Cyprus banks under scrutiny

Eurozone’s support to Cyprus is not on the agenda of todays’ Eurogroup, the council of the 17 Eurozone ministers of Finance, nor will this issue be discussed in tomorrows’ Ecofin, the council of the 27 EU economic ministers. This is a clear sign that there will not be any decision on this problem until the general election in the island  next month. The divided island’s democracy has asked for Eurozone’s help to counter its financial woes. The problems of Cyprus stared when the Greek sovereign debt bonds held by the Cypriot banks had a deep haircut of around 50% of nominal values in March 2012. On top of that what was left of those Greek bonds had to be purchased by the issuer the Greek State, for around 30% of nominal their nominal values. The huge gap left in Cypriot banks’ capital of almost €9 billion has now to be covered by the Eurozone financial aid mechanisms, the European Financial Stability Facility and the European Stability Mechanism. The sums involved surpass the tiny economy’s abilities and the Nicosia government had to call in the Brussels and the International Monetary Fund “cavalry”. As a result the country will be under auditing in order to receive the financial help of the “troika” of the European Union, the European Central Bank and the IMF. The procedure will be approximately the same as in the cases of Greece, Portugal and Ireland currently supported and directed in their financial affairs and structural reform by this troika. Cypriot banks This development however revealed also the shortcomings of the state finance and now the entire package, Cypriot banks and government finance, have to be reshaped according to the demands of the troika. The case of Cyprus resembles more the one of Ireland, rather than Greece or Portugal, with the banks being at the centre and the source of the problem. It differs however from the Irish case because reportedly the Cypriot banking system was used by Russian oligarchs to park their spare cash, without questions asked. According to various sources that kind of money may be anything around €15 billion. Given all that, tax paying citizens in countries like Germany (the largest financial contributor of the troika) has being informed by media reports that their tax money will be used trough Eurozone’s help to Cyprus, to “save Russian black money”. The idea is that Eurozone by salvaging the Cypriot banks and recapitalising them, the European taxpayers indirectly will be supporting the Russian oligarchs to retain their wealth intact. At this point enters Wolfgang Schäuble. According to major German media reports the country’s Federal Minister of Finance is adamant that the Cypriot banks have to be under scrutiny for money laundering. According to Spiegel’s electronic edition a number of European governments, including Berlin, doubt if Cyprus applies the Eurozone rules to arrest money laundering and demand that a group of specialist travel and stay in Nicosia to sort out the problem. The aim will be to verify if the rules are being applied in everyday banking practice on the island. In any case Cyprus is in dire straits over this affair and the present government of President Christofias doesn’t seem to have the political capital to short out the problem, being at the end of its term in office. The country is to hold elections towards the end of February and surely the first task of the new government will be this issue. Until then everything will remain “frozen”.