Stakes couldn’t be higher

Picture: AFP/Getty Images

Cypriots are struggling through a sorry saga while their leaders figure out a solution, even though potential EU and Russian saviours are keeping their cards hidden. It’s a situation Europe is all too familiar with, says Kyran Fitzgerald

Ordinary Cypriots are living through a nightmare as they join lengthy queues at rapidly emptying bank machines and wonder whether their savings will still be extant come next week.

The return, empty- handed, of finance minister Michael Sarris from a visit to Moscow leaves the Cypriot government with few options as it heads into crunch weekend negotiations with Europe’s leadership.

If the talks fail, it would appear the ECB will withdraw its support for the Cypriot banking system, leading to their collapse, a wipeout of depositors, and the departure of Cyprus from the eurozone.

Brussels and Frankfurt appear to believe it is now time to make an example of the island, which has operated, in part at least, as a bolthole for hot money, much of it Russian. However, it is worth mentioning that the trigger for the crisis was the meltdown in Greece, which left Cypriot banks holding Greek government bonds, rendered worthless following that country’s restructuring.

After 18 months of negotiations between the Cypriot government and Europe, led by Wolfgang Schäuble, the German finance minister, talks have reached this impasse.

By the end of February — if not long before — it had become clear that Cyprus would require an EU/IMF bailout along the lines of those introduced in Greece, Ireland, and Portugal.

In the case of Cyprus, there was an additional problem. Its banking sector represents more than eight times its GDP, an exposure of Icelandic proportions.

However, as a member of the eurozone, the Cypriots could not take a leaf out of the book of their friends in Reykjavik by simply telling large overseas depositors and bondholders to go take a hike.

The EU/ECB/IMF made clear that they could not come up with all of the €17bn deemed necessary to keep Cyprus afloat — if they did provide a loan of this scale, the debt-to-GDP ratio in Cyprus at over 150% of national output would be simply unsustainable.

Berlin and Frankfurt have offered around €10bn, with the remainder being provided by the Cypriots, in part through a burning of depositors.

The putative loan-givers did not, it seems, reckon that the Cypriot authorities would opt to levy small depositors as well as large, provoking huge anger on the island as well as beyond.

The shock proposed imposition of a levy of between 7% and 10% on Cypriot bank depositors, many of them Russian, caused big ripples.

The view, now widely accepted, is that a line has been crossed and that somehow it was sanctioned by Berlin and other wealthier EU countries, unwilling to put taxpayers’ money on the line to bail out their southern counterparts.

Some have wondered why the Cypriot government chose to risk the wrath of its own people by hitting small depositors.

The answer, it seems, is that they are afraid of scaring away large depositors who form the backbone of the financial sector and much of the economy.

All of this is history. The country’s 56-strong parliament voted down the proposed bill, forcing the government back to the drawing board.

It was a humiliating rebuff to the country’s new president, Nicos Anastasiades.

The finance minister, a true Aunt Sally figure, was dispatched to Moscow in search of backing. He promised to remain there until a deal was secured.

It was not. It seems that Russian president Vladimir Putin passed up the chance to gain strategic advantage amid concern about the likely financial exposures involved, though interestingly, his prime minister rowed back somewhat on the finance minister’s categorical statement.

Perhaps the Russians, like Angela Merkel, are simply playing their poker hand.

The betting is now on the Cypriot government passing a law this weekend to facilitate receiverships at the country’s two largest banks, with larger depositors faced with a shaving of around 40%. Widespread staff layoffs are contemplated, along with a harsh fiscal tightening.

That said, it is not yet clear that lawmakers in Cyprus realise the gravity of their situation.

It is not inconceivable that Cyprus could be cut adrift and on its way out of the euro next week, with Cypriot pounds back in circulation, hyperinflation a reality, and euro in use in a revived black market.

Such a scenario is surely too grim to contemplate, not least because of what it would do for confidence in the markets.

But even if a deal is cobbled together, real damage has been done to trust and confidence across the eurozone.

Small savers cannot feel entirely secure any longer, while holders of larger deposits will be looking much more closely at maintaining deposits in other larger eurozone countries.

Concerns centre on Spain and Portugal, in particular. Italy, and even Ireland, have been mentioned in London circles, though the Government here has been quick to assure people that depositors covered by the €100,000 guarantee will certainly not have their feathers plucked by means of a levy.

Ireland may no longer be at the epicentre of the euro crisis following three years of austerity, restruct-uring, deleveraging, and sustained export growth, but there are few grounds for complacency, whatever about the soothing noises emanating from Merrion St.

As RTÉ’s David Murphy has observed, cash-rich corporates will be thinking twice about making large deposits in eurozone banks, including those in Ireland.

The whole saga has the potential to set back efforts to repair confidence in the Irish banking sector while prolonging our reliance on the ECB, to which we are still beholden to the tune of almost €90bn (that they are also beholden to us is something for another day).

Doubts about the very future of the eurozone, largely put to bed thanks to ECB president Mario Draghi, have now resurfaced with a vengeance. At the very least, it would appear that the prospect of the eurozone re-emerging from recession later this year has been put on the back burner.

This, in turn, puts a question mark over prospects of renewed growth in exports of Irish goods in particular.

Spare a thought, however, for Nicos Anastasiades, the recently elected president and current favourite to be voted ‘Europe’s most hapless politician’, a man who swept to power on a promise that all Cypriot depositors would be protected.

He becomes the latest potentate to find himself roasted on the eurozone political and economic funeral pyre. He is unlikely to be the last.

CV: Nicos Anastasiades

- Born: 1946.
- Education: Graduate of University of Athens. Postgraduate degree, shipping law, University of London.
- Career: Lawyer.
1981: Elected to parliament.
1997: Leader, Democratic Rally Party.
2013: President of Cyprus.
- Family: Married.

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