Tuesday, March 19, 2013


Troika Bailout Package for Cyprus Undermines Basic Precept of the EU
anamericanincyprus

The Russians are here.

 Russian private jets began landing at the Cyprus International Airport this weekend, either to buy Cypriot banks or withdraw all funds once the banks open and Putin gives word, taking with them two thirds of the Cypriot economy, depending upon who you talk to in Nicosia today. 

“Moscow, which has an outstanding 2.5 billion euro loan to Cyprus and billions more in deposits in the island's banks, reacted angrily to the EU levy.” (1) The terms of the bailout includes 9.9%  levy on bank deposits over 100,000 euros and a levy of 6.7% on accounts under 100,000, though the Parliament is meeting at 6:00 pm to discuss lessoning the burden on smaller accounts. (It should be noted that the term the British press is using “savers” can be misleading as the levy affects all bank accounts irrespective of the type of bank account or origin of funds. For example, balances containing loans, even student loans and pensions are affected, all accounts are affected, not savings accounts alone.)

“Adding to the pressure on the newly-elected Cyprus leaders, a German government spokeswoman said Tuesday that Chancellor Angela Merkel had called Anastasiades to stress that his country should hold talks only with international creditors on its bailout deal. The chancellor once again emphasised that the negotiations are to be conducted only with the troika," the spokeswoman told AFP, referring to the term used for the European Union, the European Central Bank and the International Monetary Fund. The comment was made as the Cypriot Finance Minister Michalis Sarris headed to Moscow after an explosion of anger in Russia at the EU bailout deal for the island that could see Russian investors lose billions of euros.” (1)

Some sources say Troika maintains that they do not demand a levy on deposits per se, but that Cyprus has to raise 5.8 billion euros in order to receive bailout and Cyprus has no other means to raise the money.  The 5.8 billion is the amount and that Troika says is beyond the amount that Cyprus can be expected to pay back. There have also been claims that Germany and Northern Europe want to enforce a levy on Cypriots bank accounts in order to punish Russians who have invested in Cyprus as well as the country of Cyprus for its close relationship with Russia. This quote of the German Finance Minister Wolfgang Schaeuble in the Economic Times seems to support the latter "’Whoever invests their money in a country where they pay less tax, and perhaps where there is less supervision, shoulders the risk when that country's banks are no longer solvent. That's a fact,’ [German Finance Minister Wolfgang] Schaeuble said in an interview on German public radio Deutschlandfunk.’” (2)

Troika kept Russia out of the loop on a decision that has a great financial impact on Russian investors. This seems like the proverbial “slap in the face.” Then there is Merkel’s call to Anastasiades where she seems to warn him not to make a deal with the Russians beyond the thus far expected agreement to ease the terms of Russia’s existing loan to Cyprus. Though, with the threat of the levy set to appropriate Russian bank deposits, it seems that Russia would hesitate to ease the current loan terms. What’s in it for them? As Russia pointed out, all trust is lost.  Russia could reasonably be expected to demand assurances that no levy will be enacted upon Russian deposits in exchange for easing terms of the loan.

Hypothetically, what if Putin called Troika’s bluff and loaned the 5.8 billion euros to Cyprus so that Cyprus has the money without appropriating bank deposits? Would Troika accept this? Referring once again back to Merkel’s warning to Anastasiades that bailout negotiations are to only be made with Troika, I don’t think so. I suppose that Troika would argue the debt would be unsustainable. We can take the analysis further, what if Russia outright gave the 5.8 billion to Cyprus? Would Troika proceed with the bailout package? Somehow I still don’t think so. You can feel it in German Finance Minister Wolfgang Schaeuble’s statement "’Whoever invests their money in a country where they pay less tax, and perhaps where there is less supervision, shoulders the risk when that country's banks are no longer solvent. That's a fact,’” did he really have to say “that’s a fact”? It’s like a judge’s gavel slamming down. Case closed.

In his article Cyprus: Risking The European Ship For Ten Euros Of Tar Andrew Watt makes the point, in summary, that Europe should loan the full amount  to Cyprus (with no levy) because any loss incurred by Cyprus' failure to repay the loan would be minor compared to damage caused by the overall loss of  trust in the Eurozone with respect to investments. (3) Troika must have considered the this fact and decided to take the risk of loss of confidence. Thus, it would seem that the desire to punish Russia investors in Cyprus -- and probably to punish Cyprus, or perhaps destroy it's corporate services industry -- is greater than  the desire to maintain investor confidence in the Eurozone. Will Germany be saying, "Sorry, we're all out of Cyprus. May we offer you Luxembourg instead?"

If Cyprus comes up with the 5.8 billion, that would have come from the levy, from any source other than from depositors, even a non-Russian source, I think Troika would argue that such a case is unacceptable and insist on a levy. If you look at the facts, you can see it. Troika wants a levy.

Some backlash against Cyprus is understandable. The last administration asked for a bailout and then the former president, Christofias (who requested the bailout) declared that he would protest against Troika in the streets with the people. This kind of insanity must have been maddening for the rest of Europe (as it was for many Cypriots who once again felt humiliated and enraged by Christofias and his antics, referring to him by the moniker "Catastrofias").

Whatever the reason, Troika seems to be intent on punishing Russia and Cyprus and will go so far as  undermining basic precepts of the banking system in order to enact punishment, therefore undermining the basic concept of the EU, threatening its unity and therefore very existence.



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