What does ‘Euro’ mean?
Is a euro in a Cypriot bank, locked down by withdrawal limits and capital controls, the same as a euro in an Irish or French bank? Is a euro sitting in, say, a payroll account in Laiki with a balance of more than €100,000 (and subject to an unspecified “haircut” on Thursday) the same an “Irish euro”?
They’re both euro, both promises to pay the bearer, but honestly, do you have a preference? Of course you do. You’d prefer your money to be outside Cyprus. You’d prefer an Irish euro to a Cypriot one. So they’re not the same. Do we even have a single currency now, then? What does the Euro mean?
And how did this happen? At least in part, it happened because all the finance ministers of the Eurozone sat around earlier this month and let the Cypriots leave the room with a proposal to make depositors pay for bank losses, including insured depositors with balances of less than €100,000. They rowed back on that part, but you can’t undo the damage of their having taken it seriously to begin with. Imagine a snowed-in family just once agreeing “if we get really hungry, we can eat the rabbit”. You can take that back all you like – everybody knows the rabbit’s not safe any more. He’s not just a pet, he’s protein. Depositors aren’t just protected customers now, they’re also a source of money to save the bank.
We sat back and let that happen – all the Eurozone countries did. We let deposits in Cyprus undergo that subtle shift in meaning. We let their banks be closed for ages, with devastating impact on small firms and families. We let their tax rate be changed. We let them hang out there, hoping it would save us, the rest of this uneasy union. Where does that leave solidarity, in this European Project under our presidency?
Just now, you’d prefer an Irish euro to a Cypriot one. Remember that feeling, because, as Martin Niemöller might have written were he more interested in money, and living in more peaceful times, “First they came for the Cypriots …”
NICOSIA (Reuters) – Big depositors in Cyprus’s largest bank stand to lose far more than initially feared under a European Union rescue package to save the island from bankruptcy, a source with direct knowledge of the terms said on Friday.
Under conditions expected to be announced on Saturday, depositors in Bank of Cyprus will get shares in the bank worth 37.5 percent of their deposits over 100,000 euros, the source told Reuters, while the rest of their deposits may never be paid back.
The toughening of the terms will send a clear signal that the bailout means the end of Cyprus as a hub for offshore finance and could accelerate economic decline on the island and bring steeper job losses.
Officials had previously spoken of a loss to big depositors of 30 to 40 percent.
Cypriot President Nicos Anastasiades on Friday defended the 10-billion euro ($13 billion) bailout deal agreed with the EU five days ago, saying it had contained the risk of national bankruptcy.
“We have no intention of leaving the euro,” the conservative leader told a conference of civil servants in the capital, Nicosia.
“In no way will we experiment with the future of our country,” he said.
Cypriots, however, are angry at the price attached to the rescue – the winding down of the island’s second-largest bank, Cyprus Popular Bank, also known as Laiki, and an unprecedented raid on deposits over 100,000 euros.
Under the terms of the deal, the assets of Laiki bank will be transferred to Bank of Cyprus.
At Bank of Cyprus, about 22.5 percent of deposits over 100,000 euros will attract no interest, the source said. The remaining 40 percent will continue to attract interest, but will not be repaid unless the bank does well.
Those with deposits under 100,000 euros will continue to be protected under the state’s deposit guarantee.
Cyprus’s difficulties have sent jitters around the fragile single European currency zone, and led to the imposition of capital controls in Cyprus to prevent a run on banks by worried Cypriots and wealthy foreign depositors.
Banks reopened on Thursday after an almost two-week shutdown as Cyprus negotiated the rescue package. In the end, the reopening was largely quiet, with Cypriots queuing calmly for the 300 euros they were permitted to withdraw daily.
The imposition of capital controls has led economists to warn that a second-class “Cyprus euro” could emerge, with funds trapped on the island less valuable than euros that can be freely spent abroad.
Anastasiades said the restrictions on transactions – unprecedented in the currency bloc since euro coins and banknotes entered circulation in 2002 – would be gradually lifted. He gave no time frame but the central bank said the measures would be reviewed daily.
He hit out at banking authorities in Cyprus and Europe for pouring money into the crippled Laiki.
“How serious were those authorities that permitted the financing of a bankrupt bank to the highest possible amount?” Anastasiades said.
The president, barely a month in the job and wrestling with Cyprus’s worst crisis since a 1974 war split the island in two, accused the 17-nation euro currency bloc of making “unprecedented demands that forced Cyprus to become an experiment”.
European leaders have insisted the raid on big bank deposits in Cyprus is a one-off in their handling of a debt crisis that refuses to be contained.
But policymakers are divided, and the waters were muddied a day after the deal was inked when the Dutch chair of the euro zone’s finance ministers, Jeroen Dijsselbloem, said it could serve as a model for future crises.
“The content of his remarks comes down to an approach which has been on the table for a longer time in Europe,” Knot was quoted as saying by Dutch daily Het Financieele Dagblad. “This approach will be part of the European liquidation policy.”
The Cyprus rescue differs from those in other euro zone countries because bank depositors have had to take losses, although an initial plan to hit small deposits as well as big ones was abandoned and accounts under 100,000 euros were spared.
Warnings of a stampede at Cypriot banks when they reopened on Thursday proved unfounded.
For almost two weeks, Cypriots were on a ration of limited withdrawals from bank cash machines. Even with banks now open, they face a regime of strict restrictions designed to halt a flight of capital from the island.
Some economists say those restrictions will be difficult to lift. Anastasiades said the capital controls would be “gradually eased until we can return to normal”.
The government initially said the controls would stay in place for seven days, but Foreign Minister Ioannis Kasoulides said on Thursday they could last “about a month”.
On Friday, easing a ban on cheque payments, Cypriot authorities said cheques could be used to make payments to government agencies up to a limit of 5,000 euros. Anything more than 5,000 euros would require Central Bank approval.
The bank also issued a directive limiting the cash that can be taken to areas of the island beyond the “control of the Cypriot authorities” – a reference to Turkish-controlled northern Cyprus which considers itself an independent state. Cyprus residents can take 300 euros; non-residents can take 500.
Under the terms of the capital controls, Cypriots and foreigners are allowed to take up to 1,000 euros in cash when they leave the island.
(Additional reporting by Ivana Sekularac and Gilbert Kreijger in Amsterdam; Writing by Matt Robinson; Editing by Giles Elgood)
10 ways for Ireland to benefit from chaos in Cyprus
From NAMA WINE LAKE
We’ve seen over the past fortnight how the Cypriots are a deeply stupid people that have allowed their economy to collapse, and consigned their society to immiseration and decline for a long period ahead. Well, too bad for Cyprus, how can Ireland benefit from their self-inflicted fiasco?
(1) Cyprus’s corporate tax brand is destroyed. The original Cyprus bailout plan included a term compelling Cyprus to raise its headline corporate tax rate from 10% to 12.5%, there is no mention of that term being dropped in the latest version of the bailout, so it seems the change still stands. Now a 25% increase is still just an additional 2.5% but it has destroyed the Cypriot brand. Businesses now considering basing themselves in Cyprus might appreciate the 12.5% corporate tax rate as relatively low, but they know that it has been changed, and apparently without much resistance from the Cypriots. On the other hand, businesses know that Ireland fought tooth and nail to protect our 12.5% corporate tax rate. We endured the humiliation of a Gallic spat with the French president, quietly supported by the Germans, and we saw Greece get a reduction in its bailout interest rate in March 2011, but because we would not yield on our tax rate, we had to wait until July 2011, and even then we had to give a commitment to constructively engage in discussions on the Common Consolidated Corporate Tax Base. But in July 2011, domestic politicians wrote that commitment off as fundamentally meaningless, and the message is loud and clear – Ireland has a 12.5% corporate tax rate and it will stay at 12.5%. So, even though Cyprus and Ireland might have the same corporate tax rate, businesses know that ours is more likely to remain at 12.5%.
(2) Tourism. With the cold and wintry Irish weather at present, the 15 degree March climes of Cyprus might look tempting, but who wants to book a holiday to somewhere that is so unstable. What happens if they stop accepting credit and debt cards? What happens if they introduce capital controls on tourists? What happens if they revert to the Cypriot pound and force tourists to exchange their hard currency at an unattractive interest rate? And what about civil disturbances? They had a civil war in 1974, they will shortly have spiraling unemployment, who wants to go on holidays to a potential war zone? On the other hand, come to Ireland, you’ll get a great welcome, we have great scenery and this year, we have a special Gathering campaign when the families of Ireland are coming together from across the globe. Actor Gabriel Byrne might have originally written it off as a shake-down designed to relieve our Yankee cousins of their dollars, but it’s happening anyway, and you are guaranteed a better experience than that potentially on offer in Cyprus, regardless of the weather. Maybe we should get Tourism Ireland to run a negative campaign.
(3) Banking and financial services. Former Taoiseach John Bruton is the ambassador for our International Financial Services Centre in Dublin, and he will be only too happy to explain to you the tax and regulatory advantages of basing your bank or financial services operation in Ireland. Already we have over 400 of the world’s banks operating from a small spot in Dublin city. In previous years, we might have been written off as “Liechtenstein by the Liffey” or the “Wild West of Banking” but we have bolstered our financial regulation, we’ve even appointed a surly Brit to the post of Financial Regulator. But don’t fret, there is an influential industry group that meets with the Department of Finance and An Taoiseach on a regular basis, and the evidence points to the tail of international banks and financial services operations still wagging the dog of democratic politics.
(4) Foreign direct investment. The IDA’s job has become far easier. In addition to maintaining our gold-standard 12.5% corporate tax rate when those about us are losing theirs, Ireland can really stick the boot in during our investor road-shows to deter businesses who might have been considering Cyprus as a base. Does Google really want to open a base in a country with unstable currency, banking system, bailout when Ireland is brimming over with talent, technology and tax incentives.
(5) Hot Russian money more likely to come to Ireland. Let’s face it, do we really care all that much where deposits come from? All deposits support the banks in making more loans available to the economy, and more credit in the economy will drive economic growth and enable us to get a lead on our partners across Europe. So, maybe we should consider a few more Russian-language welcome signs in Dublin. Justice minister Alan Shatter will give them visas if they make some vague commitment to invest €75,000 in Ireland or maybe promise to buy an apartment from NAMA.
(6) Weaker euro helping exports to key US, UK and non-EU markets. The exchange rate between the euro and sterling has fallen from €0.88 to just over €0.84. That’s good news for Ireland given that the UK is our main practical export partner. In fact a weaker euro is altogether better for the exporting marvel that is Ireland. And we can thank the development of the fiasco for the recent decline in the value of the euro. Until a few weeks ago, sterling’s weakness as the UK struggles to generate growth together with the “mission accomplished” tenor from EuroZone leaders that the crisis was over, all pointed to the euro becoming stronger which is the last thing our exporting-economy-on-steroids needs. Thanks to the bungling over Cyprus, the euro is on a weaker trajectory which gives our economy a boost.
(7) No Irish exposure to recapitalizing Cypriot banks. The ESM, the fund that was set up last year, and to which Ireland has already contributed €509m will not be used to bailout insolvent Cypriot banks. And furthermore, it is understand that the exposure of Irish banks including the Central Bank of Ireland to Cypriot bank debt is minimal. So, Ireland faces practically no financial consequence in respect of Cypriot meltdown. If we were exposed to losses, then we might consider bilateral loans from Ireland to Cyprus. Like the British chancellor George Osborne in 2011, we might even be patronizing enough to say “Cyprus is a friend in need, and we are there to help” before providing a loan at market interest rates so that our banks, businesses and citizens might be repaid.
(8) Although we’re still the dumbest people in Europe, the Cypriots make us look a lot better. In Cyprus, they actually have finally landed on a good design to solve their financial mess. But the problem for Cyprus is firstly, they originally came up with a plan which would undermine their deposit guarantee and secondly, their implementation has been horrible with banks closed for 12 days and capital flight now guaranteed. Of course the agreement to change the corporate tax rate was also not bright, but in principle, forcing the debtors of banks to shoulder losses in specific banks ring-fenced the problem to badly run banks, keeps smaller depositors safe and imposes losses on those best able to pay for them. Contrast that with Ireland where we have repaid €11bn to junior bondholders, 10s of billions to senior bondholders and all depositors, even those with millions have walked away with 100% of their deposits, whilst the burden for the banking collapse has been placed on the shoulders of citizens who have seen PRSI increases, public service cutbacks, cuts to childrens allowance, VAT hikes, pension levies and other assorted measures which have hit the most vulnerable in society. So, we were the dumbest in Europe by a country mile for our own bailout, but the implementation of the Cypriot bailout makes us look just a little smarter.
(9) If PTSB or AIB go bust, the additional impact on the taxpayer will be limited. We now seem to have a model for dealing with insolvent banks, and keeping in mind that both PTSB, AIB and even venerable Bank of Ireland are facing extreme challenges with their mortgage books, should the banks need more capital, we don’t have to stump any more in a national bailout. Depositors with more than €100,000 and bondholders will face losses, and the problem will be contained. Well done to Cyprus for path-finding this model for us.
(10) Scales are falling from our eyes. By studying developments in Cyprus and keeping the theme of this blogpost in mind, perhaps we can now place ourselves in the shoes of the French, Germans and British in November 2010 when Ireland was frog-marched into a bailout. Perhaps now, we can step in George Osborne’s shoes and understand why he advanced a €4bn bilateral loan to Ireland. Perhaps we can now understand why Nicolas Sarkozy sought to take advantage of our woes to press for an increase in our corporate tax rates to help the French economy. Perhaps we can now understand that EU politicians can behave like a bunch of bozos and that ultimately, we must rely on our own abilities to defend our interests, because no-one else will.
[The above is a deliberately provocative commentary on the Cypriot bailout, and apologies for any offence caused. But think on, in November 2010 when Ireland was frog-marched into a bailout, do you think it beyond the bounds of possibility for other nations to have viewed our woes in the same manner illustrated above?]