Cyprus seriously considered dropping out of the euro zone at the peak of its financial crisis in March as it faced a standoff over the terms of an international bailout, Cyprus Foreign Minister Ioannis Kasoulides said in an interview in Washington on Thursday.
The country’s leaders discussed severing ties with the 17-nation currency union for “24 to 48 hours,” after the parliament rejected an initial bailout plan, throwing the country’s economic future into doubt, Kasoulides said. “It was an internal reflection” about how the country should proceed, he said. “We had to think of all the plans B or C that existed.”
The exit idea was shelved after it was estimated that reinstating the Cypriot pound would have caused an immediate 40 percent drop in the value of the new currency, devastating a small island that relies heavily on imports.
Kasoulides’s comments give insight into just how perilous the past three years have been for the euro zone but also into some of the currency union’s underappreciated strengths.
That government leaders would include an exit as an option undermines broad claims that the monetary union is “irreversible” and that the euro is destined to remain and grow as a world reserve currency. Indeed, Kasoulides said Cypriot leaders were aware of the broader implications of their actions.
“Once we were out, many governments — in Greece and Portugal — it would have been very, very difficult to convince their public opinion that they should stay” and follow the tough economic plans laid out by other European countries and the International Monetary Fund, he said.
But it wasn’t just concern about the effect on imports that led Cyprus to recommit to the euro. Kasoulides said officials were hesitant to undermine what has been at the center of efforts to knit Europe into a tighter political and economic community. “We did not do it for altruistic reasons. But we had to take into account the political factors, as well,” he said.
Amid three years of speculation about a possible euro-zone rupture, some analysts have pointed to just such political considerations as one reason the currency zone was likely to hang together.
Cyprus posed a unique challenge as the IMF and other European nations discussed and ultimately approved a rescue loan. With its major banks failing, the country faced an unusual international demand that losses be imposed on depositors and that institutions without a credible path back to profitability be allowed to fail. The IMF and others said depositor losses were the only way to make a rescue plan work, because the country did not have the resources to guarantee all deposits, and neither the fund nor neighboring countries were willing to lend enough to make that guarantee.
Kasoulides said that responsibility for the crisis “lies with Cyprus itself” but that he thought the country was also used to set an example. None of the institutions at risk in Cyprus was large enough to be a threat to the regional or global system, he noted, making it the perfect place to draw a line on taxpayer bailouts of the banking system.
“An experiment was needed,” he said. “We will recover in the coming years. . . . But I think . . . they should make sure that Cyprus is assisted so that this experiment succeeds.”