- Quest: Cyprus bailout deal is crisis averted, not problem solved
- Cyprus will still be left with an unsustainable debt load at a national level
- New normal is European banks aren't "safe" beyond deposit insurance limits
The backslapping and congratulations over the Cyprus bailout deal is still underway, and I realize it is not good form to criticize a deal when the ink has yet to dry on the agreement.
Perhaps we should be delighted that it only took a disgraceful bank levy to be thrown out by a nation's parliament, a week of bank closures with the chaos that brought, and the inevitable Sunday midnight meeting with everyone beaten into bleary-eyed exhaustion. And come to think of it, why can't the EU ever agree something during the day, without everyone having to lose a night's sleep?
The radical and immediate crises have been averted by the closure of one of Cyprus' two largest banks and "haircuts" on large bank deposits. The Cypriot bank system will survive minus one shoddy institution that is best gone and a restructuring of the rest -- if that ever happens. The date of 2018 has been set for the banking sector to be shrunk to the EU average, so don't hold your breath!
I have no doubt this was the best the leaders could do, in the time they had, to avoid Cyprus' economic collapse and exit from the euro. But I'm afraid this agreement is nothing more than the usual euro nonsense, beautifully coined in the Eurogroup statement after the deal was announced: "The Cypriot authorities have reaffirmed their commitment to step up efforts in the areas of fiscal consolidation, structural reforms and privatisation."
Hang on. Where have we heard that before? Oh yes. Greece after its first bailout. And Greece after various troika reviews which found, time and again, that few companies had been privatized, that structural reform was bogged down and that fiscal consolidation means all austerity and no growth.
The unpalatable truth is that Cyprus, even after taking €4 billion of depositors' money as part of the bailout, will still be left with an unsustainable debt load at a national level. The Eurogroup has lent the country more than 50% of its GDP.
Worse, as EU Commissioner Ollie Rehn admitted, is that Cyprus is heading into an even deeper recession. The country has shrunk for the past two years and has probably two more to go. All the woes that have been visited on Greece are now about to be experienced by Cyprus too, and it was all agreed in the middle of the night, in a hurry.
Cyprus was the victim of being the fourth sovereign to be bailed out. Even though the Eurogroup is making this up as they go along, there are now some common threads which can be seen in the way crises are being handled
Bondholders and shareholders in banks can no longer expect to be left alone. They tried that with Greece and Ireland and failed (although in the Irish case the banks eventually did have to be merged and closed).
Now the new normal is that investors should expect to be bailed in to agreements. Large depositors will also bear their share. No longer should European banks be regarded as "safe" beyond their deposit insurance limits. Anyone with €100,000 in a bank account should be on guard. Don't think it is unusual to have such large sums in bank account -- I know of several organizations and businesses who keep such sums as part of cash flow in the bank.
Northern countries like Germany, Finland, Denmark and company are now determined to take a hardline approach, and they do so because of bailout fatigue from their voters. But let's see if that line crumbles when a really big European country, like Italy or Spain, gets into trouble.
In each bailout we have seen the bark of an agreement, but we have yet to see the bite of the eurozone's determination to force countries into change. European leaders are so terrified their political project will fail that they cobble together these deals in the middle of the night, and then wonder why the whole thing fails to materialize 18 months later.
Take December's eurozone banking union deal, for instance, which was agreed to with an unrealistic timescale and is still some way off from actually happening. Despite the deal being agreed to four months ago, there remains the very real problem of civil unrest as a result of high unemployment in a number of euro countries, and there is mounting disquiet within the union.
Forgive me, I suppose I should be celebrating the Cyprus deal. But it's hard to be thrilled when all I see are crises avoided, not problems solved.