The Cyprus bailout brings fear back to the markets and the week starts as badly as it could: the bags they collapse and the spread fly. Piazza Affari started the session in the red by more than two points, while the Btp-Bund differential shot up to reach 340 basis points, after closing last week at 315.
But how do you explain so much apprehension about what is happening on a Mediterranean island? In reality, the fear is that Cyprus is only a sign of how the European management of the crisis is continuing to drive the economy towards collapse.
In the night between Friday and Saturday, at the end of tough negotiations that lasted 10 hours, the Eurogroup found a compromise for the bailout of Cyprus and its banks, touching current accounts for the first time ever. All the decisions were reluctantly accepted by the new government of Nikos Anestesiades, but they will certainly arouse strongly negative reactions, risking having repercussions also on other Eurozone countries: in particular Spain, which is struggling to get out of its own crisis banking.
After Greece, Ireland and Portugal - not counting the specific intervention for Spanish institutions - Cyprus is the fourth country to obtain financial bailout from the Eurozone, submitting to the austerity policies imposed by the visits of the Troika (EU Commission, ECB, IMF) .
The most important and controversial element of the agreement reached last week is the breaking of a real taboo: aid from the Eurozone – 10 billion euros, against the 17 deemed necessary, equivalent to the country's entire GDP – it will be added a forced levy on current accounts. Individuals will be charged a one-off tax on deposits of 6,75% for amounts up to €100 and 9,9% beyond this figure. The measure is expected to generate revenues of 5,8 billion euros and will hit everyone, but even harsher treatment will be reserved for non-residents (especially Russians, but also the British). Those who live on the island will in fact be partially rewarded with shares in their own bank equal to the tax paid.
The nocturnal negotiations in Brussels lasted a long time because Germany, Finland and the Netherlands - backed by the president of the Eurogroup, the Dutchman Jeroen Dijsselbloem, and by Christine Lagarde, number one of the IMF - wanted to make almost the entire bill for the bailout pay deposits exceeding 100 thousand euros. The suspicion is that the capital deposited in Cypriot banks is often the result of illegal activities. Furthermore, the super-levy wanted by the Northern axis seemed consistent with the need to drastically reduce the size of a banking sector that is worth seven to eight times the country's economy (Dijsselbloem called it "hypertrophic").
The idea – which was opposed by the Cypriot Finance Minister, Michalis Sarris, and the European Commission – was to also apply in Cyprus a solution similar to the haircut with which the Greek debt was restructured at the end of 2011, requiring private banks that held 58% of Athens government bonds to give up more than half of the face value of those bonds. It is a pity that in October 2011 the heads of state and government of the Eurozone had solemnly sworn never to repeat such a solution again.
In the meantime, to prevent capital flight from drying up the island definitively, the Central Bank of Cyprus has decided that account holders will no longer be able to withdraw their money at branches until Tuesdaywhen the fee will be collected. But to obtain international bailout, the country has also agreed to launch other reforms: an increase in corporate taxation from 10 to 12,5% and the green light for a privatization program that should be worth 1,4 billion euros.
Finally, two points remain to be defined: the IMF's participation in one third of the costs of the bailout (Lagarde has pledged to obtain the approval of her board as soon as possible) and an agreement with Russia to extend by five years, until until 2021, the payment deadlines for the 2,5 billion euro loan that Moscow granted to Nicosia two years ago, also reducing interest rates.
Il Cypriot Parliament will meet today to begin the process of ratifying the bailout plan negotiated with the EU. And it will be a race against time: the final go-ahead will have to arrive before the banks reopen.
