Thursday

22nd Feb 2018

Opinion

Cypriot deal is welcome change to EU approach

  • Cyprus ruins: 'The change makes it politically more feasible to deal with struggling economies which are too big to bail out, such as France' (Photo: jnocca93)

In the wake of the bailout/half bail-in that is the Cyprus rescue package, Eurogroup chairman Jeroen Dijsselbloem said last week the EU is now "going down the bail-in track."

He later clarified his remarks to say Cyprus is a "specific case."

Thank you for reading EUobserver!

Subscribe now for a 30 day free trial.

  1. €150 per year
  2. or €15 per month
  3. Cancel anytime

EUobserver is an independent, not-for-profit news organization that publishes daily news reports, analysis, and investigations from Brussels and the EU member states. We are an indispensable news source for anyone who wants to know what is going on in the EU.

We are mainly funded by advertising and subscription revenues. As advertising revenues are falling fast, we depend on subscription revenues to support our journalism.

For group, corporate or student subscriptions, please contact us. See also our full Terms of Use.

If you already have an account click here to login.

But despite his caution, the developments signal a welcome change from the EU's handling of the euro-crisis so far, in which the Union turned itself into a piggy bank for insolvent banks and governments.

Dispelling the myth that Brussels should protect depositors and bondholders from any risk of losses is a first step toward sensible management of the situation.

For that reason, the 25 March Cyprus agreement is an improvement on the original one from 15 March, which protected senior bondholders from losses and imposed a levy on small depositors.

 

Repairing the balance sheets of Cypriot banks can only happen through liquidation of bad assets.

When it comes to bank insolvency, Cyprus is in a class of its own.

Its non-performing loans (NPLs) represent a whopping 264 percent of banks tier 1 capital, the main measure of their financial stability, according to the International Monetary Fund.

To put this into context, Italian banks, with an NPL-to-tier-1 ration of 153 percent, and Greek lenders (217 percent), have a much better capacity to absorb losses.

Japan learned its lesson on bad loans the hard way.

When a surge in NPLs helped prompt its current economic malaise during the early 1990s, Japanese authorities merged weak banks with strong ones in an attempt to sweep the country's insolvency problem under the rug.

It did not work.

The newly merged entities earned the name "zombie banks" for a reason. Japan has since endured almost two decades of stagnation.

 

The EU is now trying to avoid making the same mistake with Cyprus.

The Bank of Cyprus - its largest - will be recapitalised via the liquidation of assets held by senior bondholders and a levy of up to 40 percent on unsecured deposits.

Cyprus' Laiki bank - its second largest and most insolvent lender - will close by liquidating its non-performing assets, a move facilitated by wiping out senior debt and an as yet undisclosed (but significant) portion of unsecured deposits.

Its other assets will be shifted to the Bank of Cyprus.

In return for bailing-in the banks, the Cypriot government will receive a €10 billion emergency loan, worth two thirds of its outstanding debt.

 

The deal is not without risk.

Foreign deposits comprise 37.5 percent of all Cypriot deposits (compared to a euro area average of 22 percent), and international investors are now likely to feel nervous about stashing their money in the island's banks.

Cyprus’s enormous sum of highly mobile foreign portfolio investment - totalling 122 percent of its GDP - is unlikely to endure.

Over time, foreign direct investment - currently at a large 89 percent of GDP - is also likely to decrease.

Add to this the "temporary" (weeks, months?) capital controls introduced by the fiat of eurocrats and Cypriot officials and the little Mediterranean island no longer looks like a financial paradise.

Iceland, which instituted "temporary" restrictions on currency convertibility in 2008 is unlikely to remove them completely until 2016.

If Cyprus' economy "tanks," as predicted by EU officials, a second or even a third bailout or bank restructuring may be on the horizon.

Precedents in Greece, Ireland and Portugal indicate this is not the last we have heard on Cyprus.

 

It is also unlikely to be the last we hear about the threat of capital controls, as investors fret over their positions in other weak eurozone countries.

If investors try to exit countries they see as potential candidates for the next bail-in, this could aggravate instead of soothing the crisis.

At a deeper level, creating a monetary firewall around Cyprus contradicts a basic tenet of the single market and one of the main reasons for having a single currency in the first place: free movement of capital across borders.

 

But despite the dangers, the Cyprus agreement marks a welcome sea change in the eurozone's approach to its problems.

The change of course makes it politically more feasible to deal with struggling economies which are too big to bail out, such as Italy and France, if they come under greater pressure.

 

The Cypriot precedent also marks a welcome step in another way - moral hazard.

Risk comes with reward but it also comes with potential loss.

Instead of being propped up by core eurozone countries' taxpayers, investors will have to face the consequences of their bad decisions.

 

The writer is the Warren T. Brookes Fellow at the Competitive Enterprise Institute, a Washington-based think tank

Greek government's steady steps to exit bailout programme

Growth predictions are positive, exports increasing, unemployment dropping and credit-ratings up, says the head of Greece's Syriza delegation to the European Parliament. Now the government in Athens is looking to design its own reform programme.

Analysis

We are not (yet) one people

Talks on the next EU budget will start on Friday. Brussels wants to do much more than before – and needs a lot more money. But arguing about funds won't be enough.

Intellectual property protection - the cure for Europe's ills

The European Commission is considering rolling back medical research incentives, on the faulty assumption they are somehow driving higher drug prices. But not only is that premise flawed – the proposed fix will do nothing to benefit ordinary health consumers.

News in Brief

  1. Report: EU to increase sanctions on Myanmar
  2. Juncker 'worried' by Italian elections
  3. EU migration to UK at lowest since 2012
  4. MEP Andrieu will chair parliament pesticide committee
  5. Juncker's right-hand man warns of 'institutional blockage'
  6. Greek parliament to open probe on PMs and EU commissioner
  7. May gathers Brexit ministers to hammer out UK position
  8. Tajani asks Juncker for all EMA Brexit relocation documents

Stakeholders' Highlights

  1. EPSUMovie Premiere: 'Up to The Last Drop' - 22 February, Brussels
  2. Aid & Trade LondonJoin Thousands of Stakeholders of the Global Aid Industry at Aid & Trade London
  3. Macedonian Human Rights Movement Int.European Free Alliance Joins MHRMI to End the Anti-Macedonian Name Negotiations
  4. Mission of China to the EUChina-EU Tourism Year to Promote Business and Mutual Ties
  5. European Jewish CongressAt “An End to Antisemitism!” Conference, Dr. Kantor Calls for Ambitious Solutions
  6. UNESDAA Year Ago UNESDA Members Pledged to Reduce Added Sugars in Soft Drinks by 10%
  7. International Partnership for Human RightsUzbekistan: Investigate Torture of Journalist
  8. CESICESI@Noon on ‘Digitalisation & Future of Work: Social Protection For All?’ - March 7
  9. UNICEFExecutive Director's Committment to Tackling Sexual Exploitation and Abuse of Children
  10. Nordic Council of MinistersState of the Nordic Region 2018: Facts, Figures and Rankings of the 74 Regions
  11. Mission of China to the EUDigital Economy Shaping China's Future, Over 30% of GDP
  12. Macedonian Human Rights Movement Int.Suing the Governments of Macedonia and Greece for Changing Macedonia's Name

Latest News

  1. Greek government's steady steps to exit bailout programme
  2. Frontex: Europe's new law enforcement agency?
  3. Poland and Greece broke EU environment laws, rules court
  4. Dutch MPs vote on ending 'Ukraine-type' referendums
  5. Corruption report: Hungary gets worse, Italy makes progress
  6. UK seeks flexible transition length after Brexit
  7. Commission defence of Barroso meeting leaves 'discrepancies'
  8. MEPs bar WMD and killer robots from new EU arms fund

Stakeholders' Highlights

  1. Dialogue PlatformBeyond the Errors in the War on Terror: How to Fight Global Militarism - 22 February
  2. Swedish EnterprisesHarnessing Globalization- at What Cost? Keynote Speaker Commissioner Malmström
  3. European Friends of ArmeniaSave The Date 28/02: “Nagorno-Karabakh & the EU: 1988-2018”
  4. European Heart NetworkSmart CAP is Triple Win for Economy, Environment and Health
  5. European Free AlllianceEFA Joined the Protest in Aiacciu to Solicit a Dialogue After the Elections
  6. EPSUDrinking Water Directive Step Forward but Human Right to Water Not Recognized
  7. European Gaming & Betting AssociationGambling Operators File Data Protection Complaint Against Payment Block in Norway
  8. European Jewish CongressEJC Expresses Deep Concern Over Proposed Holocaust Law in Poland
  9. CECEConstruction Industry Gets Together to Discuss the Digital Revolution @ the EU Industry Days
  10. Mission of China to the EUChina-EU Relations in the New Era
  11. European Free AlllianceEnd Discrimination of European Minorities - Sign the Minority Safepack Initiative
  12. Centre Maurits Coppieters“Diversity Shouldn’t Be Only a Slogan” Lorant Vincze (Fuen) Warns European Commission