Nothing like dramatic proof that austerity is a failure. Less than one month forcing Cyprus to take a “bailout” (which in reality was paid for entirely by the Cypriots) under the threat of effectively throwing them out of the Eurozone, a leaked Debt Sustainability Report shows that that the Troika will demand another €6 billion from Cyprus, increasing the total cost from €17 to €23 billion. From the Guardian:
Cypriot politicians have reacted with fury to news that the crisis-hit country will be forced to find an extra €6bn (£5bn) to contribute to its own bailout, much of which is expected to come from savers at its struggling banks.
A leaked draft of the updated rescue plan, which emerged late on Wednesday night, revealed that the total bill for the bailout has risen to €23bn, from an original estimate of €17bn, less than a month after the deal was agreed – and the entire extra cost will be imposed on Nicosia.
The worst is, as Pawel Morski demonstrated in an impressive shred of the Debt Sustainability Report is that it is ludicrously optimistic in terms of how the economy will fare with Germany having decided to kill its international banking sector (this while the EU is funding advertising for Bulgaria, which is low tax jurisdiction, the very sin Cyprus was guilty of):
1) the economic forecasts are worse than literally laughable (table) . The drops in consumption and investment look dementedly optimistic given the events of the past month. Exports to drop a mere 5% with the destruction of the banking industry and the introduction of capital controls. The wealth effect wiping deposit worth 60% of GDP will apparently barely register on consumption – the Troika must think the deposits are all Russian. Compare with Iceland (50% drop in investment) or Latvia (40%), the former boosted by devaluation the latter by an intact financial system. Public consumption drops 9% – Iceland held the line here, and we have bitter experience from Greece on how big fiscal multipliers are. These projections cross the line from wild optimism into contemptuously half-hearted fable. This table is a bare-faced lie.
So get this, sports fans: not only did the Eurocrats underestimate how badly their little program would hurt the economy, they are continuing to underestimate how brutal it will be. Morski notes later:
The banking sector shrinks. The domestic banking industry shrinks at a stroke from 550% of GDP to 350% by a deft combination of taking people’s money and stripping the Greek operations (120% of Cypriot GDP) out and selling them to Pireaus. Given that the Greek operations were to a significant degree responsible for the disastrous GGB trades that wiped out the banks, and given that Pireaus stock rallied sharply afterwards, the Cypriots find themselves in the position of the Blackadder character who not only had a relative murdered, but had to pay to have the blood washed out of the murderer’s shirt. (excellent stuff here on how the Cypriot banks blew up, based on leaked documents).
Of course, this means at a minimum, that uninsured depositors in Laiki and the Bank of Cyprus will not get any money back.
The Troika is also demanding that Cyprus sell 2/3 of its gold. That’s a mere €400 million; this looks like gratuitous punishment, to make it clear to Cypriots that they are being reduced to penury….for what? Ambrose Evans-Pritchard argues that it is long-awaited payback (emphasis mine):
It is an interesting question why Cyprus has been treated more harshly than Greece, given that the eurozone itself set off the downward spiral by imposing de facto losses of 75pc on Greek sovereign debt held by Cypriot banks.
And, furthermore, given that these banks were pressured into buying many of those Greek bonds in the first place by the EU authorities, when it suited the Eurogroup.
You could say that this is condign punishment for the failure of Cyprus to deliver on its side of the bargain on the 2004 Annan Plan to reunite the island, divided by the Attila Line since the Turkish invasion in 1974.
Greek Cypriots gained admission to the EU on the basis of a gentleman’s agreement, then resiled from the accord. President Tassos Papadopoulis later deployed the resources of the state to secure a “No” in the referendum on the Greek side of the island. No wonder the EU is disgusted.
But there again, Greece behaved just as badly. It threatened to block Polish accession to the EU unless a still-divided Cyprus was admitted, much to the fury of Berlin.
The Cyrpiots appear to be rebelling a bit against the Eurozone authorities again, despite the fact that the response last time was to rough the islanders up even more. The Financial Times reports that the ECB is ordering Cyprus not to fire the head of its central bank:
Mario Draghi, president of the European Central Bank, has warned the Cypriot government against sacking Panicos Demetriades, the central bank governor, over his handling of Cyprus’ worsening financial crisis.
In a letter addressed to the Cypriot president and speaker of parliament, the ECB head underscored the independence of EU central banks, adding that the launch of procedures that could lead to a governor’s dismissal marked “a very serious step”.
A decision to remove the governor would be subject to review by the EU court of justice, he said…
The Cyprus parliament’s ethics committee said on Wednesday it would investigate Mr Demetriades’ record in the year since his appointment to determine whether he had acted against the public interest by failing to avert the collapse of Laiki Bank, the island’s second-largest lender.
If the committee rules against him, the Cyprus attorney-general would decide whether Mr Demetriades should be indicted on criminal charges.
The rift between Mr Demetriades and the government appeared to widen further on Thursday when a central bank spokesperson said the bank, not the finance ministry, should decide on the sale of gold reserves to help finance Cyprus’s €13.5bn contribution to a €23.5bn international bailout.
Someone might tell Draghi it isn’t clear whether Demetriades is being pushed or jumping (hat tip Antonis):
While the speed of the retrade of the Cyprus deal is dramatic, it is hardly alone in having targets fail to be met because austerity is counter-productive, leading to additional bailouts and even more exquisite economic tortures, necessitating yet more bailouts. Greece is up to three. The Troika is recommending restructuring Irish and Portuguese bailout loans by extending their maturity seven years, but it’s not clear that this will be enough to keep Portugal from needing a second rescue. Slovenia looks like an early stage Cyprus. The Netherlands have gone wobbly. And of course, Spain and Italy are on the “bailout soon” list too, but they’ve held out due to understandable reluctance to accept “conditionality” aka loss of sovereignity, complicated in Italy by the usual government instability and the rapid rise of anti-Eurozone politicians.
And that’s before we see whether the rough handling of Cyprus leads to a resumption of the slow-motion run on banks in the periphery, as those who can shift balances to banks in the Germany and safer havens. But not to worry, all those Eurobanks passed stress tests, so everything is fine, right? Unfortunately, we may find out sooner than we’d like.
This piece is cross-posted from Naked Capitalism with permission.