
Addressing the European Parliament in Strasbourg, Rehn said that “the Cypriot authorities, the member states and the EU institutions had to find unique solutions to exceptional problems. They had to do so without previously tested instruments and – in the final stages of negotiations – under enormous time pressure.”
He said that there are two key lessons to be learned from the process: “absolute clarity about secured deposits,” in reference to bank deposits of 100,000 euros or less that had initially been targeted for a haircut, and “why a banking union is a necessary element of a true EMU.”
“We need a well-functioning single supervisory mechanism with a single rulebook to prevent the emergence of an unsustainable banking sector like in Cyprus. And we must ensure that even if the reinforced supervision fails, we have a single resolution mechanism to provide the instruments for a timely and effective restructuring and resolution of the problem banks,” Rehn said.
“The problems of Cyprus built up over many years,” the EU official added. “At their heart was an oversized banking sector that thrived on attracting foreign deposits with very favorable conditions. These capital inflows also contributed to a property boom and the accumulation of external imbalances.
“The depth of banking problems stemmed from the poor practices of risk management. Lacking adequate oversight, the two largest Cypriot banks were allowed to build up by far too concentrated risk exposures. It was the problems in these banks that caused the troubles for the sovereign and the economic decline of Cyprus – not the other way round,” Rehn added.
Rehn admitted that that time had been wasted between November 2011 when the Commission first warned Cyprus about its economic problems and and June 2012, when Cyprus first requested help, saying that in that time, the crisis in the island’s two biggest lenders – Bank of Cyprus and Laiki (Popular) Bank – deteriorated dangerously.
“As the time was running out, the scenario of the more gradual economic adjustment was not on the cards anymore,” Rehn told European deputies.