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Operation bailout: the dramatic backstage scenes
CYPRUS has been saved from bankruptcy at what was literally the eleventh hour following a saga starting last weekend and culminating on Thursday noon.
The slide down the slippery slope leading to the abyss was stopped with a rushed statement from President Demetris Christofias on Thursday when he announced “we are very close” to an agreement with the troika.
Christofias’ statement defused a time bomb, just a breath short of the explosion, saving the financial sector from meltdown. Those who took it upon themselves to prevent the disaster had a very hard time getting Christofias to lift his objections to a bailout.
The banking sector’s woes combined with the endemic problems of public finances have been dominating public debate and the news for two years now.
Regardless of how things came to this point and who was to blame, there was only one cure - appealing to the European support mechanism and signing a memorandum for financial assistance that would prop up the banks and fund the state, which was excluded from international markets. The Cyprus government stubbornly refused to accept this reality and exhausted all existing possibilities over securing loans so that it could hand over the problem to the next government.
The government’s procrastination and, to a large extent, its refusal to tackle the problems created new problems – it destroyed its trustworthiness and fuelled uncertainty. The recession worsened and in conjunction with the lack of political will to tackle it, the economy was driven to an even deeper recession.
But the government, according to what the president had said on November 14, was primarily concerned with securing a bailout with the right content. “The content of an agreement to salvage the Cyprus economy is a more important variable than the time factor,” he said.
His statement demonstrated that the government was not aware of the critical importance of the time factor reinforcing the widely-held view that the president had lost touch with reality.
AKEL’s stance on a “memorandum with the right content” was also adopted by the party’s presidential candidate, Stavros Malas. In fact, Malas’ team launched a campaign to convince the public that it would be better to get by without a memorandum until not only after the presidential elections but the following summer!
On November 16 AKEL assured the public on TV discussion programmes that based on EU contacts, they had established that Germany was not willing to approve a bailout package before the elections so we would have to find money to get by until conditions in Europe were right.
Those who were aware of the gravity of the situation and were not bound by AKEL’s central committee decisions – finance minister Vassos Shiarly and Central Bank Governor Panicos Demetriades – took it upon themselves to wake the party from its slumber.
At the same time, they sought and secured the support of opposition leader Nicos Anastasiades of DISY.
While AKEL representatives were creating an anti-bailout climate, Anastasiades penned (November 16) a stern letter to Christofias, calling on him to assume his responsibilities and warning him that if he allowed the economy to collapse he would not be just politically responsible, but could also face charges of criminal negligence. DISY was aware of a European Central Bank (ECB) decision to turn off the taps of emergency liquidity assistance to Cyprus banks if no memorandum was agreed by January 20. The prospect was frightening.
On November 16 Demetriades asked to meet Anastasiades and informed him that everything was hanging by a string. Demetriades told the opposition chief that because the capitalisation needs of the banking sector were unclear and the sector was at breaking point, the only remedy was the immediate signing of a deal with the troika. Without an agreement the banks would not stay afloat for longer than a few weeks; he could not rule out the possibility of a turn for the worst within days.
Anastasiades showed Demetriades a copy of the letter he sent Christofias and an accompanying letter addressed to Demetriades himself, rendering him also responsible for the precarious situation of the economy. Anastasiades and Demetriades agreed to inform the press that signing a memorandum was a matter of the utmost urgency. Demetriades also informed Christofias of the ECB decision in writing, arguing that troika’s representatives should not leave Cyprus without an agreement.
On November 17 discussions between the troika and the government’s negotiating team collapsed.
Meanwhile the anti-bailout campaigning by AKEL and the government was at it height. They kept leaking scare stories about troika wanting “to get its hands on our natural gas”, undermine our state sovereignty and destroy our pension system. Commerce minister Neoclis Sylikiotis raised the ante by clashing with the troika’s representatives and the finance ministry’s technocrats during talks.
Despite the negotiations’ confidentiality, government members leaked even the exchanges with troika members, cultivating negative perceptions about their intentions. The troika decided to wrap up negotiations and leave Cyprus. The head of the troika mission in Cyprus Maarten Verwey got in touch with the EU Commissioner for economic and monetary affairs Olli Rehn who advised against this, instructing the troika to stay on for a few days more.
Last Saturday, Politis newspaper reported that the ECB had set a deadline for liquidity assistance to Cypriot banks, which rang alarm bells at the Central Bank. This news could have sparked a bank run if there was no agreement by Monday morning when the banks opened.
Already throughout the previous week, people were withdrawing deposits from the Laiki Bank, if the panic spread there would be withdrawals from all banks and it would be impossible to control the situation.
At that critical juncture, the Governor and Shiarly took over and sealed a deal for the banking sector with the troika on Sunday. The deal was announced on Sunday night and came as a big surprise to everyone. It acted as a spoiler to AKEL’s plans of avoiding the signing of bailout on the grounds that the troika was making unreasonable demands and a deal was impossible. The announcement of the banking sector agreement boosted confidence and created the impression that a deal could be reached on all issues.
Monday started optimistically with the government spokesman saluting the agreement on the banks. But by evening the situation came unstuck again with the government carrying on leaking negative information aimed at creating a picture of a talks’ collapse.
The government was split. On the one side were Shiarly and finance ministry technocrats and on the other were the AKEL central committee members, headed by Sylikiotis who carried on their misinformation tactics, telling the media that they were resisting foreign plans to take control of our natural gas.
Negotiations continued on Tuesday when either an agreement or a collapse was expected. On Tuesday night Christofias attended the opening ceremony for a new building in Psevdas, during which he repeated his red lines but left a ray of hope for an agreement and consensus among the parties.
“I am sure that when push comes to shove, instead of each one of us dealing with the other on the basis of expediencies we will have to come together and see how we can face the island’s huge problems. It is a national imperative,” Christofias said.
Wednesday was the most important day. It was most certainly troika’s last day in Cyprus and all eyes were on the party leaders meeting at the presidential palace. Christofias called the leaders to update them and ask their views. According to presidential palace sources, Christofias was overwhelmed with fear of having to face another Mari (the blast that killed 13 people and knocked out the island’s main electricity station in the summer of 2011), this time with regard to the economy. His plan was to get the party leaders to push for a signing of a bailout so he could agree with them, under protest. Anastasiades went in with his own strategy: let the government tell the opposition what it wants. The DISY leader read out a new letter to the president asking him to state in writing what his position was on the economy and how he planned to manage it. The rest of the leaders backed Anastasiades’ proposal which angered Christofias, who lost his temper and said he would not sign a bailout; he also showed his irritation with Shiarly and Demetriades. During the meeting, Shiarly said if troika left there was a risk it would not come back and he was not in a position to know whether negotiations would carry on.
The disagreements and squabbling was widely reported, causing confusion and more uncertainty.
Once calm prevailed at the palace, the decision was taken to overturn the climate by announcing that negotiations with the troika would carry on. After meetings of several hours, counter-proposals were prepared by the government in an effort to sugar-coat the pill. On Wednesday evening the drama moved to the Hilton hotel where Shiarly, government spokesman Stefanos Stefanou and under-secretary to the president Titos Christofides hosted a dinner for the troika big-wigs in order to agree the remaining issues. Sylikiotis was not invited.
At about midnight they informed Christofias, who was in Brussels, they achieved the best possible outcome at the negotiations. Christofias once again postponed making a decision until the following day, hoping he would get political support from Brussels for his refusal to agree to a bailout. He found none.
On Thursday morning the market reacted to the previous day’s shambolic meeting and the troika’s departure. Substantial deposits started being withdrawn from Laiki from early morning. The Central Bank Governor, who was attending an ECB board meeting, was informed.
Demetriades got on the phone to Anastasiades to tell him that signing a bailout was imperative to stop the bleeding. Anastasiades had already announced a news conference to release the letters he had sent to Christofias to pressure him into taking a decision.
Demetriades also got in touch with Christofias in Brussels and told him that big funds were being withdrawn from Laiki and only an announcement that a memorandum was agreed would stop this. If this did not happen immediately, the rest of the banks would come under the same pressure and the economy would collapse, warned Demetriades. Finding no sympathy in Brussels, Christofias finally made up his mind to say ‘yes’ to the bailout proposal. He issued an announcement saying we “were very close” to an agreement with the troika.
His statement calmed things down. Anastasiades did not release the correspondence and in the afternoon parliament approved an additional €3 billion in state guarantees for the banks. On Thursday evening the government announced that an agreement was reached with troika.
On Friday the markets calmed down, the deposit withdrawals from Laiki stopped and the situation was stabilised.
Following the announcements, the signing of a bailout is a formality. Cyprus may be given a hard time when the Euro group has to approve the deal and national parliaments, the approval of which is also needed, may impose additional terms, but the process is now out of the government’s hands; whatever form the bailout finally takes, it will be obliged to accept.
The most important thing is that the recapitalisation of the banks would go ahead, public confidence would be restored and there would be no danger of the liquidity taps being turned off. The threat of collapse has been seen off.
Former president of the republic George Vasiliou, who was in favour of the memorandum from the outset, said the danger is behind us. “The banking system was just a breath away from collapse but is now considered safe. The banks’ problems will be permanently resolved with their recapitalisation after the memorandum is signed, but the announcement for an initial agreement has unblocked the cash flow system and there is no more reason to worry,” he said.