Cypriot voters and their MPs may not be allowed to vote on the bailout package agreed early yesterday, but international investors got to do so with their feet. It was a vote of confidence that saw shares and currency markets rise on the news, with expectations of further gains – reflecting the democracy, some would say tyranny, of the markets. But it is that pressure, fear of contagion, of runs on banks in the euro “periphery” – Italy, Spain, Portugal, and Ireland – that gave urgency to the talks and forced an outcome, albeit painful.
Yet, others were more sanguine and realistic about a deal being done, eventually. Despite stock market and press jitters over Cyprus and the aftermath of the Italian election, the bond markets have been calmer about the euro's prospects and smiled benevolently on the euro periphery in recent weeks – the four countries have raised some €28.2 billion of bonds so far this year, with yields all down significantly. Ireland raised €7.5 billion in the same period and now enjoys its lowest borrowing costs in seven years (4.1 per cent on 10-year bonds).
The Cyprus agreement should spare the island a financial meltdown – a threatened cut-off by the Eu ropean Central Bank of emergency funding as early as yesterday – by winding down the largely state-owned Popular Bank of Cyprus, known as Laiki, and shifting deposits below €100,000 to the Bank of Cyprus to create a "good bank". These depositors will be protected, but those holding over that will face levies up to 30 per cent. Senior uninsured bondholders in Laiki will lose their investments, and those in Bank of Cyprus also face losses. The EU-IMF required that Cyprus raise €5.8 billion from its banking sector towards its rescue in return for €10 billion in international loans.
The measures should set Cyprus on the road to recovery, EU Commission president José Manuel Barroso said yesterday, although the precedent of the raid on larger depositors’ accounts will create some nervousness among depositors elsewhere. Righteous indignation from Russia is, however, a bit rich.
While its citizens own an estimated €22 billion of the €38 billion deposits in accounts of more than €100,000, the bulk is widely believed to be proceeds of tax evasion and hot money, much from the sale of state assets in the post-Soviet years of "gangster capitalism". This is presumably what prime minister Dmitri Medvedev was alluding to when he complained cryptically yesterday that "the stealing of what has already been stolen continues". President Nicos Anastasiades, who threatened to resign during the talks in Brussels, fought hard, but unrealistically, against the deposit clawbacks to preserve the country's business model as an offshore financial centre. And, rightly, to no avail.