|The Anglo-American financial press has been at full throttle in portraying the Cypriot banking crisis and the attempts to resolve it as the bludgeoning by Euro bullies of a gallant little island country, intent on destroying its "banking model". Cypriot anti-Imperialist traditions have been invoked. An article in the Financial Times appealed to distant historic parallels, calling for an alliance of Britain and Russia in defence of Cyprus against the European "bullyboys". (It didn't however go so far as to propose they come up with the €17bn required). The Daily Telegraph (22 March) spelt out the message in more populist terms: "Southern Europe lies prostrate before the German imperium".
Down the food chain from the lofty heights of the Financial Times, the Wall Street Journal and even the Daily Telegraph—which have been making the running in this commentary—our own local "anti-fascist" commentators have joined the feeding frenzy. "The insanity of the Euro-project's dogmas means that all ordinary laws of human conduct may be ignored", boomed Kevin Myers (Irish Independent, 22 March):
"Today Cyprus faces ruin: who knows, tomorrow Poland, as the blundering ideologues of the euro insist on the execution of their great imperial scheme, regardless of the history and the habits of the peoples whom they attempt to bring under their monetary yoke."
And, among the bottom-feeders, we hear a Pat Flanagan in the Irish Daily Mirror (22 March) declare: "German war on Cyprus could spell the end for us all". Germany, he told us, "almost destroyed Europe twice in the last 100 years. Let's just hope it's not third time lucky."
Yet, Cyprus has shown no desire to leave the euro—a brief look at the alternatives seems to have been sufficient for that. If Cyprus is to remain within the eurozone, then it must act in solidarity with it in resolving its unsustainable, collapsed, "banking model".
The Cypriot banking crisis is the latest episode in the eurozone's attempt to resolve the contradictions of a single currency without an adequate monetary and fiscal union. From the outset the Financial Times and its eurosceptic acolytes on both the Left and the Right have been calling for a "wall of money" to be thrown at the problem. But, as details of the crisis in each country emerge, it becomes clear that such a ludicrous policy would have completely undermined the Euro project. In effect, it would have meant printing money to meet financial obligations. Britain and America have pursued this policy, but the financial crisis has shown that the financial markets apply different standards to these two countries, which are the basis of the international financial system, backed by military might. If applied in the Euro-zone, it would have undermined faith in the Euro as a sound currency, with unforeseeable consequences.
The Greek crisis began as a sovereign debt crisis which caused a banking crisis in both Greece and elsewhere. The Irish and Cypriot crises began as a banking crisis. Cyprus is likely to follow the pattern of Ireland, where the banking crisis escalated into a sovereign debt problem. But the Cypriot crisis is nevertheless completely different from the Irish one.
Since each crisis has its specific features, the prescriptions for one country may be completely inappropriate for another. There is nothing at all irrational in the Eurozone Finance Ministers advocating the "burning" of a portion of Senior Debt, and even bank deposits, in the case of Cyprus while rejecting such a policy in the case of Ireland. The effect of 'burning' the Senior Bondholders is to impose substantial losses on those who have lent to Cyprus banks, or who have lodged very big deposits of cash in them. Senior Debt is lending to Banks, which carries a lower rate of interest on the understanding that, in any crisis, it would have first call on the assets of the bank. Junior Debt brings the lender a higher rate of interest, but at a greater risk.
The elements of the Irish crisis are clear. Billions of euros from surpluses generated in Continental Europe flowed into the Irish economy through the banking system. Some of the money was used for productive purposes. There was an infrastructural deficit and a requirement for house building to cater for a rising population, but the weight of money that flowed into the economy created an enormous property bubble, followed by massive bad debts when the bubble burst. Since European money was at stake, the eurozone could not countenance the 'burning' of Senior Debt, which could have caused contagion throughout Europe and the collapse of the currency. Irish Governments—both the current and previous one—have taken the view that the national interest was to remain at the heart of Europe and concentrated on winning concessions from their Eurozone partners as compensation for remaining in the game… But Cyprus is different.
In all the acres of newsprint devoted to the Cypriot crisis by the likes of the Financial Times and the Wall Street Journal there is very little about what caused the crisis. This is no accident. Since the Anglo American financial press is not interested in a solution and seems more concerned to precipitate a deepening political crisis, there is no reason for it to examine the cause. On the contrary, its orientation is to undermine efforts to understand what happened and arrive at a solution.
So what is the cause? The cause of the crisis has nothing to do with the domestic economy in so far as there is a domestic economy in Cyprus outside the financial sector. There was no property bubble. None of the Cypriot protestors are in negative equity. There is no anger directed at the Cypriot bankers who presided over the crisis. No Seanie FitzPatrick or Fingers Fingleton has emerged to personify the country's woes. Remarkably no politician has been accused of wrecking the economy either from the current or previous Government. The political reaction gives a clue to the nature of the crisis. The focus of anger is directed against the eurozone. Russia is portrayed as a possible white knight, although the latter perception is likely to change.
The specific nature of the Cypriot crisis necessitated deposit-holders bearing some of the cost. However, President Nicos Anastasiades, whose family law practice has two Russian billionaires on its books, insisted that the "tax" on deposits would not exceed 10%. The low tax meant that the burden would not be confined to depositors over 100k. The Euro finance group, despite expressing its misgivings about this, went along with his proposal, and was foolish to do so. When the sceme was rejected by the Cypriot Parliament, Anastasiades blamed the "bullyboys" in Europe. There was not a hint of scepticism at this accusation from the financial press.
The propagandists in the Anglo American media have attempted to portray the Cypriot banks as innocent victims, who, far from being malevolent, took a 'hit' for Europe in order to bail out Greece. But the Greek crisis cannot explain the Cypriot crisis. According to some reports, Cypriot banks lost about 4 billion as a result of the Greek debt crisis. But the Cyprus banks, along with the other European banks involved, were compensated by means of up to a trillion euros in total of cheap loans from the European Central Bank which were sold on to sovereigns at a massive profit.
But, even if it is accepted that Cypriot banks took a 4 billion hit for Greece, where did the balance of the losses come from? There appears to be a consensus that the cost of the banking crisis will be 17 billion. So what is the explanation for the remaining 13 billion? The lack of curiosity about this is breathtaking. This is an enormous sum when it is considered that the GDP of Cyprus is about 18 billion.
A clue can be found in the pages of the Wall Street Journal (see graph below). Billions of Euros have flowed into Cyprus from Russia, but as much—or even more—money has flowed from Cyprus to Russia. In each of the years 2007, 2008 and 2011 a massive 20 billion flowed from Cyprus to Russia. In 2011 a quarter of all foreign investment in Russia came from little Cyprus. It is reasonable to assume that the investment from Cyprus to Russia is nothing much more than recycled Russian money. Why would money leave Russia only to return via Cyprus? The obvious explanation is to hide its source. Money from Russia is laundered or cleaned in the Cyprus banks only to emerge in 'pristine' condition on its way back to Russia. The Wall Street Journal estimates that some $11.8 billion in illicit capital left Russia each year from 1994 to 2011
There is no doubt that the Russian State is complicit or at least acquiescent in much of this. It has tax treaties with Cyprus which facilitate and reward such practices. For, quite apart from the recycling of money, there is a legitimate reason for such treaties: foreigners don't trust Russian banks, so the Cyprus banks have been used as a conduit for foreign investment in Russia, thus receiving the protection of an outside jurisdiction.
However, it appears that many of the loans by Cyprus to Russian investors have gone bad, whether by weak financial controls, incompetence, or fraud. This has no knock-on effects for the European banking system. Why should the Eurozone underwrite such losses?
Europe must help Cyprus emerge from the crisis, but it is not reasonable for it tolerate the continuation of a banking sector in Cyprus which, if unchecked, could undermine the financial stability of the eurozone. The 25% haircut imposed on deposits over €100k is the minimum that should be expected from deposit holders.
The Euro Finance Ministers have faced down the sharks of the Anglo world. They have behaved in a highly competent and responsible manner in response to the Cypriot crisis. One more decisive step in the process of consolidating the Euro has been made.
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