Nikos Chrysoloras is a Brussels-based EU correspondent for the Greek daily Kathimerini. A separate version of this commentary was published by the Crisis Observatory (crisisobs.gr) of the Hellenic Foundation for European and Foreign Policy.
"It is now official: Cyprus will pay a heavy toll for turning its economy into an offshore financial haven, and allowing its banking sector to hyper-inflate.
But if the purpose of the dramatic eurozone all-nighters was not just to punish and make an example of the island’s fate, but to solve the issue, then we can hardly speak of a success.
The Eurogroup's 25 March agreement prevented an immediate and disorderly bankruptcy. But there is no doubt that the coming months are going to be dramatic for Cypriots.
The vice-president of the European Commission, Olli Rehn, even likened the situation faced by the people of the island to the Turkish invasion of 1974.
The agreement placed the second largest lender of the country - i.e. Laiki Bank - in resolution. Beyond the fact that such a development will lead to job losses, it also means that all deposits of natural or legal entities exceeding €100,000 will virtually be wiped out.
Maybe it will take years before the clearance procedure is complete and depositors receive some kind of compensation, which, in any case, would be much smaller than the sums lost due to the haircut.
Clients of the Bank of Cyprus with deposits over €100,000 will also suffer heavy losses. In fact, the decision provides that, at least for some time, uninsured deposits in the country’s largest bank will remain frozen, until the exact amount of their “haircut” is decided, in order to reach the capital ratio for the Bank at 9%.
Hence, hundreds of domestic companies had their cash reserves depleted, and their current accounts obliterated. Some –if not most – of them will go bankrupt in the next days and weeks.
These developments, in combination with the imposition of restrictions on the free movement of capital - also for an unspecified time period - raise serious doubts as to when the economy of the island will be able to function properly again.
The unprecedented in scale destruction of capital, the loss of confidence in the banking system, which had served as a basic pillar of the economy of the island as well as a pool for jobs, the inevitable outflow of deposits along with the general uncertainty, are expected to deepen the recession in Cyprus beyond even the most pessimistic forecasts.
In this sense, sustainability projections of the draft memorandum of understanding between the Troika and Nicosia should be considered as already obsolete, and the assistance programme is already way off track.
But given that the eurozone is not willing to provide funding beyond €10 billion, the big question that now arises is how the inevitable funding gap between solvency and insolvency is going to be covered, at a time when the economy is sinking and unemployment is spiralling out of control.
Whether the Bank of Cyprus will survive is equally dubious, since besides the deposit outflows it will suffer, it has also been forced to assume the obligations of Laiki Bank towards the European Central Bank, amounting to €9 billion (around 50% of Cypriot GDP).
Moreover, the unfortunate handling of the situation by the eurogroup and the Cypriot government over the last few days has shaken the trust of Cypriot citizens in the European trajectory of the country, as it has emerged from recent polls.
Equally fragile is the confidence of citizens and markets in the crisis management skills of the eurozone. If the - undoubtedly substantial - difficulties of a small economy like Cyprus are able to cause so much trouble, what then should be expected if a major crisis occurs in Italy or Spain?
In fact, the initial decision of the Eurogroup, which imposed a levy on deposits below €100,000, makes it clear that in case of a major crisis in the future, the eurozone is ready to “cross the Rubicon”.
In an interview for the Financial Times, the head of the Eurogroup went as far as to imply that the model of Cyprus will be used as a template for the eurozone, and that depositors with more than €100,000 in their accounts may be requested to foot the bill for failed banks in the future.
In other words, his message was clear: “Take your money and run from the South”! Such statements make one wonder if the person running the eurozone wants to preserve it, or single-handedly destroy it…
Could things have taken a different turn? Of course they could, provided that the necessary political will was there.
Although Berlin was right to point out that the model of the Cypriot economy, which was based on the financial bubble, was not sustainable, the dissolution of this model in the timespan of just a few days, instead of a few years, is bound to cause more problems than it will solve, given that no alternative plan has not been designed, let alone implemented yet.
And yes, Cyprus made many mistakes and the punishment may indeed be commensurate to the “crime” committed. But what about the mistakes of the eurozone leaders? Their response to the crisis so far has been ridiculously unsuccessful, not matter how one defines success.
The continent’s economy is going through a double dip recession, even Germany, the supposed poster child of economic performance, is stagnating, unemployment is surging to all time highs, eurozone GDP is much lower than its pre-crisis levels, and the banks of the Europe are walking dead, unable to provide credit to the economy.
Populist, secessionist and nationalist movements are on the rise throughout Europe, the ghosts of the past have been awakened, and the European unification project is at stake. Countless late night meetings failed to restore confidence, and some of them, like last week’s decision to disrespect the sanctity of retail deposits, were downright catastrophic.
Whether Cyprus deserved its fate or not, the inescapable truth is that the major flaw in the crisis management system of the eurozone is that people are not laid off when they mess up. And that’s why they keep messing up."
