Eurozone overestimating ability to contain crisis, says ratings agency

The eurozone’s handling of Cyprus’s bailout puts extra pressure on its downgrade- threatened sovereign ratings and shows policymakers overestimate their ability to contain the crisis, credit agency Moody’s said.

Cyprus clinched a €10bn bailout from international lenders this week, but its terms have broken with past taboos by seizing up to 40% of the cash held in the island’s banks by wealthy individuals and firms.

Market analysts fear that could set a precedent for future rescue efforts and make the region more prone to bank runs if depositors in other debt-strained countries think their money is no longer safe.

“Policymakers appear very confident that market conditions are benign enough and that they have the tools to avoid contagion to other peripheral economies and their banking systems,” said Bart Oosterveld, managing director of sovereign risk at Moody’s. “We think that that confidence may well be misplaced.”

While Spain and Italy have so far proven resilient, analysts fear the chaos in Cyprus has increased the risk of contagion if investors think the same will happen if other countries ever seek financial help.

The ECB has sought to quash suggestions the tactics used in Cyprus could become a bailout blueprint.

However comments on Monday from Jeroen Dijsselbloem, head of the Eurogroup of finance ministers, that Cyprus could be a model for dealing with future eurozone banking crises, has left market concerns difficult to erase.

Mr Oosterveld, speaking alongside two of the firm’s other sovereign analysts, declined to comment on whether Italy and Spain, which both have negative outlooks on their respective Baa2 and Baa3 ratings, were particularly vulnerable to a downgrade after the events in Cyprus.

Italy has been in political deadlock since inconclusive elections last month. Pier Luigi Bersani, whose alliance won the largest share of the vote in February but fell short of a parliamentary majority, is meeting rival parties to try to muster support to form a government.

“In the short term, we are obviously looking at Bersani’s attempt to form a government and the implication for the credit profile,” said Dietmar Hornung, who oversees Italy for Moody’s.

The analysts were not so concerned about Spain, noting it had been easily selling bonds since the ECB said it would buy the debt of struggling countries, and that its fiscal situation was improving.

— Reuters