ECB role in bailout comes under scrutiny

Bank has been key player in all four sovereign bailouts

As every party involved in Cyprus’s bailout negotiations scrambled on Monday to blame others for dreaming up the idea of seizing a share of even small-time bank customers’ deposits, the role of the European Central Bank came under fresh scrutiny.

The independent and unelected ECB has been a key player in all four sovereign bailouts in the eurozone, through its non-voting seat at the “eurogroup” meeting of eurozone finance ministers that hammers out such rescues; and through its role in the “troika” with the European Commission and International Monetary Fund in subsequently monitoring bailout reform commitments.

The question facing the ECB after Saturday’s deal had turned sour was whether it should be so closely associated with a politically contentious rescue package. The initial deal, being renegotiated on Monday, proposed to confiscate 6.75 per cent of the deposits of Cypriot bank account holders with less than €100,000 and 9.9 per cent of those with more, so that Cyprus could be seen to be contributing €5.8bn to the bailout. This was a critical element in a year when German parliamentarians, who can veto such bailouts, go to the polls.

“The Cyprus mess highlights the challenge the ECB faces having assumed such a central role in crisis management as part of the troika,” said Mujtaba Rahman, Europe analyst at Eurasia Group, the risk consultancy. “Anything that subtracts from ECB credibility makes it harder for the bank to do its job and adhere to its mandate.”

The ECB has made clear it played no role in targeting the savings of those with less than €100,000 on deposit, a measure that contravenes at least the spirit, and possibly the letter, of a eurozone-wide €100,000 bank deposit guarantee.

Portrayed as a “tax”, albeit a tax unlike any other in that it involves giving depositors an equity stake in the bank in exchange for their seized deposits, the division of burden-sharing was said to have been drawn up by the Cypriot government, as was appropriate for a fiscal measure.

What appears clear from accounts of the negotiations is that some form of charge on deposits was the only solution that could keep all the main players – Germany, the IMF, the commission and the ECB – on board, but that Cyprus wanted to minimise the hit on wealthier depositors, many of whom are Russian foreign investors.

But, announcing the deal on Saturday, Nicos Anastasiades, Cypriot president, essentially accused the ECB of forcing an agreement by presenting “decisions that had already been taken” to terminate the provision of liquidity to one of Cyprus’s crisis-hit banks, Cyprus Popular Bank.

A person close to the ECB gave a different account. The so-called emergency liquidity assistance upon which the country’s two biggest banks are reliant comes from the Central Bank of Cyprus but can be terminated by a special majority of the ECB’s governing council if the council believes the bank is insolvent. The ECB told Cyprus it needed a bailout in order to keep its banking system solvent, allowing the liquidity provision to continue.

Once the eurogroup had convened the meeting, it was also clear that an agreement had to be reached to avoid dashing expectations and the eurozone finance ministers signed off on the deal. “We didn’t want to interfere in the chemistry of the rates,” the person said.

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