Did rich Russians scupper the vote in Cyprus on March 19 that shot down a EU-backed plan to confiscate up to 10% of all deposits in the island state? Some officials in the EU think so.
The Cypriot parliament voted March 19 overwhelmingly against a plan proposed by a German-led EU finance ministers meeting that would see the EU contribute €10bn to a bailout package as long as Cyprus imposes a one-time levy of almost 10% on all deposits in the domestic banking sector with over €100,000 and 6.75% on the smaller accounts.
On March 18, analysts were confident that Cypriot President Nicos Anastasiades could squeak the plan through parliament with a majority of one vote. However, the first vote was postponed from March 18 and held on March 19 afternoon.
The result? Not a single MP voted "yes" to the plan, 36 voted "no" and another 19 lawmakers belonging to the centre-right party of the president abstained. Cyprus is now playing a high stakes game of chicken with the Germans, who will foot most of the EU rescue plan bill. By voting the levy down, Nicosia has not blinked; now it is the German's turn at the wheel. Following the vote, German Finance Minister Wolfgang Schaeuble warned that its crisis-stricken banks may never be able to reopen if it rejects the terms of a bailout.
How did support for the levy collapse so completely, despite the government's decision to sign up to the plan on March 16?
"It became clear that there are these business interests in parliament who are telling us that we need to protect the non-resident depositors," said one exasperated Eurozone official involved in the discussions reports the FT.
The levy on small, and essentially innocent, depositors has caused particular affront and even EU politicians have openly called for the entire burden of the raising €5.8bn with the levy fall on big account holders. However, according to the reports Cypriot lawmakers strongly resisted this compromise, as they were under pressure from Russian business interests, the lifeblood of the Cypriot economy, which make up the bulk of those large deposits.
Russia is emerging as Cyprus' best hope of avoiding catastrophe. The country's two biggest banks - Bank of Cyprus and Marfin Laiki bank - are "all but illiquid" and will collapse without cheap EU loans. An unpublished report by investment company Pimco last year estimated that the banking sector needs a total of €7bn-10bn to stay afloat. Russia has already provided a €2.5bn last year and given the heavy exposure of its banks and businesses to Cyprus, may come up with more cash if needed.
In a rather bizarre twist to the tale Michalis Sarris, Cyprus's finance minister, arrived in Moscow on Tuesday night surrounded by the buzz that he had tried to resign before getting on the plane, only to be told by President Anastasiades: go to Moscow and get some money. Resign when you come back! Sarris later denied he had resigned in a message he texted to Reuters while in Moscow last night.
No details have emerged from Sarris' meeting in the Kremlin, but one plan being talked about emerged in the last days is from reports that Russia's gas firm Gazprom would be willing to bail out the banking sector in return for rights to Cyprus' offshore oil and gas. Gazprom has denied the reports.
Now Cyprus is in an "omnishambles", in the modern parlance. The EU has not said what happens next, but nevertheless committed itself to providing the promised €10bn if needed, saying it "reaffirms its commitment to provide liquidity as needed within the existing rules."
Finance ministers of other EU nations, scarred by the prospect of runs on their own banks after the sacrosanct principle of protecting deposits with an insurance scheme has been smashed - the aspect of this plan that is so shocking - reaffirmed March 19 that the same levy can not be applied in their countries. Spain's finance minister declared savings accounts in his country "sacred," adding Cyprus was "special and unique."
However, Berlin made it clear that it would not renegotiate the deal and that Cyprus is still on the hook to come up with €5.8bn from its depositors - for which read Russians.
"Of course we are developing options, but so far Germany has not been showing flexibility," an official involved in the talks with Berlin told the FT.
Angela Merkel is playing an extremely dangerous game, as the one thing regulators and the guarantors of financial stability should never do is screw about with trust in the banking system - especially when the motivation is simply short-term domestic political gain. The EU (for which read German) plan is deeply irresponsible.
One irony would be for Russia to ride to the rescue. This whole imbroglio has been caused by Germany's willingness to circumvent some of their own fundamental principles to make sure the Russians are made to suffer - and it is being done extra legem, which is what "Cyprus is a special and unique case" actually means. The idea that everyone is equal before the law is axiomatic to the western system and the decision to undermine this principle defies belief. So if the Russians do come up with a plan to, say, take over some banks and get oil and gas concessions in return for a bailout loan, the upshot would be to probably make relations between Moscow and Brussels even worse than they already are.
As an aside, it emerged on March 19 that several senior Cypriot government officials emptied their accounts in the last 10 days, adding insult to injury. This whole affair is getting messier and messier.