It seems that, there is agreement that the EU will provide €10bn in funding to Cyprus in return for a range of domestic measures, including in the short term, the burning of €100k+ depositors in two of the country’s banks, Bank Laika and Bank of Cyprus. Bank Laika itself will disappear with its good loans and sub-€100k deposits transferred to Bank of Cyprus, whilst the €100k+ deposits and toxic loans will be transferred to a bad bank which will be wound down. A LOT of uncertainty still surrounds the deal, and perhaps just as importantly for Cypriots there is DOUBT over whether the banks can re-open tomorrow, Tuesday 26th March 2013. Cypriot politicians should know the full details of the deal later today, and then they’ll have to confront the reality that their banking system is dead anyway.
The Cyprus fiasco is becoming more and more relevant to Ireland. Our deposits are fundamentally no less secure than they were a fortnight ago , though events in Cyprus will increase mistrust and possibly fear. So, it’s not really about deposits but about the mechanics of our own bailout deal back in 2010. Consider the following
(1) If the German Secret Service or the Bundes Nachrichten Dienst (BND) today has the skinny on Cypriot money-laundering and Mafiosi deposits, then what did the BND know about the identity of senior bondholders in Irish banks in 2010? As widely believed, did the BND know that German banks and German interests were amongst the main beneficiaries of repaying bondholders 100%?
(2) If Cyprus is such a hotbed of international moneylaundering and financial shenanigans, then why haven’t Cypriot banks been investigated and fined. Like HSBC which the US has found facilitated moneylaundering from Mexican druglords and Iranians. Or Barclays which is to the fore of rigging the LIBOR interest rate. Or Lloyds and its involvement in insurance and interest rate swap misselling.
(3) Forcing Cyprus to raise its corporation tax rate by 2.5% from 10% to 12.5% is little short of economic warfare on the part of France and Germany. It really doesn’t matter what the increase is – even if it were just 0.1%, Cyprus has lost its corporate tax BRAND. Investors know that future changes, forced upon Cyprus externally, are on the cards. We know all about this in Ireland, and we know that as soon as you increase your corporate tax rate, companies will immediately modify their behavior and Cyprus may find in the space of weeks that the income to which its new higher rate applies is significantly reduced. This measure has nothing to do with helping Cyprus, and everything to do with satisfying France and Germany, whose outlook on low corporate tax rates is familiar to us here in Ireland.
(4) We now know what pressure An Taoiseach Enda Kenny must have come under in March 2011, when he came into office and deployed everything he had in reducing the interest rate on our bailout, but he endured a “Gallic spat” with the French who were adamant that we raise our corporate tax rates. Even when our rates were ultimately reduced in July 2011, in line with Greece and Portugal, we, uniquely had to give a commitment to engage constructively in discussions on the Common Consolidated Corporate Tax Base.
(5) We now know better what a bunch of bullies the ECB are. We didn’t get a two sentence warning from the ECB in 2010.
No, in our case, the correspondence from the ECB to then finance minister Brian Lenihan has been withheld. But we did get a sense of the approach of the ECB in 2011 when it said “In the meantime, we may have to come to the conclusion that it doesn’t really make sense for the ECB to keep putting €100 billion into Irish banks. What we are doing is actually illegal, but we have being doing it because we want to help Ireland. Maybe we might come to the conclusion that we should stop”
Of course, we recognize that there are limits to the ECB’s provision of liquidity, but when we are on our knees, forcing us to repay 10s of billions of bonds to German and French (and British) banks, this behavior looks distinctly like extortion.
(6) The Germans are now at pains to point out that it was a Cypriot idea to burn depositors with less than €100k. But here you have a tiny EuroZone country, 1.1m people and a GDP of €18bn, with a small unicameral parliament, and it has been requesting assistance for over a year after the EuroZone decision to allow Greece to burn bondholders which consequently led to losses in Cypriot banks. Even if it was a Cypriot idea, then better-informed, resourced and experienced finance ministers should have had alarm bells ringing, and if there is any sense of solidarity in Europe, the Greek finance ministers should not have been allowed leave that room at 3.30am on Saturday morning a week ago, with a proposal which has undermined the entire Cypriot banking system. The uniform message from the Germans on how they weren’t the source of the burning of sub-€100k depositors, reminds me of the uniform message from German politicians last year who all understood that Ireland had shouldered a huge bank bailout which assisted Europe – ultimately, all that sympathy didn’t lead to a debt-writedown or Germany shouldering any more of the burden, did it?
Minister for Finance Michael Noonan is telling the media today that Cyprus has little to do with Ireland – no doubt he’ll refer to feta cheese or olives presently – so what is unfolding at the far end of Europe is of little relevance to Ireland. I think it tells us a lot about our own bailout.