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The Cypriot Crisis: the last act of the “Greek Tragedy”?

Increasing attention is being drawn on the ‘Cypriot case’, which has been causing considerable turbulence on the financial markets and raising remarkable political and legal concerns. The attitude taken by the European and international Institutions while dealing with the Cypriot crisis might seem somewhat fuzzy and confused if compared with the approach previously adopted to provide the rescue packages for some Eurozone Member States (Greece, Ireland, Portugal and Spain).

The timeline of the Cypriot crisis management is worth having a look. In June 2012 – just before the beginning of the Cypriot presidency – the government of the Island had firstly asked for financial assistance, but such issue had started to be discussed since November 2011 (when the ‘Italian financial fever’ was reaching its maximum; see the Commission statement on Cyprus, 20 March 2013 and the statement by vice-president Rehn at the Eurogroup press conference, 25 March 2013). Although the Eurogroup invited to define a financial assistance programme – building upon the EU acts already adopted vis-à-vis Cyprus and the measures taken in the Island (see the Eurogroup Statement, 27 June 2012) – an agreement seems to have been reached only on 25 March 2013, while a formal MoU is expected to be finalized in April (see the short statement delivered by the vice-president of the Commission Rehn on the progress on negotiations in November, the Eurogroup Statement on Cyprus, 25 March 2013 and the statement on Cyprus by vice-president Rehn and the Managing Director of the International Monetary Fund, 3 April 2013).

The Cypriot oversized banking sector has suffered from the turbulences on the financial markets and from the recurring cycles of the Greek crisis, due to the high stocks of Hellenic bonds owned by the Island’s banks. Thus, the situation has worsened over the last months. In March, we witnessed a round of unprecedentedly confused negotiations between the Cypriot authorities and the EU Institutions. Shortly after the conclusion of an agreement had been just trumpeted on 16 March 2013 (see Eurogroup statement on Cyprus, 16 March 2013), its rejection by the Cypriot Parliament recalled into question its (legal and) political foundations.

Apart from the lack of coordination between the EU Institutions, what is striking in the Cypriot crisis is their hesitancy in sharing the political responsibility of formulating a clear proposal and of the subsequent negotiations with the national authorities: the Commission openly and strongly marked its disagreement both with the Eurogroup and with the Cypriot government on the most discussed measure: the ‘upfront one-off stability levy’ on deposits in Cypriots banks (European Commission statement on Cyprus, 20 March 2013). The Eurogroup – after having held a teleconference on 21 March to discuss the last developments of the bargaining with the Cypriots (see  the statement of the Eurogroup President on Cyprus, 21 March 2013) – finally announced an agreement was reached on 25 March 2013 (Eurogroup statement on Cyprus, 25 March 2013).

According to the terms of the final agreement, all deposits below € 100.000 are exempted from the levy ‘in accordance with EU principles’, as this is the threshold under which EU legislation establishes the obligation for national deposit guarantee schemes to safeguard bank deposits (see Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes, as amended; this guarantee is further confirmed in point 7 of the annex to the lastly cited Eurogroup statement). A levy imposed on deposits under this threshold would have appeared in contrast with the EU intention to guarantee those deposits, however this will not prevent uninsured deposits (namely those in Laiki Bank, which will be split in a bad bank and a good bank, and the latter will ‘be folded into Bank of Cyprus (…) using the Bank Resolution Framework’) from being frozen ‘until recapitalization has been effected’, ‘through a deposit/equity conversion of uninsured deposits with full contribution of equity shareholders and bond holders’ (points 3 an 5 of the annex).

One may find somewhat ironic that Mr Barroso, in his speech in Nicosia on 6 July 2012, announcing together with the president of Cyprus the priorities of the following semester, had to declare that making progress on the Commission’s proposal to set up a banking union would have been crucial, stressing that:

‘Proper supervision of European banks, protection for citizens bank deposits and a framework for dealing with banks in trouble have a direct impact on our citizens.’

Hence, the proper and ‘usual’ functioning of the internal market has not been formally ensured, potentially undermining citizens’ trust in the internal market and in the safety of bank deposits. Meanwhile, as bank run risks have appeared more concrete than ever before in the EU – the Northern Rock case having been finally circumscribed in a part of the UK market – extraordinary measures have been adopted to limit capital flows potentially dangerous for Cyprus’ financial stability and upheld by the Commission as temporary exceptional measures (see the statement by the European Commission on the capital controls imposed by the Republic of Cyprus, 28 March 2013).

The concerns raised by this situation for human rights protection, as well as for the inconsistency between the wholly national responsibility for guaranteeing banks deposits and the aim to establish a banking union, ostensibly pursued by the Commission (for some first remarks on these issues Antoniou’s and Lindseth’s posts on www.eutopialaw.com), could make it difficult to reconcile the whole strategy adopted towards the Cypriot crisis with the principles and the spirit of EU law.

I will make two remarks, just to shed some light on some very delicate legal issues to be more properly addressed in the future.

From an institutional law standpoint – and without prejudice to any other legal problem which could be raised, in particular with reference to formal issues related to the relationships between different legal sources or different legal instruments –, the potential clash between internal market functioning and human rights on the one hand,  and capital control and ‘austerity’ measures like those imposed on Cyprus on the other hand, unveils the need for a balance between constitutional principles of EU law: freedoms of movement, human rights protection and safeguard of the ‘financial stability of the euro area as a whole’. As to the highest rank enjoyed by such principles within EU law, no one can raise doubts on the first two sets mentioned. For what concerns the last one, it can be argued that the Court of justice has recently resorted to it not just as an interpretative tool, but as a more general principle, as well as a fundamental objective pursued by the provisions on the economic and monetary union (see judgment in case C-370/12, Pringle, nyr, in particular paras 135 ff).

That does not amount to say that safeguarding the financial stability of the euro area as a whole can surely provide grounds to justify breaches of other constitutional principles of EU law, like those seemingly provoked by the measures adopted in the context of the Cypriot crisis. Nevertheless, the measure of discretion to be recognized to political Institutions when dealing with these issues has to be fine tuned while, obviously, the proportionality principle has to be respected when choosing the measures to be adopted, in particular by rescued Countries. More specifically, this problem is likely to arise (in many possible situations and in particular) when Article 136 TFEU has to be interpreted as to the room for manoeuvre to be granted to the Council when adopting ‘measures specific to those Member States whose currency is the euro’.

The second remark regards precisely the behaviour of the Institutions. In the context of the Cypriot crisis, their action – because of lack of coordination and political uncertainties, as it has been pointed out – has not been adequate and effective. The legal toolkit with which they are now equipped requires to be used appropriately and duly taking into account the complex and multi-level legal context in which rescue measures have to be applied. Moreover, the Cypriot crisis shows that the newly established economic governance of the euro area and all the reforms put in place (as well as all the foreseeable ones) cannot substitute political willingness and coherence.

The Cypriot ‘case’ also shows that the sovereign debt crisis is not over: in particular, Member States are still exposed to contagion risks from the ‘Greek infection’ and financial stability at all levels is still to be achieved also through a new and stronger legal framework (one of its pillars having to be constituted by a solid banking union).

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Roberto Cisotta

Roberto Cisotta

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