by Joce Cognord
After almost ten days of fierce debates, meetings and counter-meetings, an agreement on the Cypriot issue had been reached, hailed by everyone as the “best of all possible worlds.” The thriller that started off with an innocent-looking meeting between the Cypriot government and the Eurogroup, and which, half-way through, had many wondering about the future of the Eurozone itself, ended with an official agreement that restores “stability” in typical EU fashion: austerity, stagnation and further recession. But the Eurozone is safe.
One thing is clear after this forceful reappearance of the Euro crisis in world headlines: in order to proceed with the economic policies that have governed the management of the crisis so far, a significant degree of flexibility is still available – even to the extent of circumventing some of the fundamental “values” and laying foundations of the EU itself. The free movement of capital might be a founding principle of the EU, but it comes at a price. As we learned from the Cyprus saga, and in an interesting dialectical twist, the free movement of capital should now be restricted in order to be saved.
Everything started with a meeting on the 16th of March, in which the newly elected president of Cyprus Mr. Anastasiades met with the Eurogroup to reach a final agreement regarding the island’s borrowing needs. Cyprus needed around €17 billion, 12 for its banks which had suffered losses (in part as a result of the PSI agreement in Greece) and €5 billion for State bonds that were reaching maturity. There was a certain understanding that a Troika (EU/IMF/ECB) deal would provide €10 billion in loans, along with a typical memorandum-style austerity. Judging from his pre-election campaign, Anastasiades was as much a fan of the memorandum as Samaras, Greece’s Prime Minister. Everything seemed in order. The only things left to resolve were the exact details of the memorandum, given that Cyprus’ cash-in-hand was already predicted to run out at the end of the first quarter of 2013.
A number of austerity measures were in fact agreed upon, but everything seemed to fall apart when the Eurogroup presented an unheard of clause in the bail-out agreement: a haircut (appropriately called a tax levy) on all bank deposits, similar (and for that reason avoided so far) to what had been introduced in Argentina in 2001, which led to the uprising. It is hard to say whether Anastasiades was shocked the moment this was announced, since certain reports indicated that the plan had been discussed since January. Yet, the rest of the world found it hard to believe. The sacred cow of modern day capitalism, insured bank deposits, was now been sacrificed for a bail-out agreement, and in fact for an amount of money (€10 billion) that was extremely low in EU terms.
Anastasiades returned to Cyprus and addressed his small nation, just before the bill was sent to parliament. He claimed that he had done his best to negotiate, and though the bill was going to be hard to swallow, it was much better than the alternative, which was immediate bankruptcy. Among other things, a haircut of 6.75% was to be imposed on all bank accounts with less than €100,000, and one of 9.99% for all those above. A clear recipe for a massive bank run.
Surprising most of those who followed the events, the Cypriot parliament rejected the bill. In fact not even a single MP of Anastasiades’ own party voted in favor. All hell broke loose. European leaders reacted as if at a loss: most denied responsibility for introducing the tax levy, while the financial press was also mesmerized: why on earth would the Eurogroup call for a bank run in a small economy which as to heavily dependent on its finance sector?
The search for a culprit began. Wolfgang Schäuble came out of the Eurogroup meeting and was the first to announce that this haircut was not his idea, but one which originated from the Cypriot government, the European Commission and the ECB. Jörg Asmussen, the ECB executive board member, denied this and claimed instead that it was a result of the negotiation in Brussels. The French Finance Minister also came out claiming that he was against placing the levy on small account holders. So who was to blame for this unheard of policy? The European Commission were the first to admit that they were the ones to propose it, but only in order to avoid a fate even worse. According to Olli Rehn, the alternative that Germany and the IMF were pushing for was so much worse (a 40% haircut on all large depositors) that an attempt was being made to minimize its impact. To avoid, that is, a panic spreading around the Eurozone as well as an impressive bank run from Cyprus’ large depositors (primarily Russian).
According to some reports, Anastasiades was also concerned with protecting the wealthy clients of the Cypriot banking system, and the “unwillingly” agreed to extent the haircut to include small bank holders, hoping that in this way the burden will be spread out.
In this back and forth scenario of guilt-trips, the roles of good vs. bad cop became interchangeable, successfully drawing attention from the fact that they were all cops anyway. A series of moves of admirable choreography followed. The Cypriot government supposedly embarked on a mission to find alternative funding. A trip by Finance Minister Sarris to Russia ended in failure (an obviously expected outcome since Russia had already made it clear from June that it would only get involved in a rescue mission if an agreement with the EU was already in place), while a number of other suggestions (an obscure Investment Solidarity Fund or the nationalization of Insurance Funds) were put on the table. Meanwhile, EU leaders clarified through an ECB (non) statement, that any failure to secure the €5.8 billion euros would result in a stoppage of liquidity transfers from ELA, effective from Monday 25th of March – resulting in the immediate bankruptcy of Cypriot banks. The statement was bizarre since institutional regulations of the ECB demand a 2/3 majority vote for such a policy to take effect – a majority that the theater show of the blame game had shaken to a certain degree. But this was put aside for the time being, and in a sign of collective EU strength and decision-making, adding an exclusion of Cyprus from the Target II inter-banking system (an actually effective way of securing bankruptcy which by-passes the ECB regulations), the threat was re-instated.
The specifics of the Cyprus case were also pinpointed, in an attempt to avoid an unavoidable comparison with countries with similar financial setups – the Foreign Minister of Luxembourg Jean Asselborn, for example, made a statement asking Germany not to criticize Cyprus, since he also “came from a small country with an overblown banking sector”. The attempt by the Eurogroup to differentiate Cyprus as a special case was not very successful, nor did it stop the main question from being asked: if a tax levy on bank deposits marks a new EU policy, who would be the next in line?
The final agreement that was announced in the early hours of Monday the 25th of March put an end to all speculation. The Troika would proceed with its €10 billion loan, and would continue to provide liquidity through the ECB. In exchange Cyprus would close down the Popular Bank of Cyprus (Laiki) and transfer all of its small account holders to the Bank of Cyprus. The large account holders of the Bank of Cyprus would also receive a large haircut (the exact figures of which were not announced, but speculation puts it at around 40%), while also receiving the €9 billion obligations to ELA from Laiki Bank. Alongside, a memorandum type agreement would secure an amount of €4.5 billion through age/pension cuts and public spending reductions. Most importantly, a strict capital flow control would be put in place, trying to avoid the almost unavoidable bank run (though reports already indicated that a huge increase in capital flight from Cyprus, stemming from a rather flexible interpretation of what constitutes an exception). Finally, and in order to ensure that no surprises would follow, the haircut was conveniently named a “restructuring of the banking sector” and not a tax, thus avoiding parliament approval (the bills necessary for the implementation were already voted in Cypriot parliament on Friday 22nd of March).
All in all, the politicians of the Eurozone congratulated themselves for saving the small account holders (they all suddenly claimed that this was their purpose from their beginning). Further, the banking sector of Cyprus will be reduced in half and a decent austerity program is in place. Of course, the next-day scenario for the Cypriot economy is as gloomy as one would expect. In effect, Cyprus will follow an austerity program that will have the same effects as it did in Greece – only this time it will happen in a few days, rather than in 3 years. But at least the Eurozone is safe. For now.
Reprinted, with permission, from the German publication Jungle World.