Contradictory EU deal on Cyprus

As predictable, the  ‘Troika’ of the EU, European Central Bank [ECB] and the International Monetary Fund [IMF] has done a deal to keep Cyprus in the eurozone.

The deal makes a nonsense of the crisis the Troika themselves precipitated in requiring Cyprus to raid the deposits of bank customers in order to pay €5.8 billion towards a bail-out of it banks that need €10 billion from the ECB. This was to take 6.7% from small deposits of under €100,000 and 9.6% from large deposits of over €100,000.

Cyprus proposed and it was accepted in negotiations yesterday that small depositors – with under €100,000 [£around 85,000] would be protected from this compulsory state heist, in return for a 20% raid on large deposits at the Bank of Cyprus, the country’s biggest lender and a 4% raid on deposits of similar size held in other Cypriot banks.

The problem here is Russia, Cyprus’s major investor and whose major financier’s either offshore or, in some cases, allegedly – launder their assets through Cyprus, mainly, apparently, in the Bank of Cyprus.

The Troika has insisted upon and got the closure of the Popular Bank of Cyprus – Laiki, the second largest lender; and its division into a ‘bad’ bank holding all doomed assets [this is like deep burial of irradiated material] and a ‘good’ bank whose assets will be transferred to the bank of Cyprus.

This will cost jobs and financial losses at a level President Anastasiades had been keen to avoid.

While deposits of under €100,000 will be protected from seizure; larger deposits in Laiki will be lost in their entirety.

This is not a contribution to the bail-out but is a firewall against rolling collapse.

The policy contradiction is in the matter of the contribution from bank deposits of over €100,000 in the Bank of Cyprus.

That has simply been left to be decided at some unspecified but presumably not too far distant time.

Yet it was the principle of enforced contributions from deposits that has accelerated this crisis to an unprecedented level and undermined trust in banks across Europe.

We read the deal as announced and this anomaly as effectively meaning that the Troika is dealing with the potential bankruptcy of Cyprus conventionally through restructuring of failing bank; setting aside, at least for the moment, the issue of raiding bank deposits.

This looks like little other than a retreat from a self-inflicted mess of hugely damaging proportions, masked by the pain in Cyprus that will result from the restructuring now agreed.

It is too little far too late.

Everyone now knows that, if they see fit, the Troika is prepared to insist upon compulsory raids on savings  – from taxed income – to contribute to bailing-out a mess made by high risk-taking banks, whose activities will also damage those very savers and their country in many other ways.

The EU cannot put this one back in the box. It’s out there. Bank deposits are no longer safe from imposed state raids.

The Cyprus deal is not going to the Cyprus Parliament for ratification. The island now face a deep recession but the eurozone limps on for a while longer – the real name of the game.

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