How to rob a bank in 2013, Cyprus edition

Just when it seemed the crisis in the eurozone might be heading toward some kind of resolution, European financial regulators have managed to drag the continent back into doom and gloom. This time, the culprit is Cyprus, whose rickety banking system is heavily exposed to nasty things like Greek debt. Intense negotiations over the weekend produced the latest bailout agreement, which will raid the bank accounts of ordinary Cypriots in order to finance the bad behavior of Cypriot bankers. As David Bosco tweeted last night, "were the Eurozone ministers and IMF reps drinking during the 10-hour meeting that produced the Cyprus levy?"

Furious at the prospect of financing another bailout out of their own pocket, the Germans -- and their henchmen at the IMF and the European Central Bank -- made an offer to Cypriot President Nicos Anastasiades that he couldn't refuse. Here's how the Wall Street Journal says it all happened:

Just after 5 p.m., finance ministers, IMF Managing Director Christine Lagarde, ECB executive board member Jörg Asmussen and the EU's economic-affairs commissioner, Olli Rehn, filed into a meeting room on the fifth floor of Brussels's Justus Lipsius, which houses the EU's ministerial meetings and summits. Cyprus's newly elected President Nicos Anastasiades stayed behind in the country's delegation room on the seventh floor, ready to approve or reject any potential deals.

Mr. Rehn was the first to make a specific proposal. To raise funds, Cyprus should impose a special levy on deposits, taxing accounts of less than €100,000 at 3%, those up to €500,000 at 5% and those above at 7%. Such a "solidarity levy "-the brainchild of Thomas Wieser, an Austrian who chairs technical discussion among euro-zone finance officials, and Mr. Asmussen- could avoid a straight "haircut" on deposits, which they feared could be too destabilizing for Cyprus and the rest of Europe. The tax would be applied to all Cypriot banks, not just the two in deep trouble.

But Ms. Lagarde had something else in mind. The IMF chief presented a much more radical plan, in which deposits above €100,000 in Laiki and Bank of Cyprus would have been cut by between 30% and 40%. The owners of senior bonds in the two banks would also have faced losses-a step that was ultimately rejected. That plan would have limited the international bailout to €10 billion and raise some €7.5 billion from depositors.

Take a moment and consider those figures. According to the Journal, Christine Lagarde -- apparently with a straight face -- asked for a 30 to 40 percent reduction in large deposits to finance the misadventures of Cypriot banks.

After some more squabbling back and forth during which Anastasiades rejected IMF demands, the financial officials decided to play hardball with the newly minted president. The following exchange, as reported by the Journal, might serve as a case study for how to stick up a bank in the year 2013: 

At that point, around 1 a.m. a small group-including Ms. Lagarde, Mr. Rehn, Mr. Sarris, Mr. Schäuble, France's Pierre Moscovici, Mr. Asmussen and Mr. Dijsselbloem broke off into a separate room. It was then -- as other ministers snoozed or played on their iPads -- that Mr. Asmussen told Mr. Anastasiades that without a deal, Cyprus's two big banks faced insolvency, since they would have no prospect of European funds to repair their battered capital buffers, said people who were present. In that case, the ECB would no longer be willing to fund the banks with central-bank emergency liquidity, Mr. Asmussen said, these people said. The implication: The island's biggest banks might be unable to reopen after Monday's bank holiday.

Mr. Asmussen backed up the warning by calling ECB President Mario Draghi and letting him know the central bank might have to deal with the collapse of Cyprus's banks.

After managing to secure a concession that no deposit be taxed at a rate above 10 percent, Anastasiades signed the agreement. 

It's worth noting that the arrangement foisted upon Cyprus by regulators is also completely unprecedented in the history of the meandering European response to the financial crisis. While so-called "haircuts" have been imposed in the past -- notably on holders of Greek bonds -- European financial authorities have never had the temerity to pull money straight out of individual bank accounts in order to rescue banks.

Beyond the unprecedented nature of the move, the decision to impose a one-time tax on deposits now threatens the broader European financial system. In an effort to reduce their exposure to the tax, Cypriots flocked en masse to the country's ATMs over the weekend -- to the extent that many machines ran out of cash. With fears that Italy and Spain may also require bailout packages, depositors in those countries have to be wondering whether they too should begin moving money out of their local banks to avoid a similar tax. That may very well result in a run on banks in the two countries least equipped to handle it.

The wrinkle in the Cypriot bailout is what might be called the Russian connection. As Dylan Matthews explains, the Cypriot government has gotten in bed with the Russian government to offer a less-than-above-board financial haven to Russians looking for a friendly locale to park their money. Facing a revolt at home, Anastasiades is now trying to renegotiate the terms of the bailout. If he is able to increase rates for large deposits and lower the rate for smaller holdings, Russian oligarchs could be footing a sizable portion of the bill for the Cypriot bailout.

The question for Anastasiades now is this: Whom can he afford to infuriate more -- mom-and-pop Cypriot depositors or the Russian mob?

Yiannis Kourtoglou/AFP/Getty Images


Assad's army gets cut in half

While editing an article on Syria last year, I remember asking the author for a statistic that I hoped would give our readers a big-picture sense of where the country was heading. The reporter's response: "Welcome to Syria, there are no statistics."

It's largely true. Two years into the uprising, there is no shortage of anecdotes -- about the lives of individual Syrians, the fate of specific villages, or what happened in a given battle. But there are precious few facts that about how the war is playing out on a macro level.

The International Institute for Strategic Studies (IISS) has done a lot of the legwork to answer one of the lingering, big-picture questions about Syria: What is the state of President Bashar al-Assad's army, and how has it been affected by the uprising? The 2013 Military Balance aims to provide a comprehensive assessment of the Syrian military's fighting strength, and the struggles both sides have faced in getting the upper hand.

Here's the Military Balance's bottom line: Between the beginning of the uprising and autumn 2012, the Syrian army's fighting strength had been halved to about 110,000 troops. Of that total, the regime could only be certain of the loyalty of roughly 50,000 soldiers -- those in the predominantly Alawite Special Forces, Republican Guard, and 3rd and 4th Divisions.

Now, Syria is home to roughly 22 million people -- Assad can't maintain his substantial level of control with only 50,000 troops. For that reason, it's reasonable to assume that his core force of 50,000 is receiving substantial support from other wings of the military. Specifically, it is supplemented by: 60,000 more active army soldiers, another 60,000 air force servicemen, and an indeterminate number of police and paramilitary forces. And that's even before getting into whatever forces Hezbollah or Iran have contributed to the war effort.

The Military Balance doesn't attempt to quantify the Syrian rebels' fighting force, but it does offer an assessment of their methods.  "The rebels increasingly employed all the methods of modern insurgency including hit-and-run attacks, ambushes, assassinations and suicide bombings," the report reads. However, they have been hindered by their lack of organization: "[T]he Syrian rebels were greatly handicapped by an almost complete lack of unified political authority and strategy."

The rebels' decentralized structure has prevented them from being wiped out by the numerically larger and technologically superior Syrian army. However, it has also resulted in strategic overreach -- such as the decision to invade the city of Aleppo before they had the strength to take it -- and could lead to infighting between rebel factions either before or after Assad's fall.

As the Military Balance puts it: "If Assad could not win, the rebels could still lose."


D. Leal Olivas/AFP/Getty Images