ECB says first Cyprus bailout plan 'not smart'

ECB president Mario Draghi says the plan to tax savers in Cyprus was "not smart to say the least"

The initial plan to make small savers pay for the Cyprus bailout was "not smart", the European Central Bank (ECB) president has said.

ECB president Mario Draghi said a proposal to make "insured depositors" pay did not come from the ECB, the European Commission or the IMF.

He said the proposal only arose in talks with the Cypriot authorities, and was "swiftly corrected".

He was speaking after the ECB held eurozone interest rates at 0.75% again.

It was the ninth month in a row that they had been kept unchanged, but Mr Draghi indicated that the bank was ready to act, if necessary.

He also suggested that the problems seen for some time in smaller, weaker economies such as Spain, were spreading to stronger economies.

'Pecking order'

Cyprus eventually agreed a 10bn-euro (£8.5bn; $12.8bn) international bailout, which will see depositors with more than 100,000 euros lose some of their savings.

Accounts which have less than 100,000 euros in them will not be affected, but would have been under the original bailout proposals.

Speaking about the bailout, Mr Draghi said that the initial plan to impose a levy on all depositors "was not smart to say the least".

He said the ECB did not envisage savers covered by a guarantee - that is, those with up to 100,000 euros in savings - being forced to contribute towards the country's rescue plan.

"You have a pecking order, and here the insured depositors should be the very last category to be touched," said Mr Draghi. "The (European) Commission draft directive foresees exactly this."

How the first plan would have worked

savings loss chart

Mr Draghi also told a news conference that the Cyprus bailout was not a blueprint for what would happen in further bailouts.

"Cyprus is no template," he said.

Mr Draghi was asked whether it would have been better for Cyprus to leave the euro.

"What was wrong with Cyprus's economy doesn't stop being wrong if they are outside the euro," he said.

"So, the fiscal budget stabilisation, consolidation, the restructuring of the banking system would be needed anyway, whether you are in or out. To be out doesn't preserve the country from the need for action."

He said that leaving the euro would entail a big risk for Cyprus, and that an exit from the currency could find the country having to pursue reforms "in a much more difficult environment".

The ECB president also said that the recent crisis in Cyprus had "reinforced the Governing Council's determination to support the euro".

Risks to growth

Despite continuing signs of economic weakness across the eurozone, Mr Draghi said rates were on hold "for the time being" by consensus.

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He said he expected to see a gradual economic recovery in the second part of 2013.

However, he said that growth was "subject to downside risks". Risks included slow implementation of structural reforms by governments, or weak domestic demand.

"These factors have the potential to dampen the improvement in confidence and thereby delay the recovery," he added.

After his comments the euro fell to its lowest level in more than four months against the dollar, to $1.2745 - the weakest since mid-November - before recovering its losses.

However, Mr Draghi said that inflation would be contained in the medium term, but the bank would act if necessary.

"Our monetary policy stance will remain accommodative for as long as needed," he said.

"In the coming weeks, we will monitor very closely all the incoming information on economic and monetary developments, and assess the impact on the outlook for price stability."

Mr Draghi also reiterated that the ECB could not step into the gap left by a lack of action by eurozone governments to solve the region's debt crisis,

"We cannot replace lack of capital in the banking system or the lack of actions by governments. The most stimulative measures is to pay the arrears."

Japan stimulus

The latest indication of the state of the eurozone economy came on Thursday from financial information service Markit, which said the region's economic contraction had worsened last month.

Its closely-watched composite purchasing managers' index (PMI), which tracks both the services and manufacturing sectors, also suggested that Germany's economy slowed to "near stagnation" last month, while France's recorded its biggest contraction for four years.

The European Central Bank was one of a number of major central banks meeting on Thursday:

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