Eurozone in trouble after Nicosia’s ‘no’

(From left to right) Olli Rehn, Vice President of the European Commission, Michael Sarris, Cyprus Minister for Finance. (Council of the European Union photographic library)

The comparison of repercussions from the Greek ‘yes’ and the Cyprus ‘no’, to the troika of EU-ECB-IMF proposals, concerning the bailouts of the corresponding economies, may produce political and financial implications for many Eurozone governments, the EU Commission and the International Monetary Fund. The Greek ‘yes’ is presenting very difficult problems in the longer run, while the Cypriot ‘no’ concentrates those difficulties in the coming days or weeks. The basic difference between the two cases remains the fact that in Greece the source of the illness was government debts and deficits, while in the case of Cyprus it was the tiny economy’s two overgrown banks, Laiki and Cyprus Bank. In both lenders, difficulties begun from the moment they were obliged to suffer a deep devaluation of their investments in Greek government bonds, which lost 53.5% of their nominal value last March, with the deep haircut on Greek sovereign bonds in hands of the private sector.

In any case the ‘no’ of the Cypriot Parliament that stopped the plan to tax all banks accounts in the island starting from the first euro, has opened the Pandora’s Box and now everything goes. Proposals include the dissolution of the two banks, Laiki and Cyprus and the creation of two new ones, a ‘good’ and a ‘bad’. Others suggest the introduction of controls on national currency exports, along with restrictions on withdrawals from bank accounts, while keeping Laiki and Cyprus banks alive.

In both cases the European Central Bank is supposed to  support, within limits, the liquidity of the Cypriot banking system, with special attention over the needs for banknotes. Not to forget that there are more banks and business in the island. The central banks of Cyprus estimates that a good 10% of deposits will fly from the country’s banking system over the next few days, after the banks open to the public.

The ‘no’ was political

The Cypriot ‘no’ creates also political problems to others, mainly to Greece. If the end result will be a better arrangement for Cyprus, from a social and general economic point of view, the Greek government that accepted the troika’s Memorandum will appear as a loser. Athens signed an agreement with the troika of EU-ECB-IMF last December providing for more loans to cover the country’s obligations, but at the same time imposing draconian and highly unpopular measures like deep cuts on pensions, salaries, social spending and layoffs in the public sector.

In the meantime the government of Cyprus is being drafting a Plan B in cooperation with the troika, while the minister of Finance, Michalis Sarris, is presently in Moscow in search of a Russian loan. The Russian government is showing a vivid interest in what is happening in Cyprus for many reasons. For one thing Russian citizens hold a wealth of around €20 billion in deposits and other investments with Cypriot banks. There is unconfirmed information that Russian businessmen have an interest in acquiring the control a Cypriot bank. The same sources say that such a prospect wouldn’t please at all the Eurozone authorities and Berlin.

All in all the Cypriot Parliament’s ‘no’ has set in motion unseen before procedures. The obvious reason is that the Cypriot equation has so many factors which make the solution much more complicated than what Brussels, ECB and the IMF have faced so far with Eurozone’s troubles. The Cypriot case reminds the Irish one, because in both countries the problems started with the banks. The Russian factor however makes the Cyprus case much more difficult to solve.

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