Before any news may break late today, hopefully on an agreement between the EU and Cyprus, I am, for the first time, starting to feel uncomfortable on how this may end, for two signs of real danger start to emerge late in the process.
For a long time, I wasn’t too worried:
Six days ago now, on Cyprus: The State Giveth, the State Taketh Away, I wrote that the fact that depositholders are being asked to “contribute” is not in itself cause for panic. It should not be news to anyone that a system which has fed everyone for decades at the expense of the next generation is not to be trusted. People had a good run with someone else’s money for long enough, and will get over it. They will look after themselves more, instead of expecting the state to do that. Storm in a teacup sort of thing…
Four days ago, in Cyprus, Round Two, I pleaded again for calm, predicting that Cyprus wasn’t really playing chicken, but simply following a normal democratic process of deciding where to find the EUR 5.8bn, knowing all along they’d have to find it from domestic sources. Cyprus wasn’t trying to play with fire, but simply working hard to find the “optimal” mix of measures to unearth EUR 5.8bn from somewhere (I still believe this to be true).
Three days ago, in Hot or Not? Rumors of Cyprus’ Next Move, I reported Cyprus’ first proposal, a fund whose details were ludicrous. My prediction: Europe would reject it, and Cyprus will duly go back to the drawing board. Which is what happened. I was starting to feel rather smug about my powers of prediction, and therefore stayed calm.
Then, the EU came out with Breaking News: EU Statement on Cyprus, drawing a line in the sand on the issue of the EUR 5.8bn. Still, this was all predicted six days ago, in Cyprus: The State Giveth, the State Taketh Away. And finally, what really made me relax was the realization that it can’t get worse than a scenario where Laiki were to just go under. So we set off to do some calculations, in A Crazy Thought (?) on Cyprus, finding out that Cyprus can afford to honor a EUR 100,000 deposit guarantee and still charge only 21% of deposits beyond 100,000. It should never be possible to get any worse.
Well, in structure, my predictions seem to be right: The first 100,000 are safe, and the rest gets a haircut.
But two sinister elements are starting to emerge, and there is stuff we really, really need to watch out for if and when a new “agreement” gets out:
(1) It is rumoured that the large depositors will pay 25%. If so, the banks’ customers are paying more to save the bank than a Laiki bankruptcy would cost them. 25% breaks a limit. Cyprus can no longer claim the moral high ground of asserting that this haircut simply reflects the economic risk the depositors took by banking in Cyprus. 25% can only explained by including a price for political risk of doing business in the EU. Therefore, charging them more than 20% of deposits is a political game changer. What would be even worse (really, really watch out if this one occurs!) would be if Cyprus is singling out Laiki, and getting Laiki depositors to implicitly bail out depositors of other banks with their 25% levy, and depositors of other banks end up not paying. That would be additional gunpowder in this whole mess.
(2) A sinister David-vs-Goliath dynamic is emerging in that big EU countries aggressively blame the size of the banking system in Cyprus for the problem. This is factually wrong, and it is dangerous political opportunism. “To all those who say that we are strangling an entire people … Cyprus is a casino economy that was on the brink of bankruptcy,» French Finance Minister Pierre Moscovici told Canal Plus television. This and comments of others start to look as if there is a “big country” side of the debate, and Malta and Luxembourg’s statements show there is a “small country” side.
Blaming the problems on casino banking (does he mean investment banking? I don’t get it at all…) is hurtful to the Cypriot people, unjustified, and tremendously unhelpful, if not dangerous. I have said it before:
To fully appreciate what position the Cypriot politicians are in, we have to remind ourselves also of the fact that the Cypriot banks’ solvency problem stems in a very large part from a contribution to the Greek, “voluntary” debt restructuring which hit the Cypriot banks dis-proportionally. Cyprus is being treated like an errand child for having been recruited into an act of solidarity that hit Cyprus very much harder (on a per-GDP and per-capita basis) than any other European country. We will have to be honest with ourselves and Cyprus, if we want their politicians to be constructive, and recognize that they have already paid a disproportional share to save the Euro, when Greece was “saved”.
Watch out, over the next days, that we don’t end up like the picture at the top of this article, with a small player who loved his big friend being toyed with to death by his big buddy. Luxembourg and Malta are getting vocal about this. Fact is: The big countries also have to get their fiscal house in order, rather than blaming the small ones for being more efficient in some sectors.
According to Ekathimerini, a Greek newspaper, Cyprus has been “told” to bring its financial sector down to 3.5x GDP, the EU average. The Cypriot’s banks fault was to allow themselves being recruited to disproportionately step up in the aid of Greece. This is why Moscovici’s rhetoric is dangerous, for it leaves Cypriot banks and politicians with even less than the remaining amount of dignity they deserve. You can’t win cooperation in this manner.
Waiting and seeing how this plays out has unfortunately become a lot more exciting since tremendously unhelpful opportunist rhetoric has emerged, and since there appears to be a risk that one single bank’s depositors may be recruited beyond reasonable logical limits to help the entire banking system (of which not one, but at least two banks are effectively insolvent).