Eurozone Credibility Badly Damaged by Cyprus
Whatever the outcome of the Cyprus crisis, whether it is some sort of last minute, probably dubious deal or even Nicosia’s exit from the eurozone, the whole sorry saga of the past week underlines that the eurozone may no longer fit the financial and political purpose for which it was established. The original 10 billion euro bailout deal for a country whose banking assets were valued at eight times GDP was cobbled together after months of argument and dithering. Overall the country needs some 17 billion euros and the eurozone help requires Cyprus to provide 5.8 billion euros from its own resources.
No doubt Cyprus and its banks ran a pretty strange regime – and a quite profitable one – but then they began to get their comeuppance when the Greek crisis saw bondholders take a massive haircut. But even then the eurozone, together with the IMF and the ECB did little to really tackle the growing and quite obvious Cypriot crisis until it was far too late.
Did Eurozone Delay Aid Decision Till After Cyprus EU Presidency ?
A cynical observer might also suspect that the delay in taking action was influenced by Cyprus holding the rotating presidency of the EU for the last six months of 2012. The crisis is already a major disaster for the eurozone, but if Nicosia had been bailed out in such badly managed way or exited the euro, while actually occupying the presidency, the humiliation of the eurozone – and the EU – would have been plain for all to see. But after a week’s infighting between the EU and Cyprus, with Russia understandably stirring in the background, the humiliation is now complete. Why should countries outside the eurozone take the currency block seriously when they cannot manage to resolve the problems of one of its smallest members?
Cyprus may only account for 0.2 pct of the eurozone’s GDP but it looks as if it might well be the detonator for – at best – a major realignment of the eurozone into the northern euro group (aka the Merkel Mark) with the Club Med group, probably led by France forming the southern euro group. But things may turnout to be even worse, as the present situation could see Cyprus exit the euro, giving the country the chance to be both the first country to reject demands, advice and suggestion from the troika ( as I have said in the past, aka the Inquisition) and also the first to ditch the common currency.
As the French media, amongst others, are saying Cyprus ( at least the part governed by Nicosia) should never have been allowed to join the EU, let alone the eurozone. Perhaps they are right, but that’s a long and different story.
Underlining the whole sorry developments over the past months and especially the past week is also the arrogance of the troika and its members. Cyprus may have been even more at fault than Ireland, Greece and Spain, but the troika has decided that it knows best and has hardly accepted any changes or ideas.
Eurozone and EU Threatened by Outcome, Where Was Democracy ?
But what is worse and may end up not only breaking up the eurozone, but even the EU project as it stands, appears to have the total lack of interest in any democratic approach. Both political parties and voters have largely been ignored and deals have been hatched in bars and backrooms during late night sessions amongst EU political leaders and bureaucrats. It is as if they are scared of asking voters because they fear the outcome will be to reject such outcomes and proposals – if things do fall apart and the EU /eurozone has to be restructured, Brussels and unresponsive eurozone leaders will have no one to blame but themselves and quite rightly so. The banking union will fall by the wayside. And who given the cock-up over Cyprus, the latest of many, can be surprised if extremist and anti-EU parties of the left and right gain ground.
No doubt there will be cheerleaders – especially in the European Parliament – saying the crisis clearly shows that the answer is more, and yet more Europe. Unfortunately the real world suggests just the opposite is needed. It also raises the question as to whether the European Parliament itself is really relevant except as home for largely redundant or second-rate politicians, more interested in a comfortable well-paid existence at the expense of the European tax payer.
And again the parliament has a strange idea of democracy and free speech which seems largely to be continually focussed on promoting so-called “European unity”, while treating anyone who has perhaps different -- or just -- pragmatic views as being unacceptable, if not downright extremist. In other words, free speech is equivalent to being promoting “more Europe.”
The Latest Situation – At Least Till It Changes
Bank of Cyprus governor and ECB board member, Panicos Demetraides ( a name to remember?) says Friday is the day to decide the country’s fate and whether or not it remains in the eurozone. In principle trhis means that sometime today there should be a parliamentary vote on the latest package.
Total bank deposits with Cypriot banks are estimated 68.4 billion euros, with some 21 billion euros from non-eurozone residents. Figures for direct Russian deposits range from 5 to 20 billion euros but if indirect funds are included the total would be well over the 20 billion level.
1. Cypriot Finance Minister Michalis Sarris left Moscow with empty hands after saying he would stay till next Tuesday to reach a deal. There was no agreement to extend for 5 years an existing Russian 2.5 billion euro loan maturing in 2016, or to cut the loan’s 4.5 pct interest. Moscow was also unwilling to inject funds into a new Cypriot public sector group in return for a stake in the substantial natural gas deposits discovered off the island or to provide a further 5 billion euro loan to Nicosia. Later Russian Prime minister Dimitri Medvedev suggested the door was not completely closed but needed to await decisions by the EU.
2. The Cypriot government is due seek parliamentary approval for capital controls when banks reopen, possibly Tuesday (NB - Monday is a public holiday). (HH – Are any eurozone countries, eg Greece, now also considering capital controls to prevent contagion). The government controls 20 seats in the 56 seat parliament.
3. The government plans to restructure two largest banks, the Bank of Cyprus and Cyprus Popular Bank (Laiki), including the creation of a “bad bank” for assets over 100,000 euros. But this could see such assets eventually sold off a discount if the banking bill covering the restructuring is passed, it might reduce Cyprus based funding requirements to 3.5 billion euros (versus expected 5.8 billion euros). However a later development might see the survival of the Bank of Cyprus and just the closure of Laiki.
4. Bank deposits under 100,000 euros may be protected but any over that amount could be taxed by as much as 40 pct. The government is apparently also seeking to restrict non-cash transactions, limit the use of cheques and the size of withdrawals, and possibly convert current accounts into fixed term deposits.
5. The Eurogroup agreed late Thursday that Nicosia should guarantee deposits under 100,00 euros and will help Cyprus if any proposed reforms are backed by the troika (aka Inquisition – but how long would that take). But on Friday, the troika rejected the idea of a some sort of new solidarity fund (grouping all the assets Nicosia can readily lay its hands on), as being “too vague. If no new deal can be reached by Monday, the ECB will withdraw financing for Cypriot banks and these are likely to fail when they reopen on Tuesday.
6. German Finance Minister, Wolfgang Schauble says the eurozone will not provide more money and that Cypriot bank creditors must take some of the burden.
7. German Chancellor Angela says Cyprus has not contacted the troika for days (!) and stresses that any domestic plan to finance the bailout shortfall must not tap Cypriot pension funds
8. Nearly two thirds of Germans expect the euro zone crisis to worsen and almost half fear for their savings, according to an opinion poll released on Friday, amid rising concerns that Cyprus may be forced to quit the common currency.
9. Standard & Poors has downgraded Cyprus to CCC from CCC-plus, pushing further into junk status. “"We believe that in the absence of a credible alternative source of capital and fiscal financing, the risk of a disorderly credit event is rising," S&P said in its statement.
10. Spanish economy minister, Luis de Guindos said a new proposal for tackling the crisis is expected within a few hours and “all Euro nations” want to keep Cyprus in the common currency area. Well’s there a big surprise.
11. Apparently Piraeus Bank based in Athens is willing to take over the Greek branches of the Bank of Cyprus and Laiki Bank which could exempt from any Cyprus bailout deal.
Some Facts, Figures and Fiction ?
The EU Commission -- even before the latest developments --suggested Nicosia’s GDP fell 2.3 pct in 2012, and forecast a 3.5 pct further decline this year and a 1.3 pct drop in 2014.
Much of the Russian money deposited in Cypriot banks is considered by the troika to represent money-laundered funds, which is strongly disputed by Moscow. A leading Cypriot lawyer, Chris Vassiliades of Vassiliades & Co made an interesting comment, “ Russians have the same size assets in France and the EU is not worried about that.....(my) Russian clients are thinking of moving their assets to France.”
Was Finnish EU Commissioner for Economic and Monetary Affairs, Olli Rehn, the man who last week pushed Cyprus into imposing a special tax on all bank deposits including those of the smallest depositors ?
Only a few months ago, the leaders of France, Italy and Spain all said that the euro crisis was over and that setting up the banking union was now the most urgent step forward. But the northern euro group led by Germany was much more cautious, stressing that much remained to be done before the crisis was resolved and the banking union should not be rushed. Events appear to have backed Berlin.
Why should creditors and depositors in EU and eurozone countries any longer trust their political and financial leaders when they appear quite willing to simply ignore treaty obligations to protect depositors with assets of up to 100,000 euros in EU banks ? Who would be surprised if the events of the past week does not encourage a run on eurozone banks at the slightest sign of doubts elsewhere, especially in the Club Med group.
Spain is apparently now considering a tax on bank deposits, which the authorities claim has not been inspired by events in Cyprus. There would be a slight difference in that the tax would be levied on the banks rather than directly on depositor accounts but financial experts point out the levy, even if likely to be much less than in Cyprus, will still eventually be passed on to customers.
Strategic Issues - Middle East, Russia
Cyprus is situated in key strategic position in the Eastern Mediterranen with two British sovereign (military) bases plus important monitoring and communication facilities on top of the Troodos mountains. Although it is not a NATO member, would the latter or the West be willing to loose access to those facilities at the very moment when Syria is in the midst of a bloody civil war, the Arab Spring is still struggling, the Balkans are restless and the Israel-Palestine issue is still unresolved. I doubt it.
As a JP Morgan assessment puts it,” if Cyprus ultimately defaults and needs to leave the euro area, its dependency on Russia is likely to increase dramatically.”
-Humphrey Hudson-
