The Eurozone Deal Cyprus Could Not Refuse

At last there is a deal on the table to avert financial and economic collapse in Cyprus, a threat to the euro, and bank runs elsewhere in the European Union. At this writing, the terms Cypriot President Nicos Anastasiades negotiated in Brussels late Sunday (American time) have been approved in draft by European Union finance ministers. The Cypriot parliament is likely to take up the document Monday.

The EU ministers, known as the Eurogroup, will agree because the plan is right for Cyprus and Europe both. Cypriot legislators will accept, if not quite approve, because they finally got frightened enough to drop the pretense that they were doing anything other than protecting their own interest in a corrupted financial system.

Nicosia, which has developed an outsized, out-of-control banking sector over the past couple of decades, is now charged with raising €5.8 billion, or $7.5 billion, from depositors so as to qualify for a $13 billion bailout of its unhealthiest banks. There will be winners and losers in this deal, and the EU’s skill in determining which is which makes this, for my money, the craftiest restructuring Brussels, the European Central Bank in Frankfurt, and the International Monetary Fund have devised since the financial crisis hit five years ago.

Cypriot banks will be saved, but in a much-shrunken size. Nicosia will not survive as an offshore tax haven and financial center, and this is as it should be: The banking sector is now eight times the size of the Cypriot gross domestic product, some $32.5 billion in deposits belong to lawless Russian oligarchs, and the only people in a position to manage and regulate all this have too many interests in it to do either.

A couple of things will now happen quickly. Laiki Bank, the nation’s worst mess, will be split into a “good bank” and a “bad.” The good bank, which will retain the healthy assets, will merge with the Bank of Cyprus, the island’s largest (and second weakest at this point). Laiki’s toxic remains will be liquidated.

The best part of this is the way the EU has structured the taxes on depositors needed to raise that $7.5 billion. A levy of 20 percent is to be imposed on deposits of more than $130,000 at the Bank of Cyprus in exchange for shares in the bank. Deposits of more than $130,000 at other banks would be taxed at 4 percent. Note: Depositors whose accounts are less than $130,000 (all of which are insured) will not face a tax.

It seems clear enough that EU negotiators targeted Russian depositors and their Cypriot money managers when they structured an offer that Anastasiades, in the end, could not refuse. I think it is artfully done. The EU has managed to save those deserving of aid—small savers—while pinpointing, best it can, those not so deserving. Remember, a large proportion of big depositors in Cyprus have done well on the tax-evasion side back in the motherland.

At issue all along during the Cyprus crisis have been (1) super-rich Russian crooks with billions of euro-denominated deposits in Cypriot banks, and (2) the lawyers, accountants, and investment managers setting up shell companies and blind deposits in Nicosia for the super-rich Russian crooks. And the lawyers, accountants, and managers also happen to rank among Cyprus’s political elite. President Anastasiades’ family law firm counts two Russian billionaires among its clients.

You get the idea. Anastasiades and the Cypriot parliament tried every stunt they could dream up as they said “No!” to European negotiators—all in the interest of clients who keep private jets at Larnaca airport. “Russia will help us,” they said. (No thanks, Moscow replied. We don’t want to own some crummy Cypriot bank.) “Let’s use the state pension fund.” At this point people started getting onto the streets and crowding the ATMs. And finally, “Let’s tax small depositors disproportionately.” To this last the EU itself said no.

Even up to the eve of the final negotiations Sunday, the most remarkable rubbish exuded from high places in Nicosia. Read a little of this stuff, and note the tone and the pose.

“Cyprus must be saved!” President Anastasiades tweeted on Saturday. “We expected our European friends to help,” the manager of a Nicosia investment firm said, “and they put a gun to our heads.” “The European project is crashing to earth,” said Athanasios Orphanides, a former central bank governor. “It’s becoming a dictatorship,” a former finance minister said of the EU.

Preposterous. The small nation led by populist pols standing for their people is bullied—another term favored among the Cypriot elite lately—by those unelected, strong-arm bureaucrats in Brussels, in Frankfurt, and at the IMF. After more than a year of highly politicized austerity policies from Ireland to Spain to Greece, you can see why the elite in Nicosia would try this one on. But you cannot even say, “Nice try, guys,” because it has not been one.

In my calls around Europe lately I have found a number of people who accept the thought that Cyprus is now an argument against the euro and the bureaucracies that manage it. (Preponderance of Britons in this group, please note.) One could not disagree more vigorously. Cyprus is an argument for the euro—especially the euro as it is now being reconceived. Consider this: If the banking union negotiated last year were up and running, those swampy Cypriot banks would have been managed as a minor problem. Long run: Cyprus is better off with the euro than with some tatty currency no one has ever heard of.

The other question raised concerns the taxes on depositors. Is the EU “confiscating” funds, as some say? Is it “swooping in” (another Briton here) to garnish private bank accounts. No, and no. Nothing so large as an international bank rescue can be managed with pinpoint precision. But the EU—recognizing that North European taxpayers can be asked to bear only so much—has fingered the right bunch. I hope the collateral damage is minimal and that the right bunch enjoys their flights back to Moscow.