EU, ECB and IMF play high risk game with Cyprus

The so-called ‘Troika’ – ironically the Russian word for a triumvirate – of the EU, the  European Central Bank [ECB] and the International Monetary Fund [IMF] are engaged in a high risk game with Cyprus over a deal that would grease the wheels of the bailout of the troubled Cypriot banks.

President Nicos Anastasiades presented his parliament’s agreed plan for raising the €5.8 billion these authorities are demanding as the Cyprus contribution  – the ‘bail-in’ – to its own rescue, which will need around €10 billion from the ECB.

This plan appears to be the exemption of modest savings from raids to contribute to the bail-in, with the brunt of the raid  – 20% – laid on deposits of over €100,000 at the Bank of Cyprus. Deposits of similar size in other Cypriot banks would be levied at 4%.

This discriminates massively against depositors with the major bank – with the majority of these thought to be Russians offshoring to protect and grow their assets. They would be given shares in the Bank of Cyprus in exchange for the 20% heist. That exchange is unlikely to prove much of an anaesthetic.

One of the risks of this action – to which the Troika apparently agree – is that Russia is unlikely to accept passively this hit on its financial high fliers, who have influence.

The trouble for President Anastasiades is while the Troika accept this plan, it does not go far enough for them.

They are said to be insisting that the second biggest bank in Cyprus, the Popular Bank of Cyprus, known colloquially as Laiki, be restructured. This would see it become two banks, with one of them the repository for all of the bad debt; and the other the high street bank the protected from the potential impact of that debt’s failure.

But this will half the size of the bank and see jobs lost at a time of severe economic austerity for the country.

Cyprus is already nervous that the hit on the Russian investors will see them largely pull out of Cyprus, with a disastrous impact on the national economy. That is highly probable.

The President of Cyprus has apparently threatened his resignation at several points during the ongoing discussions with the Troika – a stand off which has seen the planned meeting of EU foreign ministers delayed by four hours. That meeting has  now begun and ministers are preparing for a long night.

Cyprus may be forced to deliver more than the people will accept – and there is already a strongly anti-EU feeling in the country, following the breach of trust in the insistence by the Troika that the Cypriot banks raid their customers deposits. It may be the knowledge of that volatility that has led to the repeated resignation threats by the President during today’s negotiations.

The axis of rampant unpopularity and the displeasure of his country’s biggest external investor, Russia, may be too much for the President to contemplate with any comfort.

The possibility of the failure of negotiations, with the withdrawal tomorrow of financial support for the Cypriot banks and with Cyprus forced to leave the euro, devalue and introduce its own currency, has been talked up today in what we read as as deliberate pressure being applied to the Cypriot negotiating team.

The likelihood is that some deal will be cobbled together to bail out the country’s banks – but the internal reaction is unpredictable where the price to be paid by the EU is certain.

The action by the EU and the ECB in trying to compel a country to take, by force, hefty percentages of savings from ordinary Cypriots as well as from Russian oligarchs – which is also taking from personal reserves of already taxed income – may not yet have made people across Europe wave goodbye to any trust in their banks.

But it has – rightly – made everyone in an EU member state suspicious and watchful. Banks in the eurozone have seen reserves fall in the days since this move although not in the plummeting pattern that was possible.

However, it is highly unlikely that very many who have not yet moved their money, are quietly exploring their options and thinking about strategic and proactive protection against a similar heist attempt, should their own state’s economy look like hitting the buffers.

In Cyprus, the two biggest banks who will be at the centre, one way or another, of any rescue plan – the Bank of Cyprus and Laiki, have announced today a reduction by over 50% of the amount of euros that can be withdrawn from ATL’s in the period before the banks reopen. The limit is now, for these banks, set at €100. It was around €260.

This episode is certain to prove very expensive for the future of the euro and of the eurozone. Who is not thinking carefully about their own protection? We should be.

The Bank of England’s current Deputy Governor, Paul Tucker, has already floated the notion of negative interest on savings to make people spend what they need to keep. This is no different in essence or in practice from the Troika’s proposal to heist the savings of the Cypriots.

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