Cyprus deal: takes and double takes

The next Cyprus will be Malta.

If there is one thing today's Eurogroup statement is keen to get across, it's that deposits below €100,000 are now safe. They'll be no tax or haircuts for anyone but uninsured depositors at Cyprus' two biggest banks. That's the good news. The bad news is that the economic pain has been transferred to the financial sector, from whence it will trickle down to everyone else. There probably won't be a bank run, but there will be bank shrinkage which won't be good for Cypriots in the long term. Political contagion throughout the Eurozone will also be a big problem. And as I wrote last week, the damage to depositor trust was done the minute the 6.75 per cent tax was announced.

As Citi's Steven Englander says (my emphasis):

It makes the euro zone more susceptible to bank deposit runs in the event that banks come under question. This may make any future bank-related crisis more intense. The fact that deposit insurance was called into question so casually will make other depositors wary of policymaker assurances that they would not behave similarly. It told depositors that policymakers could act that way if they wanted to. The German FM’s comments that deposit insurance does not apply to levies and is only as good as the sovereign backing the insurance will be remembered at the next crisis. So now we have a deal that does not involve repudiating deposit insurance or imposing a levy on deposits  -- yet is has managed to raise fears of deposit insurance repudiation and deposit levies down the road.

Here's UBS’s Reinhard Cluse on what Eurozone policy-makers might do to try and restore it this trust (my emphasis):

A good aspect of today’s decision, compared with the rejected decision from 16 March, is that deposits below €100,000 will not be bailed in. In our view, European policymakers clearly realized that they had made a mistake by originally signing off the 6.75% haircut, as this arguably increased the risk of future bank runs in other periphery countries with troubled banking sectors. European policymakers where therefore keen to reverse this decision, and this was also stressed in subsequent Eurogoup statements. Nevertheless, the ‘credibility’ of the EU’s €100,000 deposit guarantee benchmark has been damaged. We therefore expect Eurozone policymakers to come out with a strong statement in due course, stressing that the €100,000 limit will be secure in the EU in the future and that this will also be written into the EU’s future bank resolution framework in the context of the European banking union project. 2.They will hope that this sends a strong signal to depositors in other troubled Eurozone countries (above all Greece, Spain) where depositors might react a lot more nervously in the future.

Marc Ostwald at Monument Securities on where to look for the next Cyprus - which will be Malta, he thinks:

Returning to Cyprus, outside of the colossal damage to the Cyrpiot economy, the other issues to consider are the precedents that this set: in the first instance, it keeps alive Mario Draghi’s promise to do “whatever it is possible” to save the Euro very much alive, though the price that the citizens of whatever country requires assistance will always need to be prepared for the principles of law and democracy to be bulldozed, and per se to be treated with the utmost disdain and contempt. To be sure, the Cypriot economic model, or rather banking model was always doomed to failure, as had already witnessed in Iceland and Ireland, and one has to ask why there was not more effort expended in addressing this, given the Icelandic collapse was now 6 years ago – this is not to say that it would have been successful, but to highlight that policymakers have been dilettante voyeurs at this particular car crash. Eminently one needs to look at other economies which are vulnerable to such a collapse, Malta to some extent, and one has to wonder a) where Russian offshore deposits will now be re-directed to – Hong Kong and Singapore look to be the most obvious beneficiaries, especially given the much closer ties that are being forged between Beijing and Moscow, for which Germany, traditionally a very close confidante of the Moscow political elite (of whatever type), may suffer, and b) the fall-out in terms of deposit outflows in the Eurozone at any point where a crisis appears to be emerging.

 

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Former Irish premier John Bruton on Brexit: "Britain should pay for our border checks"

The former Taoiseach says Brexit has been interpreted as "a profoundly unfriendly act"

At Kapıkule, on the Turkish border with Bulgaria, the queue of lorries awaiting clearance to enter European Union territory can extend as long as 17km. Despite Turkey’s customs union for goods with the bloc, hauliers can spend up to 30 hours clearing a series of demanding administrative hoops. This is the nightmare keeping former Irish premier John Bruton up at night. Only this time, it's the post-Brexit border between Northern Ireland and the Republic, and it's much, much worse.   

Bruton (pictured below), Taoiseach between 1994 and 1997, is an ardent pro-European and was historically so sympathetic to Britain that, while in office, he was pilloried as "John Unionist" by his rivals. But he believes, should she continue her push for a hard Brexit, that Theresa May's promise for a “seamless, frictionless border” is unattainable. 

"A good example of the sort of thing that might arise is what’s happening on the Turkish-Bulgarian border," the former leader of Ireland's centre-right Fine Gael party told me. “The situation would be more severe in Ireland, because the UK proposes to leave the customs union as well."

The outlook for Ireland looks grim – and a world away from the dynamism of the Celtic Tiger days Bruton’s coalition government helped usher in. “There will be all sorts of problems," he said. "Separate permits for truck drivers operating across two jurisdictions, people having to pay for the right to use foreign roads, and a whole range of other issues.” 

Last week, an anti-Brexit protest on the border in Killeen, County Louth, saw mock customs checks bring traffic to a near standstill. But, so far, the discussion around what the future looks like for the 260 border crossings has focused predominantly on its potential effects on Ulster’s fragile peace. Last week Bruton’s successor as Taoiseach, Bertie Ahern, warned “any sort of physical border” would be “bad for the peace process”. 

Bruton does not disagree, and is concerned by what the UK’s withdrawal from the European Convention on Human Rights might mean for the Good Friday Agreement. But he believes the preoccupation with the legacy of violence has distracted British policymakers from the potentially devastating economic impact of Brexit. “I don’t believe that any serious thought was given to the wider impact on the economy of the two islands as a whole," he said. 

The collapse in the pound has already hit Irish exporters, for whom British sales are worth £15bn. Businesses that work across the border could yet face the crippling expense of duplicating their operations after the UK leaves the customs union and single market. This, he says, will “radically disturb” Ireland’s agriculture and food-processing industries – 55 per cent of whose products are sold to the UK. A transitional deal will "anaesthetise" people to the real impact, he says, but when it comes, it will be a more seismic change than many in London are expecting. He even believes it would be “logical” for the UK to cover the Irish government’s costs as it builds new infrastructure and employs new customs officials to deal with the new reality.

Despite his past support for Britain, the government's push for a hard Brexit has clearly tested Bruton's patience. “We’re attempting to unravel more than 40 years of joint work, joint rule-making, to create the largest multinational market in the world," he said. It is not just Bruton who is frustrated. The British decision to "tear that up", he said, "is regarded, particularly by people in Ireland, as a profoundly unfriendly act towards neighbours".

Nor does he think Leave campaigners, among them the former Northern Ireland secretary Theresa Villiers, gave due attention to the issue during the campaign. “The assurances that were given were of the nature of: ‘Well, it’ll be alright on the night!’," he said. "As if the Brexit advocates were in a position to give any assurances on that point.” 

Indeed, some of the more blimpish elements of the British right believe Ireland, wedded to its low corporate tax rates and east-west trade, would sooner follow its neighbour out of the EU than endure the disruption. Recent polling shows they are likely mistaken: some 80 per cent of Irish voters say they would vote to remain in an EU referendum.

Irexit remains a fringe cause and Bruton believes, post-Brexit, Dublin will have no choice but to align itself more closely with the EU27. “The UK is walking away,” he said. “This shift has been imposed upon us by our neighbour. Ireland will have to do the best it can: any EU without Britain is a more difficult EU for Ireland.” 

May, he says, has exacerbated those difficulties. Her appointment of her ally James Brokenshire as secretary of state for Northern Ireland was interpreted as a sign she understood the role’s strategic importance. But Bruton doubts Ireland has figured much in her biggest decisions on Brexit: “I don’t think serious thought was given to this before her conference speech, which insisted on immigration controls and on no jurisdiction for the European Court of Justice. Those two decisions essentially removed the possibility for Ireland and Britain to work together as part of the EEA or customs union – and were not even necessitated by the referendum decision.”

There are several avenues for Britain if it wants to avert the “voluntary injury” it looks set to inflict to Ireland’s economy and its own. One, which Bruton concedes is unlikely, is staying in the single market. He dismisses as “fanciful” the suggestions that Northern Ireland alone could negotiate European Economic Area membership, while a poll on Irish reunification is "only marginally" more likely. 

The other is a variation on the Remoaners’ favourite - a second referendum should Britain look set to crash out on World Trade Organisation terms without a satisfactory deal. “I don’t think a second referendum is going to be accepted by anybody at this stage. It is going to take a number of years,” he said. “I would like to see the negotiation proceed and for the European Union to keep the option of UK membership on 2015 terms on the table. It would be the best available alternative to an agreed outcome.” 

As things stand, however, Bruton is unambiguous. Brexit means the Northern Irish border will change for the worse. “That’s just inherent in the decision the UK electorate was invited to take, and took – or rather, the UK government took in interpreting the referendum.”