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2013: We deserved a shock, but never this: ramifications of traumatic bailout will be felt for years

Waiting patiently as the banks reopened on March 28

By George Psyllides

WITHOUT A doubt, the biggest story of the year was Cyprus’ bailout and the manner it was achieved.

Under its terms, depositor cash in the island’s two biggest lenders – Bank of Cyprus (BoC) and Laiki – was seized to recapitalise BoC, while Laiki was shut down.

Those with uninsured deposits of over 100,000 euros in BoC lost 47.5 per cent of their money. Uninsured depositors in Laiki probably lost everything.

But it was not just the lost money. The cash grab was a traumatic experience for Cypriots and the banking system. It will probably take many years to recover.

People no longer trust banks and would rather risk keeping their money ‘under the mattress’ or try getting it out of the country.

Probably the only thing keeping the system together are the capital controls, the first ever time they were imposed in a eurozone country. The government is eager to get rid of them as soon as possible – a lot have been removed since their introduction in March – but it is doubtful they will be completely lifted any time soon.

The March 25 Eurogroup decision to seize BoC and Laiki deposits and shut down Laiki had been preceded by a seemingly milder yet startling option. Impose a haircut on all deposits – insured and uninsured – in all banks. The rate would have been around 6.7 per cent for deposits under €100,000, and 9.9 per cent for those over. The suggestion was milder in the sense it spread the burden of the contribution the Eurogroup was adamant Cyprus would make towards its bailout. It was startling because it undermined EU guidelines previously thought sacrosanct: deposits under 100,000 euros were insured and could not be touched.

The outcry was immediate. Political parties did not give it a second thought. It was rejected in parliament in what, in my view, was a fine example of the populism that has been prevalent in this country since its founding.

The House voting against the first version of the haircut on bank deposits
The House voting against the first version of the haircut on bank deposits

Even ruling DISY didn’t have the guts to vote in favour, even though their president, Nicos Anastasiades had urged MPs to do so. They abstained. AKEL MPs celebrated outside the building as if they had scored a big victory by voting against it. Little did they know. At first I thought there must be a plan B hidden somewhere. It didn’t take long to realise there was nothing. I remember tweeting from parliament: “Bracing for the blitzkrieg.” It was one of those times you wished you were wrong.

I was one of those who argued in favour of approving the first haircut. In my mind, from the moment the Eurogroup announced its decision, the island’s banking sector would never be the same again.

So pass the haircut, even if it meant seizing insured deposits, and get on with it. The onus would be on the people who decided it in the first place. Imagine, an EU state snatching deposits that the EU is supposed to guarantee.

Some charged that it was President Anastasiades who proposed going after insured deposits. Even if that were the case, who was it who rubberstamped the deal?

In any case, after parliament voted against the first option, the EU quickly removed it from the table, leaving Cyprus with no options. The rest is history, as they say.

There is no point delving into what preceded the mess – why Cyprus reached the point where people’s cash had to be seized. This has been discussed ad nauseam– irresponsibility, indecision, incompetence, populism, and utter stupidity.

However, one question that still has not been satisfactorily answered is why was Laiki – the bank in the maelstrom of the bailout – deemed solvent one moment and insolvent the next.

The figures go like this: Laiki received €1.8 billion in state support in June 2012. By the end of March that year, Laiki had also received emergency liquidity assistance (ELA) from the European Central Bank. In April 2012, ELA rose to €3.8 billion; €5.7 billion in May, and €8 billion in June. When the Eurogroup decided to shut it down, Laiki had received €11.4 billion in ELA.

It was fluctuating between €9 billion and €10 billion until February 2013.

So when was it exactly that Laiki became insolvent in the eyes of the European Central Bank? (For a more in-depth analysis read Stefanos Hailis’ piece: http://cyprus-mail.com/2013/08/23/ela-laiki-the-inquiry-and-critical-issues/)

I’m not one of those Cypriots who blame foreigners for all the evils the island is going through. In my mind it is clear that the blame lies with our incompetent leaders, and some would argue, the people who vote for them.

But this time round I will be counted among those who blame the Europeans as having a share of the blame.

My problem is not with the austerity and structural reforms that Cyprus must undertake as part of the bailout. I say more of that is necessary, and if it has to be forced on us so be it. But the mess and the damage inflicted on the banking sector was not necessary.

They could have sorted out the problem earlier and spared ordinary Cypriots the additional grief. At the end of the day it is them who will bear the brunt of the recession.

The international media may have suggested otherwise, but the majority of Cypriots are hard-working, honest people. These are the same people who gave the world lessons in dignity on March 28 when the banks re-opened after almost two traumatic weeks.

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