XII. Cyprus and its Troika Troubles

Cyprus has also been unlucky in that relations between the IMF and the European Commission have become fractious. This resulted in the IMF and Commission for the first time in the eurozone’s three year crisis going into the March 15th emergency European finance ministers meeting without a joint recommendation.

The hard line adopted by the IMF with regard to the Cyprus bail-out caused one Eurozone official to comment that the ‘ayatollahs on the Fund’s staff’ were back in control after the more relaxed deal-making style under Dominique Strauss-Kahn’s leadership. In particular, the High Priest of the Fund, Siddharth Tiwari, the head of the Strategy, Policy and Review department has been restored to power since the departure of Strauss-Kahn. As a long time Fund insider the FT suggests Siddharth Tiwari is 'not inclined to give Europe special treatment'. In this he has been backed some members on the IMF's executive board, particularly Brazil, who have questioned the Funds 'risking so much on questionable programmes for rich European countries' (FT Harding March 27th 2013).



The IMF differs markedly from the Commission in that it looks at each country in crisis in isolation rather than as a member of the Eurozone and is driven by a strong belief in the need to preserve its independence and credibility with global financial markets.


(See also the excellent Brussels Blog piece by Peter Spiegel on who said what at the 15th March EuroFin meeting.See also the piece by Nathan Morely for the Cyprus Mail 12 May 2013 where a senior EU official gives an insider view of the bailout positions and negotiations.)


 The IMF/Commission Bust-Up

 After the first rejected Cyprus bailout one senior EU official “The troika model has become dysfunctional,” (FT Spiegel 24 March 2013). One source close to the IMF later said of the Commission, “They have this attitude that they are there to save the authorities in every country and it’s just a question of buying time, not a question of solving the problem.”


The FT reported that insiders believed the divergence between the IMF and Commission was,


‘all but inevitable and stems from a nasty experience with Greece, the arrival of Christine Lagarde as managing director, and pressure from emerging markets not to give Europe special treatment.’ (FT Harding 27 March 2013).


Cyprus’s lack of political and economic heft, allies and goodwill exposed it to the combined force of Germany, the IMF’s emerging tough-love bail-out line and the born-again zeal of leader of Eurogroup of finance ministers, Jeroen Dijsselbloem.


The disastrous ‘everyone pays’ bail-in of the first Eurogroup meeting seems to have emerged as a particularly unpleasant compromise.


This was fought out between the IMF/Germany hardline bail-in and bank restructuring option with its harsh losses for large depositors and bondholders and the EC and ECB’s worries that a hit on large depositors ‘would cause more problems than it solved, panicking investors, sparking a bank run and devastating the Cypriot economy’- which, on the face of it, is what seems to have happened.


As the Friday March 15th meeting of European finance ministers approached tensions between the German/IMF and the EC/ECB positions worsened. Berlin saw the Commission as ‘always spending other people’s money’ whilst the IMF was seen as using Cyprus’s economy as an economic ‘test bed’. By the time the meeting started positions were fixed.


Said one official close to Dijsselbloem,

They had been farting around for months. …They would never, ever come together. We had to light a stick of dynamite and say: it’s burning.


It seems that Dijsselbloem did just that.

Jeroen Dijsselbloem, from the Dutch Labour party, with a commitment to fiscal discipline, was the default choice to replace Jean-Claude Juncker’s as the eurogroup of finance ministers president.  The German's have backed him and made his postion secure despite initial French and Spanish opposition.  And he has helped bring about a fundamental shift of power within the eurogroup of finance ministers. 


This has allowed Berlin to realise its preferred strategy of foisting the burden of bailouts on private investors which had hitherto been blocked by Paris and the European Central Bank (FT Steinglass Spiegel 29th March 2013).


It seems Dijsselbloem may not be as ethusiatically wedded to austerity as it first appears. Civil servants in the Dutch system wield considerable power and despite growing cries of protest senior officials at the finance ministry and central bank are aggressively in favour of austerity.


Although Dijsselbloem has backed austerity it may be because he has had little choice. The Dutch Labour party has struggled to re-establish a reputation for   fiscal prudence after it presided over high budget deficits and low growth in the late 1970s (FT Steinglass 31 March 2013).


The Cyprus team went into the meeting with a desire to minimize claims on large depositors (the fact that President Anastasiades’ family law firm includes two Russian billionaires amongst its clients may not be coincidental - see FT Spiegel, Hope, Peel, 22nd March 2013).


President Anastasiades apparently alienated most people in the meeting by his ‘emotional reactions’ and his strained relations with the respected Cypriot finance minister, Michalis Sarris. (Sarris announced his departure from the government on April 2nd 2013).


On the eve of the Cyprus parliament’s vote on the first bail-out the next Tuesday (19th March) ‘EU officials had convinced themselves that Mr Anastasiades would not put his country at risk to protect wealthy holders of big bank accounts.’ But they were wrong. (FT Spiegel, Hope, Peel, 22nd March 2013).


The rest, as they say, is history. The Cypriot parliament rejected the Bailout to wide acclaim and general agreement that it was an unjust and even unconscionable solution.


But five days later the IMF/German line came to prevail in spades with a radical restructuring of Cyprus’s financial sector. Laiki bank will disappear and the Bank of Cyprus will be a shadow of its former self. For the time being at least, the Russian ‘turnaround’ trade will disappear and Cyprus will probably never again be the main source of Russian Foreign Direct Investment.


A reduction of GDP of between 15 and 25 per cent is forecast. Cyprus and Cypriots are tough and adaptable people, used to the shocks imposed on them from outside and within. But this will take much resolve, and result in much hardship, before it is over.

IMF power growing says NYT


An article in the NYT 17 April 2013 suggests that IMF prestige and power has gown in Europe under Christine Lagarde's leadership. Apparently she has a 'close, longtime friendship' with Wolfgang Schäuble, Germany's Finance Minister.


And although nudging the IMF away from a hawkish position on austerity she is constrained by the IMF's membership.


Poorer nations that contribute to the I.M.F.’s financing have grumbled about having to prop up rich Europe. More than half of the I.M.F.’s lending goes to the euro zone, from virtually nothing a few years ago. The I.M.F. has contributed about a third of the money used to rescue countries like Portugal, Ireland and Greece, with the rest coming from other euro zone countries.


The article suggests that the IMF's position is more open to compromise because it is a minority creditor, with less financial clout than the European Union.


Morris Goldstein, a senior fellow at the Peterson Institute for International Economics in Washington and a former deputy director of research at the IMF says,


“They have to make compromises, more compromises than they would like to make,” Mr. Goldstein said. “I think that’s a problem.”

On the other hand, another IMF insider argues in the FT 17 April 2013 that the IMF is losing its independence and credbility by being part of the troika.  They also argue that the European Stability Mechanism is in reality a European Monetary Fund that will undermine multilateral economic co-ordination.


Says Ousmène Mandeng,

But the eurozone debacle risks destroying the credibility of the IMF – and therefore the foundations for multilateral economic co-operation.

Accountability, rigour, transparency needed


Gabriel Sterne ( FT Alphaville Blog 19 April 2013) in a pithy critique of the IMF challenges it to become more transparent, more rigorous in its internal evaluations and accountability, and more robust with its clients, particularly the EU which it regards too much as a partner rather than as ' a patient to be cured.'


He argues that the Fund has been woeful in its predictions of the crisis and exit from it, has broken its own sacrosant rules (in the Greek bailout from 2010 by 'suppporting a lending programme ...that was inadequate to secure sustainability) and has not explained the analytical errors that have seen the cost of the Cyprus bailout balloon to 80% of the island's 2014 GDP.


He points the finger at distractions during Strauss-Kahn's tenure as MD, the under-representation of a broader consituency of countries on the board, and a lack of sufficient independence from underlying politics (vis the constant presence of a European as MD for 67 years) and accountability of the Fund's senior technocrats.


To remedy the situation he calls for the formation of a policy committee that would publish minutes and recomendations to the Board and hold invidual department heads and key positions (particularly that of the Director of the Strategy, Policy and Review Department) to account.


On the relationship with the Eurozone crisis Sterne says,


The Fund should have told Europe “no IMF lending unless there was energetic progress on eurozone’s crisis resolution institutions”; in particular banking union, fiscal coordination, and Eurozone-wide fiscal and monetary stances.


The full document is at Exotix.

In the Exotix document, Time for a Transparency Revolution at the IMF Sterne argues that the IMF's position as a minorty funder in the eurozone crisis has added to a lack of rigour. He suggests, 'it should have been the Fund on one side of the table, and the stricken country and representatives of Europe on the other' p.4.


On Cyprus bailout he says regarding leaks and tensions within the Troika


'They [leaks] already began to do so on Cyprus in January when the preference of some in the Fund for haircuts became known; then, that the Fund publicly backed a tax on all deposits (including insured deposits); and then that the Troika appeared to be briefing successfully against the deal it had signed in order push blame on to the Cypriots. Intra-Troika spats also became elevated.' p.5.