The Corner


Late last night (British time) the Daily Telegraph’s Bruno Waterfeld and Denise Roland summarized where things now stand.

All money transfers will be frozen indefinitely. Laiki Bank, the island’s second largest lender, will be wound down, threatening more than 10,000 jobs on the island, which has a population of just over 1m. Individual savings up to €100,000 will be moved to the Bank of Cyprus. All Laiki deposits above €100,000 will be placed in a bad bank and sold off at a discount of up to 40pc.

The wind-down of the Popular Bank, known as Laiki in Greek, means it will not need to be recapitalised, finding between €2.3bn of the €5.8bn in debt reduction that Cyprus must raise to qualify for its €10bn eurozone bail-out and ECB liquidity.

To raise the remaining cash, Cyprus is expected to resurrect a “stability levy” of between 9pc and 10pc on all bank deposits over €100,000, protecting small savers, including many of the 60,000 Britons with bank accounts in Cyprus. The Laiki wind-down and the levy is expected to save the Bank of Cyprus, the island’s largest bank, which had previously been targeted for closure by Germany during talks. Respite came for the bank after Cyprus promised the eurozone it would pass legislation giving wide-ranging powers to the central bank, part of the ECB system, to restructure financial institutions. A “solidarity fund” will also be created to pool state assets.

ECB, IMF and European Commission officials stepped up the pressure on Cyprus last night by demanding it find a “safety cushion” of €900m on top of an existing €5.8bn demand.

Pawel Morski:

[T]he misery of Cyprus is a feature, not a bug. It’s intended to make it clear that politics in the [Eurozone’s] core states is primary. Expect no relief.

…No human agency has acheived so much economic destruction in such a short time without the use of weapons. The combination of laying waste to the financial sector and tearing up the savings of thousands of residents means that Cyprus won’t return to current levels of output for a decade, a funeral pyre which bears comparison only with Greece. There are four shocks happening at once; the bog-standard austerity shock; the trauma of bank withdrawal controls; the wealth shock; and the structural shock of wiping out the financial sector. The bailout bill is certainly going to get a lot higher too, as a larger amount of debt is piled onto a smaller economy.

Behind the FT’s pay wall John Dizard thinks through the implications of the return of capital controls:

You may have thought that your European assets lived in a borderless single market, but as we see now being played out in the case of Cyprus, that is not necessarily the case…Even after the banks (presumably) reopen on Tuesday, a euro in Cyprus will now not be as freely transferable, or, really, as valuable, as a euro in Frankfurt. In some very real ways that is also true of euros on deposit in Greece, whose use is increasingly subject to detailed review and delay by tax authorities; or euros in Italy, where the size of cash transactions is severely restricted, at least by law. [N]ow that the…capital-controls cat is out of the bag, it is reasonable to consider when and where it will be used again, when a European banking system gets into trouble. You may be rich, in nominal Cypriot euros, or (fill in the blank) euros, but so what?

Charles Proctor, a partner in the London law firm Fladgate, and a leading scholar in the field of monetary law, points in particular to Article 65 1 b [of the EU Treaty], which allows for [capital] controls to be imposed on the grounds of “public policy or public security”. As he comments, “I suspect when that was written and agreed that nobody really knew what it meant, but they just wanted to build in flexibility. Cyprus can do this unilaterally, and there is no time limit for how long they can be in place.”

Cyprus, of course, could still be seen as a special case, but it’s hard not to think that the preconditions of panic are being baked in, something that makes these comments by SYRIZA, Greece’s powerful  hard-left opposition, worth noting.

Ekathimerini reports:

Referring to “a theft that is spreading from salaries and pensions to savings,” SYRIZA called on the Greek government to break ranks with its European counterparts and reject a proposal for a haircut on bank deposits, noting that such a move “would open the door to similar developments in Greece and other European countries.”

Greece was chosen three years ago as “the first guinea pig for the implementation of a generalized strategy of austerity in Europe,” SYRIZA said, noting that Cyprus was a guinea pig for the next step — “a generalized haircut on savings.”

Talk like that will calm people down….

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