The Cyprus mess is a perfect storm on many levels. Our own (read Cypriot) mistakes have been serious, protracted and deeply rooted in mentalities that many of us had hoped would go away after EU accession.
As the wishful thinking goes away and we run through the five stages of grief, however, a series of other issues arise that don’t necessarily concern Cyprus alone.
Eurogroup and ECB have behaved in a way that has raised –not unjustifiably- the question whether the bank run that they caused was the result of pure incompetence, or of mala fide decision making . I’ve also written about how I was dragged to CID (Criminal Investigation Department) offices for writing about ELA extensions to Laiki bank even as the ECB stood idly by and let an insolvent bank gather over 50% of the country’s GDP in emergency liquidity.
The latest interesting question, though, relates to the very architecture of the Eurosystem. Although from what I gather this was never broached in the cases of other PIGS, the role of the national Central Bank has become increasingly strange.
The national Central Banks are, essentially, branches of the ECB, which in turn is a member of the Troika, alongside the European Commission and the IMF. And yet, national central banks tend to “negotiate” with the Troika about what needs to be done.
In theory, both ECB and national CBs should have the best interest of the financial system in mind. In practice, though, this is hardly ever the case; national stability and particularities rarely jibe with the overall interest of the Eurozone. This is one of the most fundamental criticisms of the entire Euro.
When it come to Cyprus, the ECB has been playing second fiddle to the IMF, as became obvious with the disappearance of Mario Draghi from the front lines and his comments last week that he disagreed with the depositor bail in –or at least the way it was done.
On top of that, there are even deeper questions about the Chinese Wall that the ECB pretends it has created between NCBs and their governments. Statements by the governor of the Central Bank of Cyprus last week, only underlined the situation: He commented that Laiki Bank had been “on the respirator for nine months” and that he couldn’t make decisions because (presidential) “elections had to take place” before anything was done.
This is a violation of his oath- the “need for elections”, he admitted, trumped the need of the system for drastic moves.
Then it got even more bizarre. After the Eurogroup decision, the ECB was adamant that capital controls should not be imposed in Cyprus. Now, according to senior Central Bank of Cyprus officials, the Central Bank of Cyprus is against capital controls but the ECB insists on keeping them in place, largely because of IMF’s decided policy.
Behind all of this stands a simple question: Is a national Central bank in the Eurosystem fit to “negotiate” or at least “deliberate” with the ECB on the needs, requirements and best interest of financial stability in a Eurozone country?
In Program countries, Central Banks negotiate with the ECB and the Troika. At the same time, they are a part of the ECB and hence of the Troika. Governors serve as long as they enjoy the confidence of the Governing Council, but at the same time they sit at opposite sides of the table and negotiate with the ECB things like baseline scenarios for bank recap needs.
It is now clear in Cyprus that the Central Bank, which ostensibly “was negotiating” on behalf of the Republic of Cyprus with the Troika, did no such thing. This is perhaps right; why would an ECB Governing Council member negotiate with the ECB?
But then again it needs to be clear that two hats fare one too many for a single head. Program countries need to be taking a more explicit position, noting that their national Central Banks are “part of the Troika” and that they looking after Eurozone interests (and from the looks of it, following the lead of the IMF). They don’t express the best interest of the nation they “represent”.