1. The news
European Commission draft documents leaked and released on
the FT web site are offering a different picture from the previously released
details of the bail-in.
First and
foremost, in 9 days the bill has spilled
over by EUR 6 billion amounting to a EUR 23 billion shortfalls to gap over
a 3 years period. The additional burden falls on Cyprus, the total reaching EUR 13
billion.
Second, it will
be entirely born by the deposit-equity
swap at the new Bank of Cyprus (i.e. post acquisition of Laiki deposits),
which nearly doubles to EUR 10.6 billion
from EUR 5.8 previously: EUR 5 billion in 9 days (30% of 2012 EUR 17 billion
GDP) is quite a number…
Third, Cyprus will sell “excess” gold reserves for a
total consideration of up to EUR 400
million: I like the term “excess” in a world of ever devaluing fiat
currency and “excess” represents 70% of its 13.9 t of gold! Since the leak, Cyprus has denied
they intended to sale gold: what is contained in the report is an hypothesis,
of course…
Fourth, bond holders under Cypriot law will be “encouraged” to roll over up to EUR 1
billion that mature until 2016, meaning that the EZ countries and the IMF
will only provide EUR 700 million. In 2011 this “encouragement” was deemed by
rating agencies (for whatever credibility they have) to lead to a selective default (rating agencies must have learnt from
politicians rhetoric: one meets its commitments or one doesn’t; “selective” is
bullshit), not talking about a credit event for CDS. Why what was meant to
apply to Greece would not
for Cyprus?
Fifth, like all assumptions made about Greece by the EU, the ECB and the IMF proved
wrong, these will prove wrong for Cyprus: the
economic situation will worsen much more than expected the 8.7% real GDP fall
in 2013 and 3.9% in 2014. The debt/GDP ratio will go way above 130% in 2015,
and not the 126% projected.
2. Cyprus other
route
Cyprus lost its
independence, like any over indebted country will, France included, not being able to
meet its commitments.
To lose its independence, Cyprus
had a better course of action:
quickly negotiating joining a ruble zone
and offering Russia a naval
base in Cyprus
plus offshore gas rights. Cyprus would have lost its independence but
Cypriots would have been better of.
Geopolitically this would have been a coup for Russia: it will loose its naval base in Syria
and would have replaced it with an even more strategically positioned one. Russia would also have enjoyed privileged access
to Cyprus
gas, further surrounding the EU. This also would have open the way for other
disappointed countries with the EU to join the fray like Serbia; and eventually why not Greece. The
Orthodox church is a powerful cultural and historical link between all these
countries.
Cyprus
cannot be kicked off the EU (well, European politicians and eurocrats are used
to twist and carve treaties and laws to their own advantage), and therefore it
would have allowed Russia
to have a foothold in the house.
In any case, this
would have been a trump card in the hands of Cyprus in its negotiating positions
with the troika.
3. The future of
small countries
The crisis has
demonstrated that all countries in the EU are not equal in rights despite
what is claimed (not surprising, it has always been the case: big boys bullying
feeble ones). Rules do not apply the same way depending on size: France has hardly ever abided by Maastricht criteria, and
always got away unarmed (we are nearing the end of it, since eventually facts
are always right over rhetoric). Greece
was slammed (they lied, so they got what they deserved), Cyprus walked over and Luxembourg is bullied.
Cyprus and
Luxembourg
are criticized for over relying on the financial sector. I do not know what makes
Germany, France or the US to impose a business model to
small countries whose size limits their ability to enjoy a well diversified
economy. If they do not like money fleeing, they should offer a fiscal
environment where money is happy at home: there
is no tax haven if there is not tax hell. With France’s
banks over 3 x GDP (more or less Cyprus post bail-in), the financial
sector is much too leveraged. In the case of France, the media are increasingly
reporting that young educated French national are going abroad to find a job
(40-50,000 in 2012 – when one calculates the heavy cost of education and no
return from those leaving the country, it will become unbearable at some
point). These larges countries should first put their home in order before
lecturing others. A few examples: Delaware money laundering machine where the
beneficiary owner of a company does not need to be disclosed or the specific
local laws that make it very difficult to get rid off an incompetent board or special
protections against takeovers; France with its free zones, special tax treatment
of Corsica or no income tax in French Polynesia to name a few; and what about
the UK with the Channel Islands, The Netherlands with its holding tax efficient
regime, etc.
Small to medium size countries where the financial sector
allowed them to prosper are increasingly subject to bullying from large ones,
the latter specializing in finding scapegoats for their own economic sins.
We are entering a world where democracy is much talked about
as never before, but where reality contradicts the words. Small European
countries beware, you have been warned.
Source:
European Commission: Assessment of the public debt
sustainability of Cyprus
European Commission: Assessment of the actual or potential
financing needs of Cyprus
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