The pushback by more informed or at least
more lucid commentators on the Eurozone’s failed bail-out of Cyprus continued
over the past two days.
Holman Jenkings, Wall Street Journal
Holman Jenkings identified both the
hypocrisy of Eurozone leaders and a major factor in the need to Cypriot bank
recapitalisation—the Greek government bond write-down--in the Wall Street
Journal in an article entitled “The World Needs a Cyprus”
(March 26th 2013):
Mixed in with every analysis of
Europe's latest blowup are disapproving asides about how Cyprus's banking
sector is many times the size of Cyprus's economy. If this is proof of
pathology, it extends to Britain, Germany, France, Austria, Spain, Luxembourg,
the Netherlands and others, all of whose GDP is a fraction of their banking
assets. Is the implication that banks should only serve the countries in which
they happen to be domiciled? Then we might as well kiss global trade and investment
goodbye.
Of course not. The bank-to-GDP
ratio becomes a pejorative only when international civil servants are casting
around for someone to bail out an inconveniently troubled bank when the
domiciling country can't afford to.
Cyprus turns out not to be an
island of special iniquity at all—just another instance of the European problem
of insolvent governments trying to prop up insolvent banks.
Cypriot banks were large holders
of Greek government debt—the same Greek government debt that the European Union
insisted would never be allowed to default, that the European Central Bank
blessed as collateral equal to the best in Europe. Then the EU reversed course
and insisted on a Greek default. Cypriot banks, already reeling from
business-loan losses due to the Greek depression prompted partly by the EU's
previous bailouts, faced calamitous write-downs.
Clive Crook, Bloomberg
Bailout
fatigue says: “The Cypriots got themselves into this mess, and they should get
themselves out. We’ll lend them a bit more, but only if we’re sure they’ll pay
us back.” Cyprus didn’t get itself into this mess. It joined the euro system in
2008 with low public debt and a clean bill of health from EU governments (back
then, not a word was said about shady Russians). Its banks are in trouble not
because they accepted too many overseas deposits but because they bought too
many Greek bonds -- an investment sanctified by international banking rules
(which called such investments riskless) that was destroyed by the EU’s
ham-fisted resolution of Greece’s threatened
default.
Europe’s
sense of “we’re all in this together” seems to have evaporated entirely. Now
one has to ask not merely what the euro is for, but what the EU itself is for.
Please refer back to these last two
sentences in the months and years that come. Speaking for myself, and looking
back at the EU’s role in Cyprus and Greece, I am surprised that more people are
not asking this question.
Pawel Morski, Blogger
To raise the issue of depositor bailins now – five
years ahead of schedule and with nothing in the way of a resolution regime
would show impressive hubris had the Cyprus operation gone well. It didn’t. It
was a complete disaster. If I had been in charge of European policy for the
last week, I’d like to think I’d be suicidally depressed. I would be stuck in
bed with a bottle of vodka, refusing to emerge unless finally coaxed out by
someone willing to lie that the Cypriots would be willing to forgive me. From
undermining the EUR100,000 deposit guarantee, to wiping out and freezing
business working capital, to hammering businesses ahead of the April VAT
payment, the execution alone is crammed with unforced errors A politically
stupid plan, rejected by an equally culpable Cypriot parliament, was replaced
with a worse one has inflicted massive, irretrievable destruction on the economy of Cyprus. There’s a great
deal to be said for commercial experience and gradual rollout. If Coca-Cola had
tested a new product that killed 10% of the focus group, it’s reasonable to
assume that they’d hesitate with the global rollout of Cyprus Cola. Instead, Mr
Dijsselbloem is clapping the dust off his hands, announcing that he thinks this
all went rather well, and looking to have another crack somewhere else. And it
appears he’s decided to start with further scaring already skittish large
depositors.
Nikos Malkoutzis, Kathimerini
One of
the most objective and most precise commentators about Greece and Cyprus, Nikos
Malkoutzis, had this to say in Kathimerini’s English edition (Cyprus:The Eurozone's Omnishambles Moment, March 26th, 2013):
The eurozone had no qualms
about pushing to the edge its only member to be involved in a war in the last
50 years, to have part of its territory occupied by a foreign army, to be still
suffering the effect of an intercommunal divide and to have a capital in which
passports must be shown to pass from one side to the other.
It is in this environment that Cyprus, a
semi-arid island that is surrounded by competing states, must survive. It has
taken years for Nicosia to negotiate agreements that would allow it access to
the island’s natural resources, but even now Turkey is threatening a “new crisis” if Cyprus seeks to collateralize future gas
revenues before there is a settlement on the island.
It is these challenges and the hope of being
able to gain a security and stability dividend that brought Cyprus to the
eurozone. For all its failings, it did not deserve the treatment it got. With
some horror, Cyprus has now realized that the euro area’s interpretation of its
central tenet of convergence has become warped. It is not the compact structure
many had envisioned. The fissures are now clear.
Ignoring the failure of banks all over Europe
over the past few years and the fact that finance was one of the few activities
Cyprus could turn to after the Turkish invasion in 1974, French Finance
Minister Pierre Moscovici refers to the country’s “casino” banking system.
It remains to be seen whether even one iota
of logic will enter into the next Eurozone decision. Something tells me it will
not. The problems of Italy, France, and Spain are far higher than those of the
smaller periphery.
The Eurozone decision has fundamentally
altered the equation of banking in the European Union. It has destroyed trust,
and will cause increasing insecurity in the months to come, complicating any
further attempts at solving the very real sovereign and banking problems which
exist.
Moreover, it is certain that by branding
Cyprus “non-systemically relevant”, Wolfgang Schauble has destroyed the
European currency and the very idea of European unity. He has shown that there
are three types of states in Europe:
·
The solvent debtors who are in
debt, but who’s credit rating permits them to borrow. This dwindling group is led
by Germany.
·
The insolvent debtors, such as
France, Italy and Spain, who are at the precipice and waiting to be pushed
over, but are too big to fail. Bailing out (or “bailing in”) the depositors of
banks in these countries is a non-starter, and so any bank recap will be done
at different terms from that of Cyprus.
·
Smaller, insolvent debtors, who
are “non-systemically relevant”, or against whom German public or political opinion harbours
an irrational grudge. Cyprus, Ireland and Greece feature prominently on this list.
It also appears that the only reason
Germany backed off over Ireland and Irish corporate income tax levels is
because these are too important to suppress. So perhaps Ireland is in a special
category of its own: the “we have you by the balls” or “we have powerful
friends” category. Not that Germany didn’t try, of course.
© Philip Ammerman, 2013
