Bailouts start out small. At first, Cyprus just had a funding crisis; the markets had gotten smart, after years of dousing the country with cheap euros. Not that the risks weren’t there before. But markets opened their eyes. So Cyprus went begging to Russia, and got €2.5 billion in November 2011. That money evaporated without a trace. Then last June, the two largest banks were deemed to need €2.3 billion – €500 million for the Bank of Cyprus and €1.8 billion for Laiki Bank – to fill a void in their regulatory capital, the story went. No big deal.
But the banks had been eviscerated by mismanagement and corruption. Their balance sheets were loaded with deteriorating Greek corporate debt; Greek government bonds that had received a 70% haircut; loans to developers extended during the real-estate bubble that had blown up; loans on developments that were never finished or were built so shoddily that they’ve been declared uninhabitable; loans to politicians that were written off as gifts; and mortgages extended to homeowners who were tangled up in a title-deed scandal that the banks themselves had aided and abetted, leaving 130,000 properties (in a country with 838,000 souls) without title deeds, with disputed ownership, and often worthless mortgages.
So by the end of June, as bailout talks with the Troika took off, “sources” mumbled something about €10 billion, including a government bailout, that hadn’t been on the table before. People gasped. But it was just the beginning. In August, Central Bank Governor Panicos Demetriades told parliament that the banks alone would need €12 billion! Plus a government bailout. Rumor consensus settled on €15 billion total. Then in September Russian Finance Minister Anton Siluanov upped the ante: Cyprus would indeed need €15 billion from the Troika, plus €5 billion from Russia, for a total of €20 billion.
Every time someone looked at the cesspool that these banks were, the bailout amount jumped. By March 25, the Troika’s number had risen to €17 billion. But it would be a new way of doing bank bailouts. The EU would contribute €9 billion, the IMF €1 billion, and €7 billion would be extracted from Cypriot uninsured depositors, bank bondholders, public sector workers, pensioners, corporate taxpayers, and others. Laiki Bank would be dismantled. The alternative would have been the collapse of the banks and the default of the government. It was an elegant, finely tuned instrument designed to keep the Eurozone intact – regardless of the price.
The havoc was immediate. So it was tweaked while banks were closed for over a week and draconian capital controls were imposed. The economy froze. But the deal stuck. Until late Wednesday.
That’s when the draft report, “Assessment of the actual or potential financing needs of Cyprus,” was leaked. Someone had given the banking cesspool, the governmental black hole, and the collapsing economy another look. “Debt sustainability analysis” it was called. And the bailout amount jumped to €23 billion – a dizzying 125% of GDP –ten times the bailout estimate of last June.
The additional €6 billion? The Cypriot government would have to extract them from people, businesses, and institutions. The Central Bank would have to sell €400 million worth of gold. Holders of Cypriot government bonds would get an appointment at the Eurozone barbershop for a crew cut. And so on. Bedlam broke out.
The Troika “served poison,” summarized President of Parliament Yannakis Omirou. “We will resist,” said Giorgos Doulouka, spokesman of the main opposition Akel party. “They are eating us alive,” he added. President Nikos Anastasiades asked for “extra assistance” from the Troika. He was immediately shot down by Luxembourg Finance Minister Luc Frieden – the “volume will remain at €10 billion” – and by German government spokesman Steffen Seibert – “The contribution from international creditors will not change.”
Two members of the governing council of the Central Bank – Haris Achniotis and Andreas Matsis – resigned and in their letter to President Anastasiades complained that the council served only for “decorative” purposes. A third member – Luis Christofides – resigned for the same reason.
The two sums weren’t “strictly comparable,” explained EU Economic and Monetary Affairs Commissioner Olli Rehn, trying to brush off the jump from €17 billion to €23 billion. “People have been comparing apples with pears and coming up with oranges.” One was “related to net financing needs” and the other was “a gross financing concept” that included buffers for a weaker fiscal development and more losses at the banks.
So at their meeting in Dublin Friday evening, the Eurozone finance ministers approved the €9 billion for Cyprus, noting “with satisfaction that the Cypriot authorities have implemented decisive bank resolution, restructuring, and recapitalization measures to address the fragile and unique situation of Cyprus’ financial sector….” Parliaments in Germany, Finland and other countries will rubber-stamp the deal. And by mid-May, the first few billions might start winding their way toward Cyprus.
But that too is just the beginning. The financial sector with its offshore services and foreign money, the core of the Cypriot economy, has been gutted. Whatever foreign money hadn’t left already would flee as soon as possible. People would no longer be able to get rich off corruption, money laundering, tax evasion, and other financial services, or off a real estate bubble.
But they did get rich off them: The average Cypriot household, according to a Eurozone-wide survey, the largest ever in Europe, had a phenomenal net worth of €670,900 ($872,000!). Over three times that of German or Dutch households, and just shy of Luxembourg’s €710,100. Wealth achievable only by small countries with huge, murky banking centers. Or oil. Few countries in the world are in that elite club. The results were so explosive that publication was delayed until after the Cyprus bailout had been decided. But the power structure had known the results for weeks.
That wealth had been sucked out of the banks and the government until neither had a drop of lifeblood left. Now the party was over. And those households would be asked to foot a big part of the bailout costs. You can almost hear the snickering among European politicians.
But with financial services and real estate eliminated as a major economic activity, the country will have to refocus. Tourism is hard; it’s handicapped by the high euro and tough competition from Turkey. There is also offshore natural gas, but it will take years before the money starts flowing. The economy, deprived of its traditional activities, might perform a double-digit dive this year, and more bailout costs already appear on the horizon.