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.

Italian elections: And now for the warnings from around Europe - stay the course, or else...

Responses to the extraordinary results of the Italian elections have started to come in from around the rest of Europe, the most interesting of which we include below. Predictably, an instant raft of warnings has come out  from Northern Europe and Brussels.

Kicking off is German Foreign Minister Guido Westerwelle who argued that:

“It is necessary for Italy – but also because Italy is so important – for the whole of Europe for a new strong and capable government to be formed as quickly as possible. The politically responsible people in Rome recognise that Italy needs a continuation of a policy of reform, of consolidation, one which is able to secure the confidence of the citizens and the markets.” 

If only the the "responsible people in Rome" were in charge of selecting a new PM. German Economy Minister Philipp Rösler also emphasised the need to stay the course, irrespective of government:

“I could have imagined a better outcome for the reformers in Italy. There is however no alternative to the previously adopted path of structural reforms.” 

As did the CDU/CSU’s parliamentary faction leader Michael Grosse-Brömer:

“The reform path of Monti has to be continued consequently.”

Not everyone in Germany agrees though, with SPD MP Klaus Barthel (very much on the left of the party) telling Handelsblatt that:

“Mrs Merkel delivered enough substance to Berlusconi’s nationalist slogans. Her advances to the teutons [i.e. traditional Germanic values] bring perhaps one or two votes [at home] but come back negatively a million times over from the neighbours.” 

Dutch Finance Minister and eurogroup head Jeroen Dijsselbloem told television broadcaster RTL-Z that:

"Having a stable government in Italy is important for Europe. In that respect, the outcome does not make us cheerful… I assume that, no matter what a new government in Italy looks like, it will live up to the agreements that have been made".

Over in Austria, Chancellor Werner Faymann gave a pretty cautious response:

“The euro remains stable even when in some countries it is not clear yet who will build the government.”

Meanwhile, over in France Finance Minister Pierre Moscovici said that while the result "creates problems", it would not undermine the single currency, while the Minister for Industrial Renewal, Arnaud Montebourg, claimed the result showed that "Italians do not agree with market imposed policies".

Belgian Foreign Minister Didier Reynders reacted as saying that:

"I fear for a deadlock during a certain period… If it now comes to a standstill this can be very dangerous, also for financial markets".

He should know a thing or two about political deadlocks...

Meanwhile, the European Commission (whose favoured candidate got a bit of a drubbing), also issued a hilariously contradictory response, claiming that "We clearly hear the message of concern expressed by Italian citizens”, while also arguing that Monti's reform and fiscal-consolidation agenda were necessary to "underpin everybody's confidence" in the Italian economy, and the Commission "expects compliance".

Right...

Luxembourg's Foreign Minister Jean Asselborn was clearly unhappy, arguing that:

"This is a scenario that no one had wished for... This is not just bad for Italy, but also a nightmare for Europe." 

Spanish Finance Minister Jose Manuel Garcia-Margallo was also alarmist, warning that there was "extreme concern" about the financial consequences, adding that "This is a jump to nowhere with positive consequences for nobody”.

Finally, the most forthright response has to go to Hans van Baalen, leader of Dutch Prime Minister Mark Rutte's VVD party in the European Parliament, who argued that:

“Italians must elect who they want to elect and must bear the consequences when they elect clowns."

From Amsterdam to Brussels with love?

Events may have conspired to prevent David Cameron from delivering his Europe speech in Amsterdam as originally planned but it has still managed to create political waves in the Netherlands.

It is rare for statements from foreign politicians to be the focus of parliamentary debates but last night the Dutch Parliament held a debate specifically on Cameron's speech. Halbe Zijlstra, the parliamentary faction leader of PM Mark Rutte’s VVD party argued that “Cameron’s speech is a more extensive version of the European chapter of the Dutch coalition agreement.”

The relevant section of the Dutch coalition agreement reads:

"The Netherlands asks the European Commission to inventarise, on the basis of subsidiarity, which policy areas can be transferred to national authorities and will put forward such proposals itself."

Indeed Rutte has himself quipped that what will take Cameron two years (i.e. the FCO's Balance of Competencies Review), will take the Dutch Cabinet 6-7 months. Last week, in a joint letter together with Finance Minister Jeroen Dijsselbloem, Rutte also reiterated the VVD/PvdA coalition’s desire for member states to have the right to opt out of individual EU policies, such as the Schengen zone and the eurozone, or from the EU altogether.

Yesterday, in an effort to apply pressure on the coalition in this area, Sybrand van Haersma Buma, the leader of the centrist Christian Democratic Party (currently in opposition but historically a party of government), claimed that “Europe is indulging too much in all kinds of over-detailed rules”, and put forward his party’s own detailed list of areas in which Brussels should not be involved:

- Nitrates Directive
- Air Quality Directive
- European Soil Framework Directive
- Home Energy Labels
- Freedom of the press
- Occupational Pensions Funds Directive
- Income limit for social housing rent
- Family reunification for immigrants (point system)
- Internet cookies regulations
- Public procurement of small building projects
- Maternity leave
- Ministry of Transport tests
- Female quotas on EU company boards

This is going much further than Cameron, who did not present a ‘shopping list', only mentioning general policy areas such as social and employment law and environmental legislation. Interestingly though, many of the above fall into those two categories. Specifically addressing Cameron's position, Buma said:

"He's right…let's go back to what Europe was originally all about...What I want is for several countries to decide together that [certain] matters can better be regulated domestically. A Europe à la carte isn't a good idea…We must get rid of the idea that if you want less Europe, it means you're against Europe from the start."

This is set to increase the pressure on the VVD-PvdA coalition which will try to agree in the coming months on their own list of policy areas which should be dealt with nationally, and which the government can use as the basis for any negotiations in Brussels. PvdA MP Michiel Servaes reacted by saying that Buma was only “following the line set out earlier by the cabinet", but that Buma's list was "a big leap" which ought to be carefully considered and discussed with other countries.

Meanwhile, on his Elsevier blog, Dutch Professor Afshin Ellian, a well-known political commentator, described Cameron's stance as "a third, more pragmatic way between europhobia and europhilia", while in a letter to NRC Handelsblad, nine prominent Dutch professors and academics argued that in order to bridge the gap between EU centralisation and EU citizens, the Netherlands should also have a referendum on its future in the EU, an option supported by 52% of Dutch citizens according to a recent opinion poll.

As we suggested in our analysis ahead of last September’s Dutch elections, in the medium to long term the Netherlands “could well be on the path to becoming a more assertive – and far more complicated – EU partner.”