26 Mart 2013 Salı

An outcome fraught with consequences

I will talk neither about the peace process with the Kurdistan Workers' Party (PKK) nor about Benjamin Netanyahu's apology for the Mavi Marmara disaster, but rather on the last-minute solution to the Greek Cypriot economic crisis. The solution can be summarized in one sentence: Wealthy depositors at the Bank of Cyprus and those of Laiki Bank will pay the bill. A levy of 40 percent on deposits over 100,000 euros will be taken in the case of the Bank of Cyprus, while the second will simply shut down. Laiki Bank depositors will have to be content with what will be left to them after the liquidation of the bank. It is time now to discuss the multidimensional consequences of the so-called “Cyprus solution.”

Years ago, the Greek Cyprus government decided to transform the island into a “tax haven” with very weak regulations pertaining to black money inflow. Their success was amazing. The Greek Cypriot banking sector was flooded with billions of dollars from tax evaders and Russian oligarch's amounting to almost seven times the amount of Greek Cyprus's gross domestic product (GDP). Then came the Greek meltdown. The heavy haircut imposed on the Greek public debt held by banks hurt Greek Cyprus dramatically as its banks had invested extensively in the “motherland” debt. So some of the island's banks came to the verge of failure, a situation very similar to what happened in Ireland.
But given the size of the bill, it was impossible to apply the Irish rescue strategy to Cyprus -- i.e., the transformation of the debts in collapsed private banks into public debt through the nationalization of the banks -- simply because the public debt of Greek Cyprus would have reached several times its GDP, making the debt burden absolutely unbearable. So the Troika decided to contribute only 10 billion euros out of the 16 billion euros demanded to the rescue plan, the remaining 6 billion euros being left to the responsibility of the Greek Cypriot government. The first attempt to charge all depositors backfired, and finally the decision to charge only the wealthy depositors, and much more heavily than before, was taken.
Russian depositors had reacted vehemently to the first plan in which the levy on deposits of more than 100,000 euros was limited to 10 percent. Now the contribution from Russian depositors is set to be higher. A Russian commentator identified the initial 10 percent levy as “Bolshevik methods,” so I cannot imagine now the epithets that will be chosen by the furious Russians. This is the end of the tax haven. Greek Cyprus has already instituted capital controls aiming to limit the amount of money exiting its finance markets. From now on, we will witness a shrinking banking sector on “Treasure Island”; the treasure, it appears, was virtual rather than real.
Indeed, the bill of the failure is not limited to the banking sector and to its depositors. The 10 billon euro loan added to the existing public debt, more than 80 percent of GDP, will make Greek Cyprus the second most indebted eurozone member after Greece. Greek Cypriots will be obliged to “tighten their belts” for years. This aspect of the “solution” has not yet been discussed. But, as the most urgent problem, the rescue of the banking system has been solved, and Greek Cypriots will soon be facing the unpleasant measures of the standard rescue programs. I am not sure that Nicos Anastasiades' fragile coalition will be able to survive the pressure from the street.
What will happen to the “Cyprus negotiations” – the unification of the Greek and Turkish-controlled parts of the island -- in this new context? This is a difficult question. I think the negotiations will take time to resume since Greek Cypriot President Anastasiades will be very busy and will likely keep a distance from such issues. Nevertheless, in the medium term a conjunction of various factors can facilitate the solution, which has been unobtainable for half a century. The EU bailout gave Brussels efficient leverage over the Greek side of the island. See my column “Something is being plotted over Cyprus” published on March 11. It will be forced to accept a negotiated solution. Greeks Cypriots now count on a “new treasure,” the rich natural gas reserves recently discovered. The only feasible way to exploit them is through cooperation with Turkey. The recent reconciliation between Turkey and Israel gives new opportunities in this area. The dream of pipelines transporting the gas of the east Mediterranean to the EU through Turkey as well as the NATO membership of a unified Cyprus can become a reality in this new context. I think and I hope that Turkey will cooperate if Greek Cyprus agrees to give a fair share of the future gas revenues to Turkish Cyprus.
Last but not least, the young Greek Cypriot generation can get rid of their arrogance vis-à-vis the “poor” Turkish Cypriots, considered a burden, in the event of unification. We can hope that they will start to see that a solution to the division of the island will help to prevent potential pain they could suffer in the near future.

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