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Cyprus's banks have been tamed โ€“ are Malta and Luxembourg next?

Eurogroup President Jeroen Dijsselbloem.

Eurogroup President Jeroen Dijsselbloem.

Malta has not experienced anything like the problems being faced by the banking system in Cyprus, and yet some in the international media are implicating that small jurisdictions, like Malta and Luxembourg are next in line for a banking revamp.

Among them was the Brussels correspondent of The Guardian, who used the above heading in a piece uploaded today. http://www.guardian.co.uk/business/2013/mar/25/cyprus-banks-malta-luxembourg

He wrote that for the the architects of the Cyprus bailout – the German government and the International Monetary Fund – there was no doubt that the central aim of the shock therapy was to bring down an oversized banking sector that was failing. That applied especially to the Bank of Cyprus, the island's biggest and Laiki, the number two. The latter was essentially insolvent, surviving on a liquidity lifeline from the European Central Bank.

Christine Lagarde of the IMF wanted both banks, representing half of the Cypriot banking sector, closed down. In the end Laiki was being closed down with its bond and shareholders facing huge losses and €4.2bn (£3.6bn) in deposits looking lost. Bank of Cyprus will become a shadow of its former self, deposits frozen pending restructuring and downsizing and wealthy depositors facing losses probably of 30%-40%.

With a banking sector seven times Cypriot gross domestic product, Lagarde insisted this was unsustainable and that it would be more than halved to around three times GDP by 2018. In a time of embryonic eurozone bank supervision, with the European Central Bank being made the supervisory authority for all eurozone banks, the statements from Berlin and Lagarde bore the hallmark of a new policy aimed at taming financial services and getting bloated banking sectors under tight control.

"Which explains why several small countries are trembling at the prospect of what might be in store. Malta, Luxembourg and Cyprus are the three smallest countries in the EU and the eurozone. Cyprus's days as an offshore tax and banking haven are now numbered. Relative to GDP, tiny Malta's banking sector is even bigger. Its finance minister sat next to his German and Cypriot counterparts at the first Cyprus bailout meeting in Brussels 10 days ago and was extremely chastened by what he witnessed. After experiencing Wolfgang Schäuble, the German finance minister, up close, he wrote an article in the Malta Times saying God help his country if it encounters similar problems in the eurozone. (He didn't actually use those words, see http://www.timesofmalta.com/articles/view/20130319/opinion/cyprus-a-lesson-for-life.462258 )

DUTCH MINISTER'S COMMENTS

Meanwhile, Dutch Finance Minister Jeroen Dijsselbloem, Eurogroup President, when questioned what the new approach meant for euro zone countries with highly leveraged banking sectors, such as Luxembourg and Malta, and for other countries with banking problems such as Slovenia, he said they would have to 'shrink banks down'.

"It means deal with it before you get in trouble. Strengthen your banks, fix your balance sheets and realise that if a bank gets in trouble, the response will no longer automatically be that we'll come and take away your problem. We're going to push them back. That's the first response we need. Push them back. You deal with them," Reuters quoted him as saying.

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