Tuesday 21 October 2014

Pocket-change rescue that now threatens rest of eurozone

Louise Armitstead

Published 19/03/2013 | 05:00

SOME rescue. Brussels has thrown a financial lifeline to Cyprus – but in the process has threatened to scuttle the island, the global recovery and even the euro project itself. It is a measure of the mishandling that this drop of an economy, just 1.1m people and 0.2pc of eurozone GDP, has been able to trigger such a tsunami.

The €10bn bailout plan, pocket change compared with funds sunk into Greece, Ireland and Portugal, has engulfed global markets, wiping billions from the value of companies around the world, particularly the fragile banks. It has spread fear among investors, bond traders, and savers. And it has doused the careful work of "Super" Mario Draghi, whose mission has been to restore confidence in Brussels and keep the eurozone afloat.

The bailout was no surprise: Cyprus has been sailing close to the wind for years. Its current account deficit hit 17.5pc of GDP in 2008, while its banking system was dangerously oversized at nine times GDP. The banks have been highly exposed to Greek banks and sovereign debt, too.

Cyprus first applied for a bailout in June last year. The troika henchmen were held back, partly because of the Communist-led government that refused to countenance the sale of any state assets to help fund a bailout.

However, a bigger problem was the clientele of Cypriot banks. Over the years, the lenders have attracted thousands of rich foreigners, particularly Russians, but they have also gained a reputation for being centres for money-laundering. European leaders, particularly those with mutinous electorates in the north, baulked at the idea of bailing out non-EU depositors, let alone those of dubious legality.

Cyprus's election last month removed the political blockage while its deteriorating finances made a bailout urgent.

Over the weekend, the euro group triggered shock and alarm by including as a bailout condition an "up-front, one-off stability levy applicable to resident and non-resident depositors".

Outsiders

But in its determination to exclude outsiders, Brussels has inflicted extraordinary harm on itself and its members.

In a single stroke, it also removed the protection of bank depositors. The principle, which has guaranteed savings of up to €100,000, has been crucial in maintaining consumer confidence, and, at times, has alone prevented a catastrophic run on the banks.

As traders and analysts reacted with horror, European politicians appeared to realise their mistake and backtracked.

But the message was out: savings could be used to bail out banks. It's a waiting game now for savers whose money remains locked in Cypriot banks until Thursday. Investors in Cyprus and the EU may not be so patient. (© Daily Telegraph, London)

Irish Independent

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