By Elias Hazou
YESTERDAY’S accord among EU finance ministers to force investors and wealthy savers to share the costs of future bank failures may or may not be viewed as confirmation that Cyprus was used as a test case for the ‘bail-in’.
Under the compromise agreement, from 2018 the so-called ‘bail-in’ regime can force shareholders, bondholders and some depositors to contribute to the costs of bank failure. Insured deposits under €100,000 are exempt and uninsured deposits of individuals and small companies are given preferential status in the bail-in pecking order.
The rules break a taboo in Europe that savers should never lose their deposits. They are no doubt reminiscent of Cyprus, and one might argue that the island served as the ‘template’ for the bail-in of depositors.
Except that the ‘Cyprus model’ is not set in stone in the new regulations.
That’s because the preliminary deal struck by the EU gives countries some flexibility to decide when and how to impose losses on a failing bank’s creditors.
There’s a second way of rescuing a stricken lender: once a bail-in (from shareholders and unsecured creditors – not depositors) equivalent to eight per cent of total liabilities has been implemented, support from other sources can be used (up to five per cent of total liabilities) with approval from Brussels. These ‘other sources’ are national bank resolution funds, the European Stability Mechanism and the concerned state.
At any rate, the overall idea is that investors and not taxpayers shall henceforth foot the cost of bank rescues. At least on paper. As Tyler Durden writes on the Zero Hedge blog, the EU agreement “is the usual fluid melange of semi-rigid rules filled with loopholes designed to benefit large banks whose impairment may be detrimental to ‘systemic stability’.”
In the wake of the March Eurogroup decision to restructure Cyprus’ two largest banks, EU officials were at pains to emphasise to a wary European public that the “Cypriot programme is not a template, but measures are tailor-made to the very exceptional Cypriot situation.”
The day after the bailout, Dutch finance minister Jeroen Dijsselbloem appeared to suggest that the Cyprus bailout would set the template – only to take back his comments a few days later.
At the time, stunned and angry Cypriots took Dijsselbloem’s initial remarks as proof that the island was being used a guinea pig for the bail-in method. Three months on, that perception still permeates the public psyche in Cyprus.
But one leading commentator here begs to differ. Economist Mike Spanos talks of the ‘victim syndrome’ that islanders tend to be afflicted with.
“No, Cyprus was not an experiment for the bail-in,” Spanos categorically states. “The bail-in method was clearly defined in the European directive proposal of June 6, 2012, a full nine months prior to the Eurogroup decision on Cyprus.
“So for those who cared to be in the loop, it was nothing new or surprising. It is only because most of us had closed our eyes and ears that we found it shocking when it did happen,” argues Spanos.
Cyprus, he says, was merely the first case of the implementation of the bail-in.
“Was it unjust on Cyprus? Yes. But to say that we were guinea pigs is way off the mark. The European Union had clearly said that to deal with failing banks given the public debt problem there was no other way.”
Theodore Panayotou, director of the Cyprus International Institute of Management (CIIM), takes a different view – but likewise contends that Cypriots, or their leaders, shoulder some of the blame.
“There’s no doubt in my mind that we were guinea pigs for the bail-in,” he says.
“But we gave them [the EU] the opportunity to use us as such. By delaying asking for EU assistance, we bankrupted the state, let the banks amass enormous emergency liquidity funds. And so by the time we did go to the EU for help, we had zero money and zero bargaining power.
“We practically tempted the Europeans into enforcing the bail-in on us,” adds Panayotou.
According to the economist, the agreement thrashed out yesterday is “just” in that it gives bank investors fair warning.
“What the new rules say to investors, be they bondholders or depositors, is ‘look, from now on you should be careful where you put your money.’ If investors see that a bank pays out too high an interest rate, they should ask why. They should do their homework.
“The new rules give investors the heads-up. And that’s the key difference with what happened in Cyprus – investors were not warned, and that is why the solution imposed here was not fair.”