The European Commission has confirmed that it hopes the European Stability Mechanism fund will not be used for directly recapitalising banks.

A spokesman said that while work is continuing on the instrument, the commission hopes the deployment of the instrument won’t be necessary. It confirms comments by chief of euro zone finance ministers Jeroen Djisselbloem yesterday, which questioned whether the ESM bailout fund will ever be used to rescue banks directly.

Instrument deployment
"We hope to be in a position where the deployment of such an instrument will not be necessary," the spokesman said. "[This] does not mean that an agreement on such an instrument is not something that we continue to work towards, and work on the instrument for the ESM which will allow for direct recapitalisation to be an option available to us continues."

The Government is hoping to deploy the ESM to help meet the cost of rescuing Allied Irish Banks and Bank of Ireland.

Mr Dijsselbloem said in an interview on Monday he hoped the ESM would not be used to directly recapitalise banks. “We should aim at a situation where we will never need to even consider direct recapitalisation,” he said.

While European Central Bank officials moved to assure investors that Cyprus would not be used as a “template” for future bailouts, the commission said deposits over €100,000 could be used in future bail-ins. “Under the current legislation for bank resolution . . . it is not excluded that deposits over €100,000 could be instruments eligible for bail-in,” a spokeswoman for EU internal markets commissioner Michel Barnier said.

Private sector losses, which were not implemented in the Irish bank crisis, are likely to form a part of the new Europe-wide bank resolution legislation, a key strand of the plans for banking unionworking their way through the EU system. Progressing banking union legislation is a key priority of the Irish presidency of the European Council. Irish officials secured agreement on the single supervisor earlier this month, and focus is turning to common legislation on banking resolution and deposit insurance, though the forthcoming legislation is not likely to be implemented for some years.

Market reactions yesterday were mixed and the euro reached a four-month low after ECB officials said that Cyprus was not a “template” for future bailouts. “The experience of Cyprus isn’t a model for the rest of the euro zone,” ECB executive board member Benoît Cœuré said. “All countries have different problems – economic problems, problems of unemployment – but no country has the same concentration of problems as Cyprus.”

The ECB is to continue providing emergency liquidity assistance to Cypriot banks, which are due to reopen tomorrow, though its two biggest, Bank of Cyprus and Laiki, face significant restructuring, with Laiki set to be wound down.

Losses faced
As Cyprus's banks remained closed yesterday, finance minister Michalis Sarris said large depositors will faces losses of about 40 per cent on savings over and above €100,000.

Under the bailout deal agreed this week, deposits of less than €100,000 will be protected. Deposits over this threshold in both the main banks face losses, as deposits are used to recapitalise the bank in the case of Bank of Cyprus, and to pay off debt in the case of Laiki.

Meanwhile, the chairman of Bank of Cyprus, which is to be restructured and recapitalised, tendered his resignation. It was rejected by the board.