April 2010 was a turning point in the global financial crisis: the beginning of the European debt crisis. Facing state bankruptcy, then-Greek leader Giorgos Papandreou pleaded for an emergency credit line from European nations and the International Monetary Fund.
The cost of that credit: A far-reaching program of labour market deregulation, reduction in wages and budget cuts. The European Union concluded (pdf) then that Greece's top priority was to "contain the government's financing needs and reassure markets on (sic) the determination of authorities to do whatever it takes to secure medium- and long-term fiscal stability".
The memorandum imposed that priority on Greece's government.
Greece's lenders continue to impose new demands, new memoranda. One government has followed the next in Athens. Public companies have been privatised, pensions cut, wages reduced further. Greece's unemployment rate is now 26 per cent. Greece's economy is expected to contract by nearly 5 per cent this year. Last year, the country's GDP shrunk by well over 6 per cent.
Greece's international lenders have forecast growth by the end of this year. But Hellas will nonetheless have to recover from a massive economic downturn, a depression the effects of which will take years to undo.
Greek society, meanwhile, has collapsed, say observers. German trauma psychologist Georg Pieper travelled to Athens in late 2012. The grief specialist has counselled young survivors of Anders Behring Breivik's massacre in Norway. But he was shocked at what he found in Greece:
"In dramatic situations (like those in Greece) human beings become beasts of prey. They think only of themselves, and their survival."
Pieper's notes, collated by the Frankfurter Allgemeine Zeitung , depict a society of the desperate:
"Pregnant women lurch from hospital to hospital, begging to be let in. People, those who were recently middle class, collect leftover pieces of fruit and vegetable … which pigeons also have their eyes on."
In reality, "Bailing out Greece" was never about giving Greeks a "get out of jail free card". Rather, as German chancellor Angela Merkel told German television station ZDF in 2010, the loan was about "protecting the money of German citizens in Germany".
Which meant that Greece's debtors — largely European banks at the time — could not be allowed to write off their debts. At the same time, paying back Greece's debts to banks and other European countries has torn Greek society asunder.
Underlying the Euro crisis are certain premises. The modern financial system is a twisted web of securities obligations and swaps, too intricate for even the big players to have a good overview of.
For years, policymakers have reasoned, a failure to meet payment by any single actor could spark panic, causing banks to collapse or prompting big investors to exit European bank bonds or government bonds. Paying out on large obligations could wreck the world financial system.
Hence policymakers relied on judgement calls. Banks were deemed "systematically relevant" if their collapse threatened the system as a whole. They had to be saved at all costs.
Cyprus' banks were judged "too big to fail" before Eurozone finance ministers agreed to an emergency loan on Friday. And, reports say, if the bailout had not been agreed, then Cyprus' financial sector would have collapsed — with consequences for the rest of Europe.
Newly elected Cypriot president Nicos Anastasiades told Cypriot television last night that he had been "blackmailed" into accepting the deal as stands.
"The first solution would have lead to bankruptcy because it would have made European Central Bank to interrupt the extraordinary assistance that keeps the two main (Cypriot) banks in operation," Spain's El Economista quoted Anastasiades as saying.
The second solution means it is not voters — that is. taxpayers — who are carrying the can for part financing the 10 billion Euro "bailout". The concession that Cyprus' government made to secure the loan is "household sector involvement". This means, the words of Italian business paper Il Sole 24 Ore, that "families are involved in the rescue of Cyprus". Families, and their savings.
Until now, the daily explains, "Depositors were excluded from paying the cost of sovereign debt. But now the dance begins all over again." An effective guarantee that Europeans' savings were not at risk no longer holds. Cypriots will have between 5 and 6.75 per cent of their savings withdrawn by the state, presuming the bailout gets through Cyprus's parliament. Big savers will be hit harder to the tune of 9.9 per cent.
As so often happens in this crisis, Berlin was reported as having called the shots on Friday. However, German finance minister Wolfgang Schäuble told ARD television Sunday that Brussels and Nicosia made mum and dads savers pick up part of the bailout bill because they didn't want bondholders to pay.
"We would have respected the depositor guarantee up to 100,000 Euros. But those who didn't want a bail-in (a 'hair-cut' for bondholders), the Cypriot government, the European Commission and the European Central Bank, decided they wanted this solution."
And so, as almost all other bailouts during the Euro crisis, bondholders — those to whom banks are indebted — have been protected by governments. (One exception in Greece last year prompted debate over whether bondholders really lost money or not. Or whether taxpayers were again left with the bill.)
Yet unlike up until now, the bailout will not be funded through "austerity" — government cuts and tax hikes.
That is because Berlin and Brussels have judged that the core problem in Cyprus is its "oversized banking sector" — one that must urgently be reduced in size. Unlike in Greece, where the troika judged, the problem was largely big government.
"We've always said that you have to help. We have to, because we are defending our common currency," Schäuble told ARD. "But then you have to attack the root of the problem — the oversized banking sector in Cyprus."
So, Cyprus' financial sector must be reduced in size — by making savers pull out their money and put it elsewhere.
Yet it seems unlikely that even Schäuble, a master of realpolitik, intends the restructure of the Cypriot financial sector to work like this:
"Yesterday morning I watched two strapping guys trying to break into the Hellenic Bank on Prodromou (Street), banging on the doors to get their money out … I then stood in a queue at an ATM for 10 minutes. I won't bother tomorrow because all the ATMs will be empty."
Since the crisis began, governments have protected deposits because they feared precisely this would happen — financial panic.
This week, we will find out whether the loss of confidence in Cypriot banking will spread elsewhere in Europe. Whether policymakers have produced a storm — or only a storm in a teacup.
ABOUT BEST OF THE REST: It's a big world out there and plenty of commentators and journalists are writing about it — but not always in English. And not surprisingly, ideas about big events of the day shift when you move away from the Anglosphere. Best of the Rest is a fortnightly NM feature by Berlin-based journalist Charles McPhedran. Charles reads the news in French, German, Spanish and Portuguese and reports on what the rest of the world is saying about the big stories.
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