http://www.nytimes.com/...
The EU may have been dimly aware that the Greek bond write-downs could be devastating to Cyprus. But they didn't want to think more deeply than that. They do not want to look at consequences - only to solve the problem of the day. Especially when elections are nigh.
The path that led to Cyprus’s current crisis leads back, at least in part, to a fateful decision made 17 months ago by the same guardians of financial discipline that now demand that Cyprus shape up.
That decision was sealed in Brussels in secretive emergency sessions in the dead of night in late October 2011. That was when the European Union, then struggling to contain a debt crisis in Greece, effectively planted a time bomb that would blow a big hole in Cyprus’s banking system — and set off a chain reaction of unintended and ever escalating ugly consequences.
“It was 3 o’clock in the morning,” recalled Kikis Kazamias, Cyprus’s finance minister at the time. “I was not happy. Nobody was happy, but what could we do?”
He was in Brussels as European leaders and the International Monetary Fund engineered a 50 percent write-down of Greek government bonds. This meant that those holding the bonds would lose at least half the money they thought they had. Eventual losses came close to 75 percent of the bonds’ face value.
For Cypriot banks, particularly Laiki Bank, at the center of the current storm, these conclusions foretold a disaster: Altogether, they lost more than four billion euros, a huge amount in a country with a gross domestic product of just 18 billion euros. Laiki, also known as Cyprus Popular Bank, alone took a hit of 2.3 billion euros, according to its 2011 annual report.
“I cannot remember that European policy makers have seen anything coming throughout the euro crisis,” said Paul de Grauwe, a professor at the London School of Economics and a former adviser at the European Commission. “The general rule is that they do not see problems coming.”
Charles H. Dallara, the lead representative for the banking industry who negotiated with European officials in 2011 in a bid to keep the losses imposed on Greek bonds as low as possible, said the writing was on the wall.
It was “very clear that the effect of the Greek deal on Cypriot banks would be severe,” said Mr. Dallara, the former managing director of the Institute of International Finance, the banks’ lobbying group. “But there were elections coming up, and the tendency in Brussels is to let these things drift. So nothing was done.”