Media Pushback against the Eurozone Omnishambles in Cyprus

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 26^th 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

Clive Crook hit the nail on the head in his Bloomberg article “Cyprus’Plan B is still a Disaster” (March 28^th 2013). His conclusion is spot-on:

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

Pawel Morski, with his typical no-holds-barred writing, assesses just why the Eurozone solution is a failure in policy and banking terms in his blog post Europe:No Need to Worry, the Fire’s Downstairs (27 March 2013):

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.

I often wonder how Mr. Dijsselbloem can look in the mirror every morning and complain about a Cyprus offshoretax haven, when The Netherlands has a far, far greater one and when this country is at the beginning of its own economic crash. 

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 26^th, 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.

The destructive “solution” reached by the Eurozone on Cyprus casts these divisions in stark relief. It is only a question of time before European banks and sovereigns pay the price.

© Philip Ammerman, 2013