Galery

1

Victoria Mindova

Banks in Cyprus have not opened on the first working day of the week. Their branches in Greece have also remained closed despite the promises of the Cypriot government that the activity of the financial system will be restored on Tuesday, 26 March. After almost nail-biting negotiations, the lenders and the Cypriot government have reached an agreement on the basic framework of the bailout to Cyprus. However, details on the deal have not been announced. What the authorities have announced in the public space is that the largest Cypriot bank, Laiki Bank, will be closed. Deposits under 100,000 euro will remain intact whereas the others will be significantly cut. Laiki Bank’s healthy part will merge with Cyprus Bank, which will also introduce a tax on deposits exceeding 100,000 euro.

According to Drasi’s former leader Stefanos Manos, the head of the Bank of Greece, George Provopoulos, must henceforth present every week a report on the state of the Greek financial system in order for the country not to fall into the situation of Cyprus. The two Mediterranean countries are still anxious and many Greeks still worry that the turmoil in Cyprus will drag down the local banking system. GRReporter has sought the expert opinion of senior lecturer in economics at Cardiff Business School Michalis Argyrou, who states that the dangers for the euro zone do not lie so much in the economy as in the social and political separation between northern and southern Europe.

The lenders and the government have reached an agreement, and the European Central Bank has announced that it will not cease providing liquidity for the Cypriot financial system. Why have the Cypriot banks remained closed?

To answer this question, we need to know the details connected with the agreement between Cyprus and the lenders, which have not been disclosed to the public. Banks may have remained closed due to technical reasons as well. One of them is that the bank employees have not been trained to operate and serve the customers under the new conditions.

I think that the banks have remained closed on Tuesday because the details as regards the rescue programme for Cyprus have not yet been specified. For example, it is not yet clear whether the deposits exceeding 100,000 euro in Laiki Bank will be reduced by 30% or 40%. They have not announced major details about the agreement and so, major uncertainty still exists. When they announce all parameters of the rescue programme, then the banks will be able to reopen to customers.

How do you evaluate the new decision of the government of Cyprus?

The final result for the Cypriot economy after a week of changes is generally negative because Cyprus is closed as an active destination for banking services. It can be said that the second option for the rescue of the Cypriot economy is better because there will be no cuts of deposits under 100,000 euro and no reduction in deposits in particular banks like Hellenic Bank, for example.

Compared to the first version of the rescue programme, the second agreement is more expensive. However, the distribution of the burden in the second option is in favour of the financially weaker citizens. It depends on the perspective of each one separately whether it is better or worse than the original plan for Cyprus.

Personally I think that it is better because there will be no cuts in the deposits of the majority of citizens. In this way, whatever steps are taken from now on, they will be accepted more easily.

The banks will remain closed for almost two weeks. What does this mean to the Cypriot economy?

When banks remain closed for so long, it is very difficult especially for the enterprises to make deals and transactions. The situation is becoming even more difficult as the end of the month, when it is the time to pay the salaries, is approaching. In other words, we are seeing serious disturbances in social and economic life and in doing business as usual.

In times of similar shocks, there is always reduction in market liquidity and delay in payments. None of this is good, but bearing in mind what we expect to happen, the current situation is just the first step in the economic price that Cyprus has to pay during the recovery process of the local banks.

I do not rule out the possibility of people continuing to be restless and starting to withdraw their savings en masse when the banks open. That is why they have put a ceiling on capital movements.

Greek banks, in turn, have serious problems too. Now, they have to bear an additional burden and take over the Cypriot branches. How sustainable is this formula for Greece?

In Greece, the banks fell victim to the state. In Cyprus, it is the opposite - the state fell victim to the banks. Laiki Bank owes the Emergency Liquidity Assistance (ELA) nine billion euro. Cyprus’ GDP is around 15 billion euro. This means that one bank alone owes the rescue mechanism an amount equal to 60% of GDP. In Greece, the recapitalization of the banking system is expected to require about 30 billion euro. This amount is equivalent to approximately 15% of Greece's GDP.

You realize that the banking crisis in Cyprus is much more serious bearing in mind that Greece needs additional capitals equal to 15% of the local economy to rescue its banks whereas this figure in Cyprus is 60%, but for the rescue of just one bank. The Greek banks are much more stable than the banks in Cyprus. There is no doubt that some of the debts of Laiki Bank will be transferred to Piraeus Bank, but they will not be a significant part of the "bad" debts. The developments in Cyprus will not have a direct negative impact on the Greek banking system. Indirectly, it not excluded that the instability in Cyprus may cause turmoil in Greece but this is the topic of another conversation.

At present, I do not think that the crisis in Cyprus will transfer to Greece. Here, anyway, other problems are waiting to be resolved.

So, let’s make it clear. Do you think that the money allocated from the rescue mechanism to recapitalize the Greek financial system will be enough after acquiring the Cypriot branches in Greece?

I do not think that there will be a problem. As is known to date, Piraeus Bank will provide 1.5 billion euro, 750 million euro of which will come from the Cypriot government after it receives the 10 billion euro bailout from Europe. I suppose that if Piraeus Bank expressed its interest in buying the Cypriot branches in Greece, it had the capital to do so. I do not think that there will be a new problem in the banking system of Greece, which is currently the case in Cyprus.

Greece is already obliged by the Memorandum of financial support. The country’s loan needs of support funding are met by 2016. I do not believe that the Greek banking system is at risk unless something extremely wrong happens in the programme to rescue the Greek economy.

Is there a risk for Cyprus to return to the pound?

Today is the first day after the agreement reached between Europe and the government of Cyprus and we can say that it is a shocking day for the citizens. It is reasonable to discuss in this situation various scenarios for the development of the financial crisis in Cyprus, including the return to the pound.

If we need to take a sober look at the developments, the return to the national currency would be much worse than the implementation of any programme of financial recovery. First, it is because the economy of the country will not gain anything if it returns to the Cyprus pound. Not only the economic theory but also the experience of Iceland proves this. In 2008, something similar to the present situation in Cyprus happened in Iceland - the country had a very large banking sector, which collapsed. The difference is that Iceland had its own currency.

The country allowed the three major banks to go bankrupt. The state started printing money to offset the losses of small depositors. It did not pay the losses of large foreign depositors, the majority of whom were British and Dutch. Furthermore, it imposed significant restrictions on the movement of capital until its economy recovered. Immediately after the bankruptcy, Iceland fell into a deep recession and inflation increased by 50%. As a result, the people who had small bank deposits may not have lost money but it was devalued by half. After three very difficult years, Iceland returned to positive growth.

I do not think in any case that Iceland's scenario is better than the development expected in Cyprus. The rescue of the economy of the country will follow the model of Ireland. There was a banking crisis there in 2008-2009 too. Unlike Iceland, Ireland was a member of the euro area and as a result, it was not able to print money. So, it applied a recovery programme with the help of the rest of Europe. After three years of hardships, Ireland is currently beginning to rise onto its feet and the first signs of recovery have been noticed.

In other words, the return of Cyprus to the pound will not help the country avoid recession. We know this from the experience of Iceland. The inflation will be very high too, which will lead to a much more drastic impoverishment of the people. Last but not least, the return to the Cyprus pound will completely isolate Cyprus in geopolitical terms. The country is currently part of the European family. If it leaves the euro zone, it will be separated from the European Union as well. The relations with Russia have been strained. Greece is now in a weak position and is unable to help Cyprus. This means that Cyprus will be left alone as a country in an area at stake and at geopolitical risk. You are aware of the problems with Turkey and the general tension in the area. By returning to the Cypriot pound, the country will lose all its allies.

Eurogroup’s president Jeroen Dijsselbloem had said that the model of Cyprus could be applied to other countries that were experiencing difficulties in the financial sector. In other words, it seems that Europe does not rule out the possibility of introducing the cuts of large deposits as a permanent measure to recapitalize problematic banks. Later, this statement was refuted but it had a negative impact on the market and caused turmoil. What is your comment?

I think that Eurogroup’s president started from the right basis but ended up in the wrong place. The statement itself was wrong and caused exceptional market disturbances.

The main idea of ​​Eurogroup was that if there was a banking crisis, a bank would have to find additional funds to withstand the pressure. First, we will look for funds in the bank itself. If it has no funds, then we will go to the bank's shareholders. The shareholders of the bank are also responsible for overseeing the bank's board. If the money is not enough, we can turn to the bondholders of the bank. They are also responsible, because they have lent to the bank without checking its stability. Bondholders must be very careful before they lend to the bank, as it might not be able to pay this loan.

Eurogroup’s president made a mistake by saying that he would seek aid from depositors too. A citizen who has a deposit in a bank is neither a shareholder, nor the owner of bonds of financial institutions in order to make checks of the bank. So, the depositor cannot be held liable if the bank fails. The bank’s management, shareholders, bondholders and supervisors that are responsible for the financial sector bear the responsibility for the stability of the bank.

If the impression that depositors in any European bank could lose their money is created, the confidence in the entire financial system will be lost. This will have very bad consequences for the euro zone. People will start withdrawing their money from the banking system of the monetary union and will turn to other countries outside the euro zone such as Switzerland, USA or Asia. This will reduce the capital stock thus diminishing the opportunities for growth.

Another negative consequence of spreading doubts among depositors is that the people will become very careful as regards where they will deposit their money. They will be seeking the bank with the lowest risk, which hardly exists.

Banks exist exactly for the opposite reason. They collect the deposits of people in order to be able to fund companies at risk. In order to achieve economic growth, real business that always carries some risk must be financed. If we refuse to fund any business at risk, then there is no way to achieve economic growth. I'm not saying that we should put our money into companies at excessive risk, but the risk must exist in order to stimulate the economic activity.

In the end, was it a mistake in the speech or a real plan that can be applied in Europe in the future?

I do not think that what Dijsselbloem said was the result of a mistake, rather that it presents a course in the beliefs of the people of northern Europe - Germany, the Netherlands, Finland and in Austria to a lesser extent. Let's start from the fact that a closer banking integration should be established in order to preserve the euro. It will help Europe obtain an accurate procedure to deal with a crisis, as is the case in the United States. To achieve this integration, large funds must be accumulated. The Germans are aware that in order for this integration to happen they must put very large amounts into the joint account. The aim of Germany is for the process of integration to start with as few debts as possible. It promises that it will not allow any bank to fail in the future but now, it does not want to pay the unpaid bills accumulated to date (legacy issue). Dijsselbloem’s statement expressed precisely this view - if there is instability at present, someone must take on its burden. Then, there will be a new mechanism that will start functioning in order to absorb such crises.

Dijsselbloem’s statement has another perspective too. I am not judging whether it is right or wrong, but we just cannot omit it. The people in Germany, Austria, the Netherlands and Finland do not want to pay bailouts (to give aids). The response to the support programmes within the euro zone is very strong. Over 60% or 70% of respondents from these countries do not want the euro zone to continue giving money to rescue countries such as Ireland, Greece, Spain, Portugal, etc. When there is such a strong trend in the public opinion of democratic countries, it will inevitably give rise to political repercussions. The politicians largely reflect and present the public opinion prevailing in these countries. This is certainly not good for the euro, but if this is the reality in the countries of northern Europe, it is very difficult for their politicians to ignore the voice of the people.

The way the whole discussion related to Cyprus was held might have had some positive aspects, but it has created a sense of separation between the people from northern and southern Europe.  Germany’s behaviour towards Cyprus has caused very serious reactions in the public opinion of the European periphery. If this polarization continues, it will be very difficult for the southern countries to make the necessary reforms.

Although Germany is the strongest country today, has money and is the most powerful country in the euro area, it is unable to cope with the leading role in the European monetary union. It does not know how to manage a multinational organization. Germany does not have the experience of Great Britain or France, which have empires behind themselves. This is a country that has never played the role of a leader among others. It lacks the culture of leadership and many of the mistakes we see stem from this fact.

Is the euro at risk as a currency?

It is in the long term. The euro zone is not so much threatened by the economic developments but by the political and social polarization between northern and southern Europe, by the strain accumulated between the two "Europes". I do not want the euro to fail in any way but we must find a way to avoid extreme phenomena that threaten the integrity of the Union.