Mar. 26, 2013 (TSR) – MANY said that Cyprus secured the best possible deal under the circumstances during the 10-hour negotiations in Brussels but this is of little comfort when we ponder the consequences of the terms imposed on President Anastasiades. The best possible deal will push us into a prolonged slump that will shrink the economy beyond recognition, as businesses will close down and the numbers of the unemployed will keep rising.
It is true that Cyprus brought this upon itself, the previous government ignoring the countless warnings over the years and behaving as if the problems would go away if it ignored them. We put ourselves in the position from which there was no escape but this did not justify the punitive nature of the bailout agreement imposed in the early hours of yesterday. The medicine administered by the Eurogroup, on the recommendation of the IMF and the ECB, is designed to finish off rather than cure the patient.
The winding up of Laiki Bank, the second largest lender, should have taken place last year but it was kept afloat by billions from the Emergency Liquidity Assistance. What was unacceptable and indicative of the troika’s bullying was the insistence that Laiki’s €9.2 billion debt should be undertaken by the Bank of Cyprus, which would also be obliged to take over Laiki’s good business, valued rather generously at €7 billion. To be able to survive with an additional €2 billion liability the Bank of Cyprus would have to bail in uninsured deposits by between 30 and 40 per cent to meet capital requirements, instead of the proposed 20 per cent.
This means that many businesses will lose a big chunk of their trading capital, be unable to make payments to creditors and to operate. Add to them the thousands of businesses that were using Laiki and will have lost all their capital and it is difficult to see how the economy would operate. Will credit be available or will the rest of the banks reduce facilities and call in loans to limit their exposure? When the unaffected banks open today, if there are no restrictions on withdrawals, they could also come under severe pressure and face liquidity shortages because confidence in the Cypriot banking system has been shattered.
This is what the Eurogroup has achieved in its mission to reduce the size of the banking sector and destroy Cyprus’ economic model. The fact is that Cyprus was small and inconsequential enough for Germany, the ECB and the IMF to make an example of without the risk of contagion for the rest of the eurozone. They did not dare bail in depositors in the case of Ireland, Greece and Spain’s banks, ignoring the EU policy and legislation, which they felt obliged to pursue for Cyprus.
The big irony is that for months we have been hearing IMF, Eurogroup and Commission officials insisting that Cyprus’ public debt should be sustainable. It would be anything but sustainable now that they have killed off all economic prospects for the next five to 10 years.
This article was first published in Cyprus Mail.