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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