Cyprus’ lesson

Cyrpus’ crisis, which for a certain period afflicted euro area countries as well as the European Union, appears to be nearing a solution. Last week, the terms of a memorandum of understanding between the Cypriot government and troika representatives of the European Central Bank, of the International Monetary Fund and of the EU Commission have been suspended and evaluated. The issue is tabled for discussion on April 12 while parliamentary amendments to the agreement at national level – notably the Bundestag – may take place in the coming days. Thus the first disbursement to Cyprus by the European Stability Mechanism should take place only in early May. This outcome is but a temporary conclusion. The agreement envisages a 10bl EURO assistance package. In turn, Cyprus will have to undertake serious budgetary consolidation and a drastic restructuring of the Country’s banking system. The solution was hard and difficult in the making, marking the emergency of Cyprus’ banking sector already past spring, during Greece’s debt restructuring. Moreover, at that moment the Bank of Cyprus (BoC) alone had lost 1.9bl EURO. Naturally, this doesn’t account for the whole situation, but it prompts to wonder why that bank decided to keep such a disproportionate amount of Greek debt repayments. Was it perhaps a sign of Hellenic solidarity, or had the Greek government promised its creditors high interest rates? In all likelihood the BoC had no other choice than run this high risk as it had pledged to pay deposits up to 5%, even though the economic downturn and the viability of the Cypriot economy discouraged such a move. A similar approach must have motivated the Country’s second largest bank, Laiki, due to be disassembled soon. Thus Cyprus’ economic model, largely based on its financial sector, had been in dire straits for quite a while. Finally, after many months spent beating around the bush during the previous government, and after the hesitations of the new government led by president Nicos Anastasiades, Cyprus was forced to admit the evidence. Before this costly delay, European institutions could be blamed for not having intervened earlier, but Cyprus has major responsibilities. Commenting on the events, Archbishop Chrisostomos II, head of the Orthodox Church in Cyprus, questioned the vitality of the euro currency and suggested its faithful to relinquish momentary union. But civil authorities appear to be reluctant to follow this piece of advice, also since the consequences could be devastating. Skyrocketing inflation that is bound to follow such decision would annihilate most deposits, with no distinction, while no industrial infrastructure could benefit from a new favourable exchange rate. The vitality of an economic model excessively centered on the financial sector is the core of the problem. The attempts to save this model led the Cypriot government to propose a tax on bank accounts, including 95% of deposits under 100 thousand EURO. That’s why the first draft agreement, unanimously adopted by the Eurogroup the night of March 16, envisaged this dramatic measure. It came as a shock to the Cypriot population and to amost Europeans, who started to question the safety of their bank deposits, while European legislation guarantees all deposits under 100 thousand EURO. Those who took this decision should have remembered what Machiavelli wrote in the "Prince": "Men sooner forget the death of their father than the loss of their patrimony". They even could have drawn inspiration from the social doctrine of the Church, which calls for the universal destination of goods, thereby leading to the involvement of larger shareholders and depositors in the bank bailout. With equal emphasis, Church social doctrine claims that "private property or some ownership of external goods confers on everyone a sphere wholly necessary for the autonomy of the person and the family, and it should be regarded as an extension of human freedom", and "it constitutes one of the conditions for civil liberties" ("Gaudium et spes", 71). Stripping individuals of the possibility of exercising their autonomy and that of their families would have been a serious injustice.