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Broken Cyprus Bows to Its New Eurozone Masters

The small island nation is the latest victim of the floundering single currency. Also read: Eurozone Chief: Cyprus Bank Account Raids are Just the Beginning

by
Mike McNally

Bio

March 26, 2013 - 10:35 am

”For a small, open economy like Cyprus, euro adoption provides protection from international financial turmoil.”

European Central Bank President Jean-Claude Trichet, welcoming Cyprus into the European single currency in 2008.

Cyprus has agreed to a ten billion euro ($13bn) deal with eurozone and IMF leaders to bail out its banks, and to prevent the Mediterranean island nation from exiting the European single currency. However, Cypriots can be forgiven for not taking to the streets to wave flags and honk their car horns. They’re finding out just what the “protection” afforded by the euro looks like, and it’s more akin to the kind offered by ski mask-wearing heavies in certain parts of New Jersey than the financial security Monsieur Trichet promised.

Under the terms of the deal, the country’s second-largest bank will be shut down, and its largest bank will be restructured. Depositors with more than €100,000 ($130,000) in either bank will face losses in the vicinity of 40 percent. In a bid to prevent a run on the island’s other banks and to stop money from fleeing the country, capital controls have been imposed — guaranteeing that there will still be capital flight once the restrictions are lifted.

The effect on the Cypriot economy will be catastrophic. Businesses serving the banking sector will begin to fail immediately, and others will follow. Property values will plummet and unemployment will soar as the country is plunged into recession.

We’ve been here before of course, with Greece (twice), Spain, Portugal, and Ireland. And compared to those crises, the Cyprus installment of the eurozone drama has been brief, and the amounts of money involved relatively small. But while Cyprus should not, on the face of it, pose much of a threat to the euro project — it accounts for less than one third of one percent of the eurozone economy — the manner in which the crisis has been handled may make this the most damaging episode yet in the single currency’s turbulent history.

In past bailouts, the inevitable “haircut” was imposed mostly on bank bondholders, but because most of the assets of Cypriot banks are in the form of deposits, it was decided that depositors would have to take a substantial hit. An initial bailout proposal caused uproar last week when it emerged that insured depositors would face losses; under EU law, bank deposits up to €100,000 are guaranteed, but because that guarantee only applies in the event of a bank failure and the banks had not at that point failed, the savings were considered fair game.

That deal was rejected by the Cypriot parliament, and while the savings of insured depositors will not be raided under the terms of the new agreement, an alarming precedent has been set with the imposition of a levy on uninsured deposits. Eurozone leaders have let it be known that from now on they will target the savings of private individuals rather than inflicting losses solely on institutional bondholders such as other banks and pension funds.

Investors in Greece, Spain, and elsewhere have been thinking that if the eurozone can do this to savers in Cyprus, they can do it to them when their country needs another bailout (“when” is more likely than “if”). And that fear was brewing even before the chairman of the eurozone declared that the Cyprus deal would indeed be a “template” for future bailouts. As the euro and European markets fell, officials frantically attempted to row back from his statement amid fears of bank runs across southern Europe.

The imposition of capital controls also sets a dangerous precedent for the eurozone, and will further spur savers to start moving their money out of banks in Europe’s weakest economies. Far from marking an end to the eurozone crisis, the harsh treatment meted out to Cyprus runs the risk of reigniting it on an unprecedented scale.

A third new precedent is the seizing of money from large numbers of investors from outside the eurozone — specifically Russians, who are thought to have around €25 billion ($32 billion) in Cypriot banks. Wealthy Russians have been stashing their money in Cyprus since the breakup of the Soviet Union, attracted by high interest rates, low taxes, and light regulation.

In a bid to justify the raid on deposits, eurozone officials and politicians in Germany, which as the eurozone’s most powerful economy effectively underwrites the single currency, have been muttering about Cyprus being a tax haven and dropping hints about money laundering. Yet such accusations are moot given that large parts of its banking sector are about to be wiped out. And whatever Cypriot banks have been up to, they were doing it back in 2004 when the country was allowed to join the European Union, and when it joined the euro four years later. Political considerations trumped economic ones then, as they always have in the drive towards “ever-closer union”; several countries have been admitted to the euro despite failing to meet the requisite economic benchmarks.

It’s understandable that Germany, which is ultimately on the hook for the bailouts provided to Cyprus and other countries, is reluctant to be seen as bailing out Russian tycoons, particularly with elections due in September. But the roughly six billion euros ($7.5bn) that Germany is insisting must come from depositors is pocket change next to the hundreds of billions spent on bailing out other countries, and an awfully small sum over which to risk the entire eurozone.

The euro was the pet project of Europe’s rich northern countries, in particular Germany and France, with the poorer southern nations brought along for the ride. The north needed markets for its exports, and the south was seduced by the promise of cheap and apparently limitless credit guaranteed by its economic betters, which fueled both property booms and growing entitlement states. Underpinning the whole enterprise was the dream of a European superstate to rival the U.S.

When things started to go wrong following the credit crunch of 2008, the southern countries found themselves trapped, unable to devalue their way back to competitiveness while they remained in the euro, but unwilling to leave for fear of the consequences. One after another, they’ve been forced to submit to punishing austerity and economic stagnation imposed by their new masters: EU and eurozone bureaucrats, and northern politicians.

But a revolt is brewing. Tapping into a growing sense that ordinary people have been betrayed by a political class that’s both incompetent and out of touch, anti-euro and populist parties have been gaining ground across the south, most recently in the Italian elections. If just one country finds the courage to leave the euro, there could be a stampede for the exit. (A “euroskeptic” party has even been launched in Germany, albeit with a very different motive: its supporters are tired of picking up the tab for what they view as profligate southerners.)

The future of the eurozone is far from guaranteed, and the inept and cynical way in which its political and financial elites have dealt with Cyprus may yet have an impact on the continent out of proportion to its tiny size.

Also read: Eurozone Chief: Cyprus Bank Account Raids are Just the Beginning

Mike McNally is a journalist based in Bath, England. He posts at PJ Tatler and at his own blog Monkey Tennis, and tweets at @notoserfdom. When he's not writing about politics he writes about Photoshop.

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All Comments   (17)
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I do not have objections to the final structure of bank reorganization in Cyprus. It followed bankruptcy law principles and creditor rank. The WSJ commended it. I do not favor bank bailouts with taxpayer money.

I entirely agree with the writer that Euro accession destablized the Cypriot economy and ultimately led the country to bankruptcy, the opposite result that Cypriot politicos and policy makers were expecting. Would countries like the UK or Switzerland play Euro-roulette with their financial industry??? Hell, no! The Cypriots put their entire offshore franchise in jeopardy and lost big. Very poor risk assessment as well as corruption and cronyisim. The EU buys out any dissent.

Common sense would suggest that deep depressions and skyrocketing unemployment in the Eurozone will lead to revolt and break up. So far this has not happened and the Euroweenies have proved adapt at mass propaganda and political manipulation. What assists in this is the poor demographics in victim countries like Greece and Cyprus where the dwindling youth will most likely simply emigrate. You cannot expect revolt from 60-year pensioners....
1 year ago
1 year ago Link To Comment
"Uniastrum bank which is headquartered in Moscow. Eighty percent (80%) is owned by the Bank of Cyprus. After the crisis began and right up until the capital controls were implemented the bank was open for business with no restrictions upon withdrawals. So the crisis began, was all over the Press and the Russian depositors walked into the local bank and withdrew their money from Uniastrum, the Bank of Cyprus, or had it wired in from the other local Cyprus banks and it was then withdrawn. Problem solved!" http://www.zerohedge.com/news/2013-03-28/cyprus-answer-uniastrum
1 year ago
1 year ago Link To Comment
I haven't finished reading what is there yet, but will get back to it because it is so informative! Thanks for passing this along.

I have never been to Cyprus, but it is supposed to have wonderful beaches. It seems likely to me that property values there will decline sharply, especially if you are to pay for it in dollars or Euros to be deposited outside the country.
1 year ago
1 year ago Link To Comment
The Cypriot government owns those banks or at least a substantial interest in them? The NYT looked at an "independent financial advisor" who worked for one of the banks for 20 years and had most of his and his family's net worth invested in the bank stock he owned, which would now be worth a small fraction of what it had been worth not too long ago. (He kept buying bank stock as it fell, figuring that it was a buying opportunity and the stock would surely rebound.)

And the Cypriot government "caused those banks to fail by loading them with now worthless Greek Eurobonds"? How did the government force the banks to make their disasterous investments in Greek debt?

Does any responsibility for the debacle there go to the citizenry of Cyprus or does all/most of it go to the big bad "government"?
1 year ago
1 year ago Link To Comment
We keep reading this action will lead Cyprus down the same path as "Greece (twice), Spain, Portugal, and Ireland." But I have to ask. Did the respective governments raid citizen bank accounts in those countries??? Because if they didn't than it's not the same, it's a remedy beyond the mainland Euro bailouts. It's a forecast of the future. Once the people get a handle on this idea than watch the run on the banks. By stock in home banks and the weapons to protect them.
1 year ago
1 year ago Link To Comment
It's a "raid" on "citizen bank accounts" when banks fail and insurance, like FDIC, doesn't make the depositors whole for amounts above a certain cap ($250K currently in the US, previously $100K; 100K Euros, ~$130K USD)? Where would the money come from to make everyone whole, or at least all the depositors, when the banks' assets are less than what depositors have entrusted to them? The money would have to come from someone/somewhere, would it not?
1 year ago
1 year ago Link To Comment
Cyprus Averts Panic Withdrawals as Banks Open With Cash Controls By Tom Stoukas, Maria Petrakis Marcus Bensasson - Mar 28, 2013

http://www.bloomberg.com/news/2013-03-27/cypriot-banks-to-open-for-first-time-in-2-weeks-with-cash-curbs.html
1 year ago
1 year ago Link To Comment
yes, they avert them by making it illegal to withdraw or transfer out of the country more than €100 per day...
IOW the EU is holding ALL funds contained in Cypriot banks hostage.

Expect the same to start happening across the EU soon, I'm myself seriously considering emptying my bank account into cash and storing that in undisclosed locations (yeh olde treasure chest is going to make a comeback). Others are already doing so, in droves.

With interest rates on deposits close to zero, there's no financial loss in this anyway, and now that deposits are fair game for government theft when and if they want more cash for their luxury lifestyle in Brussels, Strassbourg, Berlin, and Paris, it's probably best to have as little funds where the EU can find them as possible.
1 year ago
1 year ago Link To Comment
Now, is it clear to everyone why we need to get out of the UN? What does the UN aspire to be if not a "super EU"?
1 year ago
1 year ago Link To Comment
Fetal murder is okay because we live in a post-Christian world and the traditional ideas about morality have been thrown out the window.

Sodomy is just fine because we live in a post-Christian world and traditional ideas about morality have been rejected and discarded.

Theft of your property isn't wrong because we live in a post-Christian society, and the atheistic government wants your stuff. They believe your stuff is theirs, and they want it. You don't like it, but they don't care because they just want your stuff and they're bigger than you are.

Why would anyone be surprised that "morality" continues to be redefined?
1 year ago
1 year ago Link To Comment
Does "free enterprise" equate with "theft" here? When you are a shareholder in a bank that fails because it has done what looked good to management (e.g., catering to "hot money," the sort that is super mobile, and buying deeply discounted "sovereign" debt) but proved "imprudent," you have been the victim of "theft"? If you are a depositor in a failed bank and you are only made whole up to the limits of what is insured, in this case 100K Euros, then you are the victim of "theft"? The Greek Orthodox Church is very strong in Cyprus, but the government, which is a "secular" one rather than a theocracy, is to be seen as "atheistic." When did Cyprus, and for the matter the rest of Western Europe, become "post-Christian" (sometime after WWI?), and before then people could be much more secure because incompetence and corruption were unknown, or at least a good deal less common? If we shift our attention from banking where the Greek Orthodox Church is so influential to where the Roman Catholic Church is in control, that is in Vatican City, how sound has banking practice been there in a non-post-Christian environment with the opposite of an "atheistic government"? (We'll leave sodomy and pedophilia out of this and stick with the banking part.)
1 year ago
1 year ago Link To Comment
You just know there are a bunch of Demonrats in DC looking into how they implement this kind of program to avoid cutting spending here in the U.S. And probably some Rethuglicans (not Conservatives) too.
1 year ago
1 year ago Link To Comment
Let Obama think about THIS for a moment or two. Why should millionaires and billionaires (with their corporate jets) be permitted to have bank accounts untouchable by the government?
1 year ago
1 year ago Link To Comment
Published on Mar 18, 2013 The people of Cyprus are lining up at the ATM's in an effort to save their assets from being seized by the government in an unprecedented move to bailout the failing Cyprus economy!

http://www.youtube.com/watch?v=paDYpZF4pnc&feature=player_embedded


If you think it is not going to happen here. You do not know our history from the gold confiscation from the early nineteenth century!
1 year ago
1 year ago Link To Comment
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