From Democracy to Diktat – Europe’s True
Colours
The
so-called rescue of the Cyprus banking system and economy seems much more like a
diktat imposed by the eurozone on one of its smallest members. To put it simply
the people of Cyprus and its government were left with little choice if they
wanted to avoid leaving the eurozone – which some may have felt like
doing last week and probably a lot more would
support today as details of the draconian conditions imposed by the troika (aka
the Inquisition) become known. The usual group of EU enthusiasts are already
saying that it just shows the need for more Europe sooner than later, and that
everyone has won (as long as you are not a Cypriot).
The Death of Democracy?
Brussels
and the troika may have doused the fire in Nicosia but I seriously wonder how
long small nations will go along with effectively being treated as second-class
members of the eurozone every time that they need help. As with Ireland and
Greece, aid applicants are offered a package, if they reject it, the EU comes
back again and again, in an attempt to win down their resistance and so far it
has succeeded.
But one
day, a country will rebel and simply not accept what is on offer or what has
been agreed between the troika and its own government. In fact it is still quite
possible that Cyprus could still decide that things would not be much worse
outside the eurozone and at least it would have some currency flexibility. No
doubt exiting the eurozone would bring major difficulties but it would also give
some freedom in avoiding the austerity measures and bank controls arising from
the latest deal.
A quite
striking fact is that the latest “rescue” package will not be subject to
parliamentary approval in Cyprus, although it will need to get the greenlight
from various eurozone parliaments including Germany, Austria, the Netherlands
and Finland. What a contradiction.... the country at the centre of the problem
cannot vote on the measures but others can.
Hardline German Finance minister Wolfgang
Schauble hopes this parliamentary approval will be achieved by the end of April,
as Cyprus is due to get the first tranche of its promised 10 billion euros
bailout help by early May.
Bullying By Brussels and
Berlin
In the EU
and especially in the eurozone, it seems democracy is subject to variable
interpretations, with acceptance of German views and guidelines being the
dominating factor. “ Try anything else and you will be told go away and think
again, probably vote again to make sure the right answer is finally given.” At
best this seems a dubious way of getting voters to look at European unification
in a positive light, at worse some voters -- probably growing in numbers – will
decide it is not much short of “Bullying
by Brussels or Berlin.” In France, a well-respected banking blog in Le Monde
suggested that with the German elections coming up this autumn, Angela Merkel –
whose handling of the eurocrisis till now has been remarkable – may have started
to lose the plot over Cyprus. But it also asks where was the voice of France
during all the discussions on Cyprus – the only eurozone country able in theory
to stand up to Germany.
But in
any case and awaiting the final outcome of the Cypriot Affair, the credibility
of the eurozone has been badly damaged. Every commissioner and EU pundit is keen
to stress that Cyprus is a special case, that nowhere else did the EU have such
“ a casino economy” dependent on massive foreign capital inflows and deposits.
And that therefore is no risk of charges or special taxes being imposed on
guaranteed deposits elsewhere in the EU because these are banned by treaty. But
if you can break your own rules once, they can be broken again. In other words
treaties can be ignored, when the need arises.
And IMF
managing director Christine Lagarde is obviously quite happy with the deal
describing it as “ complete and credible.”
Eurogroup Head Says Cyprus Rescue Could Be
Eurozone Template
And as if to confirm that
the eurozone could be considering a more interventionist policy when future
banking problems arise, its chief clearly set out the issues in an interview
with the Financial Times and Reuters. "What we've done last night is what I call
pushing back the risks," Dutch Finance Minister Jeroen Dijsselbloem, who heads
the Eurogroup of euro zone finance
ministers, told Reuters and the Financial Times hours after the Cyprus deal was
struck.
"If there is a risk in a
bank, our first question should be 'Okay, what are you in the bank going to do
about that? What can you do to recapitalise yourself?'. If the bank can't do it,
then we'll talk to the shareholders and the bondholders, we'll ask them to
contribute in recapitalising the bank, and if necessary the uninsured deposit
holders," he said.
It could well mean
savings accounts in Spain, Italy and other European countries will be raided, if
needed, to preserve Europe's single currency by propping up failing banks.
Dijsselbloem’s comments
certainly helped to unsettle markets late this afternoon. After last week’s
ill-fated attempt by the Cyprus government (inspired no doubt by unidentified
officials in the EU or Eurogroup) to
impose a levy on guaranteed savings under 100,000 euros, we now have the
chairman of the eurozone finance ministers saying that everyone, whatever their
status, could be at risk. Perhaps not the best way of restoring calm to the
eurozone and global financial markets.
London closed down 0.22
pct, Frankfurt 0.51 pct and Paris was 1.2 pct
lower
A survey at the weekend
showed that 40 pct of French savers feared the government might end up seizing
their deposits if the need should arise. After the latest developments, the
figure is likely to jump.
Cyprus Faces Major Recession, Job Losses
and Economic Change
By all accounts, the
country is in for a very tough few years with substantial unemployment ahead and
a deepening recession. Is that really what the eurozone wants to achieve
?
All Cypriot banks are
expected to reopen on Tuesday but the two key banks involved, Bank of Cyprus and
Laiki will stay closed until Thursday but customers at the latter two will be
able to able to withdraw a generous 100 euros in the meantime. As part of the
deal with the troika, the Laiki Bank will be closed ( and run by an
administrator, the head of HSBC in Cyprus) – and it will be split into a “ bad
bank” and a “good bank” into which all deposits of less than 100,000 will be
transferred before being eventually taken over by the Bank of Cyprus. Rigorous
controls on banks and capital movements remain in force with Cypriot customs
officers searching for departing travellers for large amounts of
cash.
None of the 10 billion
euros being made available to Cyprus will be used to recapitalise the Bank of
Cyprus, which instead will use uninsured deposits (ie over 100,000 euros), bond
and shareholders assets converted in shares and as the Eurogroup communiqué
said “the programme will contain a decisive approach to addressing financial
sector imbalances (in Cyprus) There will be an appropriate downsizing of the
financial sector, with the domestic banking sector reaching the EU average by
2018. In addition, the Cypriot authorities have reaffirmed their commitment to
step up efforts in the areas of fiscal consolidation, structural reforms and
privatisation.”
Other Developments
In other developments,
the head of the country’s powerful Orthodox Church, Archbishop Chrystomos 11
said he hoped to persuade Russian entrepreneurs to keep their investments in
Cyprus, while also suggesting that exiting the eurozone might still be a
solution.
In Russia, President
Putin called for talks on renegotiating a 2.5 billion euro loan to be reopened,
despite no progress being made last week, while Prime Minister Medev quoting
Lenin said “ in my view , the stealing of what has already been stolen, is
continuing.” And there have been some suggestion that Russia might freeze assets
belonging to German companies (HH – that does seem far-fetched at this stage).
Russians reportedly hold some 24 billion euros of private and corporate assets
with Cypriot banks , and it is clear that they will have to take a substantial
haircut, perhaps losing most of the assets.
Some Facts on Bank of Cyprus and Laiki Bank
Total
deposits with Cypriot banks are around 68 billion euros. The Bank of Cyprus
(which will stay in existence) has 26.7
pct of the deposit market and 22 pct of the loan market, while Laiki Bank (84
pct state-controlled since June 2012 when it already had to recapitalised) had
14.4 pct of deposits and 16 pct of loans.
The
extent of both banks interests in eastern Europe and Russia is also shown by
their branches. Bank of Cyprus has 199 branches in Russia, 12 in Romania, 24 in
Ukraine as well as 137 in Cyprus. Laiki Bank has (or had) 295 branches including
Russia, Ukraine, Romania, Serbia, Malta as well as Serbia and
Cyprus.
One
immediate question is where will Russians now put their money ? They may well
avoid the eurozone completely . Will it mean more funds for London or for far
more dubious offshore centres?
-Humphrey Hudson-
