"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.
By Mike McNally
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.
Fanatics Who Will Do Anything To Save The Euro
Broken Cyprus Bows To Its New EuroZone Masters
Daylight Bank Robbery In Cyprus Will Haunt The EMU
Cyprus Offers A Scary Economics Lesson For America
Willie Suttonomics
Eurozone Chief: Cyprus Bank Account Raids Are Just The Beginning
The Rape of Cyprus
Cyprus and the Death of Deposit Insurance
The Extraordinary Thing Is That There Hasn't Yet Been A Bank Run Across The Mediterranean
After Cyprus Bank Bailout, Depositors Race To Withdraw Their Cash. Is The Rest Of Europe Next?
Monumental Deceit: How Our Politicians Have Lied And Lied About The True Purpose Of the European Behemoth
The EU's Insidious War On The Nation State Must Be Halted
Václav Klaus Warns That The Destruction Of Europe's Democracy May Be In Its Final Phase
Bubble Times: 20 Facts About The Collapse Of Europe That Everyone Should Know
The UK to the EU: Eeeeeew! Go Away!
Europe's Double Dip Teaches A Lesson About Taxes
A Message To Leftists In The UK & US From Sweden
Suicide-By-Demographics, Post #3,209,598
Leavin' Here: Escape From The E.U.S.S.R.
(European) Union Power!
Über Alles After All
There's No Such Thing As A "Permanent" Tax Cut
Immigration & The Town That Stopped Mincing Words
Hitler's Ghost Haunts Europe
A Lib Dem Gives Voice To Britain's National Sickness
The American People Voted For Big Government. Now, Let Them Pay For It!
Cyprus Told: Take Bank Levy or Leave Euro
http://tinyurl.com/bo42sa8
No comments:
Post a Comment