After a hair-raising week of wrangling, threats and public protest, a deal to rescue Cyprus from the collapse of its outsized banking system was finally reached in the small hours of yesterday morning. With President Nicos Anastasiades’s agreement to radically restructure Laiki and Bank of Cyprus – leaving depositors with more than €100,000 with heavy losses – the crucial €10bn to come from the EU, the IMF and the European Central Bank has been secured.
Just in time. Cypriot MPs unanimously rejected the first bailout plan – which included a levy on smaller savers who should have been covered by EU-mandated government guarantees. Appeals to Russia also came to nothing. Still Mr Anastasiades tried to protect the island’s major foreign depositors, and thus its status as a financial haven – even threatening to leave the euro. But international lenders were intransigent; and the ECB set a deadline of Monday, after which emergency loans keeping the stricken institutions afloat would come to an end, with devastating consequences.
For all the horse-trading, there was never a viable alternative to stinging wealthier depositors. Not only would tearing up the government insurance on deposits of under €100,000 likely have provoked bank runs across the EU. There also is a moral case here: those who reaped the benefits of Cyprus’s advantageous rates should, surely, be the ones to bear the associated risk.
Nor can taxpayers from elsewhere in the eurozone (for which, read Germany) be expected to pay the price for safeguarding either the largely Russian billions in Cyprus or the manifestly unsustainable financial system through which they were laundered.
With a deal now done, the island’s imminent economic meltdown has been averted, as has the risk of its exit from the euro. But there the good news ends. If the outlook for Cyprus is far from rosy, now that its career as an off-shore banking centre is abruptly over, the implications of Europe’s maladroit handling of the situation are more concerning still.
Not only does the mere suggestion of a raid on supposedly insured deposits add to pressures on tottering banks elsewhere in the EU, notably Spain. The proposal is also evidence of a dangerous tin ear as regards the increasingly fractious public mood across the bloc. Meanwhile, the eurozone’s fundamental structural problems remain unaddressed. With Cyprus’s bailout channelled through the government in Nicosia, the toxic link between Europe’s failing banks and its over-indebted sovereigns is left unbroken. And progress towards the shared banking rules and the closer fiscal union that all agree are vital is so slow as to be meaningless.
Last summer, Mario Draghi promised that the ECB would “do whatever it takes” to save the euro, a move that did much to calm the flighty bond markets. But Europe’s politicians have used the breathing space to duck difficult decisions. The crisis in Cyprus is a lesson in how much more needs to be done; Europe’s cack-handed response is a lesson in how little has been learned.