EU bailout: After Cyprus, who next?
Of course, writes Eddie Ford, the troika bailout is unique and exceptional - just like all the others
Gripped by crisis, the Cypriot government of Nicos Anastasiades struck a last-minute bailout deal in the early hours of March 25 with the European Central Bank, European Commission, International Monetary Fund troika. The ECB had threatened to cut off the emergency funding propping up Cyprus’s distressed banks unless it raised €6-7 billion in order to qualify for the €10 billion troika bailout. Without the deal, the island faced economic collapse and almost certainly a speedy exit from the euro. Catastrophic.
The current crisis had been triggered by the initial decision on March 16 to impose a ‘stability levy’ or one-off tax of up to 10% on all deposit holders - even those with savings under €100,000 (£85,000) and thus supposedly protected under the European Union-wide insurance guarantee scheme. They were due to have part of their savings confiscated by the government. Instant panic. Long queues started to develop outside functioning ATMs, with people, most of them ordinary workers, desperate to remove as much of their money as possible. Since the start of the bank holiday on March 15 the banks had been closed and electronic transactions cancelled - so cash machines are just about your only hope. Shops and businesses, quite naturally, are refusing all non-cash payments. Cheque? You must be having a laugh.
Hardly astonishingly, not a single member of the Cypriot parliament actually voted for the ‘stability levy’ on March 19 - to have done so would have immediately turned them into hate figures. They rejected the bank tax, with 36 votes against and 19 abstentions, even after the proposal had been tweaked during the day to remove any levy on savings below €20,000.
Running out of options, fast, the government got out its begging bowl to Moscow - the Cypriot finance minister, Michalis Sarris, vowing “never to return” until he had secured a deal. Russia has already lent €2.5 billion to the island following a near apocalyptic explosion at Nicosia docks in 2011, which at a stroke wiped out about half of the island’s total electricity supply. More importantly, dubious wealthy Russians and oligarchs - not to mention government ministers - had parked enormous amounts of cash in the island’s banks to take advantage of high interest rates and an extremely ‘liberal’ approach to account vetting. ‘Dirty money’, in other words.
Hence Russian nationals are estimated to hold more than €20 billion of the €68 billion in Cypriot banks and many have deposits of well over €100,000. Indeed, the Bank of Cyprus - the largest on the island - is 9.7% owned by Dmitry Rybolovlev, a Russian based in Monaco, whose wealth is estimated at $9.1 billion, according to Forbes.
However, an embarrassed Sarris returned from Moscow empty-handed. There is much speculation that Cyprus had not made an attractive enough offer, such as Russian control over gas reserves or a warm water port.
Showing the severity of the crisis, an RAF plane was specially commissioned to fly over to Cyprus carrying €1 million in low-denomination notes for the 3,000 British service personnel based on the island. Stop them from mutinying. The archbishop of Cyprus, Chrysostomos II - also the island’s largest property owner - on March 21 met with the heads of Russian companies based in Cyprus, pleading with them to keep their money on the island. They might take some convincing. Not for the first time, he demanded that the previous ‘official communist’ government of Demetris Christofias - former president and general secretary of Akel (Progressive Party of Working People) - should stand trial: it is all their fault, apparently, that the island’s economy is in such a disastrous mess. Chrysostomos has offered the opinion that the Cypriot workers have got too used to comfort and now “must learn to live on tighter budgets”.
As the Weekly Worker goes to press, Cypriot banks remain closed - and the queues are still outside the ATMs. Panicos Demetriades, the governor of the Bank of Cyprus with a possibly apt forename, has said that “superhuman” efforts are being made to open the country’s banks on March 28. But nothing is guaranteed. The fear, of course, is that there will be a run on them as soon as they reopen, further intensifying the crisis. Yet to keep them closed drains market confidence and has will bring business on the island to a virtual standstill - inviting collapse. Damned if you do, damned if you don’t.
There appears to be no way out of the crisis. If no deal had been struck on March 25, then Cyprus would have gone into meltdown. On the other hand, the draconian and unprecedented nature of the troika-imposed bailout could eventually end up exacerbating the crisis even more - not just in Cyprus, but throughout the entire euro zone. We had to kill the patient in order to cure him.
Though we do not yet know all the details concerning the bailout, the essential points are fairly clear. Along with a package of further austerity measures (what else?) and selling off yet more state assets, the new programme leaves deposits below €100,000 untouched - exempt from the ‘stability levy’. But, having said that, while small depositors may have been spared a ‘haircut’, there are still quite large numbers of relatively ordinary citizens (including British ex-pats) with over €100,000 in the bank - as for many this constitutes their entire life savings for their old age - a treasured pension pot. Or perhaps the recent proceeds from a house sale or life insurance claim. It is not all Russian oligarchs or tax-avoiding wealthy foreigners, many of whom - it almost goes without saying - have already shifted their money by one means or another out of the island thanks to early tip-offs.
The other crucial element of the March 25 deal involves the closure of Laiki Bank (Popular Bank), the second largest in Cyprus - 84% of which is owned by the government following a €1.8 billion bailout in June last year, the rest held by private and institutional investors (including bank staff). Those with deposits under £100,000 at Laiki will see their accounts/assets transferred to the Bank of Cyprus (BoC). Meanwhile, the €4.2 billion in deposits over €100,000 will be placed in a ‘bad bank’, effectively meaning that all lenders to Laiki will see their investments wiped out - a first for a euro zone bailout. In other rescues, holders of higher-rated bonds have not faced such drastic losses.
As for the BoC itself, it survives the axe, but faces huge ‘restructuring’. No bailout money will be used to recapitalise the bank; instead its shareholders/bondholders will be hit. It is thought depositors with over €100,000 will face a bank tax of up to 40% (converted into useless bank shares). Of course, getting the bank up to healthy EU-mandated capital levels will be made harder by the fact that BoC will inherit the €9 billion debt Laiki owed the ECB. In other words, the BoC has come out of the deal much weaker - not boding well for the future state of the Cypriot economy.
Furthermore, by logical extension - even if it is the logic of the madhouse - there will be capital controls to prevent a bank run. Presently, a €100 limit has been imposed on ATM withdrawals. According to remarks made to reporters on March 27 by Phidias Pilides, the head of the chamber of commerce, the proposed controls will limit foreign transactions and capital outflows, but not movements of money within Cyprus itself. Later it was confirmed that savings accounts must run until their expiry date, with no early withdrawals allowed; cashing of cheques will be suspended (although cheque deposits will be allowed); individuals will only be allowed to take €3,000 in cash on each trip out of the country; all credit/debit card transactions abroad will be capped at €5,000 per person, per month.
Of course, capital controls per se completely breach EU rules, which loftily insist upon the free movement of capital and labour (even if their introduction was semi-mooted last year in response to the potential capital flight from Spain, Italy and Portugal). Trying to smooth things over, the European Commission issued a statement saying that capital controls will only be enacted “exceptionally and temporarily” for the next seven days - so that’s all right then (some financial commentators are promising to eat their hat if the controls are lifted in a week’s time).
There are two main reasons why Cyprus is being made to pay for part of the bailout. First, the German and other European leaders did not want to be seen bailing out Russian oligarchs and criminals who have been using the Cypriot banking system to dodge tax and launder money. It would look really bad in Germany just months before a general election having to explain why Russian crooks are getting hard-working German tax-payers’ cash, just because the banks in Cyprus happily pimped Russian money and then with the ill-gotten proceeds went on a speculative spending spree across Europe. Second, the IMF in particular was worried that if the bailout came totally from EU-IMF loans it would push Cypriot public sector debt to above 150% of GDP - with little discernible prospect of getting that debt down again in the foreseeable future; therefore Cyprus could end up defaulting or being bailed out yet again. A vicious circle. So a ‘bail-in’ of bank assets was deemed necessary by the troika.
In fact, you could reasonably argue that Cypriot workers will be worse off under the new scheme than under the initial plan to swipe 6.75% from their account. Unemployment, business closures and recession inevitably loom - joblessness already stands at a record 15%. Inevitably, many thousands of staff at both Laiki and the Bank of Cyprus will lose their jobs - a further devastating blow to the economy, feeding the recessionary cycle.
Many small to medium-sized businesses will go bust after suddenly losing a substantial chunk of their working capital. If you think about it in UK terms, £85,000 is hardly a fortune, but in Cyprus even many large businesses might go under, their profit margins squeezed just that bit too much. Cyprus is stuck with an economy that is on course to shrink by at least 20% in the next two or three years, replicating the same downwards spiral seen in Greece and Spain. Its business model, insofar as you can call it that, has been abolished in all but name and it is extremely difficult - to put it mildly - to see what it can be replaced with.
Ultimately the country’s creditors will either have to write down a good chunk of the debts or Cyprus will be forced out of the euro anyway. At the very best, it seems that with the March 25 bailout the euro leaders have just bought themselves a little more time before the next crisis erupts.
Another fear, greater even than that of Cyprus going bankrupt, is the idea that it might become a blueprint for future bailouts. Not necessarily a paranoid fantasy. After all, with their initial plan to tax all depositors, European policy-makers have demonstrated that under certain circumstances they would be prepared to raid the bank accounts of European citizens. Even though the Cypriot parliament - under huge pressure from just about the entire population - eventually scuppered the plan, the possibility could shatter confidence in the banks if (when) the financial crisis flares up again in countries like Spain and Italy. The seeds of doubt have been sown.
Suspicion was reignited on the day of the bailout when Jeroen Dijsselbloem - president of both the euro group and the European Stability Mechanism board of governors - seriously spooked the markets, and others, when he suggested Cyprus’s bailout could serve as some sort of template for other financial crises on the continent. He told Reuters and the Financial Times that he regarded the deal as “pushing back the risks”. Explaining what he meant, he said that “if the bank can’t do it” then next “we’ll talk to the shareholders and the bondholders” - asking them to “contribute in recapitalising the bank”, and “if necessary the uninsured deposit holders” will have to make a contribution too. Markets tumbled after his remarks, seen as an open invitation to any investor with more than €100,000 in a euro zone bank to remove it without delay - which, of course, some did.
Rattled ECB members rushed to distance themselves from Dijisselbloem’s remarks, loudly proclaiming the official line that Cyprus is an aberration due to it supposedly bloated financial sector. A unique and dreadful example of ‘casino banking’. Speaking at a news conference in Prague, Ewald Nowotny, a member of the ECB’s governing council, reassured reporters that Cyprus is a “special case” and is “no model for other instances” - exactly what they said, now you come to mention it, about Greece, Portugal, Spain, Ireland, etc.
There were warnings that the impact could reach beyond Cyprus, particularly to Russia. The country’s prime minister, Dmitry Medvedev, bitterly complained that the troika are “continuing to steal what has already been stolen.” Russian officials and the press have repeatedly compared the Cypriot ‘stability levy’ to the expropriations carried at the time of the 1917 revolution - only this time it is the capitalist Euro-bureaucracy doing the expropriating.
But the potential ramifications go beyond Russia - compared to Cyprus, other countries have even larger banking sectors relative to GDP. For example, in Luxembourg, the euro zone’s biggest champion of banking secrecy, it is more than 20 times GDP - the Luxembourg government has admitted it is “concerned about recent statements and declarations” on the “alleged risks” of out-sized financial sectors. And Malta’s finance minister has expressed similar concerns about what would happen if a second Mediterranean island encounters such problems.
What about the City of London, a major contributor to the tax-base of the UK and no stranger to ‘casino banking’ - a pioneer of financial speculation, in fact. If ‘stability levies’ can be imposed on Cypriot banks in times of crisis, then why not in the UK?