Cyprus Mail
CM Regular Columnist

The 2013 bail-in and the rule of law

Queues as banks reopened in March 2013

By Alper Ali Riza

The rule of law was the fundamental principle relied on by the three Cypriot depositors deprived of their savings in the 2013 ‘hair cut’ in their appeal in front of the Grand Chamber of Europe’s top court in Luxembourg on February 2, 2016. Their appeal is a landmark case on the role of the European Commission and the European Central Bank under the European Stabilisation Treaty (ESM) in negotiating the conditions for the grant of financial assistance to member states of the EU whose currency is the euro and are facing financial difficulties.

In other words, as matters stood when negotiations restarted on March 16, 2013 there was no law in force – either in the EU or Cyprus – authorising the deprivation of savings by the government to satisfy the conditionality required of it for the grant of financial assistance from euro zone countries under the ESM Treaty as detailed by the Commission and the ECB.

The appellants’ submission to the court was that the law that was passed was indeed done to satisfy the conditionality detailed by the Commission and the ECB for the grant of financial assistance to Cyprus, and its true authors were the the Commission and the ECB. The case put against the two institutions was that having realised Cyprus was desperate to receive assistance and very worried lest emergency liquidity were cut off, they failed in their duty to make it clear to the Cypriot authorities that passing a bail-in law in such extreme circumstances could be imputed to the Commission and the ECB as the true authors. Thus although the law was actually passed – with indecent haste – by the Cyprus House of Representatives, the responsibility for causing the loss to the appellants sounding in damages could lie against the Commission and the ECB.

The law was drafted with the assistance of the Commission and the ECB, and it authorised the Central Bank to put Cyprus Popular Bank and Bank of Cyprus in resolution mode, thus enabling the Central Bank to deprive depositors of 100 per cent of their savings and a little under 50 per cent respectively of deposits over the government insured limit of €100,000.

The case for the Commission and the ECB, as put to the Court by counsel on behalf of the Commission, was that the law that was passed was a unilateral act of the Cypriot authorities acting freely without any pressure from them – their role being confined to preparatory, technical, and advisory matters – and that no bail-in was discussed on March 16, 2013, let alone that it was required as a condition for the grant of financial support. And, importantly, they argue that the conditions could not be attributed to them as they were acting under the umbrella of the ESM which is an international body independent of the EU.

What then is the rule of law? The answer is a little more sophisticated than the words suggest. The citizen is free to do as he pleases unless there is a law that prohibits or regulates his or her conduct. By contrast government can only act if there is a law that authorises it to do so.

These principles are known as freedom under the law and government under the rule of law. Moreover, on matters touching fundamental rights, passing a law mechanically under duress of circumstances at a time when funds are locked-in is arguably a perversion of the rule of law. The rule of law requires that the law is not arbitrary; that it is foreseeable and accessible so as to enable the citizen to organise his life and his affairs – particularly his financial affairs – accordingly. The European Commission therefore should have advised those gathered round the negotiating table both on March 16, 2013 that a bail-in would not be in accordance with the rule of law even if the Cypriots were prepared to pass such a law, unless depositors were first given a reasonable opportunity to organise their financial affairs and move their savings to safer institutions if they chose.

In the lead up to March 16, 2013 the Commission and the ECB agreed that as Cyprus could not borrow money from the international markets on sustainable terms, the euro zone countries were in principle prepared to provide stabilisation assistance, not altruistically, but to safeguard the stability of the euro zone as a whole. The ESM – as the stabilisation body came to be known – had decided in principle to provide such assistance to Cyprus in the sum of €17 billion and what remained was to negotiate the conditionality – the macro economic reforms Cyprus was going to undertake in return for receiving assistance.

But it is important to appreciate that the assistance requested included recapitalisation of the two banks under stress, not their resolution – in the same way for example the UK did with Royal Bank of Scotland to the tune of £80 billion.

In the meantime the European Commission was in the process of negotiation with member states of the EU a draft directive on bank resolution to make a bail-in tool available to states. This had not occurred by March 2013 although it has become law since. In November 2012 there was a draft Memorandum of Understanding (MoU) that included reference to a bail-in but in a way that would not have prevented depositors access to their savings before the law was in force. Of course Cyprus had always been free to pass a law authorising a bail-in of bank deposits; however the fact is that no such law was passed and depositors were completely unaware that they could be deprived of their deposits in March 2013.

As has already been said, the claim against the Commission acting in concert with the ECB, the institution in control of the money supply to Cyprus, is that they were in an impossibly powerful negotiating position – power asymmetrical in the jargon – and able to dictate the conditionality absolutely whereas the Commission’s proper role was to ensure compliance with EU law including human rights law and the rule of law.

The Advocate General will give his opinion on April 21. The appellants are keeping their fingers crossed! At the hearing the Commission and the ECB were taken to task by some of the judges and the Advocate General on their submission that their role in negotiating conditionality was purely technical and advisory rather than ensuring that the conditionality is consistent with EU law.

The appellants were dismayed to hear that the Commission and the ECB deny to the court that on March 16, 2013 they had informed the Cypriot side that as the two banks were allegedly insolvent they had to be bailed-in, and that it was in response to that negotiating position that the Cypriot side proposed a levy across the whole banking system which was rejected by the House of Representatives on March 18, 2013, forcing the government to agree to put forward the bail-in law that was passed on March 22, 2013. The Commission and the ECB had decided that the two banks had to go into resolution even if this meant that bank depositors in Cyprus had to bear all the burden of safeguarding the stability of the euro for the benefit of tax payers in the whole of the euro zone.

This was as unjust as it was unlawful.

 

Alper Ali Riza represented the Appellants as Leading Counsel before the Grand Chamber of the European Court of Justice in Luxembourg. He is a Queen’s Counsel and part time judge in the UK

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