In a classic case of “do as I say, not as I do,” a member of the European Central Bank’s (ECB) executive board, Benoît Coeuré, proposed in 2012 a measure to help inflate the value of Cyprus Popular Bank’s (CPB) collateral, so as to be able to funnel emergency loans to that bank, to prevent it from failing, the New York Times reported, and advised against that bank’s conventional plan of using government bonds to secure more loans.
That proposal, as the Times pointed out, is contradictory to the ECB’s core principle not to print more money in order to save a failing bank, or, for that matter, a failing government. Moreover, in the end, the people of Cyprus, not the ECB, were left with the tab.
Coeuré’s suggestion set off intense debate within the ECB’s entire governing council, the Times reported, which is comprised of 24 members.The Times went on to report that: “almost two years after the Cyprus banking crisis, the ECB is pushing to restore confidence in its banking system and revive the Continent’s economy while struggling to find consensus and follow rules that narrow its options.
“Now, confidential communications from the central bank show how it has been willing to ignore its own bylaws and dictate policy to sovereign governments to prevent wider financial contagion in the Eurozone,” pointing to an example where the ECB has threatened cutting off funds to Ireland unless that country moves forward with an austerity program.
In Cyprus’ case, the Times reported, the ECB funneled more than 10 billion euros to try to save CPB, despite all evidence pointing to CPB’s inevitable collapse.
Still, writes the Times, “the questions now being raised about the bank’s actions in Cyprus and Ireland reflect deep divisions within it just as it seeks consensus on the most radical step in its 18-year existence: printing money to buy, in large quantities, the bonds of indebted countries, like Italy, Spain and Portugal.”
ECB executives also pointed out that half of CPB’s loans were directed toward the Greek economy, and so there was additional concern on the ECB’s part not to let CPB fail as that would negatively impact not only Cyprus, but also Greece.
Finally, as the Times points out: “Cyprus Popular Bank was finally wound down in March 2013. By then, the bank, and Cyprus, had accumulated €10 billion in short-term loans thanks in part to the collateral plan devised by Coeuré. And in the end it was the Cypriot bank saver that picked up the bill, not the European Central Bank.”