[MGSA-L] MGSA-L Digest, Vol 107, Issue 40

Nikos Chrysoloras nikos.chrysoloras at gmail.com
Wed Mar 27 12:15:55 PDT 2013

Dear Lissi Athanasiou Krikelis,
As a Brussels-based EU correspondent for Kathimerini, I covered every
single minute of the dramatic events of the past few weeks. Responding to
your request to "say something", here's my take on the recent Cyprus

"Cyprus: a punishment, not a solution

By Nikos Chrysoloras *

It is now official: Cyprus will pay a heavy toll for turning its economy
into an offshore financial haven and allowing its banking sector to
hyperinflate. But if the purpose of the dramatic eurozone all-nighters was
not just to punish and make an example of the island, but to solve the
issue, then we can hardly speak of a success.

Despite the fact that the Eurogroup agreement on March 25 prevented an
immediate and disorderly bankruptcy, there is no doubt that the coming
months are going to be dramatic for Cypriots. Indeed, European Commission
Vice President Olli Rehn even likened the situation faced by the Cyprus
population to the Turkish invasion of 1974.

The agreement provided for the resolution of the country's second-largest
lender, Cyprus Popular Bank (Laiki). Beyond the fact that such a
development will lead to job losses, it also means that all deposits of
natural or legal entities exceeding 100,000 euros will virtually be wiped
out. Maybe it will take years before the clearance procedure is complete
and depositors receive some kind of compensation, which in any case would
be much smaller than the sums lost due to the haircut.

Bank of Cyprus clients with deposits over 100,000 euros will also suffer
heavy losses. In fact, the decision provides that uninsured deposits in the
country’s largest bank will remain frozen until the precise size of the
haircut is decided in order for the bank to achieve a capital ratio of 9
percent. Hence, hundreds of domestic companies have had their cash reserves
depleted and their current accounts obliterated. Some – if not most – of
them will go bankrupt in the coming days and weeks. These developments, in
combination with the imposition of restrictions on the free movement of
capital – also for an unspecified time period – raise serious doubts as to
when the island economy will be able to function properly again.

The destruction of capital – unprecedented in scale – the loss of
confidence in the banking system, which had served as a basic pillar of the
island's economy as well as a jobs pool, the inevitable outflow of deposits
and the general uncertainty are expected to deepen the recession in Cyprus
beyond even the most pessimistic forecasts. In this sense, the
sustainability projections of the draft memorandum of understanding between
the troika of international lenders and the government in Nicosia should be
considered as already obsolete, and the assistance program is already way
off track. But given that the eurozone is not willing to provide funding
beyond 10 billion euros, the big question that now arises is how the
inevitable funding gap between solvency and insolvency is going to be
covered at a time when the economy is sinking and unemployment is spiraling
out of control. Whether BoC will survive is equally uncertain, since
besides the deposit outflows it will suffer, it has also been forced to
assume Laiki's obligations to the European Central Bank, which amount to 9
billion euros (around 50 percent of Cyprus's gross domestic product).

Moreover, the unfortunate handling of the situation by the Eurogroup and
the Cypriot government over the last few days has shaken the trust of
Cypriot citizens in the country's European trajectory, as recent polls have
shown. Equally fragile is the confidence of citizens and markets in the
eurozone's crisis management skills. If the – undoubtedly substantial –
difficulties of a small economy like Cyprus are able to cause so much
trouble, what then should be expected if a major crisis occurs in Italy or
Spain? In fact, the Eurogroup's initial decision to impose a levy on
deposits below 100,000 euros makes it clear that in case of a major crisis
in the future, the eurozone is ready to “cross the Rubicon.” In an
interview with the Financial Times, Eurogroup chief Jeroen Dijsselbloem
went as far as to imply that the Cyprus model will be used as a template
for the rest of the eurozone and that depositors with more than 100,000
euros in their accounts may be requested to foot the bill for failed banks
in the future. His message was clear: “Take your money and run from the
South.” Such statements make one wonder if the person running the eurozone
wants to preserve it or single-handedly destroy it.

Could things have taken a different turn? Of course they could, if the
necessary political will had been there. Although Berlin was right to point
out that the Cypriot economic model, which was based on the financial
bubble, was not sustainable, the dissolution of this model in the timespan
of just a few days, instead of a few years, is bound to cause more problems
than it will solve, given that no alternative plan has been designed, let
alone implemented, yet.

And yes, Cyprus made many mistakes and the punishment may indeed be
commensurate to the “crime” committed. But what about the mistakes of the
eurozone leaders? Their response to the crisis so far has been ridiculously
unsuccessful, no matter how one defines success. The continent’s economy is
going through a double-dip recession. Even Germany, the supposed paragon of
economic performance, is stagnating, unemployment is surging to all-time
highs, the eurozone GDP is much lower than its pre-crisis levels, and the
banks of the Europe are walking dead, unable to provide credit to the
economy. Populist, secessionist and nationalist movements are on the rise
across the continent, ghosts of the past have been awakened and the
European unification project is at stake. Countless late-night meetings
failed to restore confidence, and some of them, like last week’s decision
to disrespect the sanctity of retail deposits, were downright catastrophic.
Whether Cyprus deserves its fate or not, the inescapable truth is that the
major flaw in the eurozone's crisis management system is that people are
not laid off when they mess up. And that’s why they keep messing up.

* Dr. Nikos Chrysoloras is a Brussels-based EU correspondent for the Greek
and Cypriot daily Kathimerini. An earlier version of this article was
published by the Crisis Observatory (crisisobs.gr) of the Hellenic
Foundation for European and Foreign Policy (ELIAMEP)"

Dr. Nikos Chrysoloras
*Journalist - EU Correspondent
mob (Brussels): +32 470 411 380
mob (Athens): +30 693 40 48 858
fax/landline (Brussels): +32 253 74 222

On 27 March 2013 21:00, <mgsa-l-request at uci.edu> wrote:

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> Today's Topics:
>    1. Re: CYPRUS (Syrimis, George)
> ---------- Forwarded message ----------
> From: "Syrimis, George" <george.syrimis at yale.edu>
> To: "mgsa-l at uci.edu" <mgsa-l at uci.edu>
> Cc:
> Date: Wed, 27 Mar 2013 18:45:08 +0000
> Subject: Re: [MGSA-L] CYPRUS
>  Dear Lissi, if I may,
>  Your surprise and shock are well taken and should give us pause for
> thought if not on the pressing issue of the Cypriot bailout/in at least on
> the use and purpose of the list itself. For my part, when it came to the
> digital outlets I went to Facebook to get the feel of the situation in
> Cyprus, to exchange ideas and discuss developments. No doubt that says
> something about me and my personal choices for information but it probably
> also says something about the list as well. Has it reached its limits? Has
> it fulfilled its purpose for the years that it has been in use? Is it time
> we moved to or complemented it with new social media? Or perhaps we don't
> quite regard Cyprus as that important to modern Greek studies or, even
> worse, for once there was a silent consensus that what was going on in
> Cyprus was beyond words. We know it's not.
>  George
>   From: Lyssi Athanasiou <lyssi_a at hotmail.com>
> Date: Tuesday, March 26, 2013 5:56 PM
> To: MGSA List <MGSA-L at uci.edu>
> Subject: [MGSA-L] CYPRUS
>   Dear list members,
>  I have been a member of this list for a couple of years now and have
> witnessed debates and heated discussions on issues that were insignificant
> and irrelevant to the majority of its members.   Sometimes what seemed
> insignificant sparked debates and promoted discussions that went on for
> days, if not weeks.
>  I am writing with great disappointment, however because you have
> abstained from bringing up any of the tragic events that have been
> unraveling in Cyprus the last ten days.  Is this scenario
> so straightforward to all of us that merits no discussion, no VOICE
> essentially?
>  Speak, say something, make connections, throw blame on all sides, it
> doesn't matter.... Anything but this SILENCE would DO!
>  Lissi Athanasiou Krikelis
> _______________________________________________
> List-Info: https://maillists.uci.edu/mailman/listinfo/mgsa-l
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