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Tuesday, March 19, 2013

All at sea – What does the 'No' vote mean for Cyprus and the eurozone?

Following the dramatic vote by the Cypriot parliament tonight to reject the bailout deal, here is our flash analysis of the situation:

The Cypriot parliament tonight voted against a bill to introduce a tax on bank deposits, in return for a €10bn bailout offered to the country by Germany and other eurozone governments. Not a single Cypriot MP voted for the deal. The structure of the tax in the bill is shown in the table below. The vote leaves Cyprus’ place in the eurozone hanging in the balance and threatens the escalation of the crisis to a new level, though the most likely outcome is that the Cypriot parliament votes a second time, on a revised deal.

Results of the vote (click to enlarge)
The governing party (DISY) abstained (with one member absent), while the junior coalition partner (DIKO) voted against – this signifies the huge political divisions at work in Cyprus. Even if a bailout deal is eventually approved the government’s position continues to look untenable.

What does the vote against the deposit levy mean?

As we have noted before, this has the potential to be a very serious twist in the eurozone crisis. Previously, Germany and the eurozone have stressed that Cyprus has no alternatives to the deposit levy. Now, all eurozone partners are forced back into difficult negotiations.

What timeline are Cyprus and the eurozone working on?

Cyprus will run out of cash on 3 June, when it has to repay a €1.4bn international bond. However, the decision will need to be taken long before that. Cypriot banks cannot stay closed for long but they cannot be reopened until a decision is taken, otherwise there will almost certainly be a deposit run. While people can reportedly withdraw up to €700 per day from ATMs, businesses, large and small, cannot function without banks being open. We would expect some decision would need to be taken by early next week before the lack of liquidity and lack of economic activity begins to severely harm the Cypriot economy.

Would the ECB really pull the plug on liquidity to Cypriot banks?


The key turning point here will be whether the ECB cuts off Cypriot banks. It is to some extent the vital difference between option 2 and 4, while keeping liquidity on could help facilitate option 1. To pull the plug on ELA the ECB needs a 2/3 majority (15 out of 23 votes) at the ECB Governing Council. Although the Bundesbank and maybe the Dutch and Finnish central banks might vote to turn off the ELA a 2/3 majority is not certain. In fact since Mario Draghi took over the ECB it has not been particularly hawkish. Bloomberg reports that the ECB said after the vote: “The ECB reaffirms its commitment to provide liquidity as needed within the existing rules”. The crisis has shown so far that the rules of the ECB are incredibly malleable, so what exactly that statement means is unclear, but the vote could certainly go either way.

Click here to read our analysis in full, including four potential scenarios.

17 comments:

Anonymous said...

Banks will never be able to liquidate their assets fast enough and even under ELA terms they do not have enough money good collateral when (not if) people start to empty their accounts which they will most certainly do.

So either Northern Europe was bluffing or it won't end well for the small island unless Putin pays the bill.

Anonymous said...

Hello, nice article.
I have a question. You write:
"To pull the plug on ELA the ECB needs a 2/3 majority (15 out of 23 votes) at the ECB Governing Council".
Are you sure about that requirement? Can you provide a reference to a relevant document?
In the Statute of the ECB (as published here), Article 10, paragraph 10.2 defines 21 number of votes (6 of the executive boards plus 15 allocated to the NCBs' governors in a rotation scheme).
Furthermore, towards the end of paragraph 10.2 it reads:
"Save as otherwise provided for in this Statute, the Governing Council shall act by a simple majority of the members having a voting right. In the event of a tie, the President shall have the casting vote.
In order for the Governing Council to vote, there shall be a quorum of two-thirds of the members having a voting right".
Based on that, the decision to pull the plug on ELA requires at most 11 votes. Not very far from 15 indeed, but might make the difference in an extreme situation.
Thank you
Chris N.

Jesper said...

I'm guessing that banks will be closed until they are recapitalised.

The money to recapitalise them will come from somewhere and it might take some time to agree where this somewhere is but until then...

Increase the safe amount and see how the number of demonstrators will be reduced.

I do understand that the decision might be a bit stressful as some of the ones who might lose a lot of money might not be very nice people and might have access to some very bad people:
http://www.bbc.co.uk/news/uk-21815214

Anonymous said...

What I wonder is how the eurozone and ECB can think a bank run by the major depositors is NOT the result of this, whether the deal goes through or not. Even if the tax goes through, there is a lingering risk that it might not be enough and the deposits are hit again. The risk may be small, but considering the negligible income those deposits generate with current interest rates, any risk makes the deposits an idiotic investment (and deposits above what is needed for daily use are investments whether they are thought so or not). Pretty much anything else would be better as at least the alternatives would provide profit that would correspond to the risk level.

The major investors, who, depending on the source, account between third and half of the deposits, are best able to move their money to alternative investments and most able to perceive the added risk this represents - I can't see them keeping their money in Cyprus after that kind of tax would come into effect. And if they do withdraw their money, it does far more damage to the banking sector than the money obtained from the tax helps.

And if the tax does not go through, the situation is even more obvious: there is a constant risk of further agreement that would include the bank tax, meaning that the analysis above applies with even more urgency.

No matter which of the options is selected, it seems to me that eurozone has managed by themselves to create a bank run by major depositors, which will be far worse for Cypriot banks than the current situation. And likely the small-to-medium depositors will join in to their maximum ability.

Rollo said...

Since it is Euro Membership that has allowed the Cyprus economy to destroy itself, there is surely only one cure: get out of the Euro. Do an Iceland; and be back on your feet with your own currency. Or be back on your knees for ever.

Open Europe blog team said...

@ Chris N

Thanks for your comment. The ECB GC is made up of the 17 Central Bank Governors and the 6 Executive Board Members (23 in total). The ECB's original statute is out of date on this point since the eurozone has expanded since it was written. The two thirds vote is widely reported, but it has been officially confirmed, for example, in the answer to a question in the European parliament:

http://www.europarl.europa.eu/document/activities/cont/201106/20110622ATT22293/20110622ATT22293EN.pdf

Denis Cooper said...

What does the No vote mean?

It probably means they will have to vote again, and if necessary again and again day after day ... until they vote Yes to something that the Germans will accept.

Not only would the Germans make sure that Cyprus was economically destroyed if it dared to leave the euro, making an example to terrify any others who might be tempted to follow suit, there are also the immense practical obstacles to reverting to the Cyprus pound in the available timescale.

The Cypriots would need outside help to do that, and while maybe Putin would be prepared to help you can be sure that Cameron would not; like Merkel he will continue to do whatever he can to preserve the present eurozone intact so that it can later expand and in the end swallow us up as well.

Cameron hasn't even supported the proposal from the Dutch Prime Minister that the EU treaties should be changed so that a country could leave the euro without also having to leave the EU altogether, and why is that?

Denis Cooper said...

Rollo, Cyprus cannot do an Iceland while it is still in the euro, and the German political elite would rather see Cyprus sink into the sea than ever allow it to leave the euro. Remember that Merkel has stated the goal that all EU member states join the euro - and not making any exception for the UK, or for Denmark - and it would be contrary to that geopolitical goal if any country, however small, was ever allowed to escape from the euro trap.

Chris N. said...

@Open Europe blog team
Thank you for the reply.
The ECB Statute that I linked is the one most recenty published on ECB's website (30.3.2010 version) so I guess is not that outdated.
The ECB GC is indeed made up of 17 NCB governors and 6 ECB EB members, but the votes seem to be 21 (at least according to article 10.2 of the ECB Statute). The 21 votes are allocated to the 23 GC members as follows: one vote to each ECB EB member (6 total) and the rest 15 to the 17 NCB governors by using a complex grouping/rotation scheme.

Anyway, the crucial issue of my post is if the requirement to block ELA is 2/3 of the GC votes or simple majority.
I did some search on this and it seems you are right, i.e. 2/3 are required, since the ELA is considered a NCB function which is outside the standard ESCB operations and thus is governed by Article 14.4 of the ECB Statute which provides a requirement of 2/3 of the GC votes to block an NCB's function. Relative document from Citi: http://www.willembuiter.com/ela.pdf

Thank you
Chris N.

Anonymous said...

the ECB did it twenty minutes ago ! (or rather said it won't provide more liquidities to cypriot banks if they were not solvable)

Anthony said...

By voting "no," Cyprus' legislature might have prevented a crisis (the country is still in crisis but the larger EU might avoid a run on banks crisis).

christina speight said...

This is the EU we are writing about. What is right is wrong, What makes economic sense is ignored. "No" votes are ignored because there is always a way to twist people's arms;grease their palms out of sight.
Therefore the second option will be the first step. Some cosmetic changes of no real significance will be paraded - enough to get the 19 abstainers plus 9 from the other parties on board. This will cause civil unrest.

What ought to happen is an immediate use of Article 50 and suffer 6 months economic chaos (and foreigners lose ALL their money) . After the 6 months Cyprus would start the long climb back to independent prosperity probably in partnership with Russia which would get preferential ,treatment because of the scale of Russian money involved.

Not a pretty picture and its a long tunnel but with light at the end of it.

Meanwhile I recommend Farage's advice to be found on http://youtu.be/a0OCcjz4lfU
"Get your money out while you can"

Andrew Smith said...

"NO" means they will be told to vote again.

jon livesey said...

It occurs to me that the really big big picture of the past five years is pretty simple.

One by one, the "small country big finance centres" have been picked off and put out of business.

Iceland, Ireland, Cyprus and arguably Greece has all been done in by having financial centres that were too large for their domestic economies. Meanwhile the City and New York are recovering.

The small country financial centres have found out what people always find out - if you play poker with a rich guy, he always wins.

Anonymous said...

The banksters ordered Cyprus' "government" to steal money from their citizens' bank accoutns and, so far, the"government" has refused.

That's the only relevant fact here.

There rest is noise.

Rik said...

@Christina
You are not very fair towards the EU in this particular case. For the rest I largely can agree with your conclusions on the lack of democracy in the EU.
The no vote of the Cypriots simply means that they want the other countries of the EZ to come up with 6 Bn. Which is not very democratic as well. If theyu want to be democratic let them ask the Finns, Germans, Dutch to have a referendum on the 10 Bn as well and we all know the outcome thereof.

The Cypriots simply want something that is not on the table the 2 options on the table are:
- stay in the EZ get 10 Bn assistance and come up with 6 Bn yourself; or
- say no and get nothing (after which a long range of easily predictable consequences will follow).
Sometimes life is a bitch (probably the Venus variety for Cyprus).

Imho it is a good thing that Southern governments start to realise that other people have to work for their money as well and that their populations start to realise that 6 Bns donot come simply out of an ATM. As well as if you have a rotten political system and vote in a bunch of incompetent corrupt garbage (what seems to be the Med standard), things might go wrong and at the end of the day you as voter/taxpayer have to pay for it.
The Southern standards of living are unaffordable and their businessmodel (not only in Cyprus) is bankrupt. It is 'marche ou crepe' time for a couple of years now and we have only seen how sorry they are for themselves, but hardly anything else. Take it on the chin, left or right for them to decide and move on.

international economics said...

I think they will do this again and again until they vote yes to something that the other nations will accept.