Eurogroup’s treatment of Cyprus is ‘eye-opener’ for Malta, Luxembourg - Pissarides

Nobel laureate and Cyprus economic policy head says precedent set by Cyprus' treatment by eurogroup means ‘Malta and Luxembourg should also assess benefits of bloc membership’

Karl Stagno-Navarra
25 March 2013, 12:00am
Nobel laureate and head of Cyprus economic Council Christopher Pissarides
Nobel laureate and head of Cyprus economic Council Christopher Pissarides

Nobel laureate for economics in 2010 and head of Cyprus economic council Christopher Pissarides has questioned whether his country should reconsider its membership in the euozone.

Speaking on BloombergTV, Pissarides said "we should sit down and think very carefully about the future of this country and whether it's better to be within the euro zone or without."

"We've seen that if you run into trouble you're not necessarily going to be rescued in a way that's most beneficial to your economy," he stressed.

Pissarides said the precedent set by the nation's treatment means other small nations such as Malta and Luxembourg should also assess the benefits of membership in the bloc. "The behavior of the eurogroup wasn't one that would give you the impression, if not convince you, that here was a single unit of 17 partners trying to do the best for their continent and their currency," he said. "It was more like: here is a little guy who has misbehaved, and we'll put him down."

Cyprus dodged a disorderly default and departure from the shared currency by agreeing last night to shrink its banking system in exchange for €10 billion in an emergency bailout.

The rescue package saw Cyprus bowing to creditor demands amid a European Central Bank threat to cut off emergency financing for the nation's banks as soon as today. Cyprus rejected an initial accord when the parliament in Nicosia opposed a key plank to tax all bank accounts.

"An exit isn't something Cyprus should think about now, Pissarides said, adding that "going outside the euro zone means you have a government with no money issuing money - No one will have confidence in it."

Crisis trembles Malta?

Small EU countries are said to be "trembling at the prospect of what might be in store," the Guardian newspaper reports today.

Malta, Luxembourg and Cyprus are the three smallest countries in the EU and the eurozone. It The Guardian says that Cyprus's days as an offshore tax and banking haven are now numbered.

Realtive to its GDP, Malta's banking sector is even bigger.

Finance minister Edward Scicluna sat next to his German and Cypriot counterparts at the first Cyprus bailout meeting in Brussels 10 days ago and expressed himself as being extremely chastened by what he witnessed.

After experiencing Wolfgang Schäuble, the German finance minister, up close, he wrote an article in The Times, saying "God help Malta if it encounters similar problems in the eurozone."

Then there is Luxembourg, which along with Austria, is the eurozone's biggest champion of banking secrecy.

The wealthiest country in the EU and second smallest, Luxembourg's banking sector exceeds its GDP by a whopping factor of 23. The big difference, of course, is that these are not Luxembourg banks, but subsidiaries of the European and US banking giants, with Germany and France to the fore.

For the architects of the Cyprus bailout - the German government and the International Monetary Fund - there was no doubt that the central aim of the shock therapy was to bring down an oversized banking sector that was failing. That applied especially to the Bank of Cyprus, the island's biggest and Laiki, the number two. The latter was essentially insolvent, surviving on a liquidity lifeline from the European Central Bank.

Christine Lagarde of the IMF wanted both banks, representing half of the Cypriot banking sector, closed down. In the end Laiki is being closed down with its bond and shareholders facing huge losses and €4.2bn (£3.6bn) in deposits looking lost. Bank of Cyprus will become a shadow of its former self, deposits frozen pending restructuring and downsizing and wealthy depositors facing losses probably of 30-40%.

A "casino economy", said the French government. "A dysfunctional business model," said the Germans of the Cypriot economy. With a banking sector seven times Cypriot gross domestic product, Lagarde insisted this was unsustainable and that it would be more than halved to around three times GDP by 2018.

In a time of embryonic eurozone bank supervision, with the European Central Bank being made the supervisory authority for all eurozone banks, the statements from Berlin and Lagarde bore the hallmark of a new policy aimed at taming financial services and getting bloated banking sectors under tight control.