Cyprus crisis - Panic puts EU project at risk

With bankruptcy hanging over Cyprus, the people of Ireland probably have greater understanding than most Europeans of the plight of the beleaguered citizens of the Mediterranean island.

Having witnessed the raid on pensions here in order to bail out the banks, and having been clobbered by a barrage of new taxes in a variety of guises, hard-pressed citizens of this country know the bitter reality of having money taken out of their pockets to undo the immense damage caused by out-of-control developers, greedy bankers, and feckless politicians.

However, sympathy will count for little given the cataclysmic scale of the crisis now besetting 800,000 Greek Cypriots as they face the prospect of a yet undecided percentage of their hard-earned savings being sucked out of their bank accounts.

Despite the denial of governments across Europe, there is an underlying fear among the general public that the Cyprus crisis could have a domino effect on an international scale, namely the fear of contagion. The unspoken question in people’s minds is this: if the Cypriot government can raid bank deposits, what’s to stop it happening here?

As far as Ireland is concerned, the risk of contagion has been firmly ruled out by the Government on the basis that its universal guarantee of personal bank deposits up to €100,000 remains in place. But if Cyprus were to fail, what then? What would the repercussion be for Greece or Italy, or any other European state? Unthinkable though it may be, the question must be confronted.

In stark contrast with the Irish scenario, where the ECB and the IMF refused to burn the bondholders, especially German interests who had invested heavily in the financial institutions of this country, the authorities in Europe and the IMF have not hesitated to hit Russian investors in Cyprus.

In terms of financial morality, if such a concept is not an oxymoron, the fundamental difference between Ireland and Cyprus is that the latter has long been regarded as a convenient money-laundering centre for the Russian mafia. Whether these allegations are ever proved there is no denying that Russia controls almost half the money currently on deposit in Cypriot banks.

That explains why the island’s finance minister was in Moscow yesterday, presumably under pressure not to hit Russian investments but also pleading for an extension of the five-year deadline on an existing loan of €2.5bn, which matures in 2016, and also for a reduction in the present 4.5% rate of interest.

Moscow continues to deny rumours that it would make more money available in exchange for a future stake in the large, if still undeveloped, offshore gas reserves around Cyprus. Arguably, however, if Russia were to gain control of those reserves, it would spell disaster for the small island national riven by visible Greek and Turkish hostility.

If anything is likely to concentrate minds in the present crisis, it is the looming danger that Cyprus might be forced to leave the EU. With this dire risk hanging over them, politicians locked in emergency talks following the parliament’s rejection of the bailout package of the EU and the IMF, face grave decisions.

Fears of contagion will not go away. With banks set to reopen next week, it would be hard to exaggerate the importance of resolving this deepening crisis — but dipping into ordinary people’s savings is not the answer.