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Cyprus. Been There, Seen That

A small country is on the verge of bankruptcy. It is so small that the amount of money needed to save it (17bn euros) amounts to less than 0.12 per cent of the eurozone GDP (no typos here. It is around 30 euros per European citizen).
Been there, seen that. Just three years ago in another small country, Greece. At the time, procrastination, self interest, ineptitude, unpreparedness, made the small problem become huge. And we are all still paying the bill. The Greek crisis management was so successful that our leaders are happily embarking in the same dynamics: improvised, dangerous, half-baked solutions, supposedly designed to avoid free riding (the protestant syndrome, once again) and in fact destabilizing the whole system.

There is no need for me to repeat what has been understood everywhere except, as usual, in Berlin, Frankfurt and Brussels: the tax on deposits breaks an implicit pact between governments and depositors, and fragilizes the banking systems of the whole periphery of the eurozone.

Here I just want to cite a few paragraphs from an excellent piece by Nick Malkoutzis: I just added some emphasis here and there:

what’s happened over the past few days and what’s likely to happen in the days and weeks to come has little to do with numbers. It is much more about perceptions. Even if a financial meltdown is averted in Cyprus this week, the decision to tax depositors there in order to reduce the eurozone and International Monetary Fund contribution to the island’s bailout has sown the seeds for a future eruption. The Eurogroup’s decision on Monday was a clear attempt to correct a mistake, while steadfastly refusing to admit one had been made. […]

The back-pedalling and hand-wringing has been an embarrassing spectacle but it has also laid bare the unedifying eurozone decision-making process and the lack of stature amongst its decision makers. The only two plausible interpretations for the Eurogroup approving such a self-destructive decision as taxing all bank deposits is a complete disregard for the consequences (doubtful) or an utter underestimation for the effect it would have (more plausible).

The latter suggests that one part of the eurozone is now completely out of step with the other, unable to understand its challenges, its concerns and, ultimately, its reality. Only a core group of decision makers with no sense of the fragile state of societies in the periphery, which have been battered by deepening economic crisis and uncertainty for months on end, would favour a policy that creates a precedent for governments to grab people’s savings without second thought. […]

even if savers in Greece, Spain, Portugal and Italy don’t panic, the idea of a deposit tax and the way it was adopted has released something poisonous in the air. It is difficult to see how these citizens will be able to trust the system – be it their governments, banks or eurozone partners – in the weeks to come. Belief in countries where the economy is contracting and unemployment growing is already vitreous and planting fears about a possible deposits grab in the future could shatter it completely.

Some will argue that the numbers involved in Cyprus are not that big, that small depositors will not lose a lot. This misses the point. Again, it’s not about the numbers, it’s about perceptions. Cypriot savers […] have witnessed supposed partners back their country and its new president into a corner with almost underworld-style ruthlessness. The European Central Bank, essentially their central bank, threatened to cut off funding to Cypriot lenders, to cause their collapse, which would bring economic disaster. In these unprecedented circumstances, what basis is there for a relationship of trust between Cypriots and the eurozone? […]

Others will argue that it is unfair to expect Germany or other eurozone taxpayers to keep footing the bill for bailing out member states. This also speaks of different perceptions of reality in the euro area. It ignores the fact that taxpayers in countries that have been bailed out are also paying a price. In fact, if one looks at the eurozone today and chooses any of its main economic indicators, it is abundantly clear who is footing the much higher cost for these rescue packages.

This emergence of parallel lives is the illness spreading to the heart of the single currency. How can the eurozone’s two parts understand each other when their realities are growing further apart? How can one side decide for the other when it’s not experiencing the depression, polarization and incertitude of its counterpart? In this two-tier construct, how can those on the upper deck assimilate the warnings from those below that the vessel is sinking, when their feet aren’t even wet?
That’s why Cyprus is about so much more than just numbers.

There is really very little to add to this. Except maybe that Nick Malkoutzis is even too nice to Germany. It is interesting to notice that most of the time, in battered countries, Germany’s banks are among the top creditors. In this particular case, the exposure of German banks is 5.8 billions, exactly the amount that the tax should levy. Certainly a coincidence, but still…

I remember, a few years back, Joe Stiglitz accusing the IMF and the American treasury of imposing unnecessary austerity to crisis countries, in Latin America and in East Asia, with the objective to buy time for their banks to minimize their losses (or often times to cash their profits). The resemblance with the current situation in Europe, is worrisome. Very.

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