Economy that should be rekindled

To help Cyprus "rebuild its economy on new foundations". EU Commissioner for Monetary Affairs Olli Rehn, acknowledged that "the near future for Cyprus will be very difficult". The Cypriot population will pay a dear price for the bailout deal agreed between Cyprus and the troika of international lenders (EU, ECB, IMF) to prevent national bankruptcy and exit from the eurozone. "The agreement that we came to is painful but, under the circumstances, it’s the best we could secure", said Finance Minister Michael Sarris.Rescue from Europe. The bailout deal put into writing on March 24-25 provides financial assistance for an amount of up to EUR 10bn. The restructuring of Cyprus’ banking sector, starting with the resolution of the country’s second largest bank, Laiki, (strongly impacting holders of shares and bonds as well as depositors with over EUR 100 thousand) will provide a EUR 7bn contribution. Laiki will be shut down and split into a "good bank" and a "bad bank". The good bank will be "folded into Bank of Cyprus", while deposits over EUR 100,000 could be hit by a levy of almost 30% (deposits below €100,000 are guaranteed under EU law). The Cypriot financial restructuring plan is set to contribute with EUR 7bn to the rescue plan. "I raised the issue of a financial assistance programme for the first time in November 2011 with the then finance minister of Cyprus, because of the concerns over fiscal sustainability and financial stability", Rehn said. But it came to nothing, especially since Cyprus’ politicians, banks, perhaps even its citizens agreed that the "casino economy" (according to a formula coined by the French Minister Moscovici) was not bad after all, and everyone seemed to have something to gain from it. A sort of island offshore, a tax haven in the heart of the Mediterranean, where for years and years landed the capitals of Russian tycoons (with a suspicion of money laundering), but also of Greek banks, financiers of the City of London and other European markets.Too many anomalies. Now the Cypriot people took the streets, queues at ATMs are getting longer, while Russian President Medvedev and Prime Minister Putin are threatening Europe with retaliations… Where were they all when the Commission sounded the alarm? Reportedly, capitals kept in Cypriot banks are more than four times its GDP (exact figures are missing), a third – if not more – belong to Russian depositors. Moreover, skyrocketing public debt is nearly 100% of GDP, even though Cyprus only makes up less than 0.2 percent of the eurozone’s economy. Such unsustainable situation worries Brussels no less than the Laiki Bank. The reality of Cyprus also presents other anomalies: for example, the forced partition of the island, with the northern part under military occupation by Turkey, while the southern side has always been under Greece’s strong political and economic influence. Notably, the exploitation of priceless gas fields in the southern part of the island has already begun by assigning the concession to powerful European and extra-EU companies.Stepping up banking union. Commisioner Rehn underlined that the Commission will do everything possible to alleviate "the social consequences of this economic shock". The newly-elected Cypriot president, Nicos Anastasiades, tried to tone down European pressure, despite knowing that there was limited room for manoeuvre: in order to remain in the single currency club it was necessary to give in to EU requests. For Eurogroup president Jeroen Dijsselbloem, "We’ve put an end to the uncertainty that has affected Cyprus and the euro area over the past week", setting the pace "of a thorough restructuring of the banking sector in Cyprus". Markets in Europe reacted positively to the deal. "It’s a good deal", reassured IMF chief Christine Lagarde, which "limits the measures to the two most problematic banks" and equally divides the burden of bailout between EU and Cyprus. Moreover, that was the only possible solution. Europe already provided EUR 350bn in financial assistance to Greece, Portugal, Ireland and Spain. It couldn’t back out from helping Cyprus exit the crisis. Cyprus is requested to undergo a radical transformation of its baking system, which is bound to weigh heavily on Cypriot depositors and – once more – on citizens of European countries. The warning signal from Nicosia highlights a political urgency: the EU’s banking union, whose accomplishment has been the object of a – moderate – months long commitment, opposed by North European countries, can be delayed no further. Had it been operative, the European Stability Mechanism would have exerted its authority, promoting the intervention of the European Financial Stability Facility without weighing on Cyprus’ rickety budget, thus securing the euro currency, which would not have appeared as a weak currency exposed to ongoing risks.