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Wednesday, March 27, 2013

The Cypriot bailout: A catalogue of farce

Having followed the twists and turns of the Cypriot bailout for the last couple of weeks we’ve been struck by how – even by the standards of eurozone crisis management – it has been spectacularly mishandled often with farcical results (FAZ's Klaus-Dieter Frankenberger described it as "hara-kiri crisis management"). Here's our highlights:

Sunday 17th – The blame game begins 
The tentative agreement between Cyprus and its creditors was only a day old when the different parties tried to shift the blame for the politically toxic levy on small insured bank deposits. German Finance Minister Wolfgang Schäuble kicked it all off by seeking to distance the German government from the decision by blaming the Cypriot government, the ECB and Commission, which in turn prompted a series of denials from everyone else. The suggestion was that it was actually the Cypriot government who opted to include small savers in order to avoid hitting wealthier depositors (mainly Russians) even harder. The blame game continued throughout the week.

Monday 18th – Gazprom steps in with an alternative bailout? 
Following the acrimony over the agreement, it was reported that Russian energy giant Gazprom approached the Cypriot government the same weekend with an offer to fund the €10bn necessary to restructure the Cypriot banking sector in exchange for rights to Cypriot gas reserves. Although the story fitted in nicely with the geo-political tension narrative, it was quickly denied. Despite that, the rumours of a Russian bailout continued to be batted around for the entire week - none of which proved to be true.

Tuesday 19th (Afternoon) – Cypriot Finance Minster’s non-resignation 
On Tuesday Cypriot Finance Minister Michalis Sarris flew out to Moscow to see if he could secure more favourable terms than those offered by the eurozone. While he was there, rumours began to fly around on twitter, seemingly substantiated by respectable news outlets like Kathimerini Cyprus, that he had resigned as he no longer enjoyed the confidence of President Nicos Anastasiades. Confusingly, further rumours began to circulate that Anastasiades had rejected his resignation. However Sarris later told Reuters that there was “no truth” to the original rumours.

Tuesday 19th (Evening) - Cypriot Parliament rejects bailout deal after days of negotiation
Originally scheduled for Monday, the Cypriot parliament’s vote on the deal negotiated by the eurozone finally took place on Tuesday evening after attempts at further postponement failed. The parliament voted overwhelmingly to reject the deal, with not a single MP voting in favour. Of course, the democratic vote is itself not the issue but it was farcical that the deal was pursued for four days before being put to a vote when it was clear it would need to be altered again. Not exactly effective crisis management, especially since the 'No' vote raised questions over Cyprus' place in the euro.

Thursday 21st - Cypriot ‘Plan B’ shot down immediately
Following the vote above, Cypriot officials sought to cobble together a ‘Plan B’ to keep their chances of a eurozone bailout alive. Options on the table included the creation of a solidarity fund securitised with social security fund reserves, state assets, Church property and expected natural gas revenues. However this was shot down immediately by the troika as it was feared that it would not lower Cypriot debt to sustainable levels. Adding to the farce, the WSJ reports that Sarris (still in Moscow at this point) wasn't returning calls from his eurozone peers. By Friday, the deposit levy was back on the table bringing negotiations full circle.

Saturday 23rd – Russia to retaliate by freezing European assets? 
With it looking inevitable that Russian interests would be badly burned however the Cypriot bailout was finally structured, the Guardian reported that former Kremlin advisor Alexander Nekrassov warned that “Moscow will be looking for ways to punish the EU. There are a number of large German companies operating in Russia. You could possibly look at freezing assets or taxing assets”. As usual, this was later denied.

Sunday 24th – Infighting within the troika
The negotiations also saw severe strains developing between different members of the EU-ECB-IMF troika with the latter (with German support) allegedly resisting attempts by the Commission to water down Cyprus’ own €5.8bn contribution to the bailout. The FT cites an IMF official as saying that “The commission keeps trying to work with [Cypriot leaders], to help them put something on the table, even if that something doesn’t add up”, although another source adds that the two sides have “kissed and made up”.

Sunday 24th – Cypriot President's resignation bluff backfires 
Unlike the non-resignation of the Cypriot Finance Minister, this really happened. Reuters cites a senior official as saying that this took place during a particularly heated exchange concerning the plans to restructure the country’s banking sector and the WSJ reports that at that point Anastasiades was calmly told by other leaders "to pack up and leave" if he wasn't ready to cooperate (he didn't).

Monday 25th (Afternoon) - Dijsselbloem's accidental honesty makes markets plunge 
You’d have been forgiven for thinking that with a deal finally having been hammered out, the situation would have settled down a bit. However, Eurogroup chief Joroen Dijsselbloem had other ideas, suggesting in an interview with Reuters and the FT that the Cypriot deal could become a template for any subsequent bailouts and bank restructuring in the eurozone. This saw markets around the world tumble for fear of further write-downs, particularly in Spain and Italy. Dijsselbloem then looked to row back from his comments reiterating that Cyprus was “specific” and that he was not even aware of the English word ‘template’ which had been widely attributed to him - although given this specific word was used by the interviewers we're not sure we entirely believe him. His comments got a mixed reaction - he was backed by the Commission and Finnish PM Jyrki Katainen - who said 'bail-ins' should be part of the eurozone's crisis management strategy - but ECB Executive Board member Benoit Coeure said that he had been "wrong" to suggest this.

Monday 25th (Evening) - Banks to stay closed even longer
It was originally announced that Cypriot banks would re-open on Tuesday with the exception of the two biggest - Bank of Cyprus and Laiki -which would re-open on Thursday. However, later that day, Cypriot authorities changed their minds and announced that all banks would remain closed until Thursday (this was just the latest of the many extensions to the bank holiday and the numerous other delays throughout the week).

Given that the final outcome of all of this was a plan which will likely slam the Cypriot economy and significantly reduce the standard of living (albeit while reducing moral hazard somewhat), it is hard to see the whole week other than an array of botched diplomacy and naive negotiations.


Rollo said...

no comment...

christina speight said...

This was entirely caused by German adamant refusal to even contemplate the obvious solution beneficial to ALL - that Cyprus leave the eirozone (alright via leaving the EU and being readmitted after Art 50's obligatory negotiations reached such an agreed conclusion)

But it is all or nothing with the Germans raking it in from fugitive deposits being accepted at virtually no interest! They have bullied everyone else into doing what Germany tells them to do and the whining that nobody loves them. It feels like 1914 must have felt and 1938 definitely was.

Rik said...

I really hope that your Dave would have used such an event as you propose to put the reneg on the table (and firmly).
And do you think Spain would have accepted that seen Catalunya?

Seen the mess that is the legal situation/set up this simply doesnot look a possible alternative. Nothing to do with Germany. Impossible to have 27 countries agree on it anyway not even to mention on such short notice.

Rik said...

Wonder how democratic deficit no3482 will work out. Not even having a vote in parliament. But maybe that was a wish from the Cypriots? Allthough something that always has a considerable potential to backfire, like the original <100K bail in.

Probably Dijsselbloem used the interview to distract the general public from that point. If it becomes difficult you have to distract is one of his most famous quotes.

Technically a much cleaner solution. No tax means no taxtreaties applicable (providing they structure things right (a big if of course with these amateurs)) as well as taxholiday agreements standing in the way (apparently some have a no tax (other) tax clause in them I was told).

Also clear to see that as far as burning political capital goes it doesnot really matter if it is 10 or 100 Bn for the public in general.
Likely that will become different when actual payments have to be made and subsequently cuts have to take place, up North in particular, to cough up the cash. Grossmutter Schultz's or Oma Jansen's wheelchair iso beechbumsubsidy (or whatever it will be called at that time).
But Dijsselbloom will probably find another distraction at that time something like the Euro-Zone will be dissolved or if states cannot guarantee we carpet the place.

Anonymous said...


What on earth are you on about?

The lesskn is that Germany seem to change the rules of the game whenever it suits them. The EU have proven to have no clue whatsoever when it comes to finance yet they are making more rules for London's financial services by the day.

The word 'Europe' is now synonymous with fraud, a lack of democracy and self-interest at a sovereign level. I am sure that it must make everyone sick. The EU is living proff that clowns can and do run the world.

I hate what the EU/EZ have done to Europe and cannot wait for the day of reckoning when they all go on trial and are given life sentences.

jon livesey said...

The idea that any of this happened "at short notice" is very naive. Cyprus asked for a bailout last June.

We have all simply been treated to a Kabuki show whose outcome was pre-determined by German domestic poltics and its approaching elections.

I think we keep forgetting that all this sturm and drang was over $7bn. That's about the UK's annual net contribution to the EU budget.

Cyprus has been made an example of so that Merkel can win the next election.

Jesper said...

When did the Cypriotic banks become insolvent?

Were the banks trading for a long time while being insolvent? Are there some laws regarding trading while being insolvent which could apply in Cyprus? Reckless trading?

Stock exchanges might have some rules regarding keeping material information from investors. What, if any, responsibilities does the board of directors have in Cypriotic companies? Can the board be sued if evidence is found that they didn't disclose material information?

Gosporttory said...

With a bit of luck, little Cyprus may begin the inevitable implosion of the entire EU Gravy Train corrupt undemocratic fiasco.

David Barneby said...

Why don't you come clean and give a real name to yourself ?

I too hate the EU/EZ and consider they have destroyed the Europe that I loved !!! I can see no benefits !!! Those that others see are heavily outweighed by negatives that we could all do without .

Cristina Speight you've got the measure of it ; whether 1914 or 1938 , Germany is swinging the lead , are we seeing a possibility of WWIII ?

EU leaders really don't know what they're doing , scrambling about trying to keep the EU afloat when in truth it is damaged beyond repair and will surely lose the hearts of the people , if it has not already done so .