Cyprus: Too Small To Bail
Sometime late Friday, and in the early hours of Saturday, the president of Cyprus threatened to walk out of the north European ambush set for him and his finance minister in Brussels. The host broadcasters pictures of Michael Sarris showed a shellshocked man.
Cyprus felt that everything was coming together for a deal over the next few days.
Instead, I understand, that Sarris was shown a letter from the ECB saying that emergency liquidity assistance for Cyprus was to be pulled on Tuesday morning. President Anastasiades said last night that he was met with “faits accomplis” on decisions that had already been made.
The President didn’t want to “choose the catastrophic scenario of disorderly bankruptcy” saying “banks in crisis would cease to operate” and paying out to depositors would cost “30 billion euros, which the State would be unable to pay” and the “service sector would be led to a complete collapse with a possible exit from the euro”.
More specifically Sarris was told that for 90 days, Berlin, Brussels and Frankfurt had been monitoring whether Cyprus had caused any contagion in the markets, and it had not. Therefore the suggestion to hit depositors generally was “take it or leave it”.
Leave it, was basically referring to leaving the eurozone and returning to the Cypriot pound. Cyprus, in essence was too small to have to be bailed out fully.
There was also a debate about the extent of the levy on depositors. Cypriot politicians suggest the original move from its “EU colleagues” was a deposit cut of 40per cent, presumably to the deposits above €100,000. This was negotiated down to 9.9 per cent for deposits above €100k and 6.75 per cent below. Tonight the German finance minister claimed he would have been happy with protection of smaller depositors, and that this specific decision was made by the Cypriot government, the European Commission and the ECB.
The calculation is that tonight in Asia and in European markets tomorrow, there will be no contagion. Frankly if an indecsisive Italian election sending votes to Grillo and Berlusconi doesn’t spook markets, then how can Cyprus? The world is still intoxicated by the powerful hold of Mario Draghi’s OMT and the promise of recovery in the US.
But Cyprus could show human contagion. The government may not have a majority in parliament. Already there are suggestions of an impromptu extra bank holiday on Tuesday. The ECB will have to flood the island with euros to meet demand and calm any possible bank run.
I can’t vouch for special knowledge in predicting the response of ordinary Cypriots to the seizure of part of their saving. But the front pages of cypriot newspapers were very calm, some urging “responsibility”. Brussels figures such as economist Jean Pisani-Ferry have been pointing out that 6.75 per cent was actually the equivalent of 18 months’ interest in Cypriot banks.
If Cyprus can be persuaded that 93 cent of their savings are certainly safe, perhaps they will view that as better than an uncertain 100 per cent.
For Cypriots the computer cash machines are saying no. Cash is available up to a point, and there aren’t the queues of yesterday when some branches were meant to be open, but the anger at the extraordinary grab of the savings of ordinary Cypriots, well that’s growing.
Reuters spoke to people outside cash machines: “I feel like everyone else. Annoyed and angry at the situation we are facing. We have no idea what will happen tomorrow, the situation is really difficult,” said one. “Its unfair. I have a loan from the government for twelve thousand euros to support my daughter’s studies. I put it in the bank and now i’ll lose some of it and still have to pay it back with interest,” said another.
There’s been a certain amount of anger in Nicosia directed precisely at the two ECB representatives currently touring Cyprus. There’s a poker game going on. Cyprus could yet call Berlin’s bluff, in a way Ireland did not. I don’t think they want the banks to go bust, obviously. But some ameliorating measures, perhaps exempting those with savings below €30,000, would be very sensible.
It’s difficult not to feel that Cyprus has been extremely hard done by. The banking system was okay, until the Greek government bondholder “burden sharing” insisted on by Brussels for Greece.
The moral case for Cypriot excess rests entirely on its offshorism. In other words, ordinary Cypriots are being punished for sharing a banking system with some dodgy oligarchs. We’ll find out if their heads are being ruled by anger or realism when the banks reopen.
UPDATE: live from Nicosia tomorrow
Follow @faisalislam on Twitter.