BERLIN, March 25 (Reuters) - Europe's onerous bailout deal for Cyprus has burnished Angela Merkel's reputation as a tough defender of German interests and removed one of the biggest threats to her re-election prospects half a year before voters go to the polls.
But the agreement, struck in the early morning hours of
Monday in Brussels, comes at a price. It is likely to fan
resentment in southern Europe over Germany’s bitter reform
medicine and may ultimately increase the risk of backsliding by
a reluctant government in Nicosia.
“Much more than with Greece, there is concern over programme
implementation, that bank restructuring will be circumvented and
that deposit outflows cannot be stopped,” said one senior
European official who requested anonymity.
Merkel’s aides refused to describe the deal, which was
reached after tense negotiations that prompted Cypriot President
Nicos Anastasiades to threaten his resignation, as a “total
victory” for Berlin, as some leading commentators did.
But German officials did make clear they had got virtually
everything they had been seeking in the run-up to the
make-or-break meeting of finance ministers, central bankers and
IMF officials.
After coming under sharp criticism for approving a deal last
week that would have hit small savers in the Mediterranean
island’s over-sized banks, Germany and its allies reversed
course and forced Anastasiades to accept a massive “bail-in” —
or forced losses — for bigger depositors.
Popular Bank of Cyprus, also known as Laiki, will
be shut down completely, while deposits in the country’s biggest
financial institution Bank of Cyprus will be slashed in half.
This kind of deal, which ends the island’s status as an
offshore financial centre for rich Russians and Britons, had
been Germany’s wish from the start.
“We got what we always wanted, a bail-in that shrinks the
over-sized banking sector in Cyprus,” Finance Minister Wolfgang
Schaeuble told reporters on Monday in Berlin.
The result virtually guarantees that the bailout will sail
through the Bundestag lower house of parliament and leaves
Germany’s centre-left opposition with precious little to gripe
about.
Interviewed on German television on Monday, Greens leader
Katrin Goering-Eckardt avoided speaking about the new deal
altogether, instead criticising the government for hurting
confidence with last week’s accord, which is now obsolete.
CLEAR INSTRUCTIONS
More importantly for Merkel, the agreement with Cyprus
reinforces her image as a tough negotiator who is only prepared
to expose German taxpayers to euro zone bailouts in return for
the most painful of reform commitments.
She had taken a risk on Cyprus by demanding, initially via
Schaeuble, heavy losses for Cypriot bank depositors and then
refusing to budge.
Had Anastasiades not relented, Cyprus would have gone
bankrupt, potentially spreading contagion across the single
currency bloc for which Merkel would have been blamed.
To avoid that fate and prevent a repeat of the embarrassing
deal that unravelled the previous week, sources at the Brussels
negotiations said Merkel gave very clear instructions this time
around that she wanted a deal sealed before the unwieldy
Eurogroup, with its 17 finance ministers, convened.
This meant that a smaller group, led by European Council
President Herman van Rompuy and also including European Central
Bank President Mario Draghi and International Monetary Fund
chief Christine Lagarde, ended up negotiating with Anastasiades
and his Finance Minister Michael Sarris for much of the night,
while Schaeuble and his counterparts waited.
Merkel and French President Francois Hollande were on
standby, ready to be consulted at any time.
Still, the deal carries significant risks and could come
back to haunt Germany and its partners down the line.
After a week in which Cypriot banks were shuttered, the
country faces a substantial hit to its economy and the risk of
further capital flight that could shatter the foundations on
which the deal is based.
Then there is the question of how eagerly Anastasiades,
whose only apparent victory on Monday was preserving the
island’s biggest bank in shrunken form, will implement a
programme he clearly didn’t want.
“I am confident that the programme will work, but let’s be
honest. At this moment, we cannot say exactly what the impact is
going to be,” European Commission President Jose Manuel Barroso
said. “It will depend on the level of implementation and the
commitment of Cyprus itself.”
Merkel, who has been depicted in Nazi uniform by angry
protesters in Nicosia over the past weeks, will also have to
accept further damage to her image outside of Germany and a
deepening of the divide between Europe’s north and south.
German officials were peppered with questions on Monday
about whether the Cyprus agreement would aggravate
long-simmering resentment of Berlin within Europe, and perhaps
even convince some states that Merkel’s cure is worse than their
disease.
For Nicosia’s European partners and financial markets, one
of the most positive aspects of the deal was that the Cypriot
parliament did not have to approve it. But how long will
Anastasiades be able to keep onside lawmakers who feel they’ve
been mandated to by Berlin?
“It is far from clear that all the current members of the
Euro area will be prepared to join Germany on this journey, once
they have fully internalised how tough it is going to be,” said
J.P. Morgan analyst Alex White.
(Additional reporting by Annika Breidthardt; writing by Noah
Barkin; editing by Philippa Fletcher)
