If it is the land of Venus, it is also the land of Iago. Cypriot businessmen calling for a eurexit in the hope that inflation will erode their monstrous debts while allowing their foreign deposits to buy back their former empires; banks loaded with chronic cronyism; sclerotic politics and pervasive complacency. One would find it hard to claim that Cyprus is an innocent by-stander to its own crisis.
This week’s events, however, are something of a puzzle. The president of Cyprus, Nicos Anastasiades, sent a letter to European leaders and to Troika bosses asking them to lend a hand in dealing with the crisis created in moribund Bank of Cyprus.
European officials responded saying that “essentially he is asking for a complete reversal of the (MoU) programme,” according to the FT. In a spectacular display of ignorance for someone who is qualified to talk about the issue, the same unnamed official commented that “the failure to prepare for the bailout’s impact was partially the fault of Mr Anastasiades’ government, which initially voted down a rescue package before accepting a similar deal nine days later.” This was not actually what happened at all.
As Anastasiades’ letter hit international media, the European response exuded anxiety, nervousness, unease. “He is asking that the bailout deal be reviewed”. Well, he does, unless you actually read the letter. For some reason or another, the FT endorsed this spinful reading of the letter. Its story yesterday starts: “Cyprus’ president has asked eurozone leaders for a complete revamp of his country’s €10bn bailout, warning Nicosia may not be able to meet the rescue’s current terms because it has harmed the country’s economy and banking system even more than expected.”
Anastasiades said something quite different; while restating his government’s determination and commitment to implementing the MoU –with administrative measures underway and with 21 pieces of legislation approved already- he also notes a hard fact that certain people in (ahem) Frankfurt would very much like to avoid:
First, the insolvent Laiki was prodded up with continued liquidity assistance (through ELA) even while being manifestly insolvent. The governor of the Central Bank of Cyprus, a member of the ECB’s Eurosystem, originally commented that “Laiki was kept on the respirator for nine months” because not doing so would harm the state finances, and because “elections had to take place”. This week, he commented that this happened because the bank was, in fact, “solvent”, by virtue of the fact that Cyprus would be bailed out by the IMF, the European Commission and his masters in the ECB.
The zombie-bank, in other words, was kept alive with 9.5 billion euro in obligations because (as the ECB concurred, he says), the Cyprus bailout would cover the cost.
Then, as the bailout happened and Laiki could no longer be deemed to be solvent by virtue of the bailout, depositors lost their money to cover the losses caused by this Central Bank decision. And, no, the Central Bank didn’t take a hit. In fact, it was the only party involved in any way with Laiki bank, not to lose any money. At all.
But that was not enough; then Laiki was broken into a “good bank” and a “bad bank”. The Bad Laiki was unwound. The “good Laiki” was thrown onto Bank of Cyprus, another troubled SIFI lingering on the verge of collapse.
Except, the “good Laiki” wasn’t good at all. With just over 14 billions in assets, it doesn’t even cover the 9.1 billion in ELA (with collateral discounted at 50%), let alone the 4 billion euro or so of deposits it brought over to Bank of Cyprus. BoC had to cover the Laiki hole before covering its own.
Hence, Bank of Cyprus, in the middle of a banking crisis and deposit flight, was left with no collateral to cover any ELA needs of its own, with no liquidity support from the ECB (despite assurances to the contrary) and with no way to stave off its liquidity problem, let alone its solvency problem.
This is a very mysterious decision, one that can only be explained by an insistence by the ECB that, despite its protracted decision to break every prudential rule on extending liquidity to insolvent banks, it would not lose a cent.
Instead, the Laiki sin would be paid off –by bank of Cyprus depositors.
In order to save the country from a bank run in the face of ruined confidence in the largest Cypriot bank, the Troika then decided that all banks would face a corral, capital controls that –needless to analyze- are stifling the economy.
One mistake bred another: vast liquidity to insolvent Laiki was loaded onto Bank of Cyprus; Bank of Cyprus depositors footed the loss; and, finally, the rest of the banking system is asphyxiated by refusal to support Bank of Cyprus after all of this.
Anastasiades noted that this situation is a triple whammy on the economy: Loss of confidence because BoC is not moving along towards normalcy, BoC illiquidity, and finally capital controls on the entire system.
And, noting that all that was agreed is already being implemented, he implored that Cyprus’ EU partners do something about BoC. If Cyprus does all that was agreed (“we are no Greece, guys”), that will still not be enough if Frankfurt doesn’t support BoC. This is a gloomy realization for Cyprus.
None of this is to say that Cypriots are not at fault. The Central Bank of the island is dragging its feet to the point where the most conspiracy-loving Cypriots are wondering if the governor is actually hoping that BoC will fail. After having declared these ideas laughable, I catch myself wondering, too. Politicians are no better, while labor unions remain stuck on demands like “preferential layoff benefits” in places like Cyprus Airways, a company that is –to put it mildly- completely and utterly beyond salvation.
To spin the Anastasiades letter into a demand for a revamp of the MoU, however, is not just spin; this is deliberate mendacity. It was a cry for help, it was a “do something!” It even was a submissive assurance that the MoU implementation will continue as a show of sincerity while the country is saved. It was a hostage’s cry, not refusal to implement the MoU, which is a completely different thing from saving BoC.
The response from Frankfurt and Brussels is troubling. Did these officials not actually read the letter they were commenting on? Or is there something more sinister at play here?