Introductory Statement by Jörg Asmussen, Member of the Executive Board of the ECB, in exchange of views with the Economic and Monetary Affairs Committee of the European Parliament on financial assistance to Cyprus —
If the sovereign had shouldered these massive recapitalisation needs, debt would have risen to 145% of GDP. This would have critically endangered public debt sustainability. At the same time, traditional ways of burden sharing by the private sector bank creditors were limited, given little junior debt outstanding in banks.
The Eurozone has an effective* traditional way of burden-sharing with non-depositor creditors?
In particular, it was decided to cover the capital needs of the two largest banks exclusively through the own contributions of uninsured depositors and senior and junior debt holders. The creditors of the two banks would not be made worse-off than they would have been in the case of liquidation, which would have been the alternative to the programme.
The Eurozone has a criterion that bank debt writedowns can be justified as long as the creditors are not worse off than they would have been under liquidation?
If only Ireland had thought of these things in 2010!
[*i.e. that doesn’t endanger debt sustainability]