Why and how Germany had it again its own way in Cyprus

Christine Lagarde, Managing Director of the IMF, Jeroen Dilsselboem, President of the Eurogroup, Olli Rehn, Vice President of the European Commission, Klaus Regling, Chief Executive Officer. On 25-3-2013 the Eurogroup reached an agreement with the Cypriot authorities on the key elements necessary for a future macroeconomic adjustment programme. (Eurozone Portal, photographic library).

The final agreement reached between the Eurogroup and the Cypriot authorities contains two pivotal elements. The first is a draconian downsizing of the tiny country’s overgrown banking system. The second and less important element is “an independent evaluation of the implementation of the anti-money laundering framework in Cypriot financial institutions, involving Moneyval alongside a private international audit firm, and is reassured that the launch of the audit is imminent”.

Moneyval, is the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism of the Council of Europe. The aim of MONEYVAL is to ensure that its member states have in place effective systems to counter money laundering and terrorist financing and comply with the relevant international standards in these fields.

On both accounts, Germany through its influence on the European Central Bank and the Eurogroup has managed to settle the Cyprus financial crisis in a manner favouring its interests. Let’s start with the downsizing of the Cypriot banking industry and its salvaging by an unseen before haircut of the uninsured deposits. It’s the first rescue of a Eurozone member states’ banking system, or what will be left of it, without any ECB or taxpayers’ help, summing it up into a bail-in operation instead of the bailout used until now.

In the turbulent crisis period of 2009-2011, Germany managed  to swiftly bailout its own banking system with Deutsche Bank and the peripheral Landersbanks first in the line, which were overly exposed to PIGS’s (Portugal, Ireland, Italy, Greece, and Spain) toxic debts. In the rescue of the Greek, Portuguese, Irish and indirectly the Spanish and Italian financial sectors it was the money of the troika of EU-ECB-IMF’s money, plus hundreds of billions from European taxpayers. Not to forget the €700 billion invested by all Eurozone member states in capitalising the European Financial Stability Facility and its heir the European Stability Mechanism EFSF/ESM.

In short, Germany, by contributing only 28% (its share in ECB) in the troika and the ECB’s underwriting of PIGS debts, managed to generously reduce the exposure of its own banks to these debts. According to various sources the common Eurozone plus IMF financing of the PIGS bailouts, led to a reduction of German banks exposure to these toxic debts by anything between €350 and €540 billion. To attain this Germany spent only €196bn that is its share of 28% in financing the €700bn the EFSF/ESM dowry.

At the same time,France undertook a similar, albeit slightly lower burden, in financing the EFSF/ESM resources, without being favoured from any reduction in its exposure to the PIGS toxic debts. The French banks exposure was not made up of loans as in the case of German banks.  The French banks had an extended presence in the Greek banking system through Société Générale’s 99.1% stake in Geniki Bank, and Crédit Agricole’s control of another troubled Greek bank, the Emporiki.

Both those French banks disengaged in 2012 from Greece at great direct cost. How the French government accepted to finance the PIGS bailouts through the EU/ECB’s and EFSF/ESM’s huge spending, with only Germany profiting from that? How come and the French banks paid last year with their own money, the cost of leaving the Greek toxic banking system and only the German banks were favoured by the common EU-ECB-IMF spending? Obviously, these are questions that only the former French President, Nicolas Sarkozy, can answer.

Coming back to the present, Germany managed again, in the case of the Cyprus banking system rescue, to arrange it at no cost at all to Berlin. Cyprus banks had no exposure at all to German lenders. Their financial base was and still is expensive home and foreign deposits, with much from the last ones coming from Russia. Obviously, Germany’s banks had nothing to gain from a bailout of Cyprus. Then, magically ,the troika of EU-ECB-IMF is not to spend not one euro to rescue a Cypriot bank. All the €10 billion will be a loan to the Cyprus Republic. Eurogroup’s announcement earlier today says it explicitly in Annex 8:”The programme money (up to 10bn Euros) will not be used to recapitalise Laiki and Bank of Cyprus”.

The Germans had nothing to gain from the rescue of those banks so they insisted and finally got it their way, not to spend one euro to save “the deposits of Russian oligarchs and an unhealthy overgrown banking system”, as Wolfgang Schauble would have put it. The Germans insisted and had it their way that Cyprus banks are not worth not one EU-ECB-IMF euro and had to be rescued by their own depositors, introducing the bail-in in Eurozone’s salvage operations. Berlin does not accept to spend not one euro if there is more to gain from it.

Unfortunately, the only one country which could have blocked it, France, joined the German club. Paris could not appear politically as “helping the Russian oligarchs and their Cypriot servants”. The German publicity machine had worked very well on that to block a possible veto from Paris. As for the anti-money laundering framework in Cypriot financial institutions, including the supervisory authorities, again Berlin had it its own way, managing to put a private auditor to control a sovereign state.