By voting down the bailout proposal that would violate the deposit insurance agreement between a member-state of the Eurozone and its citizens (see my earlier post for an analysis), Cyprus parliamentarians offered the Eurozone a reprieve from the stupidest and most potentially destructive Eurogroup decision since this Crisis began three years ago. Europe now has, thanks to Cyprus’ Parliament, a second bite at the cherry and it is up to its leaders to make amends, to understand the error of their ways, and to come up with a sensible alternative. We may disagree on what that is. However, it is difficult to imagine that there is anyone who continues to believe that allowing a member-state of the Eurozone to default on the deposit insurance scheme (i.e. confiscating deposits less than 100 thousand euros) was a bright idea.
The ‘No!’ vote in Cyprus’ parliament was, indeed, momentous. For the first time since the Eurozone Crisis began, a Parliament has called the bluff of those with more power than sense. My fear now is that, as they heard themselves say ‘No!’, Cypriot parliamentarians may have become scared by the sound of their own courageous voice, and may therefore be more prone to succumbing to an equally terrible proposal; indeed that they may accept, next time a proposal is brought to them, an even worse deal than they one they rejected. For instance, the Eurozone may decide to offer Cyprus a deal closer in spirit to that of Greece or Ireland; i.e. a bailout package whereby the banks’ depositors take a much smaller hit (e.g. 2 billion as opposed to 5.8 billion) with the remaining burden pushed on the shoulders of the struggling taxpayer or of the island’s pension funds. This would be tragic: If more than 10 billion of loans is unloaded on the taxpayer, the austerity strings that will come attached with it will crush small pensions, the health system, schools, unemployment benefits and the whole of the private sector as the debt-deflationary cycle will cause the troika, Greece-style, to force Nicosia to impose hefty new taxes on property, consumption, you name it.
While the politicians are working out the new deal that will be brought to Parliament, it is imperative that the rest of us, whether in Cyprus or the four corners of the world, keep pressing them in two directions: First, to re-commit to the June 2012 EU Summit decision to have the ESM recapitalise banks directly in exchange for shares that would go to the ESM and be sold back to the private sector once the banks have been cleansed (a move that would end immediately the Cyprus crisis, but also the crises in Spain, Italy, Ireland, even Greece). Secondly, if direct re-capitalisation does not proceed (due to Berlin’s stubborn refusal) at the very least our leaders must respect (a) the idea that the Cypriot taxpayers should not be forced to borrow more than 10 billion on behalf of banks, and (b) the deposit insurance scheme that guarantees all deposits below 100 thousand. If this means a 16% haircut for uninsured deposits over 100 thousand, so be it.
