Cyprus deal reflects EU's anger with 'casino economies'

Cyprus deal reflects EU's anger with 'casino economies'

Researchers say that the crisis will contribute to financial fears around Europe

The Cyprus deal announced last Sunday, another late-night showdown in Brussels that looked like a shambles, laid down some important new markers for the future of the European Union and the countries that use the euro.

The big European powers used the crisis to establish some new, more punitive rules for countries needing emergency aid.

First, there will be no more bailouts without bail-ins, meaning investors and even some depositors in banks that get in trouble may have to pay at least part of the price of rescuing them. European leaders recognise that their voters will no longer tolerate having to pay to save other countries’ irresponsible banks and their clients.

Second, there is a strong message that if the eurozone is going to work, with a banking union that has credibility, there will be no more ‘casino economies,’ little islands like Cyprus with banking sectors many times larger than their gross domestic product, that do not follow the rules and make everyone else vulnerable.

The package for Cyprus marks a victory, of sorts, for Germany and other hard-liners inside the eurozone that are determined to signal that banks and countries will be rescued only when they do penance for their past mismanagement, as determined by their rescuers. Supporters say this will preserve public support for the euro and encourage greater prudence down the road.

Critics, however, say the Cyprus bailout was so haphazardly handled that it underscored the chaotic nature of European decision-making more than it sent an unmistakable message about a new approach to bailouts.

Many economists also say eurozone countries may have done themselves further harm by threatening to confiscate part of the savings of depositors in Cypriot banks. If large investors and even ordinary savers worry about a seizure of their assets whenever a bank gets in trouble, the private sector may grow more reluctant to steer funds towards troubled financial institutions, putting more pressure on the European Central Bank to pump in rescue funds.

Some researchers have also forecast that the Cyprus crisis will contribute to financial fears around Europe, which could end up costing Europeans far more in lost growth than they gain in savings from reducing the cost of bailing out Cypriot banks.
On Monday, after Reuters quoted Jeroen Dijsselbloem, the new head of the Eurogroup of finance ministers, as saying the Cyprus bailout could be a new template for resolving regional banking problems, stock markets in Europe and around the world dropped and the value of the euro dipped as well, giving up early gains. That appeared to reflect investor pessimism that requiring savers to bail out troubled banks would prove a good model for eurozone rescues.

The Cyprus crisis elicited a strong and uncompromising response partly for geostrategic reasons, specifically because the role of Russian money, laundered and otherwise, is becoming a major consideration. European Union officials, for example, speak privately of their deep suspicion that European position papers about negotiations with Russia were regularly leaked to Moscow from Cyprus, and European countries that are Nato members are unhappy with the laxity with which Cyprus deals with Russian spying and the way it holds up European cooperation with the alliance over Turkey.

Germany and other countries of northern Europe, either former Soviet colonies like the Baltic nations or sometimes anxious neighbours, like Finland, were not going to try to sell to their voters the idea of bailing out Russian oligarchs – and Russian officials with secret bank accounts.

Toomas Hendrik Ilves, the president of Estonia, said he and his European colleagues were shocked to hear Cypriot officials say, “Brussels is far away, and Russia is a good friend.”

Lost sympathy

Cyprus also lost sympathy by trying to protect depositors with more than 100,000 euros from too high a contribution – considered an effort to protect Russian money, for the most part – while proposing to tax depositors with accounts under that figure, which are supposed to be insured.

“It meant only that they were in bed with the Russians,” said Ilves, who is blunter than most officials. “And German voters, let alone Estonians, were not going to accept bailing out Russian oligarchs.”

Politically, he said, “you can talk about solidarity with the poor Greeks, and that’s hard enough, but solidarity with thugs and money launderers is a different matter.” However tiny, Cyprus also appeared to call into question, once again, the sustainability of the euro as a common currency for so many disparate economies.

Just after the euro seemed to have moved past its real crisis point – with the European Central Bank vowing to defend the currency, institutional changes in the works and countries like Greece, Portugal and Ireland making significant improvements – the political confusion in Italy and the Cyprus crisis appeared very damaging.

“The image of mastery, hard won, looks like it’s taking a big hit,” a senior eurozone cabinet minister said. “It looked again like the gang that couldn’t shoot straight.” The president of the European Parliament, Martin Schulz, a German Socialist, said that “the way the Cyprus case was handled is no way to do business in the EU,” and that the negotiations “lacked transparency, democratic accountability and were badly communicated.”

The confusion was made worse by the inexperience in their jobs of Dijsselbloem, who took over as leader of the Eurogroup of finance ministers two months ago, and the new Cypriot president, Nicos Anastasiades, in office less than a month.

There were also tensions between the International Monetary Fund and the European Commission, the permanent bureaucracy of the European Union, which together with the European Central Bank make up the troika that negotiates and oversees bailouts. The fund has pressed countries like Cyprus to limit debt and force losses on investors. The European Commission has tended to show greater concern about the impact that aggressive, penalty-strewn bailout packages would end up having on other economies within the eurozone.

But those advocating a tougher approach had significant support from German Chancellor Angela Merkel, who is in the middle of an election campaign, and northern Europeans who are generally fed up with countries that do not follow the rules and expect to get bailed out in any case.

“The German intention was to break up that cartel of Cyprus,” the minister said. “You can’t have a banking system seven times larger than your GDP.” And the European Central Bank, by supporting an ultimatum to the Cypriots, appeared happy to go along.
Alexander Stubb, Finland’s minister for European affairs and foreign trade, said that “now we’re bailing in as well as bailing out, to decouple the bank from the sovereign and move towards a banking union.” Banks are not simply vaults but risky institutions in which clients are also responsible, he said. “The message is that the private investor must take a hit. It’s a new principle and a good one.”

But while optimists hail a new model for bailouts, others are wary. Cyprus is almost certain to follow Greece into a deep recession or depression, with surging unemployment, that will take a generation or more to overcome. And the possibility of spreading financial unease and wariness of parking money in troubled banks could exact a toll on the region’s stability in coming months or years.