With just a few hours before emergency funding to Cyprus’ banks was due to be cut off, finance ministers have agreed a deal which will see uninsured savers with more than €100,000 face huge losses in order to keep the economy afloat.
The Cypriot president, Nicos Anastasiades finally managed to thrash out a deal with the leaders of the EU, the European Central Bank and the International Monetary Fund at the 11th hour. It includes plans to wind down the Laiki Bank, moving deposits smaller than €100,000 to the Bank of Cyprus and leaving larger depositors – including many wealthy Russians – to take heavy losses.
The agreement was reached following a frantic week of soul searching, after Cyprus’ parliament rejected EU proposals to make ordinary savers take a hit of up to 10% in order to qualify for bailout cash. Cyprus’ finance minister had been trying to drum up a deal with Moscow (as Russians have been stashing their money in low-tax Cyprus for years), and other eurozone leaders met in frenzied discussion, because, after all, they don’t want Cyprus to default.
But the cure may be worse than the disease, or at least as bad. The deal amounts to a managed partial default and will leave Cyprus picking up the economic pieces for years to come.
To give you a flavour of the intensity of negotiation, the deal was struck in the early hours of Monday morning, with 17 eurozone finance ministers having been round the table for almost 12 hours. At one point, Anastasiades threatened to pull Cyprus out of the euro altogether, so heated was the discussion. The Dutch finance minister who was chairing the committee said: ‘It has been a particularly difficult road to get here. We’ve put an end to the uncertainty that has affected Cyprus and the euro in recent days.’
And if you thought there was still room for manoeuvre for Cyprus’ MPs, there isn’t. The plans neatly sidestep parliamentary intervention because they are technically a restructuring of the banks, rather than a tax. Not to mention that Brussels pressured Cyprus into passing a new bill controlling how bank failures are dealt with just three days ago.
Finally, it doesn’t look like there is much sympathy for Cyprus among the members of that eurozone committee. The French finance minister Pierre Moscovici (who often puts in his euro’s worth without anyone actually asking for it), said: ‘To all those who say that we are strangling an entire people, Cyprus is a casino economy that was on the brink of bankruptcy.’ Very little empathie there.