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ECB's Weidmann: Lesson from Cyprus is banks can be wound down

Jens Weidmann, President of Germany's federal reserve bank Bundesbank smiles as he takes his papers after the bank's annual news conference
Jens Weidmann, President of Germany's federal reserve bank Bundesbank smiles as he takes his papers after the bank's annual news conference

BERLIN (Reuters) - The Cyprus bailout shows banks can be wound down despite difficulties, European Central Bank (ECB) policymaker Jens Weidmann said in an interview broadcast on Sunday, adding the situation on the island had stabilized.

Weidmann, chief of Germany's Bundesbank, told Deutschlandfunk radio he wouldn't rule out that Cyprus might need yet more liquidity, but stressed it was longer term structural reforms that would solve Nicosia's problems and not more cash.

To secure a 10 billion euro EU/IMF bailout last month, Cyprus forced heavy losses on wealthier depositors. Initially it had also pledged to introduce a levy on deposits of less than 100,000 euros before reneging in the face of protests.

The agreement also includes the winding down of the island's second-largest bank Cyprus Popular Bank.

Cyprus' bailout was not a template, Weidmann said, due to the large size of its financial sector, although it was crucial that those who bore responsibility for getting banks into trouble bore some liability.

"It is important to draw the lesson from Cyprus that banks can be wound up, despite all the difficulties along the way in working out the program. This is a positive signal, and should help limit uncertainty," he said.

Weidmann pointed to discussions at European level on a directive for dealing with failed banks. "We can't always rescue banks which have got into difficulties with taxpayers' money. It is about winding down banks in such a way that it doesn't endanger the financial system."

The European Commission is currently drafting a directive on bank safety which would incorporate the issue of investor liability in member states' legislation.

Weidmann warned that the appetite for making structural reforms in Europe was waning, and this posed a problem.

Commenting on Italy he said although the country seemed to be functioning on auto-pilot and sticking to measures already agreed, so long as it lacked a government it would trigger uncertainty over whether it could tackle its problems.

"It is not that we have too little liquidity in the euro zone or that the central banks have not been active ... the problems are rather a lack of competitiveness in certain countries and doubts over financial sustainability. We need to fix this, and only governments can do that," he said.

Weidmann added: "managing the crisis won't be a matter of months, I think it is something we will be working on for years, because winning back competitiveness and consolidating state budgets are huge, wideranging challenges which will take a long time."

(Reporting by Alexandra Hudson; Editing by Jason Webb)

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