Troika's bank levy plan has opened a Pandora's box
If we're clever, we may gain retrospectively from any Cyprus bailout via the ESM, writes Marc Coleman
A central bank governor called "Panicos", a Russian play for influence and gas reserves in the Mediterranean, an ancient bond between brother orthodox nations and a currency in crisis. The Cyprus crisis isn't just a threat to the euro. It has all the hallmarks of a Dan Brown thriller.
By imposing a bank levy on bank deposits – a large part of which are Russian-held – as part of a €10bn bail-out, the Troika has opened a Pandora's box of unintended consequences almost unlike any other since the start of this crisis.
As we Irish know, being a small nation in a big field can make you a pawn in a bigger game. Some countries, Finland and Israel, have played this difficult hand well. This week the Cypriot government did the reverse. The bank levy it voted down was illogical in the extreme: protecting depositors in banks that go bust while taxing depositors in successful banks, and protecting bondholders who made ill-advised investments, is about as nonsensical as it gets. But it isn't the Troika's first mistake: imposing on us a property tax that hits those in negative equity and mortgage arrears hardest is an even greater one.
At least the bank levy is a tax on wealth. For families in negative equity and mortgage arrears, the property tax compounds a nightmare of negative wealth and squeezed income. If Cypriots get angry over a bank levy, the question arises why we don't get angry here. But, as an old Irish saying goes, 'An te nach bfhuil laidir ni folair do bheith glic'; if you can't be strong, be clever.
As Ruairi Quinn put it best: we drop our grenades into the ballot box. Our gains from the promissory note deal, such as they are, resulted not from brinkmanship in the Dail, but years of preparation and diplomacy. Achieving a retrospective gain from any Cypriot bailout via the ESM will require spade work too. By acting without electoral support, Cypriot parliamentarians have got themselves in a fix. With their banks closed until Tuesday, they may find voters sympathising more with those deprived of cash and credit than with wealthy Russian depositors.
When asked to cough up €5.8bn in a bank levy, Cypriot politicians tried to develop an alternative plan. Without understanding its real agenda, they turned to Russia. Like Montenegro, Serbia and Greece, Cyprus shares a religion and a long history of opposition to both Turks and Catholic westerners. To wealthy Russians, Cyprus is what Mallorca is to wealthy Germans. The most important ties are financial, though, with €20bn of Russian deposits in Cypriot banks.
But when they rejected the bank levy last week, Cypriot legislators took old loyalties too much for granted. Russia has its own interests as far as the EU is concerned. And they don't always involve Cyprus.
When Russia's finance minister announced that talks with his Cypriot counterpart Michael Sarris – aimed at securing an alternative Russian bailout – had "ended as far as the Russian side is concerned", Cypriots realised they had miscalculated.
On Friday, EU Commission president Manuel Barroso and Russian prime minister Dmitry Medvedev held a joint press conference in Moscow on issues close to Russia's heart – trade and travel visas – that had little or nothing to do with Cyprus. Russia still opposes a levy on bank deposits. But some sort of levy is likely and Russia would not be asking for easier travel for its citizens in the EU were it not prepared to give something in return. Like Ireland during its history, Cyprus may have turned to an ally only to discover it has become a pawn. Such is the fate of small nations.
As for dire predictions about the impact the levy will have on the euro, they are exaggerated. Cyprus is the last country likely to need a bailout and, as Simon Coveney made clear, a precedent here is unlikely to be followed. That doesn't mean the levy isn't inexplicably dysfunctional. Just that it is unlikely to be repeated.
Despite Russia's big-picture approach, Cyprus will still get some leverage out of Moscow's support. For Ireland, it would be like Barack Obama supporting our case for a large bank debt write-down. But he is doing the reverse: when the IMF backed our call for one two years ago, it was treasury secretary Timothy Geithner who blocked it. So much for Paddy's Day photo ops with the Taoiseach.
With no big brother to hold our hand, we have to rely on our wits. Cyprus will still have to contribute €5.8bn to any bailout, but alternatives to relying solely on a bank levy will be found. One idea – nationalising pension reserves – has been rejected by Angela Merkel. Another, to merge Cypriot banks, will involve a bank levy targeted on wealthier depositors and/or losses of up to 40 per cent for uninsured depositors. For Ireland, that is the one to watch.
When the dust settles on the Cypriot bailout two things will become clearer: whether and how much Ireland can benefit from any use of the ESM to support our banks and whether the new EU banking union will require constitutional change via a referendum. If Cypriot depositors are burnt, the case for burning bondholders in Irish banks will have been vindicated, albeit retrospectively. And if ESM assistance is given to Cyprus, then the Government has a strong case to extend that assistance to Ireland. And if the Government needs to get the Irish people to pass another Troika-inspired referendum, it may need to take a second look at a Troika-inspired property tax.
This week's Meath East by-election may also give it reason to pause for thought.
Marc Coleman presents 'Coleman at Large' each Tuesday and Wednesday from 10pm on Newstalk @marccoleman
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