By Paul Taylor
BRUSSELS (Reuters) - In bailing out Cyprus and taking funds from savers instead of taxpayers, the euro zone has crossed a Rubicon with implications for future banking rescues in other countries despite assertions that the crisis in the island nation is unique.
CYPRUS: ONE-OFF OR TEMPLATE?
Eurogroup Chairman Jeroen Dijsselbloem caused uproar in financial markets by saying in an interview with Reuters and the Financial Times that the Cyprus solution gave a flavour of how Europe would handle future bank crises, by making banks solve their own problems rather than using European taxpayers' money.
Finnish Prime Minister Jyrki Katainen supported him, saying that "bail-in" thinking should guide a planned European banking union, but clarified that he did not necessarily mean depositors should be hit in future.
ECB policymakers sought to calm the ensuing storm and reassure savers throughout Europe by pointing out that Cyprus was unique in that its banks were largely funded by deposits rather than by issuing bonds and shares.
The European Commission said it might be possible for large uninsured depositors to be "bailed-in" as part of the future resolution of a bank under a new draft EU law, but savers with less than 100,000 euros (84,878.89 pounds) would not be hit.
Under existing rules, shareholders and bondholders are the first to take losses. The exception so far has been senior bondholders. The European Central Bank blocked any "haircut", or debt write-down, for them in Ireland's bailout programme but has since dropped its opposition in future cases.
Dijsselbloem's comments made clear that the idea of using the euro zone's European Stability Mechanism (ESM) rescue fund to recapitalise banks directly, agreed by EU leaders last June, is increasingly remote and may never come to pass.
His thinking gave some insight into how policymakers may be looking at new ways to deal with banking crises in the future.
WHAT NEXT IN CYPRUS?
Banks are due to reopen in Cyprus on Thursday after a closure of nearly two weeks, but withdrawals will be limited "for a matter of weeks", its finance minister has said. The government has yet to spell out restrictions on capital movements and there are fears of a bank run.
The British security firm G4S <GFS.L> that transports cash for Cypriot banks is working round the clock, sending teams out with police protection to stock bank machines and readying guards for when banks reopen.
Cyprus Popular Bank <CPBC.CY> will be among banks to reopen for limited business even though it is due to be wound down under the terms of the bailout deal, with insured deposits under 100,000 euros to be transferred to Bank of Cyprus <BOC.CY>.
The Cypriot parliament holds its weekly session on Thursday, the first since the bitterly resented bailout deal, which may inflict losses of some 40 percent on deposit accounts of more than 100,000 euros in the two banks, many of them held by Russians and savers from outside Cyprus.
Parliament does not need to ratify the bailout deal because it already adopted bank resolution legislation last week. However, its will have to approve privatisation laws for state assets due to be sold under the EU/IMF programme.
The banks face big layoffs that may cause labour unrest.
Parliament, which rejected an earlier plan to impose a levy on smaller bank deposits, may also seek to legislate to shield pension funds, such as those of Cyprus Popular Bank workers, from losses.
Critics have accused Cyprus Central Bank Governor Panicos Demetriades, a fierce critic of austerity in his former role as an economics professor at Leicester University in Britain, of mismanaging the crisis and questioned whether he is capable of implementing the bank resolution that covers the bailout.
WHAT NEXT IN THE EURO ZONE?
The European Central Bank has vowed to do "whatever it takes" within its mandate to save the euro, notably by buying the bonds of troubled euro zone countries that accept an EU/IMF assistance programme, but that pledge has yet to be tested.
Euro zone finance ministers say there is no other country which needs a bailout after Cyprus joined Greece, Ireland, Portugal and Spain in receiving emergency loans from the currency area's rescue fund.
Ministers hope both Ireland and Portugal will manage to exit their adjustment programmes and return to market funding this year. Ireland has already issued its first 10-year bond since 2010. Portugal is some way behind but has also made its first bond issue in January since the mid-2011 bailout.
EU governments and lawmakers agreed last week on the key rules for a single banking supervisor for the euro zone, based at the European Central Bank. The new supervisory body is due to enter into force gradually by mid-2014.
The European Commission says it will propose laws this summer for a single resolution mechanism for banks covered by the supervisor.
The EU executive has also promised proposals at a later stage to connect national deposit guarantee schemes, although EU paymaster Germany and its northern allies have opposed any joint liability for deposit insurance. One possible model could be to make national guarantee schemes take out reinsurance contracts with the euro zone rescue fund.
NEXT SHOE TO DROP?
Slovenia's central bank chief Marko Kranjec said last week he was sure his small euro zone country would not need a bailout in the footsteps of Cyprus. Banks in Slovenia are nursing some 7 billion euros in bad loans, equal to about 20 percent of GDP, but the banking sector's assets represent just 135 percent of Slovenian GDP, compared to 800 percent in Cyprus.
Slovenia has experienced political instability, with a new centre-left government taking office last week after the previous conservative administration lost its majority in parliament in January over a corruption scandal.
Dijsselbloem said on Tuesday there has been no sign of higher-than-normal withdrawals of bank deposits in the euro zone or of abnormal shifts in deposits from peripheral to core countries following the Cyprus deal.
Analysts say European savers and companies may diversify their holdings to keep accounts under 100,000 euros.
Both Luxembourg and Malta have higher ratios of banking sector balance sheets to GDP than Cyprus, but neither is seen as carrying the same risks.
Before the Cyprus bailout drama, market attention was focused on political uncertainty in Italy, where centre-left leader Pier Luigi Bersani is struggling to form a minority government after a general election that gave the radical anti-system 5-Star movement the balance of power in the Senate.
However, after an initial spike following last month's vote, Italian borrowing costs have fallen again and markets seem unfazed by the prospect, if Bersani fails, of another short-lived technocratic government and an early return to the polls.
The main threat to euro zone stability is now seen as the absence of economic growth in southern Europe and the risk of rising social unrest and political radicalisation over record unemployment. Popular anger could topple Greece's fragile governing coalition, analysts say.
(Additional reporting by Michele Kambas in Cyprus and Jan Strupczewski in Brussels; Writing by Paul Taylor)