I have attempted to summarise the banking bailout in Cyprus and draw some clonclusions. These should be read in conjunction with my Not so Lucky Laiki piece below.
The full summary and conclusions are here.
Below is the final section of the piece.
I have not been a great fan of the Cypriot model of development and share concerns about Cyprus's status as the greatest source of foreign direct investment into Russia.
The system has clearly been tightened up since the UN embargo-busting days of Deutsche Mark deliveries to Laiki bank's Larnaca branch in suitcases from Slobodan Milosevic in 1990s but legitimate concerns remain about light touch regulation, money laundering (see the FT 6 February 2013 article in particular precised here) and corruption (see the recently released Transparency International Cyprus report, the comment by Hubert Faustmann, political-science professor at the University of Cyprus on graft on the island, “Elite corruption is endemic, there’s an initial public outcry when scandals are revealed but they fade away without coming to court" and the Attorney General's recent defence of his decision to have a drink-driving-without- tax-and-MOT prosecution against his 32-year old son dropped in Political Fallout).
But these are not issues exclusive - perhaps with the exception of the comparative size of Russian interests and financial flows - to Cyprus. But they have been mobilised in the German electoral cycle (see Germany) and elsewhere and build upon a sense of betrayal and anger amongst some EU officials and member-states about both the failure of Cyprus to ratify the Annan peace plan (that was regarded as a de facto quid pro quo for Cyprus's accession to the EU in 2004) and the refusal of the previous Christofias administration's to look reality in the face.
This nevertheless does not justify the inconsistent and unprincipled way in which the Cypriot bank bailout has been both designed ('negotiated') and applied. In particular the difference in treatment of depositors in Greece and Cyprus (and especially those in Laiki and the Bank of Cyprus where Russian and Cypriot deposits rub up against each other) and the lumping of all the Central Bank obligations (many of which were incurred supporting Greek banking operations) onto Cypriot banks is unconscionable, politically expedient and would be an unthinkable course of action in larger distressed euro zone members where systemic risk and contagion (as well as sheer political clout) would forestall this 'template of action.'
It remains to be seen if legal challenges and political pressure can roll back any of the bank bailout decisions and conditions.
Maybe the most hopeful strategy is the careful mobilisation of a widespread feeling in the European parliament and in parts of the international community that Cyprus has been treated in certain and well-defined areas with undue harshness.
Quite what that can achieve is a question of politics and imagination and maybe side-deals concluded away from the harsh glare of the German political cycle - on such things as structural and special funding, assistance with gas exploitation, a reconsideration of the use of ESM and EFSF funding for recapitalisation and maybe even moves to resolve the 'Cyprus question.'
The upcoming Cypriot parliamentary vote on the bailout after the overwhelming German parliamentary approval of it will, it seems, take Cyprus to the brink again. I personally feel that exit from the Euro would be a disaster for Cyprus in both the short and long term. But that it is for the President and the parliament as representatives of the people of Cyprus to decide.
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