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German Court Case Has Potential To Force Euro Exit

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Last summer to avert the euro crisis, Mario Draghi announced Outright Monetary Transactions (OMT) to support the Spanish and Italian bonds. Now finally the German constitutional court is to hold hearings this week on the legality of the ECB using OMT as a tool to finance deficits in bankrupt states. Already Bundesbank’s Jens Weidmann has submitted a report to the court objecting to OMT but the panel looks split and the ruling could go either way. This has the potential to possibly force a German euro exit or at very least throw the eurozone back into a full blown crisis.

Udo di Fabio, the constitutional court’s euro expert until last year, said the explosive case on the legality of the European Monetary Union rescue machinery could provoke a showdown between Germany and the European Central Bank (ECB) and ultimately cause the collapse of monetary union.

“In so far as the ECB is acting ‘ultra vires’, and these violations are deemed prolonged and serious, the court must decide whether Germany can remain a member of monetary union on constitutional grounds,” he wrote in a report for the German Foundation for Family Businesses.

“His arguments are dynamite,” said Mats Persson from Open Europe, which is issuing its own legal survey on the case on Monday.

Dr Di Fabio wrote the court’s provisional ruling last year on the European Stability Mechanism (ESM), the €500bn (£425bn) bail-out fund. His comments offer a rare window into thinking on the eight-strong panel in Karlsruhe, loosely split 4:4 on European Union issues.

The court is holding two days of hearings, though it may not issue a ruling for several weeks. The key bone of contention is the ECB’s back-stop support for the Spanish and Italian bond markets or Outright Monetary Transactions (OMT), the “game-changer” plan that stopped the Spanish debt crisis spiralling out of control last July and vastly reduced the risk of a euro break-up.

germanThe case stems from legal complaints by 37,000 citizens, including the Left Party, the More Democracy movement, and a core of eurosceptic professors, most arguing that the ECB has overstepped its mandate by financing the deficits of bankrupt states.

Berenberg Bank said the case was now “the most important event risk” looming over the eurozone, with concerns mounting over an “awkward verdict” that may constrain or even block ECB action.

Dr Di Fabio said the court, or Verfassungsgericht, does not have “procedural leverage” to force the ECB to change policy but it can issue a “declaratory” ultimatum. If the ECB carries on with bond purchases regardless, the court can and should then prohibit the Bundesbank from taking part.

The Bundesbank’s Jens Weidmann needs no encouragement, say experts. He submitted a report to the court in December attacking the ECB head Mario Draghi’s pledge on debt as highly risky, a breach of both ECB independence and fundamental principles. The ECB does not have a legal mandate to uphold the “current composition of monetary union”, he wrote.

Dr Di Fabio said it was hard to imagine that an “integration-friendly court” would push the EMU “exit button”, but it can force a halt to bond purchases. This may amount to the same thing, reviving the eurozone crisis instantly.

“It would pull the rug from under the whole project. It is the OMT alone that has calmed markets and saved the periphery,” said Andrew Roberts from Royal Bank of Scotland. Mr Draghi said last week that the OMT was the “most successful monetary policy in recent times”.

The court dates back to the Reichskammergericht of the Holy Roman Empire created in 1490, but it was revived after the Second World War along the lines of the US Supreme Court.

It has emerged as the chief defender of the sovereign nation state in the EU system, asserting the supremacy of the German Grundgesetz over EU law, hence the German term “Verfassungspatriotismus”, or constitution patriotism.

The court backed the Lisbon Treaty but also ruled that Europe’s states are “Masters of the Treaties” and not the other way round, and reminded Europe that national parliaments are the only legitimate form of democracy. It said Germany must “refuse further participation in the EU” if it ever threatens the powers of the elected Bundestag.

It issued another “yes, but” ruling last September. It threw out an injunction intended to freeze the ESM, but it also tied Berlin’s hands by capping Germany’s ESM share at €190bn, and blocked an ESM bank licence. It killed off hope of eurobonds, debt-pooling, or fiscal union by prohibiting the Bundestag from “accepting liability for decisions by other states”.

Crucially, the court said the Bundestag may not lawfully alienate its tax and spending powers to EU bodies, even if it wants to, for this would undermine German democracy.

Chief Justice Andreas Vosskuhle said at the time that Germany had reached the limits of EU integration. Any further steps would require a “new constitution”, and that in turn would require a referendum.

 

Source: The Telegraph

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German Finance Minister Who Launched Euro, Calls For Its Breakup

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euroThat the euro has been a disaster is now beyond question.  Even the German Finance Minister, Oskar Lafontaine who was responsible for Germany launching the euro is now calling for its breakup. He believes countries would unite against Germany, forcing change. Ambrose Evans-Pritchard writes:

Oskar Lafontaine, the German finance minister who launched the euro, has called for a break-up of the single currency to let southern Europe recover, warning that the current course is “leading to disaster”.

“The economic situation is worsening from month to month, and unemployment has reached a level that puts democratic structures ever more in doubt,” he said.

“The Germans have not yet realised that southern Europe, including France, will be forced by their current misery to fight back against German hegemony sooner or later,” he said, blaming much of the crisis on Germany’s wage squeeze to gain export share.


Mr Lafontaine said on the parliamentary website of Germany’s Left Party that Chancellor Angela Merkel will “awake from her self-righteous slumber” once the countries in trouble unite to force a change in crisis policy at Germany’s expense.

His prediction appeared confirmed as French finance minister Pierre Moscovici yesterday proclaimed the end of austerity and a triumph of French policy, risking further damage to the tattered relations between Paris and Berlin.

“Austerity is finished. This is a decisive turn in the history of the EU project since the euro,” he told French TV. “We’re seeing the end of austerity dogma. It’s a victory of the French point of view.”

Mr Moscovici’s comments follow a deal with Brussels to give France and Spain two extra years to meet a deficit target of 3pc of GDP. The triumphalist tone may enrage hard-liners in Berlin and confirm fears that concessions will lead to a slippery slope towards fiscal chaos.

German Vice-Chancellor Philipp Rösler lashed out at the European Commission over the weekend, calling it “irresponsible” for undermining the belt-tightening agenda.

The Franco-German alliance that has driven EU politics for half a century is in ruins after France’s Socialist Party hit out at the “selfish intransigence” of Mrs Merkel, accusing her thinking only of the “German savers, her trade balance, and her electoral future”.

It is unclear whether the EU retreat from austerity goes much beyond rhetoric. Mr Moscovici conceded last week that the budget delay merely avoids extra austerity cuts to close the shortfall in tax revenues caused by the recession.

The new policy allows automatic fiscal stabilisers to kick in, but France will stay the course on the original austerity. “It is not about relaxing the effort to cut spending. There will no extra adjustment just to satisfy a number,” he said.

Mr Lafontaine said he backed EMU but no longer believes it is sustainable. “Hopes that the creation of the euro would force rational economic behaviour on all sides were in vain,” he said, adding that the policy of forcing Spain, Portugal, and Greece to carry out internal devaluations was a “catastrophe”.

Mr Lafontaine was labelled “Europe’s Most Dangerous Man” by The Sun after he called for a “united Europe” and the “end of the nation state” in 1998. The euro was launched on January 1 1999, with bank notes following three years later. He later left the Social Democrats to found the Left Party.

Remember Helmut Kohl’s recent comments on introducing the euro in an interview that was conducted by Jens Peter Paul, a German journalist in 2002, but only recently published. Kohl said that he would have lost any popular vote on the euro by an overwhelming majority.

“If a Chancellor is trying to push something through, he must be a man of power. And if he’s smart, he knows when the time is ripe. In one case – the euro – I was like a dictator …

“I knew that I could never win a referendum in Germany,” he said. “We would have lost a referendum on the introduction of the euro. That’s quite clear. I would have lost and by seven to three.”

So there you have it, stuck with a currency that was rammed through against peoples wishes and a completely predictable disaster. Of course a currency union, as the elites point out, cannot work without a fiscal union. That has always been the end game, to hand over all economic power to the EUSSR. In other words a “power grab”. Hegelian dialect, the method to implement something you want by creating a problem which induces a reaction , whereby you already have the solution. After all, the Soviet Union was based on Hegelian dialectic techniques.

Source: The Telegraph

Bundesbank’s Report To German Court Could Torpedo Draghi’s OMT

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Draghi’s great plan to buy bonds of struggling eurozone countries through Outright Monetary Transactions (OMT) has taken a massive knock. A report issued by the Bundesbank on friday, to the German court which has yet to give its consent to OMT,  is damning to say the least.  The following line from the report says it best “It is not the duty of the ECB to rescue states in crisis”.

The hardline central bank – known as the temple of monetary orthodoxy – told Germany’s top court that the ECB’s pledge to shore up Italian and Spanish debt entails huge risks and violates fundamental principles. “It is not the duty of the ECB to rescue states in crisis,” it wrote in a 29-page document leaked to Handelsblatt.

  The Bundesbank unleashed a point by point assault on every claim made by ECB chief Mario Draghi to justify emergency rescue policies – or Outright Monetary Transactions (OMT) – unveiled last summer to stop Spain’s debt crisis spiralling out of control.

The Draghi plan mobilized the ECB as lender of last resort and led to a spectacular fall in borrowing costs across the EMU periphery, buying nine months of financial calm. The credibility of the pledge rests entirely on German consent. Analysts say the crisis could erupt again at any moment if that is called into question.

“The report borders on economic warfare,” said Harvinder Sian from RBS. “We think there is going to be fear and dread in the market that the court will reject OMT.”

The document said OMT entails the purchase of “bad bonds”, violates ECB independence and entails a high risk of heavy losses in the “not unlikely” event that debtor states are forced out of EMU.

 

It said Greek debacle had shown that conditions cannot be enforced, and, in any case, is “very questionable” whether it is desirable to drive down the borrowing costs of profligate states.

To cap it all, the Bundesbank said the ECB has no mandate to uphold the “current composition of monetary union”. Its task is to uphold price stability and let the chips fall where they may.

While the Bundesbank’s president, Jens Weidmann, has openly criticised the Draghi plan before, the aggressive language in the report shocked economists. The document was submitted in December but was not revealed until Friday.

Germany’s constitutional court will rule on the legality of the bond rescue plan on June 12. It gave a provisional go-ahead last September for other parts of the EMU rescue machinery, but limited Germany’s bail-out share to €190bn (£160bn). Crucially, it warned that the Bundestag may not alienate its tax and spending powers to any supra-national body or be exposed to “unlimited” liabilities.

“If the court rules against OMT, it means the end of the euro. The stakes are so high that I don’t see how they could just pull the trigger,” said Mats Persson from Open Europe.

He said the Draghi plan is a legal hot potato because it is, by definition, unlimited. “The previous rulings by the court have all been predicated on this point.”

German historian Michael Stürmer said the tough report is a bid by the Bundesbank to “reassert its primacy”. “They have told the ECB in no uncertain terms that it is exceeding its mandate. Angela Merkel may be smiling because this helps her set limits in Europe.”

Prof Sturmer said the forthcoming ruling – wider than just the Draghi plan – is “much more serious” than last September’s judgment, limited to an injunction brought by eurosceptic groups. “This is about issues of sovereignty. I don’t think the Court will dare to issue a ruling before the elections in September. They will procrastinate,” he said.

The court has some jurisdiction over ECB policy because it intrudes on the German Grundgesetz, or Basic Law. “Once the ECB starts bailing out states it is moving into dangerous waters,” he said.

The court made a glancing reference to OMT in September, stating that ECB bond purchases “aimed at financing the members budgets is prohibited, as it would circumvent the ban on monetary financing”.

The bond markets ignored the leaked report on Friday, confident that the court will once again find some formula to avert a crisis. It could cite a clause in the Lisbon Treaty stating that the ECB has a duty to “support the general economic policies in the Union”, which would include saving the euro.

“They might refer the case to the European Court but that would leave the Sword of Damocles hanging over the market for another two years,” said David Marsh, author of books on the Bundesbank and EMU. “I think use of OMT is practically impossible until this is resolved.”

Sovereign bond strategist Nicholas Spiro said markets are “sick and tired” of the eurozone debt crisis and have stopped paying attention to the detail. “There is this ravenous hunt for yield and they think there is all this money coming from Japan. But it has long been unclear whether OMT is real or just a myth, and the eurozone’s underlying economic crisis is still getting worse. The window of opportunity created by Draghi has been wasted.

“If the court sides with the Bundesbank in any way the whole house of cards could come crashing down.”

Source: The Telegraph

Anti Euro Sentiment Growing

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euroRight across the eurozone people are waking up to the damage the euro has done to their economies. In Italy there is a growing backlash against the euro as both Berlusconi and Grillo have an anti euro policy. It now seems Germany is getting in on the act.

 

Anti-euro movements were pushed aside or squashed by political establishments across the Eurozone. There is, for example, Marine Le Pen, of the right-wing FN in France—“Let the euro die a natural death,” is her mantra. Though she finished third in the presidential election, her party has next to zero influence in parliament. Austria has Frank Stronach, who is trying to get an anti-euro party off the ground, without much effect. Germany has the Free Voters, an anti-bailout party that has been successful in Bavaria but not on the national scene.

Then Italy happened. Two anti-austerity parties with no love for the euro, one headed by Silvio Berlusconi the other by Beppe Grillo, captured over half the vote—and locked up the political system. Newcomer Grillo had thrown the status quo into chaos, for better or worse. Suddenly, everyone saw that anger and frustration could accomplish something.

It stoked a fire in Germany. Chancellor Angela Merkel’s euro bailout policies—“There is no alternative,” is her mantra—hit increasing resistance, particularly in her own coalition, but wayward voices were gagged.

“Time has come,” Konrad Adam called out as a greeting to the crowd Monday night and reaped enthusiastic applause. Despite the snowy weather, over 1,200 people had shown up at the Stadthalle in Oberursel, a small town near Frankfurt, for the first public meeting of the just-founded association, Alternative for Germany (AfD), that isn’t even a political party yet, and that wants to be on the ballot for the federal elections on September 22.

So Adam, one of the founders and a former editor at the Welt and FAZ, was pressed for time. It’s wrong to say there’s no alternative to the euro bailouts, he said. “Politics is nourished by alternatives.” He introduced his demands:

– Dissolution of the “coercive euro association.” An orderly end of the monetary union. Countries should be able to legally exit if they “could not, or did not want to remain.” The euro would be replaced by parallel national currencies or smaller, more stable monetary unions.

– Observance of the rule of law, specifically the laws laid out in the now totally flouted Maastricht Treaty that specified, for example, that no Eurozone member would guarantee the debts of other members.

– A referendum if “the basic law, the best constitution that Germany ever had,” were modified to allow the transfer of sovereignty to a centralized European state.

The event had been opened by co-founder Bernd Lucke, an economics professor who’d been a member of Merkel’s CDU for 33 years until he abandoned it in 2011 over her bailout policies. So he hammered her. “We have a government that has failed to comply with the law and the rules and the contracts, and that has blatantly broken its word that it had given to the German people,” he said to rousing applause.

But this wasn’t the radical fringe of Germany. The mood was enthusiastic and serious. The people weren’t so young anymore. Supporters, by now 13,000, were a well-educated bunch, with a higher concentration of PhDs than any party. Among the early supporters were prominent economics professors, ex-members of the CDU, and even Hans-Olaf Henkel, the former president of the Federation of German Industry (BDI), an umbrella lobbying organization representing 100,000 businesses. And so the event was orderly, a picture, as the Wirtschafts Woche described it, of the “German bourgeoisie.”

Many supporters hailed from the center-right CDU and FDP, but AfD didn’t want to be categorized in the classic scheme of left and right. “We represent non-ideological values that people of different views can share,” Lucke said.

A claim that was validated: 26% of Germans would consider voting for a party that would steer the country out of the monetary union. They came from all political directions: on the right, 17% of CDU voters and almost a third of FDP voters; on the left, 15% of SPD voters, 27% of Green voters, and 57% of Left voters.

The challenges are huge. One is fragmentation. It would be difficult to get people from that kind spectrum to agree on anything. Another is time. The founding convention will be on April 13 in Berlin. By June 17, the party and sections for each state must register with the federal election office. By July 15, the party must collect signatures in every state amounting to 0.1% of the electorate or 2,000, whichever is lower, just to get on the ballot. But Lucke was optimistic. “With you, we can easily get the signatures,” he told the crowd.

It will be tough. Merkel is immensely popular. The major parties are well-oiled political machines. The AfD lacks truly prominent personalities, experienced politicians, economically powerful supporters, financial resources, structure…. And its platform is still skimpy.

But it doesn’t need to govern. The parliament let itself be intimidated by the executive branch “through the assertion that there is no alternative,” Lucke said. When the AfD arrives in parliament, “it will cause the large parties to begin to rethink.” This would lead to “a critical questioning of the monetary union.” And to a look at the very alternatives that Merkel said didn’t exist.

There have been waves of threats by Eurozone politicians to bully people into accepting “whatever it takes” to keep the shaky monetary union glued together. These threats peaked last year with disorderly default, and when that wasn’t enough, with collapse of the Eurozone. But now, the ultimate threat has been pronounced: war. Read…. The Ultimate Threat In The Euro Bailout and Austerity Racket: War

Source: testosteronepit

Your Banks Mess Up, But Its Your Fault

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Wolfgang Schauble, Germany’s Finance Minister is not one for holding back when it comes to pointing out the ills of other countries. Schauble has clearly laid the blame for Ireland’s bank collapse at the hands of the Irish. While partly this is true, he neglects the enormous part played by the ECB. It was the ECB’s interest rate decisions which Schauble’s Germany benefited from, that caused credit bingeing countries all their problems. He also neglects the ECB’s decision to force the Irish taxpayer to pay back gambling bondholders and help keep German banks afloat.
If that’s the best analysis Schauble can do regarding Ireland then God help the German taxpayers because I wouldn’t trust this lawyer to run my finances. When it comes to German banks exploding, Schauble’s attitude is, it’s never the banks fault. I woudn’t fancy been forced to bail out German banks along with bailing out the rest of Europe.
Wolfgang Schauble, Germany’s powerful federal minister for finance, has said it is all Ireland’s fault its banks collapsed, plunging the economy into a deep recession, and absolves reckless European bondholders of all blame.

In a frank interview for a new documentary called State Secrets and Bank Bailouts, Schauble dismisses claims that European bondholders should be made share in the responsibility for unsustainably pumping up Ireland’s banking system with billions.

“The cause in Ireland is something Ireland itself created – not Luxembourg, not France, not Germany, but Ireland – and it benefited from it for some time,” Schauble claims.

“Then everyone has to bear the consequences of a wrong-headed policy.”

In the documentary, presenter Harald Schumann, a former editor of Der Spiegel, asks Schauble to publish a list of the bondholders who cashed in from the German-backed decision by the European Central Bank not to make them bear the cost of banking recklessness but instead to shift this bill on to the citizens of peripheral European states like Ireland.

“Why don’t you publish a list of creditors so we can have an informed debate about it?” he asks. Schauble dismisses this view as being “naive.”

“[Banks are] very intermingled. And if one bank is not solvent anymore, then it will immediately trigger doubts about the solvency of the next bank because it may have credit at the other,” Schauble states.

“Everyone should solve their own problems. If everyone swept in front of their own door, the whole neighbourhood would be clean,” the German politician added.

“The Irish were very aware that their banks were less stringently supervised then the German banks,” he said.

Most economic common sense in Ireland unfortunately comes from independent politicians (the mainstream politicians are the best money can buy). In this case Stephen Donnelly easily dismisses Schauble’s argument.

In this major documentary, independent TD Stephen Donnelly disputes Schauble’s views of the Irish crisis, which are widely accepted in Germany.

“The gun was held by the European Central Bank,” Donnelly states, “The suspicion is that the European Central Bank said you will continue to pay these bondholders to whom you owe nothing or we will pull the emergency funding out of your banking system. Thereby collapsing your banking system, thereby collapsing your economy. To me, that is gunboat diplomacy.”

Former finance minister Brian Linehan backed up Donnellys claim before he died stating that Trichet made him bail out the bondholders. Even current finance minister Michael Noonan claims to have the letter from the ECB forcing Ireland to bailout the banks at the taxpayers expense, otherwise emergency liquidity would be withdrawn.

Source: Irish Independent

Euro May Have To Devalue By Mid Year

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In an original interview with Handelsblatt, Felix Zulauf founder of  Zulauf Asset Management in Switzerland has declared that the euro will most likely experience a crisis by mid year and will have to devalue.

euroThe Euro crisis will escalate again says Felix Zulauf. Swiss money manager is preparing for a collapse of the stock market. But even greater is his concern that angry citizens could take to the streets.

The markets were expecting the world economy to recover, but he suspected that neither the economy nor corporate earnings would develop as hoped. Once the distance between “wish” and “reality” became apparent, “it could cause a crash.”

Timeframe? This year. Optimism might hang in there for a while; the second quarter would be more problematic. Over time, downdrafts in some markets could reach 20% to 30%. Despite the incessant insistence by Eurozone politicians that the worst was over, he didn’t see “any normalization.” The structural problems were still there, they’ve only been hidden, “drowned temporarily in an ocean of new liquidity.”

“Look at the economic data,” he said. “There is no visible improvement.” As if to document his claim, the Eurozone Purchasing Managers Index was released. It dropped again after three months of upticks that had spawned gobs of hope that “the worst was over.” Business activity has now declined for a year and a half. New orders, a precursor for future activity, fell for the 19th month in a row. While Germany was barely in positive territory, France’s PMI crashed to a low not seen since March 2009 and was on a similar trajectory as in 2008—when it was heading into the trough of the financial crisis!

Sure, the financial markets calmed down, but only because the ECB pulled the “emergency brake” by declaring that it would finance bankrupt states so that the euro would survive. It was a signal for the banks to buy sovereign debt. Borrowing from the ECB at 1%, buying Spanish or Italian debt with yields above 5%, while the ECB took all the risks—”a great business for the banks,” he said. As a consequence, the banks were once again loaded up with sovereign debt. “The problems weren’t solved but kicked down the road,” he said.

Politicians would muddle through. Government debt would continue to rise. But next time something breaks, the pressure would come from citizens, he said. Standards of living have been deteriorating. Many people have lost their jobs. Real wages have declined. “We’ve sent millions into poverty!” People were discontent. And it was conceivable that “someday, they could go on the street and attack these policies.”

Mid year is the timframe for the euro to hit a crisis. Draghi will have no choice but to “lira-ize” the euro.

Countries were devaluing their currencies to gain an advantage. This “race to the bottom” could escalate to where governments would impose limits on free trade. The devaluation of the yen would hit other countries. In Germany, it would pressure automakers, machine-tool makers, and others. By midyear, he said, “Europe will reach a point when it can no longer live with this euro.”

It would have to be devalued. France’s President François Hollande was already agitating for it. “And he has to because the French economy is in a catastrophic condition. It’s no longer competitive. France is becoming the second Spain.”

But didn’t the ECB emphasize that the exchange rate was irrelevant for monetary policy? And wasn’t the Bundesbank resisting devaluation?

“The policies of the Bundesbank are unfortunately dead,” he said, and its representatives were only “allowed to bark, not bite.” Monetary policy at the ECB was made by Draghi, “an Italian.” He’d push for the “lira-ization of the euro,” he said, “not because he likes it, but because he has no choice.” It was the only way to keep the euro glued together. “Mrs. Merkel knows that too, but she cannot tell the truth; otherwise citizens would notice what’s going on.”

So what does Zulauf recommend ?

Given this dreary scenario, what could investors do? Long-term, equities were a good choice, he said, but this wasn’t the moment to buy.

Gold? That it was down from its peak a year and half ago was “normal,” he said. Currently, gold funds were forced to liquidate, which could cause sudden drops, but it also signified “the end of a movement.” He expected the correction to end by this spring. “Long-term, the uptrend is intact,” he said.

Bonds? They had a great run for 30 years but were now “totally overvalued”—in part due to central banks that had bought $10 trillion in debt “with freshly printed money” over the past five years. Debt markets were completely distorted, but central banks would be able to hold the bubble together for “a while longer.” So he admitted, “Last summer, I sold all long-term debt.”

But where the heck was he putting his money now? That’s when he made his sobering remark, “I’m sitting on cash.”

Source: Testosteronepit, Handelsblatt

Germany On Verge Of Bailing Out Cyprus

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This euro crisis just gets better and better. Cyprus is locked out of the bonds markets for over a year now and is being kept alive by a loan from Russia but badly needs a bailout. Thats where the dilemma lies for Germany which will bear the brunt of any bailout. A lot of the depositors in Cypriot banks are Russian black money and with an election later this year, it would be very embarrassing for Merkel to be seen to supporting handing over German taxpayers money to pay back dodgy Russians.

When German officials said they would save the euro zone at all costs, the prospect of bailing out Russian oligarchs was not what they had in mind.

But eight months before a crucial election in Germany, Chancellor Angela Merkel is facing charges that Europe is doing just that as the tiny island of Cyprus, a haven for Russian cash, threatens to become the next point of contention in the euro crisis.

In recent days, Germany has signaled that it is reluctantly edging toward a bailout for Cyprus, after lifelines have been extended to Greece, Ireland and Portugal to prevent potentially calamitous defaults. While Cyprus makes up just a sliver of the euro zone economy, it is proving to be a first-rate political headache.

“I don’t think that Germany has ever in the history of the euro zone crisis left itself so little wiggle room,” said Nicholas Spiro, the managing director of Spiro Sovereign Strategy in London. “But Germany wants the euro to succeed and survive, and they are saying we can’t afford a Cyprus bankruptcy.”

But giving a bailout to Cyprus is trickier than it seems. Cyprus’s politicians would prefer not to take European money, which comes with the harsh austerity conditions that have spread misery in Greece. And they can argue that Cyprus was doing relatively well until Greece’s second bailout, when Greek government bonds — of which Cypriot banks held piles — lost considerable value.

The question of keeping the euro together had seemed to be conveniently fading for Ms. Merkel, who in the fall put her full backing behind the euro zone, quieting fears of a breakup. But Berlin seems to have been caught off guard by the political tempest stirred up by Cyprus, which has been shut out of international bond markets for a year but has been kept afloat by a $3.5 billion loan from the Russian government.

Here, is where it get hilariously funny 😉

With that money running out, Germany and its European partners have been locked in a fierce debate over whether and how to throw Cyprus a lifeline. The problem is, most of the money lost by Cypriot banks was Russian, and the worry is that most of the bailout money could wind up in the hands of Russian oligarchs and gangsters. That fear, backed by a recent report by German intelligence, has stoked a furor even among some of Ms. Merkel’s political partners. “I do not want to vouch for black Russian money,” Volker Kauder, a prominent member of her conservative bloc, said recently.

The Russian presence is thick on Cyprus, a picturesque Mediterranean island and a onetime British colony. The bustling, large city of Limassol has an enclave of restaurants, shops and fur boutiques so packed with Russians that locals call it “Limassolgrad.”

You know when something is true, when you get an official denial.

Officials in Cyprus say there is no proof that the Russian cash in its banks is of dubious origin, and they insist that they cracked down on money laundering before joining the European Union. The officials point to an evaluation by the Organization for Economic Cooperation and Development showing that Cyprus is compliant with more than 40 directives against money laundering.

With a population of slightly over 1 million, Cyprus is looking for about €22 billion for its banks.And  I thought Ireland messed up its banks bigtime.

While any lifeline for Cyprus would be small — about $22 billion compared with about $327 billion for Greece — the quandary has reverberated in Europe’s halls of power, and especially in Berlin, which appears to have been backed into a corner by Ms. Merkel’s commitment to keep the euro zone together no matter what.

The outspoken German finance minister, Wolfgang Schäuble, recently cast doubt on whether Cyprus should even be considered for a bailout, given its small size and the stark reality that it is not nearly as vital to the euro’s existence as the larger economies of Spain or Italy. His blunt assessment reportedly drew an admonishment from Mario Draghi, the president of the European Central Bank, which has spent hundreds of billions of euros on a program intended to discourage financial market speculators from attacking euro zone countries.

Already Cyprus is implementing austerity measures and they are having predictable consequences.

With Russia refusing to provide any further financing unless the so-called troika of creditors — the European Central Bank, the International Monetary Fund and the European Commission — provides most of the bailout, the Cypriot government has few options. It signed a memorandum of understanding in November with the troika, setting off a wave of austerity measures that are already starting to hit the enfeebled Cypriot economy.

The salaries of public sector workers have since been slashed by up to 15 percent, state pensions are to be cut by up to 10 percent and the value-added tax is set to rise. “The island has been hard hit, and there is an atmosphere of fear,” Mr. Faustmann said. “People are not sure if they will keep their jobs, and if they do, how long they will have them.”

Mr. Faustmann estimated that it would take at least a half-decade for the Cypriot economy to recover — assuming that the conditions required by Germany and the troika do not send Russian money fleeing from the banks. “If that happens,” he said, “then Cyprus is dead.”

Source: NY Times

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