Cypriot bank heist

In the early hours of Saturday morning, the Euro leaders, led by the Germans, the other northern European states and Christine Lagarde from the IMF, held a gun to the head of the newly-elected president of Cyprus Nicos Anastasiades  and gave him an offer he could not refuse.  Either he accepted that the cash and savings deposits of ordinary Cypriots would be raided to the tune of 6.7-10% or there would be no funding for Cyprus’ banks that were bust.  Anastasiades has a reputation as a political ‘bruiser’ who campaigned under the slogan “the crisis needs a leader”.  Well, he fell at the first hurdle.

The deal will be voted on Monday in the Cyprus parliament while the banks remain closed through to at least Tuesday.  If it fails to back the deal, Anastasiades has warned that Cyprus’s two largest banks will collapse.  Cyprus Popular Bank could have its emergency liquidity assistance (ELA) funding from the European Central Bank withdrawn immediately.  As Anastasiades stated, it was put to him by the EU leaders that “we would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis”.   Neoclassical economist and Nobel prize winner Christoforos Pissarides, who heads the newly-formed National Council for the Economy, echoed these words, when he said there is no other option than taking these measures, otherwise the country’s credit system would crumble leading the country to chaos.  “This may be a painful solution but it is the only hope we have to save the economy of Cyprus.”

Cyprus needs €17bn in funds to cover the losses its wildly over-extended banks have made on all the loans they made to property developers on the island – and most important, to Russian oligarchs and Greek shipping magnates that have now turned sour.  The Cypriot government had been bailing them out up to now but has now exhausted that capability.  But the EU-IMF Troika was worried that a straightforward bailout to the Cypriot government would mean a total support to Russian mafia depositors that have been using Cypriot banks as money launderers  and it would also double the public sector debt ratio for Cyprus to 145% of GDP by end-2013, with every likelihood that it could never be paid back.

So the EU leaders took the unprecedented step in taking the ‘insured deposits’ of Cypriots as part payment for the funding.  The one-off levy will raise about €6bn of the €17bn needed.  In return the depositors will get shares in the banks!  Even Ireland, whose banking sector was about as large relative to its economy as Cyprus’ (bank assets are eight times annual GDP) when Irish banks were forced into a bailout in 2010, never agreed to taking people’s savings.

Not surprisingly, Cypriots reacted angrily. Hundreds of account-holders gathered outside branches of Cyprus co-operative banks, which normally open on Saturdays, after emptying ATM machines of cash at the start of a three-day holiday weekend.  “They’ve cheated us, they said they’d never allow a haircut on deposits,” said Andreas Efthymiou, a taxi driver, referring to a government pledge to seek alternative ways of rescuing the island’s banks.  Christos Pappas, a financial services worker, said: “I tried to transfer cash online as soon as I heard the news, but the account had already been blocked.”

EC official Asmussen justified the measure by saying it broadened the number of people who will shoulder the burden of the bailout. Without the measures, he said, much of it would fall on Cypriot taxpayers; by going after all large deposit holders – many of whom are Russian or British – outsiders would help fund the rescue.   Cypriot finance minister Sarris was shame-faced: “I am not happy with this outcome in the sense that I wish I was not the minister that had to do this,” he said. “But I feel that the responsible course of action of a minister that takes an oath to protect the general welfare of the people and the stability of the system did not leave us with any [other] options.”

So here we have Cypriot banks who have been laundering money for Russian oligarchs, lending to all and sundry in speculative ventures, Icelandic style.  Now they are bust and who is to pay?  Not the Russian oligarchs.  If it had been them, all their deposits could have been forfeited or the bank levy could just have been applied to those with over €100,000 on deposit.  And it’s not the owners of Cypriot sovereign bonds who bet on the government continuing to allow the banking spree.  No, the Greek and Russian banks that own Cypriot debt, or the hedge funds that bet on a bailout,will be laughing all the way to the banks.  No the main payers are the poorer Cypriot deposit holders and Cypriot taxpayers.  If you have €30,000 in the bank as your only savings, you will be losing €2000 forever. And that €2000 is much more important to the small saver than the rich Russian oligarch.

And the taxpayers still get hit with a large increase in debt payments to make down the road and increased taxes now.  Also the government now plans to privatise the utilities to meet part of the bailout bill.  Cyprus also the potential for offshore gas supplies.  No doubt revenues from those will end up in the hands of creditors rather than as better incomes for average Cypriots.   Already, as a sweetener, Anastasiades has hinted that he would offer depositors equity returns, guaranteed by future natural gas revenues. “Half of the value of the haircut will be guaranteed by natural gas proceeds”. So Russian oligarchs will get some energy revenues.

The immediate issue  is whether this heist will spark runs on banks in other countries.  If your cash in the bank is no longer safe from the Euro thieves, people may prefer to keep it in the UK or the US or under their beds.   EC official Asmussen, the leader of the heist, said the Cypriot government and the ECB were closely monitoring deposit flows, including on an intraday basis, for signs of a bank run and insisted those with accounts in other bailout countries need not fear for their holdings since the rescue programmes are already fully funded and would not need to dip into deposits for more cash.  But the idea of guaranteed deposit insurance everywhere in the EU has now been undermined. The precedent has been set for insured depositors to suffer losses in order to protect Russian oligarchs and reckless banks.  If the Eurogroup can impose this on Cyprus, it can do so elsewhere too.

The cruel irony is that even with this heist on depositors to pay for recapping banks that remain in private hands, and even with EU-IMF loans to repay government creditors, such will be the depression that ensues in Cyprus that the Troika’s target to getting the public debt ratio down to 100% (still well over the 60% target of the EU’s fiscal compact) will not be achieved.  So Germany and the rest will probably have to revisit Cyprus either for another heist  or for a further transfer of funds.
ADDENDUM
The Cypriot government is desperately trying to persuade the EU-IMF to change the terms of the depsoit levy so that it is less onerous on the small depositors – in order to get the heist through parliament today, Monday.
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9 Responses to “Cypriot bank heist”

  1. Brian BAKER Says:

    All very good and all that but I would love to be a fly on the wall when he tells the Russian mafia depositor that he has just had a 10% haircut.

    On another point the collapse of Stalinism leads to this chaos directly. Russia is now a gangster economy and this was a direct result of central control. People wanted freedom exactly as those in the west who want lees centralised government. We have to rid ourselves of the belief that central planning and control can lead us to a better life. Just look at where you end up, from the cult of the personality to control over everyone’s lives. Exactly what the EU is for and we have to rid it from our lives.

  2. Nadeem Mahjoub Says:

    Brian, first we should ask: central control of what? Of everything or of the key sectors of the economy? Second, what do you mean by freedom? Freedom of having control of the key sectors of the economy? Or freedom for big business and banks to do what they want in search for profit? Or freedom for small businesses? Why are they only the two alternative you mentioned above: Stalinism or the Western-type economy and politics?

  3. paulc Says:

    I’m curious as to why bond holders in the respective banks are not being touched [or are they?] and only deposit holders. After all both bond and deposit holdings sit on the liabilities side of the balance sheet. Why wouldn’t bond holders be forced into a debt for equity swap as depositors are.

    • michael roberts Says:

      So-called ‘junior’ bond holders will probably get a haircut because they have less rights and are more short-term depositors. ‘Senior’ bond holders are secured becase it has been an ECB-EU principle to protect these bond holders so as to avoid ‘contagion’ affecting the value of other bank bonds in Europe and causing a new financial crash. But then it was also a principle that savings deposits in banks (up to €100k) were ‘safe’ and insured and that has now been broken. The problem for the EU-IMF was that there was only a small amount of bank bonds on the Cypriot bank books – the liabilities are hugely in deposits (from Russian oligarchs and Greek firms, as well as ordinary citizens). That’s because the Russians wanted to keep their money ‘hot’ and short-term! But when the Greeks ‘restructured’ their public debt, it wiped out the value of the assets of Cypriot banks and brought them to their knees – the product of the ricochet of this crisis across the Eurozone. The alternative of restructuring the public debt and protecting deposit holders was seen by the EU-IMF as unviable because it took Cypriot sovereign debt to unsustainable levels and was unjust on Cypriot (and German) taxpayers – they would preserve Russian oligarchs money. However, it seems the reason the bank levy was not just applied to the money launderers is that the Cypriot banks want to ensure that Russian money stays in their banks! What a mess.

  4. Nadeem Says:

    Micheal, you may be interested in this

    http://www2.lse.ac.uk/researchAndExpertise/units/growthCommission/documents/pdf/LSEGC-Report.pdf

  5. Choppa Morph Says:

    “Wiping out the value of assets” sounds very much like the destruction of capital to me. And as you say, it seems to be “ricocheting across the eurozone”. Like a pinball machine or Bejeweled Blitz ;-)
    We are being held responsible for these assets and their fate — by having to pay for them. So it’s time we took control of them and exercised our social responsibility.
    Time to move on from “no taxation without representation” to “no responsibility without power”.

  6. Edgar Says:

    I wondered when they would take this action. The government are hyping up the seriousness, saying it’s a catastrophe if this doesn’t get passed, because they are putting these proposals to the vote. So they have to raise the stakes and scare people into voting.

    Nicos Anastasiades is putting the gun to the heads of the Cypriot people. But will the people give this blatant robbery a veneer of democratic respectability or will it be like Reservoir dogs where everyone holds the gun to everyone’s head.

    The left really should make as much capital out of this as they can, this really will send a chill down the spine of every person in Europe. Even Sky news presenters, the very faces of the corporate media were taken aback by this act of thievery. These sort of policies can really unite the masses. We should look to take advantage.

  7. matthewrusso9Matt Says:

    Jesus effing Christ, what next from Europe? I suppose these are bizarre economic science experiments performed on small countries “just to see what happens”, before applying some mix of the same to larger, more “dangerous” countries. Larger banks don’t rely on small retail deposits to stay in business. These deposits don’t comprise the “working capital” of these banks. If anything they are a liability, and by tax-haircutting them all, they lower that liability, improving their overall solvency.

    But if Italy is any indication, they’ll run into trouble: the political center has collapsed into the hands of a comedian and his merry band of irate petit-bourgeois outsiders. Like Samson, they threaten to bring down the Italian political temple by refusing to work with anyone else. If the radical socialist and working class left does not move into the gap, some latter-day offspring of fascism will.

  8. Wanda Says:

    They did do something similar here in USA after the TARP bailout, my credit union and many credit unions leveed a $15 fee on every account, just like that not choice no voice no vote, I had three accounts for me and my family, 45$ gone just like that… complained and tried to get it reveresed but it happened in many places like that

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