The Cyprus bailout that spooked the markets as depositors' savings were raided is not a "template" for future bailouts in the eurozone, European Central Bank President Mario Draghi said on Thursday, after the central bank left interest rates on hold.
"If anything the events on Cyprus have reinforced the governing council's determination to support the euro while maintaining price stability," Draghi said.
Analysts have said that the Cyprus bailout – which included a haircut on savings over the European Union-insured level of 100,000 euros ($128,000) – would be used as a model in future decisions by the European Union.
Eurogroup president Jeroen Dijsselbloem was quoted as saying last month that the Cyprus bailout should serve as a template for other eurozone bank bail-outs but he later toned down his remarks, saying he had been misunderstood by the media.
"Cyprus is no template," Draghi said. "I am sure the president of the Eurogroup was misunderstood."
"A bail-in by itself is not a problem. It is the lack of ex-ante rules known by all parties which can make a bail-in a disorderly event," he said, adding that a lack of buffers of "bail-inable" assets was "essential."
In Cyprus, bonds were "quite limited in comparison with the size of the assets of banks," and this is why that method was chosen, Draghi said.
"Cyprus is no template; Cyprus is no turning point in the euro policy. We had to be able to resolve banks without using taxpayer money and without disrupting the payment system. That's why we had to have a resolution framework in place."
He said that the ECB initially presented "a proposal where no bail-in of the insured depositors was foreseen. All the other proposals by the European Commission and the IMF had the same features."
But, after prolonged negotiations with Cypriot authorities, the outcome was a levy on insured depositors as well, which led to small depositors panicking.
"That was not smart, to say the least, and that was quickly corrected the next day in a Eurogroup meeting," Draghi said.
When the bailout was announced in mid-March Cypriots flocked to ATMs to withdraw their savings, a move that prompted the closure of banks for 10 days and the introduction of capital controls for the first time in the eurozone's history.
The Cyprus bailout was initially ignored by markets, with the consensus view estimating that the country's economy was too small to affect the eurozone as a whole.
RATE ON HOLD
The European Central Bank's Governing Council decided to keep the interest rate on the main refinancing operations at 0.75%, the rate on the marginal lending facility at 1.5% and the rate on the deposit facility at 0%, the bank said in a statement.
Draghi reiterated his forecast that there will be a "gradual recovery" in the second part of the year in the eurozone economy.
"This economic outlook for the euro area remains subject to downside risks," Draghi said.
"The risks include the possibility of even weaker than expected domestic demand and slow or insufficient implementation of structural reforms in the euro area. These factors have the potential to dampen the improvement in confidence and thereby delay the recovery."
Euro area export growth "should benefit from a recovery in global demand" and the ECB's "accommodative monetary stance" should aid domestic demand, he added in his monthly news conference.
On inflation, Draghi said that "price developments over the medium term should remain contained; inflation expectations are firmly anchored and in line with price stability over the medium to long term."
Draghi said the ECB had "no plan B" for the hypothetical case in which a country would want to leave the eurozone. The euro "is not like a sliding door, it's a very important thing, it's a project of the European Union," he said.
The ECB head added that he would not answer hypothetical questions about what happens if Cyprus leaves the euro: "we don't have that in mind."
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