Mediation should be a useful tool in resolving an international financial crisis, but it hasn't been much in evidence of late. As a result, trust between nations is urgently required to build it up again. This time it was Cyprus. A lack of consensus saw problems on international banking supervision and regulation being passed on to investors. It all started off with a cash flow problem. The cash reserves of Cyprus are running out, partly due to its banks' collateral being of low quality. The European Central Bank had promised to provide liquidity. But negotiations turned problematic, results were unpredictable and investors reactions deeply unpleasant.

Last week Cyprus's banks were closed as the legislature prepared to hold a vote on a 10 billion ($13 billion) bailout plan. The plan proved to be wholly unacceptable: there would be a 6.75 percent levy imposed on all deposits under 100,000, while bank accounts with deposits over that amount would get 9.9 percent levy. The proposals pleased no one. It prompted outcry from the Russians who hold big deposits in Cypriot banks but were not consulted. The tax on deposits idea was said to have been demanded by a German-led creditor group. The plan also affected all Cypriot people with money in the banks. Tense negotiations resulted in long queues of savers outside banks who tried to withdraw their money.

The ripples came to Hong Kong belatedly due to perhaps time difference and other things. On March 21, the stock market in Hong Kong fell for a second day as Cyprus's president proposed a new plan to obtain a European bailout.

On March 22 it was reported that Cyprus had run out of bailout options. The chances of Cyprus finding a way to get 5.8 billion from Cypriot bank accounts to unlock a 10 billion rescue appeared over, as bailout lenders rejected another counter-offer from President Nicos Anastasiades. Cyprus was facing the collapse of its financial sector and a possible exit from the euro was widely discussed.

If Cyprus could not reach a deal, the European Central Bank had said it would cut its emergency loans to Cypriot banks.

Then, at the weekend, a deal was struck so that the island was saved by a 10 billion bailout. However, the rescue will inflict severe losses on wealthier depositors.

It is this kind of crisis, even if it has been apparently resolved, that will erode public confidence in banking and its regulators. Days, if not weeks, of tortuous negotiations can easily go wrong. Markets fluctuate wildly in the meantime and investors lose their confidence. Liquidity then dries up, more money is required to provide further liquidity and interest rates start to rise. It can be a vicious cycle.

A 5.8 billion gap with international creditors is small compared to the whole of the EU crisis. It is not a small one for small economies like Cyprus. The social costs will be tremendous. The side effects of not having a bailout are becoming another black swan. The tough negotiating positions of creditors are simply regarded as a bit too insensitive.

There have been many suggestions other than austerity programmes as a condition for the provision of liquidity which can prove extremely unpopular. One was to invite Turkey to bailout the Greek part of Cyprus and thereby unify the island and make peace between Greece and Turkey at the same time. Turkey's EU entry talks may be back on again, but they cannot be part of the negotiation unless the whole matter is raised to a higher level than the European Central Bank. The mechanism that can make such negotiation possible would appear to be one of international mediation. I remember the days when places like Helsinki were the place for negotiations on international disputes and every country would have to fly there. But this does not have to be so. Hong Kong should now consider what position it can take to promote the resolution of regional financial or other crises through international mediation. The European financial crisis can be a good starting point.

The author is a HK barrister and chairman of the Hong Kong Bar's Special Committee on Planning and Policy.

(HK Edition 03/28/2013 page9)