By Despina Syriopoulou

 

How do you judge the decision taken by the Eurogroup, regarding Cyprus?

I think that if you scrutinize the numbers, the levy on small depositors, those below 100,000 euro, which is fully and explicitly guaranteed by deposit insurance scheme in any EU member country, the official sector was able to rise only 2.08b by doing that. So the question is why would they be prepared to undermine the sanctity of insured deposit to cross the red line, which would have a lot of implications on across Europe in terms of the credibility of these deposit insurance schemes…and just for 2,08b euro. That is to be questioned.    

You spoke about implications. In practice, what are those implications?

Three. Number one, potential deposit flight in Cyprus and among non- resident depositors in Cypriot banks. But this we don't know until the banks reopen. This is something that we watch very carefully.

Number two, potential contagion to depositors and subordinated and senior bond holders of weak banks in weak member countries of the euro area.  We still have a number of those. For sure those creditors to weak banks and depositors to weak banks are looking to what has been done to Cyprus and they would naturally have concern about the safety of their deposits.

And number three, the whole idea of the deposit assurance scheme which will be harmonized and coordinated in the European Union and within the framework of progress towards a banking union in the euro area, will face some credibility deficit, because it has been demonstrated that policy makers will not hesitate to break the deposit guarantee, when they need to mobilize funds for rescue packages.        

so, we are not talking about implications only on the European economy, but also on world economy. Right?

Well, to the global economy and global financial system, the implications seem to be more in the line of if the weak banks in Europe continue to have difficulty getting funding and therefore cannot lend so that  the flow of bank credits to non financial sector, business sector, household borrowers remain depressed, then growth in the euro area, and particularly in the crisis countries will remain low, or even in negative territory. This will have negative impact overall in terms of slow growth in the euro area.            

As political situation in Cyprus shows right now, this decision won't be approved by the parliament, challenging an internal political turmoil and at the same time we see great social anxiety. what do you expect from now on?  Do you see a Cyprus exit from the eurozone as an option? is it on the table? 

I think that unfortunately this decision and the reaction by the people in Cyprus makes many things quite uncertain. We now learn that the Parliament has voted against the package. What would happen next is difficult to say. There are many scenarios. The more benign ones suggest a re-calibration of the package in terms of different levy rates being put on small and large depositors, before resubmitting it to Parliament for another vote. Other scenarios can not be ruled out at this juncture. What is crucial when the banks reopen is what the ECB will do in implementing its statement " it will provide liquidity to Cyprus within the existing rules governing the central bank".

Do you think that this decision puts in risk the future of the euro? and the cohesion of the Eurozone?

well, I think that it reinforces the impression created by the Italian vote only in the sense that the eurozone requires more cohesion, more integration, more solidarity, more reforms to make the weaker member countries less divergent from the stronger ones in order to sustain the euro. That is the logic of the euro. The reality on the ground that we have seen is solidarity fatigue in the core countries and reform fatigue in the crisis countries…so it doesn't seem to add up.

From your point of you, which decision would be the right solution for Cyprus?

well, it's difficult to say but if I would say one small example, I would say that 2.08b euro is the amount that must be raised by imposing 6.7% on the small depositors, those below of 100.000 euro, that should have been accommodated elsewhere and not be imposed on the small depositors.

could you tell me something more specific?

well, 2.08b, where can you get that money? you can look on privatizations, on a variety of things, on profits of the Central Bank of Cyprus etc.

Do you think that this decision will have a further impact to markets, and how do you expect that they will react in the near future?

I think that the reactions of the markets so far is rather modest, because at the end of the day Cyprus is a very small country, less than 0,5% of the eurozone economy. The problem I see is more impacting the psychology and the concern among depositors in weak banks in weak countries, among subordinated and senior bond holders and creditors of weak banks in weak countries and therefore the phenomenon that we have seen that the funding conditions remain very difficult despite the decline of sovereign bond yields and spreads we have seen since last summer.     

So far, we see a very neutral stance on behalf of the United States. Do you think that the IMF's biggest shareholder should show its presence pro Cyprus, defending some kind of stability that has been created the last few months  in the eurozone area?

well, I think that the officials in the US and elsewhere are of course paying attention to these developments that could pose risk to the overall financial stability and therefore would encourage efforts to find efficient and fair measures to stabilize the situation. But again, I think that the key point we want to stress is that undermining the sanctity of insured deposits, particularly for such a small sum of money is really a very ill-advised decision and it has to be reconsidered.    

On Cyprus issue and eurogroup's decision, there is a confrontation between Russia and Germany.  How do you see the Russian involvement?

I think that it has more to do with the lack of consultations between the eurogroup and other stakeholders in the problem, in this case Russia. So the effort to have full consultations/discussions involving key stakeholders (like Russia) is welcome. 

Germany should change its policy?

Well, I think that the big question is at the end of the day is if all the 17 members of the eurogroup again reaffirm that they want 1. to keep the euro, by seeing benefits in having a common currency then, they have to accept the logical consequences of  having a monetary union and that is a progress towards a fiscal union and fiscal union means countries that need to be reformed and to improve their economic performance and productivity, and not to be resistant to reforms. At the same time countries in the stronger area have to support weaker member countries to go through that adjustment period in order to achieve a more coherent and more convergent performance among the 17 members. if they don't have that, the euro will always remain under some uncertainty.   

Published at Ependytis newspaper on 25-3