Cyprus’s economic plight is unique and Europe’s proposed terms to pave the way for a bailout won’t be copied elsewhere in the region, said Lars Rohde, the governor of Denmark’s central bank.
The turmoil has reignited Europe’s debt woes, which had shown signs of easing until this month. A proposed levy on bank deposits was rejected late yesterday by the Cypriot parliament, testing Europe’s crisis handling skills as bailout talks stall.
“Cyprus won’t impact the euro area, or Denmark,” Rohde said in an interview in Copenhagen today. “Obviously, it has led to considerations about how things will be done in other troubled nations, but Cyprus is a very special case, and there is no desire, or intention, to copy what is being done for Cyprus elsewhere.”
The turmoil rekindled demand for the safest assets earlier this week, as investors questioned Europe’s ability to extricate itself from the crisis. The central bank of Denmark, which pegs the krone to the euro, needed to resort to an unprecedented negative deposit rate last year to counter a capital influx into its AAA-rated securities.
In a normal economic cycle, “there’s a lower limit to how close the spread between Denmark and Germany can go, which is linked to liquidity,” Rohde said, citing a central bank survey published today. “Our situation has been very special in recent years, almost Swiss-like, as some investors in Asia and the U.S. looked for something safe that isn’t denominated in euros.”
Denmark, which enjoys a stable AAA grade at Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, emerged last year as a haven from the debt crisis in southern Europe. Though the nation is struggling to surface from a burst housing bubble and regional banking crisis, its government debt load is less than half the euro zone’s average, the European Commission estimates.
Denmark in 2011 became the first nation in the EU to bail in bank depositors, when it forced some Amagerbanken A/S savers and senior creditors to share losses. Though the move only affected depositors holding more than the EU’s 100,000 euro ($129,000) insurance limit, it still left its mark on Denmark’s bank system, Rohde said.
“It wasn’t free for Danish banks that depositors had to pay up, as it changed how rating agencies appreciate systemic support,” Rohde said. “Still, it was the right thing to do, as deposits or other instruments like senior debts must be used to cover losses if the equity isn’t enough.”
Protesters cheered outside the Cypriot parliament in Nicosia last night as 36 lawmakers rejected the proposal to levy deposits, with 19 abstentions. There were no votes in favor. The bill exempted deposits of as much as 20,000 euros, imposed a 6.75 percent levy on amounts between 20,001 and 100,000 euros, and taxed deposits exceeding 100,000 euros at 9.9 percent.
Germany and its euro-area allies maintained pressure on Cyprus’s politicians today to raise a planned 5.8 billion euros by drawing funds from bank accounts in return for 10 billion euros in external aid.
Luxembourg Finance Minister Luc Frieden has called for the 17 euro finance ministers to reconvene as soon as possible to discuss new bailout terms. Meanwhile, Cyprus is in talks with Russia on possible financial assistance, Cypriot Finance Minister Michael Sarris said after a meeting with his Russian counterpart, Anton Siluanov. Russian companies and individuals have $31 billion of deposits in Cyprus.
“Cyprus is a very special case,” Rohde said.
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