In exchange for un-needed bank bailout, Cyprus gives up its sovereignty

As reported by Der Spiegel, in exchange for a bank bailout, Cyprus has effectively given up its sovereignty to the Troika (the IMF, ECB and European Commission) and accepted permanent austerity.

With this action, Cyprus has become the poster child for what the future holds for Greece, Spain, Italy and France so long as policy makers insist that protecting bank book capital levels comes ahead of protecting the real economy and society.

Cyprus wants help from the European Union's bailout fund. But the price for the billions in emergency aid money is high. The country will effectively lose its sovereignty.... 

it is already clear that in return for billions of euros for the debt-ridden country from the European bailout fund, the "troika," made up of the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF), will essentially take control of the Mediterranean island. 

The Cypriot government and representatives of the troika negotiated for almost five months over the terms of a bailout package, worth at least €17.5 billion ($22.8 billion). 

The negotiations produced the draft version of a 30-page Memorandum of Understanding (MoU), in which the troika dictates to Cyprus what steps it will have to take in the coming years, down to the smallest detail.... 

[Cyprus President] Christofias left no doubt as to who he blames for the disaster, saying: "It's true that the decisions of bank executives and the miserable control by the Cypriot central bank have cost Cyprus billions of euros." 

The amount of the aid package corresponds almost to the country's entire economic output in a year. According to the troika's plan, by 2016 Cyprus's national budget will be cleaned up enough that the country can hopefully make do without new debt. 

Cypriot banks are also expected to make a contribution. Crisis-ridden institutions will no longer be supported solely by injections of cash from the European bailout fund. This time, the banks' creditors are also expected to pay up. 

"With the goal of minimizing the cost to taxpayers, bank shareholders and junior debt holders will take losses before state-aid measures are granted," the MoU draft reads. This means that creditors of Cypriot banks won't just be able to withdraw their money. Instead, their claims will be converted into bank shares. 

In taking this step, the troika is avoiding a potential embarrassment. 

Substantial sums of Russian capital are deposited into Cypriot banks, and some of it is probably of dubious origin. It would be difficult to explain to the European public why its taxes are being used to rescue wealthy oligarchs.... 

At the same time, Cyprus will have to rebuild its financial sector in the coming years, along with drastically improving regulations and intensifying the fight against money laundering and tax evasion. 

All of this raises the interesting question of why bailout the banks in the first place.

Wouldn't it be simpler to just have them absorb the losses on their exposure and rebuild their book capital levels through retention of 100% of pre-banker bonus earnings?

It would also be better for the citizens of Cyprus as it is pretty clear that they do not receive much if any of the bailout money (the money is likely to go to banks in France and Germany that over-extended credit to the banks in Cyprus).

But on Tuesday, the president wasn't willing to end his address without giving his fellow Cypriots at least some words of comfort and hope. ... Cyprus can hope for a new "economic miracle."

Since the bank losses have been socialized, it will take a miracle for Cyprus to ever recover.