The state-sponsored chorus about the end of the debt crisis in the Eurozone has been deafening. It even has feel-good metrics: the Euro Breakup Index for January fell to 17.2%—the percentage of investors who thought that at least one country would leave the Eurozone within twelve months. In July, it stood at 73%. For Cyprus, the fifth Eurozone country to ask for a bailout, the index fell to 7.5%. “A euro breakup is almost no issue anymore among investors,” the statement said.
Just then, in a fight over whether or not to bail out Cyprus, top Eurocrats exposed what a taxpayer-funded con game they thought these bailouts really were—and how fragile the Eurozone was.
A debate has been raging in Germany about Cyprus. Not that the German parliament, which has a say in this, wouldn’t rubberstamp an eventual bailout, as it rubberstamped others before, but right now they’re not in the mood. Cyprus is too much of a mess. Bailing out uninsured depositors of Cypriot banks would set a costly precedent for other countries. And bailing out Russian “black money,” which makes up a large portion of the deposits, would be, well, distasteful in Germany, a few months before the federal elections.
For the tiny country whose economy is barely a rounding error in the Eurozone, it would be an enormous bailout. At €17.5 billion, it would amount to about 100% of GDP: €10 billion for the banks, €6 billion for holders of existing debt, and €1.5 billion to cover budget deficits through 2016. The new debt, a €2.5 billion loan that Russia extended in 2011, and other debt would amount to 150% of GDP, according to Moody’s. Unsustainable. So haircuts would be necessary. But whose hair would be cut?
As always, there is never an alternative to a bailout. “It’s essential that everybody realizes that a disorderly default of Cyprus could lead to an exit of Cyprus from the Eurozone,” said Olli Rehn, European Commissioner for Economic and Monetary Affairs. “It would be extremely stupid to take any risk of that nature.”
A risk German Finance Minister Wolfgang Schäuble would be willing to take. He’d been saying publicly that it wasn’t certain yet that a default would put the Eurozone at risk—”one of the requirements that any bailout money can flow at all,” he said. Cyprus simply wasn’t “systemically important.” In fact, there were alternatives.
Heretic words. He needed to be shut up, apparently. And that happened at the meeting of Eurozone finance ministers a week ago, details of which sources just leaked to the Spiegel.
The meeting was marked by the transfer of the Eurogroup presidency from Jean-Claude Juncker to the new guy, Dutch Finance Minister Jeroen Dijsselbloem. Cyprus was also on the agenda, but not much was accomplished, other than an agreement to delay the bailout decision until after the Cypriot general elections in February. The government has resisted certain bailout conditions, such as the privatization of state-owned enterprises and the elimination of cost-of-living adjustments for salaries. Now, everyone wanted to deal with the new government.
But what didn’t make it into the press release was that ECB President Mario Draghi, bailout-fund tsar Klaus Regling, and Olli Rehn, all three unelected officials, had formed a triumvirate to gang up on Schäuble.
That Cyprus wasn’t “systemically important” was something he kept hearing everywhere from lawyers, Draghi told Schäuble at the meeting. But it wasn’t a question that can be answered by lawyers, he said. It was a topic for economists.
A resounding put-down: Schäuble, a lawyer by training—not an economist—wasn’t competent to speak on the issue and should therefore shut up!
The two largest Cypriot banks had an extensive network of branches in Greece, the triumvirate argued. If deposits at these branches weren’t considered safe, Greek depositors would be plunged again into uncertainty, which could then infect Greek banks and cause a serious relapse in Greece.
If Cyprus went bust, they contended, it would annihilate the flow of positive news that has been responsible recently for calming down the Eurozone.
For weeks, all signs have pointed towards an improvement, they argued. Risk premiums for Spanish and Italian government debt have dropped significantly, and balances between central banks, which had risen to dangerous levels, have been edging down. If the money spigot were turned off, this recovery could reverse, they argued. Contagion would spread and could jeopardize Ireland’s and Portugal’s return to the financial markets.
Further, Cyprus was carrying its portion of the bailout funds and therefore had a right to its own bailout—a legal argument even a mere lawyer should be able to grasp.
And so, letting tiny Cyprus default could tear up the rest of the Eurozone, they argued—saying essentially that bailouts were a delicate con game, and that Schäuble, by digging in his heels, was blowing it up.
It made for another bitter Eurozone irony: the democratically elected finance minister of a country whose taxpayers have to pay more than any other for the bailouts got shut down by unelected Eurocrats who, in a continued power grab, postulated that Cypriot banks, their bondholders, their depositors, even their uninsured depositors, even Russian “black money” depositors had a “right” to the German money (and anyone else’s). And if Schäuble refused, it would blow up the entire Eurozone. Schäuble’s response hasn’t bubbled to the surface yet.