The probability of the European authorities implementing this proposal and imposing losses on depositors and senior debt-holders is currently low because of the significant contagion risks that such an action would pose for the banking systems of other stressed euro area countries, the agency said in its Credit Outlook, which was published yesterday.

“However, if European authorities pursue such burden-sharing, it would be a material shift in public policy on bank bailouts and would be credit negative for European banks,” Moody’s said.

Citing a confidential memo, the Financial Times reported on Monday that a proposal had been made to 'bail-in' investors and depositors of Cypriot banks, a move that would reduce the amount of financial assistance required by Cyprus and make its debt sustainable.

Moody’s warned the media coverage alone may be enough to do damage.

“While we consider enactment of this reported proposal unlikely, the media coverage surrounding it heightens the risk of deposit withdrawals from Cypriot banks and has broader credit negative implications for Cypriot and euro area banks if European authorities pursue it,” Moody’s said.

Cyprus has fiercely rejected the suggestion, saying it would never accept such a development.

The FT said the new plan has not been endorsed by its authors in the European Commission or by individual eurozone members.

The memo warned that “risks associated with this option are significant”, including a renewed danger of contagion in eurozone financial markets, and premature collapse in the Cypriot banking sector.

Source: Cyprus Mail