Professor Dr. Achilles C. Emilianides, gave a compelling lecture regarding the Bail-In of Cyprus; also known as “haircut”, on the 17^th of November 2016, at UCLan Cyprus. The presentation was given as a part of the Jean Monnet Module and considered the legal evaluation of the issue. Dr. Emilianides is an advocate and the Head of the Law Department of the University of Nicosia.

During 2012-2013 Cyprus faced an extreme economic recession which led to a Bail-In in 2013. A Bail-In takes place before a bankruptcy and under current proposals, regulators would have the power to impose losses on bondholders while leaving untouched other creditors of similar stature, such as derivative counterparties. In the case of Cyprus, the creditors in question were bondholders, and depositors with more than €100,000 in their accounts.

There is a difference between a Bail-Out and a Bail-In. A Bail-Out is a colloquial term for giving financial support to a company or country which faces serious financial difficulty or bankruptcy. In a Bail-In, the creditors are forced to bear some of the financial burden.

During the 1^st EuroGroup meeting that took place on the 15-16^th of March 2013, it was decided that a “tax” had to be imposed on bank depositors, as condition for Cyprus receiving a €10 billion bailout loan. This aimed at reducing the cost of the bailout for the EU through a process of raising the necessary funds to recapitalize Cypriot banks through depositors’ money. This decision caused a major crisis since the banks had all closed down for a few days until the next EuroGroup meeting took place. In the second EuroGroup meeting on the 24-25^th of March, it was decided that all deposits below €100,000 would be safeguarded and the second largest bank of the country, Laiki Bank was shut down permanently. This was the first time a Bail-In was applied.

Whereas the bailouts of Greece, Portugal and Ireland forced investors holding bonds to sustain haircuts, bank deposits were left intact and loans from European countries financed the bailouts. The situation in Cyprus was very different as depositors in Cypriot banks were treated as investors. It was argued that since bank deposits constituted “possessions”, the deposits had to be protected, but since they were not, that could constitute a violation of the right to property of the depositors. This right is protected by the first paragraph of Article 1 of Protocol No. 1 of the ECHR and by Article 23 of the Constitution of Cyprus. The European Union (EU) is not liable for damages regarding the Bail-In, because of the fact that the decision was effectively imposed to the Republic of Cyprus by the EuroGroup and Troika. Dr. Emilianides stressed out how the European Central Bank and the European Commission deny the allegation that political pressure was imposed on Cyprus to accept the Bail-In, but that the legal measures were proposed by the two organs and the government of the Republic decided to adopt them.

According to  the ECHR right, Member States have both negative obligations, like not to interfere with the right of property, and positive obligations, such as  preventing an interference with the right to property. A fair balance needs to be established between the demands of the general interest of the community and the requirements of the individual’s right to property. In the present case, deposits of Laiki Bank were written off and converted into shares of the Bank of Cyprus. This clearly amounts to deprivation of possessions, along with an interference with the depositors’ right to peaceful enjoyment of their possessions. With regard to interference with property rights, the European Court of Human Rights tends to afford a wide margin of appreciation to national judicial authorities, which are considered in principle better placed than an international court to evaluate local needs and conditions, especially in matters of general social and economic policy.

Dr. Emilianides argued that three years later, we still do not have a clear picture of what is going on between the Bank of Cyprus and the Bank of Laiki. This has given rise to several problems: First, the freezing of deposits in order to impose the haircut occurred without a legal basis. Second, a decision made to the benefit of the depositors should be made on financial grounds and not political. Third problem that arises is the fact that the first haircut was unforeseeable and a second one might be unforeseeable as well. The fact that the government has already accepted the 1st haircut that declares it constitutional, and if a second one happens the government cannot argue that it is unconstitutional. Cyprus law does not have any flexibility because we have a written constitution. If this happened in the UK they could argue that it is unconstitutional

Important cases that revolve around this matter are; The President of the Republic v. House of Representatives (2011) 3 Α.Α.Δ 777σσ  and the case of Christodoulou v. The Bank of Cyprus (2013) 3 Α.Α.Δ. 427. In the first case it was held  that a legislative provision may be declared ‘unconstitutional’ if it is inconsistent with the principle of good governance.  In the Christodoulou case, the majority of the Full Bench of the Supreme Court, held that the relevant Decrees affected the legitimate interests of affected depositors only indirectly and as such the depositors did not have a legitimate interest, and accordingly legal standing, to file recourse under Article 146 of the Constitution for judicial review of the said Decrees.  This decision, according to Dr. Emilianides, does not allow an effective remedy to be given to those affected. It was further held that the only persons directly affected by the Decrees were the banks themselves, which did not seek to have the decrees reviewed and the depositors could file civil suits against the banks in order to protect their legal interests.

To conclude, 2013 was a very difficult year for Cyprus and its citizens. The Bail-In has had a huge impact on the financial stability of the island, and its consequences affect the country to this day. Many have described the Bail-In as unfair and unpredictable. The rage of the citizens affected has created a series of reactions and cases revolving this matter have not been determined yet.

Written by Antonia Michaelidi