Cyprus Crisis – An Account Of The 10 Days That Shook The Euro Area

By Beda Romano – BRUSSELS – On Sunday March 24 at 9AM, Nicos Anastasiades, the president of Cyprus, boarded a special aircraft of the Belgian Air Force sent in haste to Nicosia by the President of the European Council Herman Van Rompuy. The plane had landed at dawn. "We wanted to be sure to have him here in Brussels at midday, before the start of the Eurogroup", says a leading figure in the negotiations that on Sunday night, exactly a week ago, led to a long-fought agreement between Cyprus and its international creditors.

10 days that shook the euro area, from March 15 to March 25, have been marked
by long meetings; impromptu conference calls; blunders and misunderstandings,
tensions, fears, controversial decisions, some of which have been reneged on,
while others are now considered a model for the future; and last-minute choices
like the one that prompted Van Rompuy to send an air force plane to pick up the
Cypriot president. “I would not be at all
surprised if the Cyprus week-long episode does not register in history’s annals
as a major turning point; as the moment in history when Europe moved beyond the
says the Greek economist and Athens university professor, Yanis Varoufakis.

An account of the events of the last 10 days leaves the impression that the
Cypriot crisis is far from over. Will the country restructure its banks and
remain a member of the European Union? Will the restrictions on the movement of
capital decided in Nicosia extend to other countries? More generally, the
negotiations over the last two weeks have shown Van Rompuy’s negotiating
ability, the personal limits of the new Eurogroup president Jeroen
Dijsselbloem, and the surprising helplessness of the finance ministers, overwhelmed
by agreements which have become increasingly complex from a technical point of
view. The arrival of Anastasiades in Brussels, on Sunday March 24, was preceded
by a chaotic week.

Following his election in February, the new Cypriot President decided from the
start to negotiate an aid package with the Troika – the European Central Bank,
the International Monetary Fund and the European Commission. A round of
negotiations between the sherpas took place. Concerned about a situation that
was dangerously systemic, Dijsselbloem decided to convene an emergency meeting
of the euro area Finance Ministers on March 15, in the wake of the European
Council of heads of state and government which was scheduled to end that same
The meeting started in the evening, but as it started it was clear that it
would last through the night. At a technical level, diplomats had not been able
to solve a number of hurdles. The IMF raised the issue of debt sustainability
in Cyprus, as it had done in the past with Greece. It requested and obtained a
contribution from the private sector as a pre-condition to allow for
international loans. Taxing bank accounts became an option, but the
Anastasiades administration was torn between the desire to protect Cypriot
citizens and the instinct to preserve Russian investors. The discussion lasted
for hours. Finally, a compromise emerged at dawn: it was based on taxing
deposits below 100,000 euros at a 6.5% rate and all other deposits above this
level at a 9.9% rate.
To avoid confusion in communication, Dijsselbloem asked his colleagues to be
the only minister to hold a press conference at 4 in the morning: "All the
ministers agreed – recalls a diplomat -. However, the president of the
Eurogroup did not  speak out on the
burning question of taxing depositors. We were all taken aback." Within a
few hours, the newly-announced measures created doubts and resentments. In
Cyprus, the compulsory levy sparked new protests. Most critics pointed out that
the choice of taxing bank accounts ran against the promise to guarantee all
deposits under 100,000 euros. Another official said: "They reckoned
without one’s host, finding an agreement which was too technical and not
political enough."
Two days later, the Cypriot Parliament roundly rejected the compromise reached
in Brussels by Cypriot Finance Minister Michalis Sarris. In the wake of the
vote in Nicosia, the Eurogroup was forced to convene another emergency meeting,
this time by teleconference. In between the lines of a statement issued
thereafter, the finance ministers admitted they had made a mistake and
supported the Cypriot attempt to find a more balanced solution. A European
negotiator says: "In that circumstance, the most serious consequence was
to sabotage the Anastasiades government, which had just been elected with a
pro-European agenda. What an awful impact on the image of Europe."
Officially, the ball was in the Cypriot camp, but several prominent
members of the European establishment admitted they had no trust in the
Cypriot government: was the country at the mercy of events or just looking for
byzantine solutions? As for the
Cypriots, they have lived for 500 years under the rule of the Venetians, the
Ottomans, and the British. Their entry into the European Union in 2004 was a way
to free themselves from the surrounding regional powers, but now they saw the
EU as a new dominating force, with which to play hide and seek. On
Thursday March 21, the ECB decided to harden the tone: it warned that it would
stop extraordinary liquidity injections into Cypriot banks in the absence of an
While in Brussels, at a hearing in the European Parliament, Dijsselbloem under
fire took "full responsibility" for the latest decisions of the
Eurogroup. In Frankfurt the ECB wanted to force Cyprus’ hand as it attempted to
snatch help from Russia. That same Thursday, the finance ministers came
together again by teleconference. Busy in Moscow, Sarris was absent, awkwardly
replaced by the Labour Minister Haris Georgiadis. "At some point – a participant
recalls – a minister asked if there was an emergency plan in case of no bailout
agreement. No one was able to answer".
Meanwhile, in Cyprus the popular protest was mounting against the bank closures
imposed by the government to prevent capital flight. The parliament adopted two
laws on Friday March 22: the first was on the resolution of troubled banks, the
second on the restrictions on the free movement of capital. The Cypriot
government had decided to reopen the banks on Tuesday March 26. An agreement was
urgently needed, so much so that Dijsselbloem convened a new emergency
Eurogroup meeting in Brussels on Sunday, March 24. Worried about the collapse of the first
agreement, Van Rompuy decided to cancel in haste an EU-Japan summit in Tokyo
and to participate in the negotiations personally.
As the Cypriot government continued to negotiate with the Troika in Nicosia,
European Council officials in Brussels organized the arrival of Anastasiades.
"We decided to keep open as a last resort the option to convene a summit
of heads of state and government," an official explains. Meanwhile,
arriving in Brussels, ECB President Mario Draghi warned that his ultimatum
expired on Sunday at midnight, not on Monday at 6 pm, as many secretely had
hoped. Meanwhile, in Cyprus the head of the Orthodox Church, Archbishop
Chrysostomos II, came out bluntly: "It is certain that [the euro] will not last in the long term, and the
best is to think about how to escape it."
The first challenge was to find an agreement within the Troika. While the IMF
called for the closure of the two most indebted banks (the Laiki Bank and the
Bank of Cyprus), the Commission wanted to save one of the two in order to allow
it to continue to support the economy. A compromise was finally reached, but an
accord remained to be found with the Cypriot authorities. With strong links
to the island’s financial industry, Anastasiades wanted the two banks to remain
open. "The state of the Laiki Bank was outrageous. It was really
impossible for us not to impose its closure”, says a European negotiator At one
point, during the negotiations, the Cypriot president even threatened to
Late on Sunday  evening, Sarris met
a number of national delegations proposing solutions that Anastasiades himself
had refused with representatives of the Troika. New byzantine procedure? A form
of friendly fire? "We were confused to say the least," a diplomat
admits. The negotiations were led by Van Rompuy and the heads of the Troika,
while the ministers were kept informed only from time to time: "In fact,
the Eurogroup was bypassed – another diplomat recalls –. It only gave a formal
endorsement to the final agreement." Many ministers spent the evening in
the offices of their national delegations, waiting, frustrated.
Suddenly, close to midnight, after yet another rumor regarding an extraordinary
European summit of heads of state and government, an agreement was found. It
included the closure of the Laiki Bank, the restructuring of the Bank of
Cyprus, and losses for both depositors and bondholders. Yet, optimism for the
future remains fragile: "The crisis is not over – says a high placed
European official –. The Cypriot economy has boomed artificially. Now we need
to bring it back to the size of the island. In addition to supporting the country,
we need to follow step by step the bank restructuring process and the
restrictions on the movement of capital. Can we trust the Cypriots?"
In Europe, there is little trust for Cyprus. In Brussels and in other capitals,
there is also the awareness that the Cypriot crisis has divided the 17 members
states of the eurozone, left indelible scars in the euro area, and weakened the
president of the Eurogroup. By declaring that the contribution of the private
sector is a new model for the management of banking crises, Dijsselbloem
created new tensions between markets and governments. "2013 will be a
decisive year for the debt crisis – a diplomat sums up –. There is the risk of
witnessing many more Munich Conferences in which all participants say they have
won, while in fact they are all losers, especially Europe."

(A shorter version of this article was published in Italian in Il Sole/24 Ore dated Mar 31 2013)