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If Cyprus rejects the bailout...

19 March 2013 / 17:03:05  GRReporter
4644 reads

Anastasia Balezdrova

"What we see today in Cyprus has its name: History," a leading Greek commentator wrote in the social networks. The whole world is anxiously following the developments in the small country which is about to change all that now seems secure and stable.

The Parliament of Cyprus has postponed for the second consecutive day the crucial vote on the bill on the cuts of deposits, which is to save the banking system. Banks are still closed for fears of mass withdrawals of capital. Finance Minister Michael Sarris has left for Moscow, which sharply responded to the probability of cutting the deposits of Russian citizens.

"The government of Cyprus is trying to use the people with smaller deposits as a shield against the cuts of big deposits, i.e. to prevent the people with big deposits from paying. But banks cannot remain closed forever.

From this point onwards, I cannot predict the outcome of the vote in the Cypriot Parliament. What is clear is that if the deputies reject the bill, Cyprus will enter a very difficult period. A similar decision will surely bring turmoil in all other European countries, but the consequences will be severe especially for Cyprus," professor of economics at the Panteion University in Athens Antigone Lyberaki told GRReporter.

But how has the country ended up in this situation and what may follow? Political scientist Haridimos Tsoukas answers the questions of GRReporter.

Mr. Tsoukas, what has caused this drastic decision?

It depends on how far back we want to return. The most crucial factor was the euro zone’s decision to haircut the Greek government bonds in 2012. This was when Cyprus' problems started, because the Greek haircut brought huge losses to the banks of Cyprus. The banks were unable to fill them and therefore, the state had to intervene.

Subsequently, the problems were exacerbated because of the structure of the Cypriot banking system. It is eight times greater than the GDP of Cyprus; it is huge, hypertrophic and of course, a large part of the foreign deposits belongs to Russian citizens. There were rumours that at least a part of them was the product of money laundering. Later, this drove different "moralists" mainly in Germany and especially from the opposition Social Democratic Party to pressure Chancellor Angela Merkel to sign an agreement with Cyprus, under which deposit holders would pay as well. They had threatened that they would not support the bailout agreement to Cyprus in the Bundestag otherwise.

From then on, they have begun considering solutions that involve deposit holders. Instead of deciding on the involvement of people with deposits exceeding 100,000 euro, the euro zone with the consent of the Cypriot government has decided to involve people with small deposits too.

This decision of the European Union violates the taboo that deposits under 100,000 are guaranteed and it has sown the crash actually.

Do you think that the policy of the former Cypriot government contributed to the adoption of this decision?

It helped, of course. Former president Dimitris Christofias turned in July 2012 to the euro zone with a request for financial support and later accused the European financial institutions of being "thieves" and refused to cooperate, generally speaking.

The agreement with the supervisory Troika should have been signed many months ago. It was in the drawer of the previous government for 250 days but the governemnt did not do anything. As we are now seeing what has been going on over the past few days we understand why Dimitris Christofias had firmly refused to negotiate with the lenders. Obviously, he did not want to assume the huge political responsibility by agreeing to their requirements.

But that only made the situation worse. Dimitris Christofias should have asked for compensation for his agreement to the haircut of the Greek debt long before that. He did not do anything about it. Moreover, it is absolutely inexplicable why the Cypriot authorities allowed the Cypriot banks to spread so much in Greece. Now we see that it was a disastrous mistake. It is also not clear why the Cypriot government agreed to the merger of the Greek Marfin-Egnatia bank and the Cypriot Cyprus Popular bank. I can continue with many political errors that have been accumulating and which cause enormous problems at some point.

What opportunities are there for Cyprus to manoeuvre during the talks?

I am not aware of the recent discussions taking place at the presidency in Nicosia. Anyway, talks with Russia are underway.

I'm afraid that the only option for Cyprus is to accept the agreement revised last night, which offers cuts of big deposits exceeding 100,000 euro by around 15.5% or reject it.

What would the consequences of such a decision be?

If the threat of the European Central Bank that it would break the liquidity of Cypriot banks were real, as I think it is, then logically, the two big banks would collapse. This will be disastrous for the economy. It will not be able to recover and suspension of payments and exit from the euro zone most likely will follow.
 
A chain reaction of events will follow that cannot be predicted with accuracy. The effect will be like the effect of an uncontrolled nuclear explosion. There is no way to know exactly what the outcome will be but the risk of sovereign default is quite probable.

Tags: PoliticsCyprusCuts of bank depositsHaridimos TsoukasAntigone Lyberaki
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