Sunday, March 17, 2013

German Politics at the Core of Cyprus Decision

The excellent blog Wonkbook has a post about the "bail out" of Cyprus. I mostly agree but one thing caught my eye:

Those are the reasons the IMF has insisted on losses for depositors — those, and the fact that rescuing Cyprus’s finances without the 5.8 billion-euro contribution represented by depositors’ losses would have meant a bailout approximately equivalent to the country’s annual economic output, too much for the fund to stomach.

I disagree with this passage. The IMF is not the responsible party in this mess it has at least last year called to stand behind the deposit insurance, which is now being guttet. The decision to "tax" depositors was made due to German politics. Merkel has problems keeping her coalition together when votes are called for on "rescues". There are at several (up to 23) so called "Abweichler"  ("deviators")  primarily in the two smaller partners (CSU and FDP), who will vote against such packages. So Merkel needs the opposition to vote yes.

The Greens and the SPD, just like the coalition, said (for example SPD "expert" Carsten Schneider on Friday) that they would only vote for a rescue of Cyprus if the bank customers would be involved in the bail out. The only other party in the Bundestag- the left wing Die Linke - will most likely just say no to the rescue. All German "rescue" parties are scared that money will bail out Russian oligarchs. That is the primary reason why they want a tax on bank deposits.

Here is why the situation in Germany matters so much: the Constitutional Court made a vote on such packages mandatory, so Merkel's "governor" cannot agree to ESM money being pledged unless the parliament agrees. Here's the catch: Germany is one of two countries which always has a defacto veto in the ESM. Even if the ECB says a rescue is necessary at least 80 % must agree within the Board of Directors. The German "governor" controls 27 % of the votes, which equals the share of money Germany has contributed to the ESM. Making it impossible to "help" any country without Germany agreeing.

The party responsible for the unimaginably stupid "bail out" is Germany not the IMF.  What makes this even worse is that no matter who is elected in September, the next German government will consist of the very people who caused the already happening and the ensuing mess. Specifically, the destruction of the European deposit guarantee might just prove the last drop necessary to cause a breakup of the Euro area.

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