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A Repeat Of Cyprus Plan Could Cause Contagion - Economist

posted 28 Mar 2013, 07:08 by Mpelembe   [ updated 28 Mar 2013, 07:08 ]

As banks in Cyprus reopen and cash rolls into the Cyprus Central Bank, the country prepares itself for a possible bank run. Berenberg Bank's Christian Schulz says contagion is only a concern if theEurogroup suggests again that the Cyprus plan is a template for other countries.


"(QUESTION: We hear a lot - If all goes well in Cyprus, there will be little reaction. If things go wrong, there will be contagion. What constitutes things going wrong for you?) 

Well, it would of course be dangerous if we see TV pictures today of people queuing in front of banks, maybe security forces or private security having to step in and then watch people in other countries watching this and taking their cues from that. That would be the worst case but the deal that we got in Cyprus now is much better than what we had last week and deposits up to EUR100,000 are guaranteed so there's no need for people to go to the banks and withdraw their money at the moment. So I think that is a big step forward. It's a much better package than we had. 

(QUESTION: Is the market still worried? Are you still worried about those Dijsselbloem comments? Using this as a template for others?) 

Well, clearly that was his own opinion. More as a Dutch finance minister than as the Head of the Eurogroup but clearly we have to be worried that he is not the only one who has that opinion. I think though that the market reaction to his comments may have a salutary effect. There was no contagion until he made these comments. Now there is this contagion so clearly, what made him make these comments, the absence of contagion is now over and I think everybody will watch their words from here on onwards. 

(QUESTION: What do you think of the way the ECB's handled this? Do you feel as comforted now as you did two or three months ago?) 

Well, the ECB's commitment to potentially unlimited bond purchases OMT is still the key tool that can prevent contagion. If a country abides by the rules, if it reforms itself, and if it applies for a bailout package from the ESM and it gets approved even by Germany's Bundestag, then the ECB will help. If these conditions are not met, the ECB will not help and I think that's the right position to take. Of course, the ECB will be under pressure next week to do more to help the flagging economic recovery but really the ECB can't do that much. The ball's in the court of the governments. They have to behave both in the North when it comes to rescue packages and in the South when it comes to reforms. I think that's what we have to watch over the next few weeks."