Tuesday, March 19, 2013

Why Anastasiades was Right to Put Controversial Levy Before Parliament

As expected the Cypriot parliament this evening rejected the levy on bank accounts, Troika’s requirement to receive financial assistance for its failing economy, as agreed in the early hours of last Saturday morning. Proving to be offensive to the Cypriot people, foreign investors, protested against in Spanish streets as well as in Cyprus and widely criticized by financial analysts, with Forbes Magazine stating “By comparison [to the Lehman Brothers crisis of 2009] the German-led group of EU officials who  engineered this weekend’s Cyprus bank bailout don’t have a leg to stand on. Although they had years to consider their options (Cyprus’s problems are closely related to those of Greece and have long been almost as obvious), they have opted for a “solution” that amounts to probably the single most inexplicably irresponsible decision in banking supervision in the advanced world since the 1930s.” (1)

Anastasiades, who took office last month following a disastrous term in office by the opposition party, maintained during his presidential campaign that he adamantly opposed a levy on bank deposits. The opposition party now accuses Anastasiades of betraying the Cypriot people. In his weekend address to the nation Anastasiades stated that he is still against the levy but chose to support the levy imposed by Troika because since Troika insisted on the levy as a prerequisite for financial assistance, to refuse the levy would be to choose disorganized bankruptcy. Therefore he chose to make a decision that he knew he would be criticized for in an effort to gain financial assistance to Cyprus.

It is well known that Troika was annoyed with the way that the former president, Christofias, handled bailout negotiations, dragging negotiations out, failing to meet a deadline and his general apparent disrespect for the process and what was arguably his inability to grasp the seriousness of the situation. Coming into power at the end of drawn out negotiations, Anastasiades argued against the levy, claiming that the levy is unprecedented, will harm the Cypriot people, foreign investors, the corporate services industry (the major source of income in Cyprus) and would undermine confidence in the Eurozone. However, when Troika insisted, he had to choose between stalling further a process that had taken far too long and generated a backlash against Cyprus or moving forward by bringing the levy to the parliament.

It has been said the Anastasiades underestimated the negative reaction of the Cypriot people. But I don’t think so. The levy has been widely and strongly criticized in Cyprus since it first came up. I think the move was tactical. Anastasiades was well aware that the opposition party would absolutely refuse to support the levy and since the ruling party does not have a majority it was highly unlikely to pass. Troika put pressure on Anastasiades to hold the parliament vote on Sunday, but he postponed it until Monday, not necessarily solely because he did knew it would not pass on Sunday, but because he wanted the market response and the world reaction. Markets fell and the levy has been supported by a minority though highly criticized as irresponsible and a blow to Eurozone confidence with negative future implications to the entire banking industry.

Anastasiades also knew that the Russians would be angry. Will the Russians offer a loan to Cyprus to cover the amount that would have been raised by the levy? If so, this would be the last thing Troika wanted (see my article dated earlier today). Cyprus and Russia would be even more closely tied. Troika has been accused of being irresponsible and vindictive, therefore Troika would have to extend financial assistance to Cyprus if it raises the funds that would have been collected by the levy, or risk appearing objectively vindictive and irresponsible, causing a complete loss of confidence in the Eurozone and discord and distrust among its members.

Whether or not Cyprus attains new financial assistance from Russia sufficient to meet its current need, Troika will be forced to renegotiate with Cyprus. To reject Cyprus’ bailout based upon Cyprus’ refusal to apply a levy called by Forbes magazine as “probably the single most inexplicably irresponsible decision in banking supervision in the advanced world since the 1930s” (1) would appear Draconian. It would seem that Troika has no reasonable choice other than to back track. Suddenly, Cyprus, the tiny island nation with seemingly no negotiating power has Troika backed into a corner. Well played, Anastasiades.

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