Cyprus has avoided complete economic collapse after agreeing to a “crisis management” bailout deal that avoids the confiscation of funds from small deposit-holders but exposes those with deposits of more than 100,000 euros to a loss of up to 30% of their deposits. The Laiki Bank will be wound up entirely, its bad assets transferred to a holding bank, its smaller deposits transferred to the Bank of Cyprus. “Bad debts” in this case includes deposit of more than 100,000 euros, all of which are likely to be wiped out. The Cyprus Bank will also take on 9 billion euros of Laiki debts to the European Central Bank, which will hobble its ability to refloat Cyprus right from the start.
The deal was hammered out at the last possible minute, as Cyprus banks were literally running out of money — with no more than a few million euros left, unable to restock ATMs, and the prospect of a cashless freefall looming. The President of Cyprus, Nicos Anastasiades, had previously refused to contemplate the deal, but in the end he presumably felt he had no choice.
The exclusion of pretty much every Cypriot — those with under 100,000 euros in cash deposits — from confiscation has at least saved many people from disaster.
The deal was initially met with a positive reaction from money markets, to widespread relief. However this was almost instantly thrown into chaos by Jeroen Dijsselbloem , a Dutch EU official, who said this would be the “model” for future bailouts. Given that the EU had spent weeks trying to emphasise Cyprus was a special case as far as bank confiscation was concerned, this was a disaster, a message to the whole eurozone that its bank deposits were not safe. Hours later, Dijsselbloem hastily “clarified” his remarks, but by then the damage had been done. It took a lot of clawing back and clarifying to talk down incipient panic about the deal.
That was all the more important since it has become clear in recent days that the EU’s Cyprus operation was not a stuff-up, but an elegant double-whammy, hitting both European tax havens within the EU/eurozone purview and smacking the Russian bear on the nose, to quote innumerable Cold War-era editorials.
Effectively, the argument is Cyprus has been double-dipping as far as EU membership goes — taking advantage of being a eurozone member in terms of access to capital markets while using its small size to offer a scrutiny-free, low-tax bank parking alternative for Russians and other non-EU nationals looking for a stable and guaranteed place for their funds. Cyprus’ growth as a financial bunghole in the decades since the collapse of the USSR allowed this formerly dirt-poor small-scale agrarian country — to a degree, a pre-capitalist subsistence country — to substantially inflate its income. The economic base didn’t change substantially, even though tourism increased markedly, compared with the simple growth as a rake-off from financialism.
That of itself would not have put the country into crisis, had its banks not invested these deposits heavily in Greek government bonds, which went belly-up when the financial markets assessed that country as heading towards default. The sandbagging of Greece was a self-fulfilling prophecy — those who assessed it as heading to default stood the most to gain from its new massive interest rates. Cyprus was pure collateral damage.
As always, the name of the country — Cyprus, Greece, Iceland — becomes a synecdoche for an elite group within them, taking risks the populace would not have authorised if they could understand, or even knew, what was involved. There then follows moralising tales from eurocrats and boneheaded sycophantic finance journalists about countries not paying their way, wanting something for nothing, etc, etc. When people accept the newfound fake prosperity that’s around, they are blamed for moral laxity, as if an entire population should make millions of separate and individual decision to refuse cheap credit.
Many Cypriots will simply revert to a life they knew until relatively recently — but that is small consolation when a new life has been offered to you, and its blandishments continually pumped towards you through satellite TV. The EU is now turning its attention towards Malta, another hypertrophic economy. But both countries are likely to get rougher treatment than Luxembourg, the uber-shifty-banker nation of them all, whose sector is composed of most of the banks that are creditors to Greece, Cyprus and the rest.
Small cheer for Cyprus, which must find a third of its annual GDP to cover imminent and public private debts, and has closed its banks until Thursday (again). The initiative now goes to the Cypriot people — remember them? Any categorical refusal by the public to accept the deal in a more forceful manner could set the country, the EU and the global economy on its ear. Some crisis. Some management.