There is nothing more undignified than the sight of a bankrupt person begging for assistance. The contrasts between the cosy and sometimes sumptuous living before the event and the state of helplessness and destitution soon after are stark indeed. While generous persons may come forward to offer their help, they know in their heart of hearts that lending money to a bankrupt person is very risky and is not unlike saving a drowning person, which may cost you your life.
In the eurozone, this sight concerning a whole country is becoming quite a common occurrence. The classical and distinct case of Greece was soon to be followed by that of Ireland, then Portugal, then Spain and now Cyprus. All of them have their own story to tell but all serve a lesson to other eurozone members including Malta.
Cyprus, more than all the others, holds a special place not so much with regard to the unique factors which brought about the financial crisis upon it but as a case study of how an EU micro- Mediterranean island member state is expected to be treated if ever its unfortunate turn would come to seek aid from its fellow member states.
The long night between Friday and early Saturday morning, locked in a meeting room in the Brussels based EU Council building with 16 fellow finance ministers, was indeed an eye- opener. Sharing the night with us was the European Central Bank President Mario Draghi, the Executive Director of the International Monetary Fund, Christine Lagarde, and the EU Commissioner for the Economy and Finance Olli Rhen. The meeting and subsequent one- to- one negotiations were very ably conducted by the Eurogroup President. I was lucky enough to see the event unfolding with Germany’s Finance Minister Wolfgang Schauble sitting next to me and the Cyprus minister right opposite us at the same end of the hall. It reminded me of an unavoidable cross- Atlantic flight where you are not allowed to move from your seat though you are wined and dined several times during the endless voyage.
Though the unit of account was in billions of euros, the sums involved in Cyprus’s case were by European standards almost insignificant. But at stake were matters of principle. Firstly that creditor countries, including us, would ensure they get their money back. Secondly, that an equal effort is seen to be made by both creditor and debtor countries. The latter contribution is now fashionable and quaintly referred to as bailing- in, in contrast with bailingout. Thirdly, that all the past sources of irritation which went unheeded by the country concerned are finally and forcefully settled with the now all- powerful creditor countries.
In the case of Greece these irritations included profligate public spending, corruption and misuse of EU funds. In the case of Ireland it was the conspicuously low corporate tax rate. In the case of Cyprus it was the Russians, with the implication of it being recognised as a tax haven with abundant stories of flagrant gross money laundering activities.
So the package had to create the precedent of penalising the depositor rather than the taxpayer. Of course, like all attacks, the collateral damage to be suffered by the Cypriot people could not be avoided. The €18 billion financial gap had to be filled in partly by a €10 billion EU bail- out and a matching €8.5 billion bail- in. This includes gold sales, privatisation, a stiff levy on interest from bank deposits covering both guaranteed and non guaranteed ones, and an ambitious 4.5 per cent of GDP consolidation which will cut Cyprus’s enormous debt back to 100 per cent by 2020. More questionable for a micro state is a proposed downsizing of their domestic banking sector to European average proportions.
All this was “agreed” to by the Cypriot government representative who, with a pistol to the head, was naturally unusually co- operative. But it took nearly 10 long hours before the Cypriot minister’s body and soul became exhausted enough for him to assent to this accord. As soon as that happened Schauble demanded that all wire transfers to and from the Cypriot banks would cease forthwith.
The feeling one got on exiting the meeting in the early hours of the day was that never in one’s life would one like to dream the experience let alone live it. That is indeed salutary to any finance minister who needs to be reminded that any fiscal slippage in the country’s public finances is done at a great risk to the country’s economic welfare.
Prof Scicluna is Minister of Finance.