by (Originally published 21 March 2013)
Yves Smith at Naked Capitalism has reposted Cyprus Bailout: Stupidity, Short-Sightedness, Something Else?, an article by Antonis Polemitis and Andreas Kitsios that originally appeared at Cyprus.com.
The article has a number of problems, not least of which is that it suggests that “this was not something that the Cyprus government invented – it was forced on them by the Troika”, despite the fact that it was Cyprus’s representatives in the negotiations who rejected plans that did not hit small depositors. But it is more confused on a deeper level.
It could be that when Polemitis and Kitsios write “forced on them by the Troika” what they mean is not the particular deal itself, but the need to make a deal. They write that
Anastassiades was ambushed when the troika said to him: “Agree to depositor bail-in as part of the financial package or the ECB will cut off funding to Laiki on Tuesday” causing a surprise collapse of our banking sector.
But there’s a problem with this version, because earlier in the same article, when describing the various banks in Cyprus, they write “Laiki is definitely insolvent and needs to be restructured.” If this is so, then t”cut[ting] off funding to Laiki” is exactly what the ECB should do and should not be a “surprise”. The ECB’s emergency liquidity facility is meant, as its name indicates, to provide emergency liquidity, not to provide an bottomless funding source for banks that are “definitely insolvent”.
No doubt the best course of action would be to restructure Laiki, but Cypus seems not to want to do that. Indeed, according to the Wall Street Journal, Christine Lagarde proposed that only the accounts of the problem banks be charged:
The IMF chief presented a much more radical plan, in which deposits above #100,000 in La iki and Bank of Cyprus would have been cut by between 30% and 40%. The owners of senior bonds in the two banks would also have faced losses-a step that was ultimately rejected.
It may be true, as Polemitis and Kitsios write, that
What is even more absurd is that this is not a bail-in of Depositors of Bank A to rescue Bank A, but a bail-in of Depositors of Banks A-Z to rescue Depositors of Bank A (Laiki), B (Bank of Cyprus) and C (maybe some small amounts to the others).
… but this “absurdity” is not the fault of the Troika. The Troika suggested “a bail-in of Depositors of Bank A to rescue Bank A,” but such was unacceptable to the Cypriot delegation.
It is no doubt true that Cyprus preferred no depositor “bail-in”, and that “both the President and Minister of Finance said: ‘No depositor haircuts…'” The problem is that this is plainly unrealistic. As Polemitis and Kitsios point out, Cyprus’s “banks are almost 100% deposit funded”. This is a good thing, in general, but it also means that, in the case of bank insolvency, there is no one other than depositors to receive a haircut. In the negotiations, the Cypriots were unwilling to give haircuts to those who deserved it, and thus ended up giving haircuts to everyone. But that was the choice of the Cypriots, not the Troika.
One final point, which is less important. As a defense of Cyprus’s banking system, Polemitis and Kitsios point out that “Banking assets are about 7.1x GDP relative to the EU average of 3.5x GDP and similar to Ireland and Malta.” While true, this is slightly misleading absent the further information (present in a different article) that ” financial services […] accounts for 45% of Cyprus GDP.” Which puts a slightly different colour on the “7.1x GDP” figure.
