Cyprus sends rumbles through shaky banking system

Saturday - 3/30/2013, 11:38am EDT

BY DAVID McHUGH
Associated Press

FRANKFURT, Germany (AP) -- This week's deal to rescue Cyprus and its banks from financial collapse has renewed fears about Europe's shaky financial system and where trouble might next appear.

Many banks across Europe have been struggling for more than three years as losses on government bonds and bad loans piled up. Some governments, meanwhile, have taken on more debt trying to prop up their lenders to the point where they have needed bailing out themselves.

In Cyprus's case, its banking sector became much bigger than the country's government could afford to rescue -- seven times the size of the country's economy. When the banks were hit by large losses and Cyprus could not afford to bail it out on its own, the country turned to the other 16 European Union countries that use the euro.

Rather than making Europe's taxpayers foot the entire bill for bad banking, Cyprus and the other eurozone countries agreed to make the banks' bondholders and big depositors contribute to the rescue. One bank, Laiki, is to be split up, with its nonperforming loans and toxic assets going into a "bad bank." The healthy side will be absorbed into the Bank of Cyprus. Savers with more 100,000 euros in both Bank of Cyprus and Laiki will face big losses -- possibly as much as 80 cents on the euro.

Daniel Gros, director of the Centre for European Policy Studies in Brussels, said the Cyprus deal "could be a strategic change."

Depositors and investors have taken note of the Cyprus deal and are warily looking around at other countries where the financial sector appears too big or too unstable. The STOXX Europe 600 Banks index have fallen 7 percent since a first bailout deal, later rejected, was reached March 16.

Even some of the more financially disciplined countries in the eurozone can raise concerns: The Netherlands had to take over SNS Reaal, the country's fourth-largest bank, after it suffered heavy losses. And in Germany there are banks under pressure from competition and losses on bad loans. However, most of the countries that are gaining scrutiny in the aftermath of the Cyprus bailout do not have economies on the same scale as the eurozone's financial leaders.

Here is a look at some countries whose banking sectors are getting increased attention form analysts and investors.

SLOVENIA: Privately owned banks are suffering from a burst real estate bubble and unpaid property loans. The country -- which is only 0.4 percent of the eurozone's overall economy -- has a relatively small banking system and has relied on successful exporters such as home appliance maker Gorenje. But the banks' troubles are large enough that the government has struggled to borrow to finance its deficits and some think it might eventually seek a bailout loan from other eurozone countries.

The new government of Prime Minister Alenka Bratusek is moving to set up a "bad bank" to take shaky loans and investments off banks' hands. Analysts at Commerzbank say depositors will not suffer losses in any bank restructuring because the system only needs a billion euros in new capital for this year. Cyprus, which is half the size of Slovenia, needed up to 8 billion euros to help rescue its banks.

Fitch Ratings said last week it didn't think Slovenia, which is in a recession, would need a bailout. But the agency warned that the quality of the banks' assets and the capital buffers needed to protect them from future financial shocks are deteriorating.

MALTA: Like Cyprus, Malta is a small island country with a big banking system -- eight times annual GDP. Its banks have not suffered the huge losses on government bonds that brought down Cyprus' banks. But last year the IMF warned that the size of Malta's banking sector and its interconnectedness to the rest of the eurozone raised the potential for trouble to spread from elsewhere. It told Malta, whose economy has so far avoided a recession, to strengthen deposit insurance guarantees and push banks to strengthen their finances.

The head of the central bank has said that comparisons to Cyprus are misleading. The country is 0.07 percent of the eurozone's economy, with only about 6.7 billion euros of GDP.

LUXEMBOURG: The small, wealthy country's banking system is more than 20 times the size of the economy. Economist Gros says it's completely different from Cyprus, since the banks are subsidiaries of foreign banks, whose parent companies could take any losses. So far the banking sector seems calm.

The terms of the Cyprus bailout could give Luxembourg cause for concern, however. Germany insisted that as part of the rescue, Cyprus should shrink its banking system to the EU average -- about 3
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