Well, they left it late this time. With just hours to go before the European Central Bank cut Cyprus off without a penny and condemned the country to bankruptcy, they managed (once again) to cobble together a last minute deal that keeps the whole Euro-train on the rails. True, the result is likely to be disastrous for the Cypriot economy, but at least the rest of the Eurozone can breathe easily again.
So what’s been done? The worst of Cyprus’ troubled banks, Laiki, is being wound up. If you had less than €100,000 in a Laiki account you will get all your money back, but if you had more than that saved you are not going to be able to get your hands on your money for a while, and you may end up losing most of it. If you are a big depositor in the other major insititution, Bank of Cyprus, you will also not be able to get your hands on your cash for the time being, but you shouldn’t lose more than 25-30% of it. Still pretty brutal.
The plan is for the island’s banks to open again tomorrow but with severe capital controls in place. Even small depositors are going to be restricted in the amounts they can withdraw, and there will be limits, too, on the use of credit cards. In return for all this pain, Cyprus will be lent €10 billion from the European bailout fund, which is supposed to recapitalise their remaining banks and help the rest of their financial services industry rebuild itself.
And this is where the theory and practice are likely to diverge, because who is going to trust a Cypriot bank again? Certainly none of the big Russian depositors who are feeling victimised - and a great deal poorer - by the whole affair. And possibly not small depositors either who came close to losing a significant slug of their savings, and who may not fancy taking such a risk again. The bailout from Europe is a way of putting money into the banks, but as soon as people are allowed to, they are likely to start taking their money out, thus possibly making the whole exercise self-defeating.
The Eurozone has avoided - narrowly - its first departure, but at a significant cost. The guarantee that is supposed to apply to deposits of less than €100,000 throughout the EU has been deeply undermined: if it can be scrapped once, however briefly, it can surely be scrapped again. And capital controls have been introduced for the first time in the Eurozone’s history, meaning that for the first time some Euros are no longer the same as others. This comes close to undermining the whole point of a single currency.
But worse than both of these, it has established in the minds of southern Europe the idea that within the Eurozone small countries can be bullied by big ones, poor countries by richer ones. An editorial in the respected Spanish daily El Pais said yesterday that “Angela Merkel, like Hitler, has declared war on the rest of Europe, this time to guarantee its own vital economic interests”. The language was incendiary and over-the-top, and the article was quickly withdrawn and an apology issued, but it is still an indicator of the way resentment is growing.
Cyprus has been taught some pretty harsh lessons about the nature of power-politics in the Eurozone. Last year it was forced to accept losses of €4.5 billion when Brussels and Berlin decided that those who had lent money to Greece would lose 70% of their money. When this led to trouble for their own banks they were told that the bailout fund (to which they had contributed their share) would only help them if their biggest industry (financial services) was cut down to half its size. And when a recently and democratically elected government tried to resist, it was threatened with bankruptcy and effective expulsion from the Euro.
The travails of Cyprus cannot be laid entirely at the door of the Eurozone, far from it, but the uncomfortable realities of life in the single currency won’t have been lost on others in southern Europe, especially those who may now be questioning how this project is being run and for whose benefit.