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.