18 March 2013

Paul N Goldschmidt: The bailing-out of Cyprus - A poorly-explained necessity negotiated under stress

It is of the greatest importance to ensure that the measures decided by the national governments within the Eurogroup are not described as a malevolent imposition thrust upon Cyprus by an uncaring "Europe".

The announcement of the terms of the Cyprus bailout, at the end of nightlong negotiations, caught observers by surprise because of the intention to impose a levy on bank deposits. It is supposed to be, as in the case of the Greek sovereign debt “haircut”, a one-off “exceptional” measure. Having no prior frame of reference, some commentators consider it a transgression of the 2008 accord among Member States guaranteeing bank deposits under their jurisdiction, up to an amount of € 100,000; this about face could severely endanger the credibility of the European Union itself.

On closer examination, this turns out not to be the case: deposit guarantees provide “compensation” to cover the inability of a bank to honour its commitments towards depositors. Though it is true that the Cyprus banks would have defaulted without the bailout, the current plan envisages recapitalising the banks with funds provided by the international community on the one hand and taxes on the other, so as to ensure that the sector continues to function normally.

The proposed levy on deposits is therefore a “tax” which will be voted upon, under an accelerated parliamentary procedure, ensuring its legitimacy.

The lack of clarity in the hastily bungled communication by the authorities, giving ample scope for the most diverse interpretations, has already induced an initial negative market reaction. It is affecting mainly the banking sector but is also contaminating the sovereign debt market, putting into peril the slow progress realised in fighting the excessive fragmentation of the euro markets. 

The mobilisation of fiscal resources in the handling of the Cyprus crisis should be interpreted as a strong and welcome indication signalling the will of Governments to face, at last, their responsibilities, as requested with insistence by the ECB. Indeed, the options selected by the Eurogroup can be analysed as an attempt – as far as Cyprus is concerned – to break the incestuous circle of mutual dependency of the domestic banking sector and government finances.

To avoid further risks of contagion, it is urgent to remove any ambiguity concerning the nature of the proposed measures whose credibility concerning their “exceptional” character needs to be reinforced. It is, however, necessary to preserve the absolute powers of a state to raise taxes legally and to determine their scope. It is within such a framework that amendments aimed at protecting the weakest Cypriot citizens are not only possible but highly desirable.

It is of the greatest importance to avoid that the measures, decided by the national governments within the Eurogroup,  be described, once again, as a malevolent imposition thrust upon Cyprus by an uncaring “Europe”. Indeed, the lack of citizen’s support for the Union will continue to grow, in Cyprus and elsewhere, if Ministers blame systematically Europe each time they are called to defend unpopular measures instead of promoting the indispensable “solidarity”, needed to deal with the crisis.

The sacrifices requested from Cypriots are painful; the resources necessary to save the country (and probably the euro) are manageable; let us make sure that all stakeholders accept their share of the burden and that the European Union emerges stronger than before.

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Paul N Goldschmidt, Director, European Commission (ret.); Member of the Advisory Board of the Thomas More Institute

Tel: +32 (02) 6475310 / +33 (04) 94732015 / Mob: +32 (0497) 549259

E-mail: paul.goldschmidt@skynet.be / Web: www.paulngoldschmidt.eu

© Paul Goldschmidt