The pressure on Cypriot leaders finally worked. Cyprus’ parliament had thrown out the plan to levy the bank deposits of ordinary Cypriot citizens – a plan drummed up by Cyprus right-wing president Nicos Anastasiades and the EU leaders. The Cypriot leaders then appealed to its Russian ‘benefactors’ (the main foreign bank deposit holders) to give them a new loan to bail them out. But Anastasiades’ Russian pals refused to help – they did not want to make a new loan as it would eventually have to be written off. Good money after bad.
So Cyprus has been forced to return to the idea of a hit to deposits to find enough money to trigger the EU-IMF bailout funds of €10bn. The final deal is a ‘restructuring’ of the second biggest bank, Laiki, with deposits over €100,000 (so-called uninsured) being frozen for use in restructuring and the largest Bank of Cyprus may also be hit with a levy on uninsured deposits and will take on the debt that Laiki has with the ECB. All other bank deposits will be untouched. This measure means big losses for Russian depositors and the end of banking as we know it in Cyprus. Apparently, the plan to restructure Laiki angered Anastasiades so much that he threatened to resign rather than see his beloved ‘casino banking’ centre wiped out- yet another example of his great leadership of the Cypriot people.
Along with a package of further austerity measures and significant sales of public assets, this will raise enough funding to meet the demand of the Troika for about €6-7bn to add to the €10bn Troika bailout. Cyprus faced a Monday deadline to clinch a bailout deal with the EU or the European Central Bank says it would cut off emergency cash to the island’s banks, spelling certain collapse.
The aim of making Cyprus pay part of the bailout is two-fold. First, the German and other Euro leaders did not want to bail out in full all those Russian oligarchs and ‘mafia’ who used Cypriot banks as tax havens and money launderers. It would look bad in German parliament just months before a general election to have to explain why Russian crooks should get German money because Cyprus banks acted like money prostitutes for Russians and then went on a speculative spending spree across Europe. Second, the IMF was concerned that if the bailout came completely from EU-IMF loans it would take Cyprus public sector debt to above 150% of GDP and there would little prospect of getting that debt down over the foreseeable future (as the graph below shows). So Cyprus’ public sector could end up defaulting or being bailed out again. So a ‘bail-in’ of bank assets was necessary.
The levy on deposits is unprecedented in the Eurozone, as is the proposal to introduce capital controls so that Cypriots, Russians and other foreigners cannot take all their money out of Cyprus when the banks open on Tuesday. For the first time in the Eurozone, a member state is taking people’s savings and blocking the movement of euros within the Single Currency area in order to pay its bills. This is breaching EU Treaty rules. It is a big sign that the Eurozone area is in deep crisis. The impact on deposits in banks in other EMU states like Greece, Spain or Portugal could be damaging. Depositors will look to get outside the risk of capital controls being applied again within the Eurozone.
Small depositors have been spared a ‘haircut’ in their savings, but remember there are still ordinary citizens with over €100,000, as for many this constitutes their life savings in their old age. It is not all Russian oligarchs or tax-hiding wealthy foreigners – many of these had already got their money out or move it to Swiss bank accounts. And then there is the hit to bank workers. It is not their fault that their boards and the politicians built up a ludicrous financial albatross round the necks of Cyprus and then tried to defend this huge ‘rentier’ financial centre at the expense of depositors and bank staff. Cyprus has a skilled workforce; with possibilities to to develop manufacturing and services industries; and it has gas reserves soon to come on line. It did not need such a distorted economy. Bank workers and public sector workers (photo below) are now to lose their jobs and pensions as Laiki is ‘restructured’ and the whole banking system is shrunk by half over the next few years.
As Paul Krugman put it in his blog: “The Cyprus mess shows just how unreformed the world banking system remains, almost five years after the global financial crisis began.A few Cypriot banks bet big on Greek bonds, very big, and their losses are about one-third of Cypriot G.D.P. Why would anyone want bank executives and traders to be in a position to do this much damage to a country? But step back for a minute and consider the incredible fact that tax havens like Cyprus, the Cayman Islands, and many more are still operating pretty much the same way that they did before the global financial crisis. Everyone has seen the damage that runaway bankers can inflict, yet much of the world’s financial business is still routed through jurisdictions that let bankers sidestep even the mild regulations we’ve put in place. Everyone is crying about budget deficits, yet corporations and the wealthy are still freely using tax havens to avoid paying taxes like the little people.”
Cypriot politicians and bankers were so swept up in the short term benefits of the Mediterranean island’s adoption of the euro that they ignored warnings over the resulting lending boom. Banks’ loan books expanded almost 32 percent in 2008 as its newly gained euro zone status made Cyprus a more attractive destination for banking and business generally, but Cypriot banks maintained the unusual position of funding almost all their lending from deposits. That supposedly protected them from the credit crunch and global financial collapse in 2008-9, where banks that relied on inter-bank borrowing like Northern Rock, Dexia etc, went down. But then the Cypriot banks stimulated a property bubble in the island and funded it by ‘hot money’ from abroad, namely Russia. And the bank boards, like those in Iceland and Ireland, got hubris. They could do no wrong and the politicians were happy to agree for a slice of the action.
The rapid expansion of bank assets left Cyprus with a banking system eight times the size of its national output, as its accommodative regime of not taxing foreigners’ dividends and capital gains lured investors from countries like Russia. A depositor would have earned 31,000 euros on a 100,000 euros deposit held for the last five years in Cyprus, compared to the 15,000 to 18,000 euros the same deposit would have made in Italy and Spain, and the 8,000 euros interest it would have earned in Germany, according to figures from UniCredit.
Bulging deposit books not only fuelled lending expansion at home, it also drove Cypriot banks overseas. Greece, where many Cypriots claim heritage, was the destination of choice for the island’s two biggest lenders, Cyprus Popular (Laiki) Bank and Bank of Cyprus. About 30 percent (11 billion euros) of Bank of Cyprus’ total loan book was wrapped up in Greece by December 2010, as was 43 percent (or 19 billion euros) of Popular. More striking was the bank’s exposure to Greek debt. The Bank of Cyprus’s 2.4 billion euros of Greek debt was enough to wipe out 75 percent of the bank’s total capital, while Laiki’s 3.4 billion euros exposure outstripped its 3.2 billion euros of total capital. Bank staff, who mostly got small bonuses and annual pay rises of around three or four percent, were unhappy about the mounting exposure to Greece but powerless to stop it. The banks could survive a maximum 25 percent loss on their Greek bonds. The “haircut” on Greek debt imposed on private creditors ultimately agreed by the EU leaders, including Cyprus’ then president Demetris Christofias, was more than 70 percent, heaping losses of 4.5 billion euros on the banks. The ricochet of the crisis across the Eurozone finally brought Cypriot banks to their knees.
So is this deal the only way out? No, no, no. Cyprus could pay for the recapitalisation of its bust banks itself without having to take a Troika bailout. There are at least €30bn in deposits held by tax-dodging foreign-based individuals and companies. A bank bailout would cost €10bn maximum but if the four largest banks were restructured into one state-owned bank with any worthless assets siphoned off and sold, that would reduce the ultimate cost. Bank staff could be guaranteed a job in the state-owned banking system or retraining on full pay for a new job. Also there is €2.5bn in bank bond debt held by foreign banks (including Greek) that could be written off.
A 50% levy on foreign-based deposits plus the writing off of bank debt and the restructuring of the banks would raise €20bn, more than enough to sort out the banks and provide support for bank workers and others that may have a case of need. Then a properly run banking system can be established owned by the Cypriot people, garnering deposits from citizens and lending it back to residents and small businesses on the island. Instead, this deal protects senior bank bond holders (other banks), threatens thousands of bank jobs, imposes severe fiscal austerity and a permanent depression in the Cypriot economy for the rest of this decade, at least.
The leader of the Church of Cyprus, the island’s largest property owner, said after the Sunday mass in Nicosia that on Thursday he is going to host a dinner with the chiefs of Russian companies that are active in Cyprus to convince them against taking their money away from the island so that the situation does not deteriorate further. He blamed the previous Communist-led government for the mess and said that “Cypriot people must learn to live on tighter budgets”. The church leader is worried that his Russian friends will flee. Maybe if church property was sold off, it could help bank staff keep their jobs and pensions.
And my alternative would enrage not only the Russian oligarchs and their government, it would also be against the interests of the financial and church elite in Cyprus who are in league with rich Russians and other Eurozone banks. And it would mean losses for the ECB which has lent credit (€9bn to Laiki). Banks holding Cypriot bank debt would go to international courts to get their money back. And a Cypriot government that did not impose austerity and privatisations would be breaking the fiscal compact targets of the Eurozone. But breaking Euro law is already being envisaged with the measure of capital controls in this ’emergency’.
This is an emergency too for the Cypriot people. A fearless Cypriot government could ‘bank’ on its people (and those in other Eurozone countries like Greece) to support them in arguing its case with the Euro leaders. The Euro leaders could provide solidarity support with funding, but they won’t. The terms of EU-IMF funding deal means selling Cypriot jobs, savings and resources to pay for it.
Michael Roberts Blog 
Why are you repeating, uncritically, the IMF/Bundesbank baloney:
“First, the German and other Euro leaders did not want to bail out in full all those Russian oligarchs and ‘mafia’ who used Cypriot banks as tax havens and money launderers. It would look bad in German parliament just months before a general election to have to explain why Russian crooks should get German money because Cyprus banks acted like money prostitutes for Russians and then went on a speculative spending spree across Europe.”
Read the papers recently? Barclay’s and Libor, JP Morgan and the whale, Wells Fargo and illegal foreclosures, Goldman Sachs and duping its clients, Dexia bailed out how many times? UBS and any number of criminal activities; HSBC and money laundering; BNY and money laundering? Citibank? Bank of America? Siena?
Why are the Cypriot banks any different that those in the rest of the EU, or those outside the EU?
Or how about Lagarde herself, with her apartment raided in the search of evidence concerning certain “questionable things” she may have done while Sarkozy’s finance minister?
Why give credence to this crap about criminal activity, when it has nothing, absolutely nothing to do with the predicament of the Cyprus banks; when that predicament is the direct result of…well capitalism to be sure, but the specific terms imposed upon Greece by the very same troika so insistent on confiscating deposits from Cyprus?
Russian oligarchs and mafia? How is that any different from US oligarchs? UK mega-punters?
How is Cyprus different from Liechtenstein? or the Cayman Islands?
50% tax on foreign deposits, so we can what? recapitalize the banks? Because why? The current plan protects senior bondholders in Cyprus? Guess what? There are NO senior bondholders of Cyprus’ banks, Really. Cyprus’ banks funded their operations almost completely through deposits. Total senior secured debt comes to about 200 million euros in the bank network.
Expropriate the banks, cancel the debt? Good idea. But it means nothing in Cyprus. Make it EU-wide, and now you’re saying something
None of the scams and corruption of the international banks you cite led to a need for a bailout by the EU – although they wasted productive resources, led to large losses for small investors and employeese and in some cases required bailouts by national governments.
As I said in my posts on Cyprus, tax dodges and offshore havens have been allowed to develop in the Eurozone without action, and that included allowing Cypriot banks to launder the money of Russian oligarchs. Malta and Latvia are up to the same tricks now. Even though the German secret service knew it was dodgy money, nothing was done – until of course the Greek haircut drove the Cypriot banks to the wall, as you say, and as I said in my last post. Cyprus is no different from Lichtenstein except that it went bust and asked for a bailout – thus becoming an embarrasing situation for Mrs Merkel in an election year after four bailouts hitting the German taxpayer already. Slovenia is to come.
Presumably, the Cypriot people still need a banking sector in a monetary economy. It needs to be a publicly owned public service and so it needs capital. A newly constituted banking system will require capital which it can get either by Cypriot taxpayers funding it or the EU funding it or by requisitioning enough of the deposits. Yes there is not very much bank debt, about €2bn including junior debt, so the new capital must come from elsewhere. As you say, EU funding without the draconian fiscal austerity measures combined with cancellation of any debt and requisitioning of the billions of dodgy deposits would be best. An EU-wide policy would be saying something.
“None of the scams and corruption of the international banks you cite led to a need for a bailout by the EU – :”
and neither did the “scams” nor “corruption” in Cyprus lead to the need for a bailout by the EU. There isn’t one element of “scam” or “corruption” that you can provide as CAUSAL evidence for the EU bailout. What led to the need for an EU “bailout” was the devaluation of Greek sovereign debt, itself a repercussion of the 2007-2008 collapse in the asset backed securities markets, which was itself a result of a decline in the rate of profit.
Hate to sound rude, but get your facts straight. As of now, you’re parroting the “swindle, fraud, evil speculator” explanation for capital’s predicament.
“Dodgy money”??? I didn’t realize your objections to capitalism were grounded on morality. My bad.
I’ll try harder to get my facts right
OK, and my apologies for being excessively harsh.
There are parallels with Iceland here. Bankers used to handling domestic accounts get a flood of fast money. The bankers are all excited, knowing that at the very least they will be able to get their small piece on all dollars deposited.
Iceland bankers used depositor’s money to buy US subprime. It would appear that Cyprus bankers bought Greek and other EU sovereign debt.
In both cases, how could anything go wrong?
We now know that US ratings agencies were wrong on synthetic subprime mortgage debt. We now know that the EU policy that the debt of all EU countries was implicitly AAA was wrong.
In both cases the raters walk and the nationals are expected to backstop banks whose operations they did not even know were putting them in debt.
Many smart investors never bought US subprime. Many smart investors never bought Greek debt. Many bankers suddenly deluged with fast money and way out of their depth bought these types of junk based solely on apparent safety and high yield.
The Cyprus failure was a failure to prevent its banks taking on more risk than the owners of the banks could support, without getting at depositors money.
Iceland now puts depositors first in line, everyone else after that. This puts the responsibility for risk management where it belongs – with the owners of the banks. It removes depositors from any risk – since they have no idea how the bankers are investing their deposits, how can they oversee operations.
This should be the international standard.
The EU refuses to admit how badly it has managed the Euro and the debt of EU countries. Until it admits failure and works out a new system that makes the owners of failed banks pay for their failure, it will continue to stumble from one failure to the next.
Ain’t it a shame how value keeps pricking those price bubbles. I’d be interested in hearing more about how real estate speculation by the Orthodox Church hierarchy contributed to the current economic slump on the Greek side of Cypress.
Do not neglect potential tension between Russia and Cyprus re. natural gas —
”The total amount of the Levantine basin that encompasses also Israeli and Lebanese exclusive economic zones may have 122 TCF according to KRYTEK, which presented relevant estimations by the United States Geological Survey (USGS). Definite data will only be validated once all researches are due. Furthermore, Noble Energy’s block 12 may contain further another 7 TCF, according to company’s initial estimations and a final investment decision will be made by 2015, so as to start production in 2018, whilst the following year regular LNG shipments could be available for international markets supply…”
http://www.naturalgaseurope.com/cyprus-natural-gas-reserve
Appears that Cyprus could be energy self-sufficient -and- supply part of W. Europe.which, via the loans, has in effect already purchased said gas — masmenos what U.S. did with Mexico after early 1980s…
Pardon the simplicity but complete story would be far too long — Aside from which, what a great blog you have here.
Gracias y Regards
”
Artesian’s point is well taken. “Excess” competition is inevitable to capitalism. That is why it can be abstracted from in any analysis, at least by Marxists.
That Cyprus, rather than the Caymans and other money-holes, is singled out here is more expressive of the inter-imperialist balance of forces more than anything else. Russia is neither a member of the Euro, the EU or NATO. That makes Russian capital the default target of opportunity. The popular use of “Russian” as a synonym for anything “shady” is in large measure a product of a persistent City of London propaganda, as we are reminded of once again with the death of Berezovsky.
Only here we have a “Russian oligarch” in favor with the City of London, in an instance of “their oligarchs and ours”. And yet even Londons’ favored oligarchs must be cast in the obligatory “shade” of being Russian.
The take from a famous American rag: http://www.newyorker.com/online/blogs/newsdesk/2013/03/boris-berezovsky-how-oligarchs-die.html
I think that’s correct. It’s just so convenient for the troika to be blaming Russia, “shady money,” “speculation,” irrational exuberance, whatever; blame of course being the smoke in “smoke and mirrors” capitalism.
We can’t afford to participate, give credence to that sort of argument, because a)it’s not accurate and b) it, like the smoke, obscures the real issue– which is class struggle, capital vs. labor, or the conditions of social reproduction, or what is known popularly as “living standards”
The other thing I think we need to avoid is “programmatic” “solutions” that are essentially rationalizations of capitalist accumulation. Could Cyprus levy a tax on corporations, international depositors, on financial transfers and get itself out of this mess? On paper, yes. But as they say about baseball, you don’t play this game on paper.
It takes an agent of change, a class to impose a program that can resist the combined efforts of the “combine” or troika– and that class has to make that effort internationally.
So we might want to suggest, first and foremost, some sort of social program, not an isolated “monetary” or fiscal, or banking program as the alternative to Schauble/Lagarde/Draghi.
Other than that, I repeat my apology for the tone of my earlier posting.
It seems that you have misundersdood what the “levy on the deposit” is. According to the official statements is the transformation of a part of the deposits over 100,000 Euro into capital shares. So, the depositors concerned are tranformed into joint-stock owners of the three Cypriot Banks..
Kostas
True – but what will that be worth compared to the cash deposit value? The ‘rich’ depositors are in effect recapitalising the banks instead of the state or the EU ESM. It would have been better to have state owned preference shares so that the three banks are owned by the people and not by rich depositors. Liquidating the previous shareholders, bank bond holders and rich foreign depositors is fine but everybody (including most leftist/Keynesian analysts) seems to think it is fine that the banks should still be owned privately or any state holdings sold off as soon as possible (privatised). Thus private capital will capture any future profits (based on staff losing their jobs in part) and also they continue with boards of management where the people (and staff) have no say in how they are run in future. Perish the thought that the people through its government should have ownership and control!
Ownership may be a distraction.
If these banks had been state owned before this failure and had the failure still occurred, the state would be on the hook.
Public or private, the issue is oversight. In our times, oversight is seen as an intrusion, a frill. In spite of manifold bank failures.
Failure of a private bank should not be a public responsibility.
Failure of a private bank should affect depositors least. First, depositors get their money. Then, if there is anything left, the owners of the bank get that. The people most able to oversee bank operations pay for their mistakes.
In the private sector, people are not forced to buy shares in a bank. The forced conversion of deposits into shares is outside normal capital system procedures. It cannot happen at any level of deposit other than as a punitive measure unrelated to the failure of the bank.
How will the depositors be paid in full if the banks’ owners wasted up to 40% of deposits on top of the equity in worthless investments and loans (Laiko)? A properly run state bank providing a public service for its people would never have made such speculative loans to property developers or bought Greek government bonds or taken deposits from dubious overseas tax dodgers. Do you think these tax dodgers should get their money back in full?
Deposit insurance is not a public responsibility. Deposit insurance is a tax on depositors that goes into an insurance fund. In most countries, deposit insurance has no public/state component. Occasionally, the state does step in to top up deposit insurance funds. This rarely happens.
My argument, and the argument of the people of Iceland, is that depositors should have first claim on the assets of the bank. Only banks willing to operate under those conditions are allowed to operate. Competition would force all others out of business in no time.
A bank gambling with depositors money (depositors are the last in line to get the assets of the bank) will take chances. A bank gambling with the bank owners’ money (depositors get their money first) will be more careful.
Can losses exceed deposits? Possibly. In that case, the central bank has been loaning money to the banksters without the needed regulatory oversight.
However, even in this case, the knowledge that the owners will be paid only after the depositors have been paid in full would certainly act to restrain the gamblers/banksters.
If failure of a “private bank” should not be a public responsibility, then why have deposit insurance? Why have the state guarantee all deposits up to say euro 100,000 or $100,000 when the sum of those deposits is likely to exceed the “premiums” paid by the participating banks and require supplemental assistance from the public treasury?
What these “events” or crises of capitalism tell us is that the division between private property and public “utility” is obsolete, outmoded, incapable of accounting for what actually goes on in capitalism. These events tell us that the state serves property, serves capital, as if we needed reminding. So our focus should be on expropriation.
Michael,
You have a third option to consider:
The Political Authority, actual or future:
a. expropriates the deposits over 100.000 Euros (about 11.000 accounts) of nationals or/and foreigners,
b. turns the proceed of the expropriation into share capital of the banks,
c. distributes free and equally / unequally the share capital issued to:
1) the depositors, or
2) the workers and the unemployed, or
3) the whole of the civil population.
So, you get the direct social self-management of the banking system in the desired class configuration.
Worth considering but the banks have still got to be integrated into a plan for recovery involving support for Cyprus’ natural advantages: tourism, shipping, agriculture and a skilled English-speaking workforce (rapidly leaving). That means self-management as part of a national plan and an appeal for Europe-wide policies. We can dream.
The plan can be integrated into the social self-management scheme by giving the Political Authority a percentage of the share capital and a corresponding seat in the Board of Direction. So, “plan” becomes a two ways dynamic process (the mathematical model of which has not yet elaborated).
You said “remember there are still ordinary citizens with over €100,000, as for many this constitutes their life savings in their old age.”
Can you let me know how big ordinary citizens’ depoists are?
Most are much less or non-existent as savings. But there are some older Cypriot citizens who have saved up for retirement. Over 40% of all deposits over €100,000 were from abroad.