In the early hours of Saturday morning, the Euro leaders, led by the Germans, the other northern European states and Christine Lagarde from the IMF, held a gun to the head of the newly-elected president of Cyprus Nicos Anastasiades and gave him an offer he could not refuse. Either he accepted that the cash and savings deposits of ordinary Cypriots would be raided to the tune of 6.7-10% or there would be no funding for Cyprus’ banks that were bust. Anastasiades has a reputation as a political ‘bruiser’ who campaigned under the slogan “the crisis needs a leader”. Well, he fell at the first hurdle.
The deal will be voted on Monday in the Cyprus parliament while the banks remain closed through to at least Tuesday. If it fails to back the deal, Anastasiades has warned that Cyprus’s two largest banks will collapse. Cyprus Popular Bank could have its emergency liquidity assistance (ELA) funding from the European Central Bank withdrawn immediately. As Anastasiades stated, it was put to him by the EU leaders that “we would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis”. Neoclassical economist and Nobel prize winner Christoforos Pissarides, who heads the newly-formed National Council for the Economy, echoed these words, when he said there is no other option than taking these measures, otherwise the country’s credit system would crumble leading the country to chaos. “This may be a painful solution but it is the only hope we have to save the economy of Cyprus.”
Cyprus needs €17bn in funds to cover the losses its wildly over-extended banks have made on all the loans they made to property developers on the island – and most important, to Russian oligarchs and Greek shipping magnates that have now turned sour. The Cypriot government had been bailing them out up to now but has now exhausted that capability. But the EU-IMF Troika was worried that a straightforward bailout to the Cypriot government would mean a total support to Russian mafia depositors that have been using Cypriot banks as money launderers and it would also double the public sector debt ratio for Cyprus to 145% of GDP by end-2013, with every likelihood that it could never be paid back.
So the EU leaders took the unprecedented step in taking the ‘insured deposits’ of Cypriots as part payment for the funding. The one-off levy will raise about €6bn of the €17bn needed. In return the depositors will get shares in the banks! Even Ireland, whose banking sector was about as large relative to its economy as Cyprus’ (bank assets are eight times annual GDP) when Irish banks were forced into a bailout in 2010, never agreed to taking people’s savings.
Not surprisingly, Cypriots reacted angrily. Hundreds of account-holders gathered outside branches of Cyprus co-operative banks, which normally open on Saturdays, after emptying ATM machines of cash at the start of a three-day holiday weekend. “They’ve cheated us, they said they’d never allow a haircut on deposits,” said Andreas Efthymiou, a taxi driver, referring to a government pledge to seek alternative ways of rescuing the island’s banks. Christos Pappas, a financial services worker, said: “I tried to transfer cash online as soon as I heard the news, but the account had already been blocked.”
EC official Asmussen justified the measure by saying it broadened the number of people who will shoulder the burden of the bailout. Without the measures, he said, much of it would fall on Cypriot taxpayers; by going after all large deposit holders – many of whom are Russian or British – outsiders would help fund the rescue. Cypriot finance minister Sarris was shame-faced: “I am not happy with this outcome in the sense that I wish I was not the minister that had to do this,” he said. “But I feel that the responsible course of action of a minister that takes an oath to protect the general welfare of the people and the stability of the system did not leave us with any [other] options.”
So here we have Cypriot banks who have been laundering money for Russian oligarchs, lending to all and sundry in speculative ventures, Icelandic style. Now they are bust and who is to pay? Not the Russian oligarchs. If it had been them, all their deposits could have been forfeited or the bank levy could just have been applied to those with over €100,000 on deposit. And it’s not the owners of Cypriot sovereign bonds who bet on the government continuing to allow the banking spree. No, the Greek and Russian banks that own Cypriot debt, or the hedge funds that bet on a bailout,will be laughing all the way to the banks. No the main payers are the poorer Cypriot deposit holders and Cypriot taxpayers. If you have €30,000 in the bank as your only savings, you will be losing €2000 forever. And that €2000 is much more important to the small saver than the rich Russian oligarch.
And the taxpayers still get hit with a large increase in debt payments to make down the road and increased taxes now. Also the government now plans to privatise the utilities to meet part of the bailout bill. Cyprus also the potential for offshore gas supplies. No doubt revenues from those will end up in the hands of creditors rather than as better incomes for average Cypriots. Already, as a sweetener, Anastasiades has hinted that he would offer depositors equity returns, guaranteed by future natural gas revenues. “Half of the value of the haircut will be guaranteed by natural gas proceeds”.So Russian oligarchs will get some energy revenues.
The immediate issue is whether this heist will spark runs on banks in other countries. If your cash in the bank is no longer safe from the Euro thieves, people may prefer to keep it in the UK or the US or under their beds. EC official Asmussen, the leader of the heist, said the Cypriot government and the ECB were closely monitoring deposit flows, including on an intraday basis, for signs of a bank run and insisted those with accounts in other bailout countries need not fear for their holdings since the rescue programmes are already fully funded and would not need to dip into deposits for more cash. But the idea of guaranteed deposit insurance everywhere in the EU has now been undermined. The precedent has been set for insured depositors to suffer losses in order to protect Russian oligarchs and reckless banks. If the Eurogroup can impose this on Cyprus, it can do so elsewhere too.
The cruel irony is that even with this heist on depositors to pay for recapping banks that remain in private hands, and even with EU-IMF loans to repay government creditors, such will be the depression that ensues in Cyprus that the Troika’s target to getting the public debt ratio down to 120% (still double the target of the EU’s fiscal compact) will not be achieved. So Germany and the rest will probably have to revisit Cyprus either for another heist or for a further transfer of funds.