just this once

How “special” cases like Cyprus are shattering investors’ faith in Europe

March 19, 2013
Obsession
Euro Crunch
March 19, 2013

Greece was supposed to be Europe’s “special case.”

At least that was the explanation for the involvement of banks in the restructuring of the country’s sovereign debt and related losses. Such a thing was not to happen again in the euro zone. In January 2012, German Chancellor Angela Merkel said: We have said time and again that Greece is a special case and if you look at the Greek data you see that the contribution of the private sector is a necessary precondition but not a sufficient one to get Greece back onto an acceptable path.

Thus, this leitmotiv echoed between Brussels and Berlin reassured investors by guaranteeing the recovery of stability in the euro. No more “haircuts” then: only for banks (maybe). For savers’ deposits, no.

They held Greece and these promises so sacred that, over the weekend, Cyprus became a “special case,” too, another target of a heavy haircut.

In fact, this is the fifth country—after Greece, Ireland, Portugal and Spain—to call and get, at a high price, aid from the European Stability Mechanism, European Central Bank and the International Monetary Fund in order to save the bankruptcy of its banking sector.

But Cyprus is unique, everyone says (again). Its economy is also very marginal within the euro zone, comprising only 0.2% of Europe’s GDP. Of course, Greece was only 3%, but this has not prevented it from becoming the fuse on the fire that has not yet been turned off.

Undoubtedly, Cyprus actually is a case much more special than Greece. The island is a safe, generous, offshore place (until yesterday) for Russian capital, with a financial sector seven times larger than its economy. The €17.5 billion aid originally asked for (and actually cut down to €10 billion) is equivalent to the entire annual GDP of the country. However, this is another problem.

The double rescue of Athens shattered the trust between Europe and investors, triggering a contagion in the euro area. Today the Cypriot affair may reopen this dangerous script.

The potential consequences would be even more devastating, particularly in the most vulnerable, southern countries in the euro zone, Greece and Italy included.

Cyprus needs more than €17 billion, but the European bailout won’t be more than €10 billion. The rest of the money will be collected from bank deposits: The compulsory levy on all deposits above and below €100,000 (for now respectively 6.75% and 9.9%) will yield €5.8 billion—all to co-finance the rescue of Cyprus.

This action is legally unacceptable. Many argue that it is a “legalized robbery” at the expense of investors. Furthermore the decision is inconsistent with the European Union directive which insures security deposits up to €100,000 throughout the union.

It is worth remembering that this general level of assurance was designed precisely to protect the proper functioning of a single market in order to discourage competition in the hunt for European savings. Considering this, the potential damage to Europe becomes even clearer.

The blow inflicted on the confidence of investors in Cyprus will not only further fragment the single market—but also trigger new capital flight and anti-European sentiments.

Follow Gabriel Vallin Frangoulis on Twitter at @GabFrangoulis. We welcome your comments at ideas@qz.com

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