A week or so ago, one of the EU’s most senior officials said the Euro is “still sexy.” If so, finance ministers had better wear tassels when next they meet. Without this distraction, it will be even more obvious that the Euro’s sex appeal – such as it is – comes only from the fact that it’s naked.
What a debacle the Cyprus situation has proved. Like the Greece fiasco before it, Cyprus’ banking crisis gives the lie to the European Union’s willingness to abide by the rule of law. Sure, there are rules and laws – some helpfully set standards on matters such as the shape of a banana. But, none of these laws sets rules and rules don’t matter if someone in Brussels thinks looking the other way furthers a pan-European goal or a national objective to which he or she is sympathetic. Thus it was that the EU averted its gaze when Greece faked its budget to gain access to the Euro and, five years ago, it did so again when Cyprus – flush with funds from thieving Russian oligarchs – won admission to the Eurozone despite a raft of anti-money laundering laws and rules.
Unsurprisingly, Russians found that keeping their money by the sea was better than stashing it in Switzerland, especially since the U.S. was finally forcing that nation to do a bit about its willingness to take funds from all comers. Cypriote banks stepped in, ballooning to more than seven times the nation’s GDP in the few short years in which blinis became Cyprus’ beach-side bite of choice.
No one in Brussels noticed? Apparently not. Nor did the decision by Cyprus’ largest banks to put their ill-gotten funds into speculative Greek investments garner a gaze from the European Banking Authority. When it did its “stress tests,” Cyprus did nicely, thank you. Sovereign debt is, after all, a zero risk-weighted asset.
So, here we are again. It’s not just that Cyprus got where it is because none of the EU’s rules matters much. It also ran aground because there’s no meaningful resolution regime for Eurozone banks with a currency common only in name used by the seventeen nations that put their faith in it. In the last week, Eurozone finance ministers have lurched from bad to worse in their efforts to keep Cyprus within the fold. First, of course, it was the disastrous plan to force insured depositors – ordinary Cypriotes – to hand over their funds to prevent worse losses for the Russians. Then, when that cratered, Cyprus contemplated other schemes to squander national assets – eviscerating pensioners to back the banks as a case in point.
As I write this, the EU and its central bank are combining threats with a variety of possible solutions, among them a good-bank/bad-bank structure of some sort to protect the innocent. Maybe this will work, although the signs weren’t promising this morning. But, even if this latest hail-Mary pass gets Cypriote banks over the goal line, so what?
Lurching from crisis to crisis, the Eurozone has shown again that it has no construct for bank regulation or resolution despite thousands of pages of requirements and untold hours of discussion and debate. Sure, the EU yesterday moved ahead on Basel III, but how credible is this given how easy it was for Cyprus’ banks to grow huge on pilfered funds in the face of rules nominally bent on barring this? What of the EU’s deposit-insurance scheme if, under stress, Brussels can demand that deposits well within the coverage limit give up a hefty percentage of their hard-earned funds to promote national objectives of dubious worth?
For speculators, the Cyprus case proves the safe-haven value of the Eurozone – the poor are to suffer to protect their betters in the name of European harmony. For U.S. regulators, the Cyprus crisis demonstrates anew that global resolution regimes cannot be harmonized when national objectives – regardless of nominal law – vary so decisively. If the U.S. wants the anti-bailout regime required by Dodd-Frank, we’ll have to construct it ourselves and require cross-border banks to govern themselves accordingly within our borders. This will create inefficient, anti-competitive barriers in the U.S. and promote systemic risk around the world, but it’s the least-worse course for the U.S. if the European Union and other regimes view banks as instruments of national policy, not private companies that should bet only with their own money. The Financial Stability Board has a raft of “high-level principles” and “key attributes” that are supposed to make banking a business. It’s time for them to stop writing and start demanding. If laws are ignored and rules irrelevant, then finance is a fool’s game or, worse, one only scoundrels can win.