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Originally published Tuesday, February 12, 2013 at 3:40 AM

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Official: EU not working on private Cyprus haircut

For a second day in a row, the European Union's top financial official sought Tuesday to quash speculation that private bank depositors in Cyprus might be forced to take losses as part of a bailout deal - a suggestion that's fueled fears of large-scale withdrawals from the country's troubled banks.

Associated Press

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BRUSSELS —

For a second day in a row, the European Union's top financial official sought Tuesday to quash speculation that private bank depositors in Cyprus might be forced to take losses as part of a bailout deal - a suggestion that's fueled fears of large-scale withdrawals from the country's troubled banks.

The new head of the euro area's 17 finance ministers stoked concerns Monday about the security of uninsured private deposits in Cyprus when he declined to rule out such a step following repeated questions from reporters. Instead, Eurogroup chief Jeroen Dijsselbloem, who is also the Dutch finance minister, said the matter had not been discussed at the meeting he'd just chaired - his first.

Olli Rehn, the EU's monetary affairs commission, stepped in then to say that the European Commission, the union's executive arm, was not working on any such proposal.

On Tuesday, following a meeting of all 27 EU finance ministers, Rehn repeated that and then went a step further.

Even though private creditors were forced to take losses as part of a deal to bail out Greece, Rehn noted that the Commission had said at the time that such a step would not be repeated - and that, he said, remains the Commission's position.

"The Commission is not working on any PSI option for Cyprus," Rehn said, using jargon for Private Sector Involvement, or forced losses on private creditors.

"Greece is a specific and unique case in this regard," he said.

Meanwhile, the front-runner in Cyprus' presidential election, to be held Feb 17, said Tuesday that he would not sign any bailout deal that would force private depositors to take losses. Right-wing opposition leader Nicos Anastasiades said it was "imperative that we put an end to insecurity and uncertainty."

In addition, the current Cypriot finance minister, Vassos Shiarly, has also ruled out such a step.

The bailout of as much as (EURO)17 billion ($22.84 billion) is equivalent to Cyprus' entire economy, raising concerns that the country might not be able to pay it off.

Cypriot officials are in discussions with potential international creditors, including its partners in the 17-country group of European Union countries that uses the euro, about a rescue package to avoid possible bankruptcy that could see it ditch the euro currency. The country got into trouble through its banks' exposure to Greece.

The final shape of a bailout, and the conditions that will be attached to it, is expected to be agreed upon in the second half of March. The conditions will depend not only on an examination of the country's financial difficulties by the so-called troika of international lenders - the Commission, the European Central Bank and the International Monetary Fund - but also on a negotiation between the troika and national officials, and among the troika members themselves.

"Uncertainty over the exact form of Cyprus' bailout will continue to hang over markets in the coming weeks," said Elwin de Groot, an analyst at Rabobank International.

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Hadjicostis reported from Cyprus. Pan Pylas in Brussels contributed to this report.

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