Cyprus Parliament says no to blackmail

 From left to right: Mr Jeroen Dijsselbloem, President of the Eurogroup; Mr Michael Noonan, Irish Minister for Finance; Mr Olli Rehn, Vice President of the European Commission; Mr Michael Sarris, Cyprus Minister for Finance; Mr Wolfgang Schauble, German Federal Minister for Finance; Ms Christine Lagarde, Managing Director of the IMF (back). (Council of the European Union, Photographic Library).

From left to right: Jeroen Dijsselbloem, President of the Eurogroup; Michael Noonan, Irish Minister for Finance; Olli Rehn, Vice President of the European Commission; Michael Sarris, Cyprus Minister for Finance;  Wolfgang Schauble, German Federal Minister for Finance (sitted);  Christine Lagarde, Managing Director of the IMF (back). (Council of the European Union, Photographic Library).

Not one Cypriot Parliamentarian voted yes for the draft bill proposal, providing for a haircut on all deposits in Cypriot banks. As a result the island’s financial system will remain shut down until Thursday, in the hope that a solution to the stalemate will be found. It was quite a spectacle to see all the 19 governing DHSY party deputies to abstain from the vote, despite the fact that it was their party’s government who introduced the draft bill in Parliament.

Meanwhile the rest of the actors in this Cypriot tragedy, namely the Cypriot President Nikos Anastasiades, the German Chancellor Angela Merkel and her minister of Finance Wolfgang Schauble, the general manager of the IMF Christine Lagarde and the European Commissioner Ollie Rehn, all of them pointing a finger at each-other for the worst bailout package ever produced in the Brussels’s financial laboratory, the Eurogroup.

Pocketing depositors’ money

As for the new President of Eurogroup, the Dutch Minister of Finance, Jeroen Dijsselbloem, seemingly he was just presiding in the crucial meeting of last Friday night Saturday morning. It was in the early morning hours when it was born, the monster bailout package to save the Cypriot banks, by giving a deep haircut to their depositors’ money starting from the first euro.

As it usually happens in the European Union the need to arrive at a decision that contains something from everybody’s positions, produces at the end such an ugly monster that not even its parents like it. In this case the ugliest part of the deal was the haircut on all bank accounts in Cypriot banks. It was the newest German idea about how will be financed the future bailouts of failing Eurozone banks. Obviously the Germans were once more wrong, by not taking into account the reaction of the other side.

Now the whole thing is back in the incubation chamber and God knows what the new product will be. In the between there is a cacophony of opinions developing all over Europe, including Russia. A wealth of around €20 billion, in deposits to Cypriot banks belongs to Russians, who have parked their money in the islands’ offshore financial facilities, where no questions are asked. They also go for their vacations, there and usually combine business and pleasure. The haircut on their wealth came as an ugly surprise. Russian depositors/investors in Cyprus are expected to lose anything around €2bn and President Putin seems disposed to make a big fuss out of it.

As the stalemate drags on, the polyphony takes dangerous dimensions. Very important players in the island, like the prestigious Greek Orthodox Archbishop, are now openly proposing a full exit from Eurozone and a return to the Cypriot Pound.

In the same line of thinking the discussion has resumed in mainland Greece, about the futility of the Greek bailout package agreed last December. In must be reminded that Athens has signed with the troika of its creditors EU-ECB-IMF, three draconian Memorandums of Understanding over the past two years, which have by now cost the country at least one fifth of its GDP and a 27% unemployment.

Returning to the Cypriot crisis it seems that the only light in the tunnel came from the usually outspoken Austrian central banker, Ewald Nowotny, a member of European Central Bank’s Governing Council. He said that the ECB has not taken a decision yet, but according to the standard practice the central bank will offer liquidity to the Cypriot Banks when they open again and added that the ECB is also ready to play its role as lender of last resort.

In any case the ball is presently in the Cypriot government’s court. It is President Nikos Anastasiades who has to come up with a new plan. According to information from sources in the island, the new plan will leave untaxed the bank deposits of up to €20,000. To make up for the losses after the exemption of the small depositors, the government examines the possibility to raise money from the private social security funds. In any case the administration needs almost €6 billion in total. This amount together with a loan of €10bn from the troika of EU-ECB-IMF will be used to recapitalise the Cypriot banks.

In any case the rejection of the haircut on deposits by the Cypriot Parliament is like calling ECB’s bluff, which said it will withdraw the liquidity line to the island’s banks, if the deal is not honoured by Nicosia. Novotny however seems to say quite the opposite. The problem is that the stalemate cannot continue beyond Thursday, the day the banks are supposed to open. With a bank run considered as a certainty and the protraction of the uncertainty with the banks kept shut being equally risky, the issue has to be settled today or early tomorrow.

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