During a debate in the European Parliament this morning, Olli Rehn, the European Commission’s economic chief, got roughed up by MEPs lambasting the handling of the €10bn Cypriot bailout by the so-called “troika” of international lenders, of which the Commission is a member.
Jean-Paul Gauzés, the French conservative who led the debate for centre-right parties, called it “disastrous”; his centre-left counterpart, Austrian Hannes Swoboda, dubbed it “neo-colonial” and called on Rehn to disband the troika altogether.
In his response, Rehn chose instead to focus on remarks by Philippe Lamberts, a Belgian Green, who questioned why the size of Cyprus’ funding needs had risen by €6bn over the nine days between the first botched bailout agreement and the second, final deal struck the following weekend:
A month before this famous weekend, €17bn was necessary in order to render Cypriot debt sustainable. Now we found at last week it’s €23bn. Just a slight mistake, a comma here or there. Those who carry out the forecasts and estimates for you, are they incompetent…or was it: well, we’ll play around with the figures to make sure reality looks better than it really is?
Rehn took to the floor and sought to portray the confusion over the numbers as a misinterpretation of leaked documents, which some in the European Parliament took to mean us here at the Brussels Blog:
Here are Rehn’s remarks in full:
The confusion is coming from the fact that two entirely different sets of figures are being compared, one net the other gross, one based on a set of assumptions from several months ago while the other taking into account the most recent decisions and most recent macroeconomic projections. In other words, in the public debate in the media, people have been comparing apples with pears and coming up with oranges, frankly. I’ll refrain from remarking that this is what happens when stories are written based on leaked documents.
If you look at these two figures of €17bn and €23bn…the difference is that the €17bn is related to net financing needs while the larger figure that has been quoted, €23bn, is a gross financing concept. Moreover, the larger number also includes additional buffers in the second Cypriot programme.
Part of the problem, as Rehn points out, is that despite the fact eurozone leaders have decimated the Cypriot banking sector and forced local businesses into bankruptcy, they have never publicly explained in any detail how they came up with the numbers used in the bailout. Headline figures are tossed around with abandon, but only through hunting for the source documents from confidential sources and scouring through their contents can the general public get any idea of why such monumental decisions have been made.
Despite Rehn’s protestation, a document we posted last week from the European Stability Mechanism is pretty darn clear on the matter: “Prior to the drastic measures taken by the authorities recently, Cyprus’ total financing needs over the programme period amounted to €23bn”. And Rehn himself acknowledged that going into the March deliberations, the estimate was €17bn.
Duly chastened by Rehn, however, we went back to our leaked documents (to this day, there has been nothing publicly released other than two detail-free statements by the eurogroup itself) in an attempt to figure out what are apples, what are pears, and what are oranges.
To help in our forensic examination, we have for the first time posted a chart leaked to us in February (see it here) that is part of a document used for a story where we first reported that a bank deposit “bail-in” was being seriously considered by bailout lenders. Although we have received many requests to post the document in its entirety, we cannot, since it includes things that could identify our source.
As the chart shows, the “baseline – full bailout” assumptions going into the deliberations were that the total cost of the bailout would be €16.7bn, broken down this way:
- €8.9bn to recapitalise Cyprus’ banks
- €1.1bn to recapitalise its cooperatives
- €1.8bn to finance the Cypriot government over the course of the three-year programme
- €4.9bn to pay off bonds that come due during the programme
Or, to put it more simply: €6.7bn to run the Cypriot government and €10bn to shore up its faltering banks.
A close reading of the European Commission’s assessment of financing needs for Cyprus after the agreement looks like this:
- €10.6bn to wind-down or restructure Cyprus’ two largest banks
- €2.5bn to recapitalise cooperatives and small banks
- €3.4bn to finance the Cypriot government
- €4.1bn to pay off bonds that come due during the programme
Or, to put it more simply: €7.5bn to run the Cypriot government and €13.1bn for its banks. Add that up and you get €20.6bn, not the €23bn contained in the ESM document.
Why the discrepancy? As far as we can tell, this is where Rehn’s net versus gross argument comes into play. The same document lists bailout financing coming from three sources:
- €9bn from the eurozone bailout fund, the ESM
- €1bn from the International Monetary Fund
- €13bn in a “Contribution by Cyprus”
The problem is, adding these together and getting €23bn double counts some things. Many of the “Contributions by Cyprus” (which added together brings the gross financing to €23bn) actually brings down the net cost of the bailout.
For instance, selling off €400m in Cypriot central bank gold is counted as part of the “Contribution of Cyprus”, but it actually reduces Cypriot funding needs. Same with €600m in proceeds from privatising government assets.
As far as we can tell, the amount needed to fund the Cypriot government really hasn’t changed that much from pre-bailout to post-bailout estimates. Sure, the actual deficits have increased by €1.7bn, thanks to a darkening economic picture. And there’s an extra €400m needed to fill a pension hole, which was created when the pension fund lost its holdings in the now-shuttered Laiki bank.
But that is offset by deciding not to pay domestic holders of €1bn in government bonds. They will be “encouraged” to roll over their holdings instead. And they’re selling gold. And privatising government assets.
What has really changed are the needs of the Cypriot banks, which went from €10bn to €13.1bn. It is still a major increase, much of which is due to the botched handling of the first bailout. But it’s €3.1bn, not €6bn.
Clear as mud, right? We have run this analysis by EU officials and have yet to have a response. We’ll update Brussels Blog readers if and when we do.
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