It's their headline, not mine!
The ‘rescue package’ designed to destroy the economy
As
outrage mounts over an unprecedented bank tax in Cyprus, Europe's
biggest economies, France and Germany, have put the blame for the
bank levy on Cyprus. Banks all over the country, meanwhile, will
remain shut pending parliament’s decision.
17
March, 2013
EVEN
though the haircut of bank deposits had been on the agenda of the EU
for more than a month now, featuring in Commission memos and being
openly discussed by European politicians, most of whom, refused to
rule it out, few people thought the Eurogroup would go ahead with it.
It was an idle threat, to force Cyprus privatise SGOs and increase
the corporate tax, was the prevailing view.
And
after all, President Anastasiades had emphatically declared in his
inauguration speech that “absolutely no reference to a haircut on
public debt or deposits will be tolerated,” adding that “such an
issue isn’t even up for discussion.” Finance Minister Michalis
Sarris made similarly reassuring statements, arguing that it would be
lunacy for the EU to impose such a measure because it would threaten
the euro system.
Germany
and the leaders of the Eurogroup opted for this lunacy, calculating
that Cyprus is too small and inconsequential for the haircut on its
bank deposits to cause contagion in the eurozone. Of course, the
markets could view the decision differently, perhaps not when they
open on Monday, but a few weeks later as it becomes apparent that not
even deposits in European banks are safe from raids by the Eurogroup.
It
is obvious from the statements made that Anastasiades was blackmailed
into accepting this euphemistically called ‘solidarity levy’. If
he did not accept it, the European Central Bank would not provide
Emergency Liquidity Assistance to the Cypriot banks, after the March
21 deadline (it had been extended by two months in January) and the
banks would have collapsed on the same day, with people losing much
bigger parts of their deposits than the seven to 10 per cent that
would be taken now.
Was
there an alternative for Anastasiades? It is difficult to say, given
the pressure for a political agreement by last Friday. All
indications are that our EU partners had taken their decision before
then and this was why they scheduled the Eurogroup meeting that would
discuss the bailout on a Friday night. The Cypriot banks would be
closed for three days during which all the steps for bailing in
deposits could be taken, and the banks could re-open normally on
Tuesday.
If
only things were so simple. It is highly unlikely it will be business
as usual at the banks on Tuesday as thousands of people will likely
turn up to withdraw their money. Big depositors would give
instructions for the transfer of money abroad and never again place
it in a Cypriot bank. What would be the capital needs of the banks
faced with a mass exodus of deposits, brought on by the Eurogroup
decision? Would the EU order another ‘solidarity levy’ in such a
case or would it declare Cyprus bankrupt, having dealt a fatal blow
to its financial services sector that is by far the biggest
contributor to GDP, and kick it out of the eurozone?
Yesterday’s
decision still needs to be approved by the House of Representatives,
which will meet today or tomorrow to approve the haircut bill.
Judging by the statements made by the political parties yesterday the
approval of the relevant bills is far from certain. Anastasiades was
to meet the party leaders last night in an effort to persuade them to
support the bills, but there are already many dissenting voices, not
to mention the public outcry, which is bound to affect the stand of
the parties.
One
deputy yesterday wondered whether it would be better to allow the two
banks that required liquidity assistance from the ECB to go under
instead of accepting the haircut. But the problem would not be
confined to these two banks as there is inter-dependence among the
banks and a bank run on two would spread to all. This will be
Anastasiades’ main argument in explaining why he agreed to the bail
in of deposits. The alternative would have been the collapse of the
banks, state bankruptcy and exit from the euro.
Under
the circumstances the president opted for the lesser of two evils,
even though we doubt there would be many people who would give him
credit for that. In effect, the EU offered a ‘rescue package’
that is designed to destroy rather than rescue what is left of the
Cyprus economy.
It’s truly refreshing to see that the real truth about the Republic of Cyprus is finally beginning to emerge for all to see.
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