Merkel’s Cyprus Gamble Explained as German Vote Nears

March 18 (Bloomberg) -- Jefferies Head of Global Fixed Income Strategy David Zervos discusses Cyprus's deposit-tax vote. He speaks on Bloomberg Television's "Market Makers." (Source: Bloomberg)

Germany’s role in imposing the euro bloc’s first levy on bank deposits, in Cyprus, shows Chancellor Angela Merkel’s dilemma in explaining to voters facing September elections why they should pick up the tab for another bailout.

“I have to go to my constituency and explain to my people in my constituency why we are willing to lend more than 3 billion euros ($3.9 billion) to Cyprus,” Michael Fuchs, deputy parliamentary leader of Merkel’s Christian Democratic Union party, said in an interview with BBC Radio 4 today. “Why should Germans bail out these people and they are not willing to accept at least a minor bailing out by themselves?”

Euro finance ministers agreed on March 16 to force Cypriot bank depositors to share the cost of rescuing the country, the fifth euro-region bailout. Cyprus is to raise 5.8 billion euros from bank deposits, cutting the international contribution to 10 billion euros. Cypriots responded by lining up and emptying cash machines as the specter of capital flight threatened to disrupt the relative market calm of the past six months.

The deal means “the responsible people are partly included and not only the taxpayers in other countries,” Merkel said at a CDU meeting in the northeastern town of Grimmen on March 16. “It’s right that we went down that road and I think it’s a good step which will certainly make it easier for us to approve the help for Cyprus.”

‘Naked and Stupid’

Winning parliamentary approval in Berlin may be a hurdle for Merkel given that some members of her Christian Democratic- Free Democrat coalition oppose bailouts, meaning she may need to rely on opposition votes from the Social Democrats and Greens.

“The big question is whether Merkel can get it through the Bundestag,” Jan Techau, director of the Brussels center of the Carnegie Endowment, said by telephone. “With elections looming, the temptation of the opposition may be to say ‘no’ and leave her looking naked and stupid.”

Related: Deauville Zombies Strike as Cyprus Tax Inflames Crisis

While the main opposition parties have mostly voted with the government on crisis-related measures to date, Merkel’s majority has been whittled away amid unease in her own ranks at the rising cost of showing “solidarity” almost three years after lawmakers were first called upon to aid Greece.

Merkel narrowly won parliamentary backing for a revised Greek aid package in November with 297 votes, four more than a simple majority of the ballots cast. The measures passed, yet it was the third Bundestag vote in which she failed to gain a so- called chancellor’s majority of 311 seats, one more than half the 620 seats in the lower house. Her coalition controls 330 seats.

Cyprus ‘Profiteers’

Carsten Schneider, the main opposition Social Democratic Party’s budget spokesman in parliament, said Merkel has wasted too much time in dealing with Cyprus.

“The profiteers of the Cypriot business model must pay the bill -- not the European taxpayers,” Schneider said in a statement e-mailed by his office in Berlin yesterday.

The Market Now Blog: Two Contrarian Arguments for the Cyprus Deposit Tax

Senior members of the SPD, the Greens and Merkel’s Free Democratic Party junior coalition partner have all said they want to see the Cyprus bailout tweaked so that those with deposits of more than 100,000 euros pay a larger share of the burden to allow more protection for smaller savers.

In particular, Russian deposits in Cypriot banks have been criticized across the political spectrum in Germany.

“Money from German taxpayers won’t be used to secure Russian deposits of illegal money,” the SPD’s Schneider was quoted by Bild newspaper as saying on Dec. 21. The CDU deputy leader Fuchs told BBC Radio 4 that “one has to ask a question: why there is so much Greek and Russian money in Cyprus?”

Latest Polls

Polls suggest Germany’s Sept. 22 federal election is a toss-up. Merkel’s Christian Democratic bloc leads with 39 percent compared with 28 percent for the Social Democrats, an Emnid poll showed yesterday. Yet with Merkel’s FDP partner at 4 percent, she wouldn’t be able to continue her present alliance if the result was replicated on election day.

With the Greens at 16 percent, the SPD would also be just short of a majority with its preferred partner, meaning that Merkel might again head a grand coalition with the SPD, as she did from 2005 to 2009.

“Because the SPD has consistently attacked Merkel over bailout payments from German taxpayers to Russian oligarchs, action had to be taken,” David Zervos, a managing director at Jefferies & Co. in New York, who served as a visiting adviser to the Fed in 2009, said in note yesterday.

‘Dictatorial Regime’

While the German electorate “would applaud her bold actions,” taxing bank deposits “sends an ominous message to the entire global investment community,” Zervos said. “This is a policy move you expect from a dictatorial regime in sub- Saharan Africa, not in an EMU member state.”

For all that Cyprus accounts for less than half a percent of the 17-nation euro economy, the raid on bank accounts risks triggering new convulsions in the crisis.

Merkel’s chief spokesman, Steffen Seibert, was today forced to reiterate a guarantee on deposits in German banks made in 2008 by Merkel and her then finance minister, Peer Steinbrueck. Steinbrueck is now the SPD’s candidate for chancellor in this year’s election.

The flare-up in turmoil caused by the Cyprus bail-in of depositors meanwhile shows the debt crisis never went away, according to Fredrik Erixon, director of the European Centre for International Political Economy in Brussels.

“The acute phase petered out because of the ECB,” Erixon said in a phone interview. “But throughout the past months the crisis was waiting in in the wings for political mismanagement to return. And this is what’s happening right now.”

To contact the reporter on this story: Leon Mangasarian in Berlin at lmangasarian@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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