The bailout of Cyprus shows how urgently the euro zone needs to establish a banking union to break the negative feedback loop between weak banks and governments, European Central Bank Executive Board member Joerg Asmussen said on Wednesday.
Cyprus this year became the fourth euro zone country that needed to be bailed out by international lenders, and unlike any other aid deal it controversially forced depositors to foot the cost of recapitalizing banks exposed to debt-crippled Greece.
“The Cypriot case has been a salutary reminder of the importance of establishing banking union as swiftly as possible,” Asmussen said in introductory remarks for an exchange of views with the Economic and Monetary Affairs Committee of the European Parliament on financial assistance to Cyprus.
“Only then we will be able to break the negative interaction between sovereigns and their banking systems,” he said.
Short term risks were high in Cyprus, he added, as the deep recession was expected to take a toll on banks’ balance sheets.
“The reliance of the largest bank on emergency liquidity assistance (ELA) continues to be exceptionally high,” he said.