BRUSSELS - Inflicting losses on banks' shareholders, bondholders and even large depositors should become the 17-country eurozone's default approach for dealing with ailing lenders, a top European official said Monday.
Banks' owners and investors must be held responsible "before looking at public money or any other instrument coming from the public side," said Jeroen Dijsselbloem, who chairs the Eurogroup gatherings of the 17 eurozone finance ministers.
The eurozone countries and the International Monetary Fund earlier Monday granted Cyprus a 10 billion euro ($13 billion) bailout that foresees dissolving the country's second-largest bank, wiping out its bondholders and inflicting significant losses - possibly up to 40 percent - on all deposits larger than 100,000 euros ($130,000).
EU officials have previously stressed that this measure, a so-called bail-in, was a "unique step" in Cyprus. That's because of the size of country's banking sector - almost eight times the economy's annual output - and the capital structure of its lenders, which rely almost exclusively on deposits instead of bonds.
"If there is a risk in a bank, our first question should be 'OK, what are you in the bank going to do about that? What can you do to recapitalize yourself?' If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders," Dijsselbloem said in an interview with the Financial Times and Reuters. Dijsselbloem's office confirmed the remarks.
In the past, nations like Ireland have dumped billions of taxpayers' money into rescuing their banks, fearing that forcing owners and depositors to take losses would roil markets and spread uncertainty. That has drawn howls of outrage as pension cuts and tax hikes were used to spare rich overseas investors from losses.
European officials had that in mind when they decided, in Cyprus' case, to shrink and restructure the banking sector, reducing the amount of money European and Cypriot taxpayers would have to pay.
But forcing losses on large deposits could encourage investors to pull money out of weaker southern European economies to more stable nations in the north, like Germany.
That concern was evident in markets. The euro currency, used by more than 330 million Europeans, rose against the dollar to about $1.30 in the morning on the agreement on a bailout for Cyprus, but tanked below $1.29 - its lowest since November - following Dijsselbloem's remarks. European stock market indexes also lost their earlier gains, with bank shares hardest-hit, particularly in financially weak countries like Italy and Spain.
Dijsselbloem said the new approach was more just because it was about safeguarding taxpayers' money and force losses on banks, their owners and investors instead.
"The consequences may be that it's the end of story, and that is an approach that I think, now that we are out of the heat of the crisis, we should take," he said in the interview.
Later Monday, after the whirlwind of nervous market reactions, Dijsselbloem issued a terse clarifying statement, saying, "Cyprus is a specific case with exceptional challenges which required the bail-in measures."