17 Mar 2013

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.

10 reader comments

  1. Sandra Dunn says:

    Banks are money laundering for goodness knows who and what and ordinary people must pay the price? Will the cypriots lie down and take this?

    1. pierregonzalez says:

      Ordinary people as you call them have been enjoying the benefits of the Russian money . They also had a communist governement which was granting high salaries to unecessary civil servants and everything was backed by the Russians . And now they might end up being bailed by Moscow in exchange of the exclusivity for Gasprom to manage the offshore gas ressources. So “ordinary people” were happy to vote communist because they were enjoying the benefits and now that the system collapsed they don’t want to pay as usual . Because the Cyprus banks were very much involved in Greece because it was the gate for the Russian money to get laundered in the EU.

  2. sue_m says:

    I’ll bet they feel annoyed to say the least!

    What annoys me is your headline article about George Osborne’s attempt at winning some fans by saying our military personnel in Cyprus will be compensated – which of course is good – whilst pointing out that the real hero is Cameron who ‘got us out of euro bailouts’. Except of course, he didn’t as we are contributing to this bailout by having to bailout our levied military and government personnel.

    I hope they make public exactly how much we pay to any government people with accounts out there because you can bet your bottom euro that their accounts have considerably more in than the service personnel.

    Your fact check blog has often highlighted Osborne’s (and Cameron’s) difficulty with truthfullness but to contradict himself in the space of two sentences is pretty good going.

  3. sarah says:

    The are 2 serious and perhaps rather sinister lines within the Cyprus bailout story. The first relating to the levy on savers (no consent, no option given, no time to make alternative arrangements etc). Why are these terms applied to Cyprus? What does it say about the terms of future bailouts?

    The second is that the EU appears to have justified the levy on the basis of money laundering….er…so what happened to legal due process, evidence before a court, burden of proof that money laundering has happening i.e. that crimes have been committed??? And why is punishment visited on people not connected?? The EU / IMF conditions on the bailout for Cyprus appear to punishment for ordinary savers for “unproven / unevidenced crimes” committed elsewhere. Where is the justice? In whose interests is the EU operating? I would really like to know the answers to these questions! Bailout negotiations and terms are a murky business, but to mix international money laundering into the pot defies belief.

    Cyprus needs a bailout because the EURO is not functioning equitably and Cyprus was overly exposed to the situation in Greece – that’s the international crime that the EU should…

    1. pierregonzalez says:

      Cyprus was exposed in Greece because it was the gate for laundered Russian money to go into the EU .
      The next point is that the Cyprus government had the option to put the all burden on the rich with more than 100.000 Euros . The problem is that they are almost all Russians and Cyprus cannot survive without the Russian money. But they cannot upset the Russians .Cyprus should not be part of the Eurozone because it had a communist government for to long time . It is a socialist type country and they should belong to the Comecon.

  4. Andrew Dundas says:

    John Major (Tory PM) warned ALL savers long ago. When BICC & County Bank went bust on his watch, that Tory PM told us: Take care with which bank you deposit your money. If you save recklessly, you’ll risk losing it.

    Since the 2007-08 crisis amongst Wall St banks, and caused by their reckless lending, banks all over the world have been hit. Isn’t 4 – 5 years enough prior warning?

    Banks are most vulnerable when the markets they lend in stop growing. The EU is stalled: that’s a ‘danger sign’. Greece – Cyprus’ banks lending market – is sliding downhill fast and an even bigger risk. So Cyprus depositors were earning higher interest by taking a gamble on the Greece economy.

    They could have put their savings on the Cheltenham Gold Cup. That’s risky too.

    1. pierregonzalez says:

      Yes but for Russians billionaires it is less risky to put their money in Cyprus than to keep it in Russia were everything can be stolen by the government the day they put you in jail under any accusation they will be pleased to invent!

  5. Philip Edwards says:

    Faisal,

    How about a more detailed blog on which individuals at the IMF forced this disgusting theft on Cyprus?

    Later, you could broaden it to describe how that corrupt organisation is composed, how its policies are formed and how its members are appointed, not elected.

    Funny how an organisation with such global power is never remotely examined or analysed by mainstream media………………………….

    1. Sandra Dunn says:

      To Philip, Excellent idea

  6. Peter Mueller says:

    Anastassiades said: “One idea is to take as much cash as possible from the pensions and provident funds, and then only come after small depositors for the rest.” The funds could be compensated with shares in Cyprus’ bailed-out banks, or government bonds backed by revenues from the country’s gas fields.

    She added that pension funds could be seen as more natural holders of these kinds of long-term illiquid assets than individual investors. She added: “In effect pension funds are only giving back the extra interest they have earned in the past two or three years.”

    http://www.efinancialnews.com/story/2013-03-19/cyprus-pension-fund-bank-deposits?mod=sectionheadlines-PE-AM

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