Cyprus: what a mess!

Me of little faith!  I thought that the Cypriot parliament would have been bullied and blackmailed by the EU leaders, the ECB and the IMF – and Cyprus’ right-wing President Nicos Anastasiades and his finance minister Sarris – into accepting the levy on bank deposits as part of the bailout package.  But the threat from the ECB that it would withdraw funds from Cypriot banks causing them to go bust was resisted by an irate populace and such was the fury that even the government MPs did not vote for the package; they abstained.  As one protestor put it: that was real cowardice – they could not vote for the levy that their president wanted, but they could not vote against it either!

So what now?  Well, as soon as Cyprus banks reopen (and that may not be until next Tuesday!), there will be a run to get cash out.  The authorities are preparing measures of capital controls etc to curb that.  But even so, Cyprus bank deposits (already falling before this crisis) will take a dive.  Ironically, that makes the cost of recapitalising them even greater than the original estimate of €6-7bn – it’s heading over the €10bn that the American PIMCO analysis came up with as the worst case scenario in January when asked by the Cypriot government.


Actually, the government probably has until June before the money runs out when it has to meet a sizeable redemption payment on government bonds, unless, of course, the ECB withdraws its emergency funding for the banks as it has threatened to do.  But actually the ECB can only stop the central bank of Cyprus from providing emergency lending in euros if there is a two-thirds majority on the ECB board to do so and that is in doubt.

In the meantime, the Cypriot finance minister is in Russia trying to negotiate a deal with Putin for more money on top of the €2.5bn loan that Russia made last summer.  Don’t hold your breath.  Any more money would only come with conditions like tying it to future gas revenues from the gas reserves that Cyprus has off its shoreline.  So Cyprus’ future prosperity would be handed over to the Russians while all Russian mafia deposits in Cyprus banks would be secured.

And that is is the thorny issue.  Should EU taxpayers be bailing out Cypriot banks that promoted themselves as offshore tax havens and money launderers for Russian oligarchs and the ’roundtripping’ of illicit funds?  Apparently both Anastasiades and the head of the National Economic Council, Nobel prize winner neoclassical economist Christopher Pissarides, think so.   They want to preserve the current Cypriot banking system as an offshore tax haven.  As Pissarides put it: “Cyprus is dependent on them (offshore funds) just like Luxembourg, the Channel Islands, Hong Kong and Singapore are. Every mature small nation has a large financial system. Malta is building its own now, after joining the Eurozone and is benefiting from the Cyprus fallout. Financial services is what Cypriots are trained to do.”  He fails to mention that Cyprus has just a 10% corporation tax, the lowest in the OECD (even lower than Ireland), designed to attract tax dodging funds.

And that’s why Anastasiades wanted to keep the deposit levy hit on those with more than €100,000 as low as possible, instead of shifting all the tax onto them and avoiding any tax on insured depositors with savings below that threshold.  Anastasiades was worried that the Russians would take their money to somewhere else – like Latvia.  Thus we have it.  Cyprus should, as its ‘unique selling proposition’, just be an unproductive financial centre for storing ill-gotten gains from Russia.

The EU leaders want to shrink the Cypriot banking sector by half.  In other words, they want to end its role as an offhore banking centre.  That is hypocrisy, of course.  They have never done much about Luxembourg, or for that matter, Latvia or the other offshore havens used by Russians and other rich tax dodgers across Europe.  And they are doing nothing about EMU state Malta doing the same.   But the Germans need this smokescreen to justify the bailout to the German electorate with just six months to go before a general election that Mrs Merkel wants to win.

But, by trying to take the cash deposits of the Cypriot people as part payment of the bailout, the EU leaders have set a precedent.  It’s no longer taboo to touch deposits.  So no ordinary citizen with savings in a Eurozone bank can trust its bank.  Undemocratic instititutions like the ‘independent’ ECB and the ministers in an EMU council, or officials sitting in Washington at the IMF can just steal your savings overnight.

What this crisis shows is a proper banking system that is a public service to its people (small businesses and households) should not be one that is just a speculative hedge fund buying and selling  financial assets, or just a money launderer.  Cyprus could become prosperous through developing its natural resources (gas etc) and providing goods and services from a skilled workforce. Instead, its economy has been distorted by turning the island into a financial pirate den.  Cypriot bank investments in Greek debt and Greek banks went sour partly because the Euro leaders made investors in Greek debt (including Cypriot banks) take a ‘haircut’ in return for ‘bailing out’ Greece.  So the interconnections within the European banking system, buying and selling financial assets, led to a ricochet of bankruptcy, just as it did in the global credit crunch back in 2007-09.

What needs to be done now??  Well, in some ways, the Financial Times came up with a good approach.  “Nicosia could create good banks from the zombies that now roam Cyprus, with balance sheets composed of insured deposits and enough assets to match. Small depositors would see their savings cordoned off from the banks’ losses. …..  This would leave subordinated creditors – uninsured depositors and unsecured bondholders – with the pieces. This is no rosy scenario – but orderly resolution at least allows a new banking system, stabler if smaller, to emerge immediately from the ashes of the old.   The loss would be a metastasised offshore banking sector; but it is a mystery why the eurozone should lend funds to safeguard a model Cyprus itself can no longer afford….It would show that governments are no longer on the hook for banks’ losses. ”  

Of course, this does not go far enough. There is no guarantee that privately-owned banks (whether owned by Cypriots or Russians) that start doing their proper role of taking deposits and making loans won’t start speculating and providing tax dodging activities again.  Cypriot banks should be nationalised and brought into a controlled system so they are democratically run under taxpayers control.  It is not accidental that Cyprus’  cooperative banks. not engaged in offshore activities, were able to operate during this crisis.

Cyprus still has time to sort this.  The Cypriot people have spoken.  They do not want a ‘bailout’ that makes them pay for the failures of their banking elites and the politicians who have been in league with them.  Cypriots can avoid this, if the burden of any losses is put fairly and squarely on those who have used Cyprus as a tax haven and for money laundering or as an investment centre.  They took the risk and they must pay.  The banking system must be restructured as a democratically run, publicly-owned system providing a service to Cypriots, not tax dodgers.  The EU leaders should help Cyprus with funding to ensure this.  More likely, however, Cyprus will do a deal with Russia and the EU to sustain its distorted system at Cypriots’ expense.  We shall see.

7 thoughts on “Cyprus: what a mess!

  1. “But actually the ECB can only stop the central bank of Cyprus from providing emergency lending in euros if there is a two-thirds majority on the ECB board to do so and that is in doubt.” – Please explain, I have lived in the happy conviction that central banks in euro states could not lend directly to their governments or for that matter that all central bank lending to banks should go via ECB, except in an indirect way through the Target 2 system, but that involves different transactions. So that the only government option is issuing bonds that its own central bank cannot buy in the primary market.

    1. Karen
      The ECB and the national central banks cannot buy government debt direct (but can buy government debt in the secondary market and have done so). Under the Eurosystem’s Emergency Lending Assistance (ELA), national central banks in the Eurosystem can provide emergency funding to their own banks in order to preserve ‘financial stability’. That gives power to the national central banks to ‘create’ euros to give to its banks in a crisis. Thus, central banks in Ireland and Greece have done so considerably. Of course, this adds to the euro money supply and is not under the direct control of the ECB. But as it is one eurosystem, obviously the ECB and other central banks will get worried if one national central bank just goes on printing euros as it likes. That’s when the ECB might intervene and stop ELA. All these transactions and all the private commercial transactions appear in the euro settlement process that is Target 2.

      1. Thank you, so it is new that they can do so. Amazing and in contravention of the basic principles. Confirms the long-held view of some commentators that the eurozone has led to renationalisation of banking.

      2. Karen, well ELA is not new and was in the original Eurosystem statutes – but of course, it is now being used way more than expected or desired by the ECB. The ECB is slowly being dragged towards being a lender of last resort and even to the monetisation of debt. That is why the ECB wants a single banking union and a tight fiscal compact (leading to automatic fiscal transfers/) for the Eurozone as part of becoming the lender of last resort.

  2. Hi Michael.

    Great stuff as usual. I hope you don’t mind if I post two links — to pieces for our blog by London-based writer and activist Kevin Ovenden that have had a run in a number of places around the globe. They are much more on some of the political machinations and what sort of line the radical Left should take.


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