20 Mar 2013

Cyprus: Leaving Larnaca searching for Eurozone’s FDR

It felt good at the time. Euphoric protests erupted into song outside Nicosia’s parliament as MP’s said “Oxi”, No to the troika. Not a single “Yes” vote.

Little Cyprus, one five-hundredth of the Eurozone economy, had faced down the mighty Troika. I spoke to opposition Leader Andreaus Kypranou of the AKEL party as he triumphantly strode through the crowd.

The Troika had gone too far, he told me, and they should learn a lesson.

As I left Larnaca Airport in the early hours of this morning I noticed the empty “currency declaration” and “cash controls” counter.

Yet there were flights:

  • one by the RAF of bundles of euros for British squaddies,
  • one by Eurosystem banks to fill the cash machines,
  • one by Russians meeting their lawyers about their bank accounts,
  • and one, the flight of capital that everyone expects when, or indeed if, the banks reopen anytime soon.

My flight took off past the private jet parking lot of 13 planes, which I am variously told is “very close to normal” and “totally abnormal for March” by different Cypriots.

By the time I return to Cyprus, it is certainly a possibility that this island will have capital controls. I mentioned the possibility at the end of my TV report last night (see video above).

The Wall Street Journal ran a scoop late last night about collaborative efforts to make contingencies for capital controls in Cyprus. If that is the case, expect officers at that currency declaration counter to be physically searching people trying to leave Cyprus with more than a maximum defined stash of euros.

The Cypriot Navy might be a little busy too.

Of course, in essence Cyprus already has temporary capital controls with the announcement of impromptu bank holidays.

It’s worth getting across just how extraordinary this development was already. The last time it happened across a banking system over multiple days in Europe, was the collapse of Austrian bank Credit Anstalt in July 1933.

Latvia in 2008 is the only event in Europe that gets close, but that was principally one bank. Other than that it’s Latin America, and the bank run-ridden Jimmy Stewart era of the US in the 1930s.

Jacques Cailloux of Nomura has amassed this table with the help of the IMF’s systemic crisis database and academic economic history.

He quotes Roosevelt’s fireside chat of exactly 80 years ago:

“It needs no prophet to tell you that when the people find that they can get their money — that they can get it when they want it for all legitimate purposes — the phantom of fear will soon be laid”.

Sadly Wolfgang Schaeuble, Angela Merkel, and in particular the farming economics specialist who claims to be running the Eurozone – Dutch Finance Minister Jeroen Dijsselbloem – are more PR than FDR.

Perhaps it’s Draghi. He’s disappeared since Saturday.

Here’s the thing. In 1933, Roosevelt stopped the runs after the bank holiday by essentially creating deposit insurance. In 2013, the incompetents and inadequates liberally sprayed across the Troika, have created a pent-up demand for a bank run by stopping deposit insurance.

US Bankers put out this statement on Cyprus on Monday. “Depositors in US banks are insured up to $250,000 and no insured depositor has ever lost money in a bank failure. … Simply put, US insured depositors are safe and their deposits are protected by a strong FDIC fund, a financially secure banking system and the full faith and credit of the U.S. Government”. Can you imagine the Eurozone version of this?

I have been told that so self-satisfied was one north European AAA creditor nation’s delegates at the moment Cyprus caved in to singeing its own depositors in the early hours of Saturday morning, that they high-fived each other. “Gimme Five? Billion of Deposits?”

Budget coming. Let me present the counterargument to this rampant Troikaphobia later.

Follow @faisalislam on Twitter.

16 reader comments

  1. Roger Day says:

    We’re all Cypriots now. The Europoliticians have let the genie out of the bottle. They have no qualms about individual rights, the law or even decency. They will rob us blind to keep their noses in the trough. Cyprus was just a test.

    1. Prince Charles says:

      Roger,
      we are most certainly NOT all Cypriots.
      And we will never be Cypriots!
      http://www.youtube.com/watch?v=K5R2JyU_MKg

  2. pierregonzalez says:

    I love when a MP says that the EU should learn a lesson . The lesson is that Cyprus is a bunch of crooks who gladly accepted to vote communist during many years because they could give financial shelter to Russian money whose origin is more than suspicious . For me the Eurozone should let them go bankrupt and leave the EU . So they can join the Comecon of their beloved Russian friends .
    Coclusion : never trust people who vote communist , not by conviction but by interest .

    1. kevin wardle says:

      Have you ever been to Cyprus, besides being based there for three years I have returned many times on holiday and I have always found them to be the most welcoming people there is, who still think the world of the British people and our country.
      As for the Russian billions lets not forget HSBC bank have just been done for laundering billions of drug money.

  3. Andrew Dundas says:

    Previous Greek PM failed to call Merkel’s bluff about debt haircuts. Largely because he failed to get Parliamentary support. And we know where that led to: economic disaster for Greece.

    It’ll be interesting to see whether Cypriot MPs & businesses can achieve what Greece failed to do.

    The Russians took a big risk depositing their capital stash in Cyprus. They risked a big loss. Much safer to use banks of a Country big enough to have internally-funded Sovereign Debts. The UK looks good on that score.

    1. Prince Charles says:

      Plenty of Russians depositing cash in London,buying property in London and also buying football clubs…..in London.

      Hot money has always been welcome in London,it has ever been thus.

  4. Prince Charles says:

    Germany’s] objective in this case is to remove the implied support for the Cypriot banking system, so that it can no longer function as a large offshore financial center whilst receiving a European [Central Bank] backstop… absent such a transformation, Germany appears ready to live with the consequences of Cyprus stepping out of Europe.”

    “Germany wants a solution,” said German chancellor Angela Merkel this morning.

    “We will continue negotiations, primarily via the troika [of the EU, ECB and IMF].”

    “As recently as in January, Cypriot banks offered 4.5% for a 1-year deposit while other peripheral countries, including Italy and Spain, offered about 2.5%, and Germany 0.9%,” points out a note from UniCredit, adding that depositors putting their money in Cypriot banks would have made around €23,000 more since 2008 than those depositing in Germany.

    “Why does the Cypriot parliament (and many commentators) seem to suggest that a 15% tax on such deposits…would be unreasonable now the banks are in trouble, but that German, Italian and other Eurozone taxpayers should rather foot the bill? To me, the Cypriot position is simply un-sellable in the rest of the Eurozone…

    1. Andrew Dundas says:

      For once I agree with his Highness the Prince Charles of Wales (!).

      Why should taxpayers in other EU States provide security for depositors and bank shareholders who all took those obvious risks?

      At the very least they should adopt the Gordon brown remedy and make Cyprus Banks hand over ownership of those banks to the EU. Then we could re-coup our stash later as the banks recover.

  5. Jonathan says:

    Faisal
    Yet again the “little person” is likely to be affected if your comment “expect officers at that currency declaration counter to be physically searching people trying to leave Cyprus with more than a maximum defined stash of euros” is accurate.
    But (with hindsight) wouldn’t it have been better if the politicians and regulators had said that the banks could not accept any more deposits. Surely, part of the problem is that certain banks attracted huge “speculative” in-flows of cash/currency. To pay the interest they had to lend the money out – and in Cyrprus’ case this was to Greece. Whilst the boom was going, interest was paid and everything was fine. Once the music stopped, interest payments stops, loans defaulted and the Cypriot banks discovered that their balance sheets were not covered.
    So stopping people leaving with their cash is “shutting the stable door after the horse has bolted”. Politicians and regulators must ensure that banks do not take on more cash then can physically be pumped into the economy.
    Which leads to spllitting banks between the “casino” part and the “deposit” part is not sufficient. What is necessary is to ensure that say a 10%…

  6. pierregonzalez says:

    We should start by talking about numbers first : Cypru has a GDP of 17 Billions Euros . The Russians deposit are estimated at 31 Billions Euros plus 7 Billions Euros deposited by other residents. Already you have there a massive problem .
    Next question is why so much money deposited there ?
    Because they started offering a 5% interest for lng term deposits and they even increased when fearing that people will lose confidence and take their money out.
    Furthermore you could enjoy confidentiality and a very low taxation , making Cyprus a much better place than Switzerland .
    Of course Russians billionaires rushed there , because furthermore they knew that the communist president was goign to protect them .
    All this doesn’t hide the real situation : a low growth of 0,5% in 2012 and a public debt of 90% of the GDP , because when you tax deposits and businesses at 10% you don’t generate money for the country .
    Now next question : Is it scandalous that people who have been enjoying so many advantages are obliged to pay a special tax of 10% ?

  7. john burns says:

    Surely the financial spivs in the banks in Cyprus who encouraged and accepted the Russian deposits, and no doubt enjoyed the usual excellent bankers’ salaries and obscene bonuses for their ” cleverness”, should be the main target of any search for funds to sort out this mess?

    Not for the first time I am inclined to appreciate the German position. Another occasion was when I took part in a study tour of German businesses some years ago and our first night’s hotel
    refused to take the organiser’s credit card. We all had to empty our wallets of cash instead. We learnt then that–at that time at least–they did not approve of credit cards and easy credit.

    in the UK at that time every day’s mail included two or three offers of a credit card and seemingly unlimited easy credit for just anyone who asked for it. most people could see it was unsustainable and were not tempted. But they are the ones currently paying for the ones who did run up those huge debts.

    Another interesting question is who exactly, and for what political reasons, allowed Cyprus into the EU?

    1. pierregonzalez says:

      It was during the ” romantic ” period of the EU . Everybody felt moraly obliged to give them protection against the surronding arab world and the invasion by Ankara justified it. The UK also pushed for it because it has important military interests in the area. This why the Russians offered to bail out the country for the full amount of the debt in exchange of the possibility to install a naval base ; something that the EU would not allow.

  8. kevin wardle says:

    Faisal.
    What is Britain doing to help out Cyprus, besides being a member of the EU they are also still a protectorate of Britain, we have assured their independence from outside powers, that is why we still have bases for all three arms of our forces in Cyprus.
    Surely ensuring their security should not only mean from attack by force of arms but also from attack on their financial and economic survival, which is what the EU seem to be threatening and the Russians by removing all their hidden billions.
    All the government would have to do is guarantee to cover the Cyprus part of the bailout, after-all its what has happened to every other EU country that has got into trouble.

  9. Philip Edwards says:

    Faisal,

    Franklin Delano Roosevelt? Isn’t he the US President who was nearly toppled in a US fascist coup exposed by Marine Commandant Smedley Butler?

    Ironically, isn’t he the US President accused of “fascism” by today’s breed of Yank neocons?

    Now of course we also get Russians following capitalist exploitation accused of being “communists.”

    You couldn’t make it up, but loony neocons do.

    Meanwhile, congratulations to Cypriot leaders who stood up to IMF blackmail. They may lose the struggle to a different form of theft but they have demonstrated it is possible to take on and beat the banker thugs, even if it is for only a short time. Sooner or later this fight will take place again on a much wider stage. At least the Cypriots have shown it is possible to organise and fight back.

  10. Steve Willis says:

    Does what’s going on in Cyprus breach the European Convention on Human Rights and Fundamental Freedoms? For instance:

    Article 3 – Humiliating treatment; to be deprived of access to one’s investments without consultation by the act of banks remaining closed or limiting cash withdrawals amounts to humiliation.

    Article 8 – Right to Privacy; to have your personal investment accounts effectively frozen or having access artificially restricted breaches the right to privacy.

    Article 14 – Right not to be discriminated on the grounds of a whole range of things including “other status” where action appears to be being applied against people with the “other status” of resident in Cyprus or that of an investor. (This discriminatory approach has not been taken against the Italians, Irish, Spanish or French.)

    Perhaps, we’ll see a class action by residents of Cyprus against the EU or politicians or members of the Troika to bring them to court. I do hope so.

  11. Andrew Dundas says:

    Smart depositors in Cyprus Banks would have appreciated that Euro accounts are usually gauranteed up to Eu 100k. They’d put no more than Eu 99k into any one Bank. They won’t pay any levy.
    Less savy pensioners who had Eu 100+k may lose 40% of their pensions for the remainder of their lives. It’s tough – even nasty – love!
    What was needed, but time didn’t allow, was a graduated wealth tax levy on all the assets of all bank depositors.
    Lesson learnt: governments should develop the mechanism for a wealth tax should a similar emergency occur. Topic for the next G8 Conference, perhaps?
    [I won’t hold my breath].

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