Saturday

28th May 2016

Opinion

Cyprus bailout: a punishment not a solution

  • 'The handling of the situation has shaken the trust of Cypriot citizens in the European trajectory of the country' (Photo: consilium.europa.eu)

It is now official: Cyprus will pay a heavy toll for turning its economy into an offshore financial haven, and allowing its banking sector to hyper-inflate.

But if the purpose of the dramatic Eurogroup all-nighters was to solve the problem, instead of punishing the island and making an example of it, then we can hardly speak of a success.

Dear EUobserver reader

Subscribe now for unrestricted access to EUobserver.

Sign up for 30 days' free trial, no obligation. Full subscription only 15 € / month or 150 € / year.

  1. Unlimited access on desktop and mobile
  2. All premium articles, analysis, commentary and investigations
  3. EUobserver archives

EUobserver is the only independent news media covering EU affairs in Brussels and all 28 member states.

♡ We value your support.

If you already have an account click here to login.

Despite the fact the agreement in the Eurogroup of 25 March prevented an immediate and disorderly bankruptcy, there is no doubt that the coming months are going to be dramatic for Cypriots.

Indeed, the vice-president of the European Commission, Olli Rehn, himself likened the situation faced by people of the island to the Turkish invasion of 1974.

The agreement placed the second largest lender of the country - Laiki Bank- in resolution.

Beyond the fact that such a development will lead to job losses, it also means that all its deposits of natural or legal entities exceeding €100,000 will virtually be wiped out.

Maybe it will take years before the clearance procedure is complete and depositors receive some kind of compensation, which, in any case, would be much smaller than the sums lost due to the haircut.

Clients of the Bank of Cyprus with deposits over €100,000 will also suffer heavy losses.

In fact, the decision provides that, at least for some time, uninsured deposits in the country’s largest bank will remain frozen, until the exact amount of their “haircut” is decided, in order to reach a capital ratio for the bank of 9 percent.

In this way, hundreds of domestic companies have had their cash reserves depleted and their current accounts obliterated.

Some - if not most - of them will go bankrupt in the next days and weeks.

These developments, in combination with the imposition of restrictions on the free movement of capital - also for an unspecified time period - raise serious doubts as to when the economy of the island will be able to function properly again.

The unprecedented-in-scale destruction of capital, the loss of confidence in the banking system (which served as a basic pillar of the economy of the island as well as a pool for jobs), the inevitable outflow of deposits along with the general uncertainty are expected to deepen the recession in Cyprus beyond even the most pessimistic forecasts.

In this sense, sustainability projections of the draft Memorandum of Understanding between the EU-led troika and Nicosia should be considered as already obsolete and the assistance programme as already way off track.

Given that the eurozone is not willing to provide funding beyond €10 billion, the big question that now arises is how the inevitable funding gap between solvency and insolvency is going to be covered, at a time when the economy is sinking and unemployment is spiralling out of control?

Whether the Bank of Cyprus will survive is equally dubious, since besides the deposit outflows it will suffer, it has also been forced to assume the obligations of Laiki Bank towards the European Central Bank, amounting to €9 billion (around 50 percent of Cypriot GDP).

The handling of the situation by the Eurogroup and the Cypriot government over the last few days has shaken the trust of Cypriot citizens in the European trajectory of the country

Equally fragile is the confidence of citizens and markets in the crisis management skills of the eurozone.

If the - undoubtedly substantial - difficulties of a small economy like Cyprus are able to cause so much trouble, what then should be expected if a crisis occurs in Italy or Spain?

In fact, the initial decision of the Eurogroup, which imposed a levy on deposits below €100,000, makes it clear that in case of a major crisis in the future, the eurozone is ready to cross the Rubicon.

In an interview for the Financial Times, the head of the Eurogroup went as far as to imply that the model of Cyprus will be used as a template for the eurozone, and that depositors with more than €100,000 in their accounts may be requested to foot the bill for failed banks in the future.

In other words: “Take your money and run from the south!"

Such statements make one wonder if the person running the Eurogroup wants to preserve the single currency, or to destroy it.

Could things have taken a different turn?

Of course they could, provided that the necessary political will had been there.

Although Berlin was right to point out that the model of the Cypriot economy, which was based on the financial bubble, was not sustainable, the dissolution of this model in the timespan of just a few days, instead of a few years, is bound to cause more problems than it will solve.

No alternative plan has been designed, let alone implemented yet.

Yes, Cyprus made many mistakes and the punishment may indeed be appropriate for the 'crime.'

But what about the mistakes of the eurozone leaders?

Their response to the crisis so far has been ridiculously unsuccessful, not matter how one defines success.

The continent’s economy is going through a double-dip recession, even Germany, the supposed poster child of economic performance, is stagnating. Unemployment is surging to all time highs, eurozone GDP is much lower than its pre-crisis levels and the banks of the Europe are zombies, unable to provide credit to the economy.

Meanwhile, in the political sphere, populist, secessionist and nationalist movements are on the rise and the European project as such is at risk.

Countless late night meetings by EU leaders and finance ministers have failed to come up with anything to restore confidence, and some of them, like last week’s decision to disrespect the sanctity of retail deposits, have been downright catastrophic.

Whether Cyprus deserves its punishment or not, the truth is that the people who run the eurozone are not held accountable - are not sacked from their jobs - when they mess up.

And that’s why they keep messing up.

The writer is a Brussels-based EU correspondent for the Greek and Cypriot daily Kathimerini. An earlier version of this article was published by the Hellenic Foundation for European and Foreign Policy, a think tank in Athens

News in Brief

  1. Syrian refugees sue Denmark over immigration law
  2. Ukraine bans Gorbachev for backing Crimea's seizure
  3. Dozens dead in two shipwrecks outside Libya
  4. Slovak PM says his country is no place for Muslims
  5. Juncker's spin-doctor warns of populist 'horror'
  6. EU urges Hungary to end discrimination of Roma children
  7. Majority of voters think UK will stay in EU
  8. Leading MEP says Greek bailout will not work

Stakeholders' Highlights

  1. ACCAEducation and Training 2020 - Giving Young People the Workplace Skills They Need
  2. EPSUTrade Unions Back New Undeclared Work Platform
  3. European Healthy Lifestyle AllianceCould targeting children’s fitness boost academic performance?
  4. World VisionDeclares the World Humanitarian Summit a Positive Step in a Longer Journey to Ending Need
  5. EJCPresident Dr. Moshe Kantor on Brexit and the Jewish Question
  6. Swedish EnterprisesNew rules for posted workers - Better Protection or the End of Posting ?
  7. World VisionWhy The EU Needs to Put Children at the Centre of Emergencies - In Their Words
  8. ACCASustainability Reporting in Danger of Losing Its Momentum Says ACCA and CDSB
  9. Dialogue PlatformDiversity as Heritage of Humanity! Join the “Colors of the World“ Show at the EP
  10. Centre Maurits CoppietersNew Responses to the Basque Peace Process? MEP Juaristi on Stateless Challenges Conference
  11. European Healthy Lifestyle AllianceImproving Cardiovascular Health Begins by Closing the Gap in Sex Disparities
  12. IPHRBrussels Talks to Take Stock of Human Rights in Turkmenistan