Cyprus bailout not expected to be last for the ailing eurozone: survey


By Andy Bruce, Reuter

LONDON — Cyprus probably won’t be the last eurozone country to ask for an international bailout, according to a Reuters poll of economists, who cited Spain and Slovenia as the likeliest candidates. The survey also showed no agreement over whether the latest bailout, which hinges on shutting one of Cyprus’s biggest banks at a cost to richer depositors, would be better or worse for the financial stability of the eurozone. Cyprus struck a 10-billion-euro bailout deal with the European Union and International Monetary Fund on Monday, designed to untwine it from a failed banking sector that has long dominated its economy. Thirty-six out of 48 economists polled this week said other countries will need help to pay their way, too.

There were 16 responses naming Spain, and 16 for Slovenia, whose outsized banking industry has drawn comparisons with Cyprus, making it the latest country to fall under the spotlight of the eurozone’s debt crisis. “The Cyprus deal has brought the European banking crisis to a new level,” said Lena Komileva, director of G+ Economics, a research consultancy in London. She said this entailed the return of convertibility risk within the eurozone — in other words, that euros in Cyprus can no longer be treated the same as euros elsewhere. “This represents a uniquely bad deal for the euro’s future.” Capital controls being prepared by Cyprus are one reason for that convertibility risk. Intended to prevent a run on the banks from depositors anxious to withdraw their savings, the controls effectively render a Cypriot euro less liquid than, say, euros in France, where no such restrictions exist. Still, 38 out of 46 economists said capital controls for Cyprus were appropriate, with the alternative being an uncontrolled exodus of cash from the country. The other eight disagreed. European policymakers have stressed any controls are likely to be temporary, lasting days or weeks. Analysts were less sure. Thirty out of 46 said controls would last months, while 13 expected they would endure a matter of weeks. Three said they could last years. “Iceland is still having capital controls, so it might take months if not years in Cyprus before the situation is stabilized,” said Peter Vanden Houte, chief eurozone economist at ING in Brussels, referring to the banking crisis that brought Iceland to its knees in 2008.