Is Cyprus, for Germany, one rescue too far?

Stephanie Surface discusses whether, for Germany, the rescue of Cyprus is possible at all

On Monday morning, everybody involved in the Brussels negotiations about the emergency rescue package for Cyprus refused to take the blame. Different versions of events emerged, but all agreed on one point: that the German Finance Minister Wolfgang Schäuble would not yield and would insist that Cyprus raise a substantial amount to contribute to its rescue from bankruptcy. The negotiations went from Friday till early morning Saturday, and various levies were discussed with the Finance Minister Michael Sarris of Cyprus, but all options seemed to fall short of the required money.

christine lagardeFinally the chief of the IMF, Christine Lagarde, came up with a radical suggestion: why not charge every Cyprus bank depositor with over €100,000 a rate of 30%-40% and give them preferred banking bonds, which would raise over €7bn? Schäuble liked the idea, so did the Finns, the Dutch and the Slovaks, though Spain, France, Italy and Luxemburg voted against it. Now, Sarris desperately tried to come up with alternatives as he wanted to preserve Cyprus’ offshore banking system, which depends on huge foreign deposits, mostly from Russia. If these deposits took heavy ‘haircuts,’ Cyprus’ economy would take a huge hit as some of her projects were indirectly financed by this foreign money. Also he feared a backlash from the Russians who for years had flooded Cyprus’ banks with their money. But his alternatives fell on Schäuble’s deaf ears, as the German Finance minister didn’t want to soften the terms of the rescue package.

In the meantime, President Nikos Anastasiadis of Cyprus decided to freeze all payment transactions by the banks and wait for the final negotiated result. At around, Jörg Asmussen, director of the ECB, informed Sarris that the ECB would halt its liquidity support, meaning that the two biggest banks in Cyprus would go bankrupt after the bank holiday. By the tired negotiators emerged to announce the rescue package: Cyprus would get a bail-out worth €10bn from the EU, but subject to Cyprus raising €5.8bn via a one-off tax of 9.9% on deposits of more than €100,ooo and 6.75% on smaller deposits.

The German opposition was appalled and even the coalition partner, the FDP, said they couldn’t support this package in a parliamentary vote. They accused Schäuble of breaking the banking law which Merkel and the rest of the EU put in place in 2008, guaranteeing deposits of up to €100,000. Schäuble hit back at his critics, stating that he didn’t care how Cyprus would come up with their own contribution to the bailout. He also pointed out that Cyprus Finance Minister was the initiator of the new tax levy.

The Cyprus problem has been a crisis waiting in the wings since last year. The German government, however, had hoped it would stay off stage until after the September general election. With each new rescue package, the German voter becomes increasingly aware that taxes will have to rise sharply to pay for it all – rise, that is, even further than they already have. The new eurosceptic party “Alternative für Deutschland”, which has not even announced a full programme yet, seems to be present on every talk show on German TV, objecting to the craziness of all these rescue missions and challenging the ruling party’s vision for the future of Euro-land.

The German government can no longer ignore the wishes of the people. Domestically it is now impossible to hide the cold reality that, for the Cyprus rescue package, Germany is the main contributor. There is a new sense of rage amongst the voters about the stark injustice of this latest north-to-south wealth transfer. Why, they ask, should Germans support a Cyprus banking system where depositors get a yearly interest of 5% compared to their own measly 1.5% (before tax) – lower than the yearly inflation rate? Worse, they hear how much dodgy money is deposited in Cyprus’s banks; they see this latest bail-out as the law-abiding German saver propping up the money-laundering Russian oligarchs.

The major opposition parties in Germany feel they finally have a point to attack Merkel, conveniently forgetting to mention that they all supported the other rescue packages undertaken so far. The other hypocrisy in the stance of the SPD and “Die Grünen” (The Greens) is their opposition to a tax on bank accounts – having recently announced their plan for new wealth taxes and an income tax rise.

So far the Cyprus banks remain closed and the government is trying desperately to find some way out of the crisis. The Orthodox eurozone_bailouts_464Church now wants to help, although not without its own interest in mind, as it owns a large part of Cyprus’ third biggest bank. In addition, Russia is playing a double game: on the one hand, it wants  the Cyprus banks to lay open their accounts, so they can find out about tax-dodging depositors, while on the other hand, they proclaim how unfair, unprofessional and dangerous the EU plan is. While this gigantic poker game is going on, each player seems focused on preserving his own stack of chips. The reality is that nobody cares about the Cypriot small saver. Russia has eyes on bigger fish: it wants a deal for gas exploration off Cyprus’ shores and a Mediterranean port for its navy to replace the present one in rapidly-collapsing Syria.

As for Germany, it seems that she gets the blame again for being the bully. The German embassy in Cyprus has had its flag torn down. Demonstrators brandish placards with the image of Angela Merkel wearing a Hitler-like moustache.

As long ago as 1997, Arnulf Baring, who worked for the German president and is a prominent lecturer, author and journalist, prophesied: “The Monetary Union will at the end turn out to be a gigantic extortion project… If we ask for German monetary discipline, other countries, who will be in financial difficulties, will blame us for this discipline and therefore make us accountable. Also even if the European nations first approve and sign up to this, they will perceive us as a sort of economic policeman. We will risk in this way becoming again the most hated nation in Europe”.

Follow Stephanie on Twitter:  @suranie 


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