By Alper Ali Riza
On April 21, 2016 the Advocate General Nils Wahl gave his opinion to the European Union’s Court of Justice over the appeals by Cypriot depositors concerning the 2013 haircut, in which he recommended their appeals be dismissed.
They had sought compensation for the loss of their deposits which they claimed was caused by the European Commission and the European Central Bank (ECB) during the euro zone crisis of 2013. They argued that the ‘hair cut’ which deprived them of their deposits was foisted on Cyprus by the commission and the ECB without legal backup.
In two thirds of cases the Court of Justice follows the Advocate General’s opinion, so unless the court decides to make a stand in favour of the individual against the mighty institutions of the EU and a desperate Cyprus on the brink of financial ruin, it is more likely that the appellants will lose their appeals.
Not all is lost however! On a careful reading of the Advocate General’s opinion he has actually left the door ajar for the Court of Justice to allow the appeals on the basis that it should be for the court at a trial of the facts to decide whether there was a deliberate flouting of EU law by the EC and the ECB. And it is wide open for any fresh claimants provided it is the case that the commission and the ECB demanded directly or indirectly a ‘hair cut’ of deposits in their meetings with President Nicos Anastasiades on March 16, 2013.
At paragraph 69 of his opinion the Advocate General said: “I agree with the appellants that even when acting outside the EU legal framework, the EU institutions must scrupulously observe EU law. The commission is not permitted, even when acting on behalf of the ESM, deliberately to breach EU rules. Moreover the commission may not contribute, though its conduct, to an infringement of the EU rules committed by other entities or bodies.” This begs the question because, if that is the law of the union, why not allow the appeals so that the cases can proceed to trial of the facts to enable the trial court to decide if the EU institutions had indeed deliberately breached EU law, and contributed to its infringement by the government and parliament of the Republic of Cyprus, as the appellants contended?
There were a number of lines of argument, but the single overarching submission was that individual depositors were entitled to expect that after the European Commission and the ECB decided to grant Cyprus financial assistance in 2012 the conditionality that was to be required for such assistance had to be in accordance with the law. It was argued that the individual depositors were caught between the huge interests of the EU in safeguarding the eurozone and the dire, desperate needs of the state of Cyprus for financial assistance. Depositors needed as never before the protection of the law which in turn required mindful judges who took care not to fall into the easy error of being ‘more executive minded than the executive’.
The rule of law requires legal backup for every act of government so as to enable members of the public to organise their affairs – particularly their financial affairs – in accordance with the law. This is a fundamental principle of EU law known as the principle of legality. The law must be clear and its consequences foreseeable and ‘it must be brought to the notice of the person concerned in such a way that he can ascertain exactly the time at which the measure comes into being and starts to have legal effect.’ Crucially ‘it must not take effect before it is passed.’ It was submitted that this was in effect what had happened in Cyprus when the depositors’ money was locked in after March 16, 2013.
The importance of this principle in this case is that at the material time on March 16, 2013 there was no law either in the EU or in Cyprus authorising the Central Bank to deprive bank depositors of their money for the purpose of bailing-in the banks. On the contrary just a couple of months earlier, as a candidate, the president of Cyprus had famously made a solemn pledge that there would be no ‘haircut’ of deposits. Depositors had absolutely no idea that their savings could be lost overnight. This is not the rule of law! It was the arbitrary ‘appropriation of property belonging to another’ for the purpose of obtaining financial assistance for Cyprus and ultimately for the purpose of safeguarding the euro zone! Why depositors in Cyprus should have lost their savings to safeguard the euro zone is a good question!
The argument against the EU Commission and the ECB was that they were the true authors of the bail-in inflicted on Cypriot depositors. It was argued that they pressed hard for the bail-in of the two banks and that they did this brazenly and deliberately with full knowledge that there was no legal back up for their demand. They threatened the new president that liquidity would be cut off if he did not comply with their demands to bail-in Cyprus Popular Bank and Bank of Cyprus, yet shamelessly submitted to the court that all the decisions concerning the passing of the bail-in legislation were exclusively those of the sovereign government and parliament of Cyprus.
The facts are that by November 2012 the EC and the ECB had agreed to provide financial assistance to Cyprus to the tune of €17 billion that included bailing-out the banks. They then changed their mind unilaterally at the beginning of March 2013, seemingly without informing the new Cypriot government. The volte face was as a result of a new policy not to use state aid to save banks but to use the bail-in mechanism that was being promoted in the commission in a Draft Bank Recoveries and Resolutions Directive. This has now become law but had not become law in 2013. Indeed its provisions regarding use of the bail-in mechanism on deposits were not to be used until 2018 to give depositors in the EU a fair opportunity to place their deposits with safe institutions if they chose.
It looks as though President Anastasiades was not aware of this change of policy until the demand for a bail-in of the banks was sprung on him on March 16, 2013 – which is a disgraceful way to treat a head of government. It seems this was the date he was informed that both banks were insolvent and had to be closed and that consequently the financial assistance previously on offer was no longer to include a figure of €7 billion to salvage the banks and that any financial assistance provided was not be used to assist the two banks.
The economy of Cyprus was on the brink of total collapse so in a desperate attempt to avert full financial catastrophe the president agreed. However instead of accepting the bail-in and closure of the two banks immediately, he proposed a bank levy across the whole banking system – a well known form of taxation – but when this was rejected by the House of Representatives on March 18, 2013, government and parliament surrendered unconditionally to the bail-in demand that had been made on March 16, 2013.
The House of Representatives then rubber stamped a ready made bail-in law imported straight from the ECB that in the end enabled bank deposits to be appropriated and the whole charade presented in the Memorandum of Understanding as a fait accompli passed by the sovereign parliament of Cyprus, without any hint that the true authors were the commission and the European Central Bank.
‘There is something rotten in the state of Europe’
Alper Ali Riza QC represented the Appellants as Leading Counsel before the Grand Chamber of the Court of Justice of the European Union. He is a Queen’s Counsel and a part time judge in England.