Cyprus Prime Minister Nicos Anastasiades and German Chancellor Angela Merkel
by Carlos Diaz
In September of this year the world will be commemorating the 5th anniversary of the Great Financial Crisis which sparked the Great Recession, which, in case you don’t remember, we are still recovering from. Now another financial catastrophe is on the horizon and it threatens to be very destructive, especially for the people of Cyprus and the Eurozone to which they belong. Today the leaders of the International Monetary Fund (IMF), European Union (EU), European Central Bank (ECB), and Cyprus are meeting in Brussels to craft a plan which will allow Cyprus to receive a €10 billion bailout. In order to receive this aid Cyprus needs to come up with €5.8 by Tuesday. If it can’t come up with this amount by Tuesday then the ECB will cut the emergency funding it has been providing, this will lead to the collapse of its banking system along with its government. If this does indeed occur then the small Mediterranean island could be forced out of the Eurozone, something which the EU lead by Germany has prevented in the cases of Italy, Ireland, Spain, Portugal and Greece. The impact of a Cyprus exit could be devastating to the Eurozone as a whole and the euro as a currency according to some economists.
The situation has been very tense since the past week in Cyprus, a nation of around 1 million citizens. Banks have been closed since Monday and some businesses are only accepting cash as a form of payment. There are also reports that banks are limiting the amount which customers can withdraw from ATM’s to €100 a day.
There are various reasons which explain how Cyprus ended up in this situation. Cyprus as mentioned before is a small island, but it has an extremely large financial sector which amounts to 700% of its Gross Domestic Product. Michelle Caruso-Cabrera of CNBC put it in perspective, if the United States’ banking system were that large it would consist of 45 banks the size of JP Morgan Chase, America’s largest bank. The reason why the banking industry has reached such an astronomical size is because it functions as a tax haven for rich individuals and corporations especially Russian ones, similar to the Cayman Islands role in the western hemisphere. In other words people who have a lot of money and wish to hide it from tax authorities in their country for any reason could take it to a place like Cyprus. This process is epitomized by the fact that Cyprus is a bigger investor in Russia than Germany, the world’s fourth largest economy. All this Cypriot investment actually comes from Russians who make money in Russia, hide it in Cyprus, and then take it back to Russia to commence the process all over again. The Cypriot banks decided to fund some very bad investments with this money like Greek sovereign debt.
All throughout last week the leaders of Cyprus have been trying to come up with a plan to raise the almost €6 billion they need. The most talked about idea was that of taxing bank’s depositors regardless of the amount they had in the bank. This was faced with fierce opposition from the citizens of Cyprus who took out to the streets in protest of this measure. This measure was defeated by the country’s parliament. Cyprus then went to Russia for help, but its call was denied there. The latest measure is also taxing depositors, but in this case the tax or levy would be 20% on depositors at the Bank of Cyprus with a €100,000 or more- €100,000 is the amount insured by the government, similar to the way the FDIC insures deposits in the United States-, a 4% tax on deposits over the insured amount at other banks, including foreign ones is also part of this plan. This new plan reportedly has parliamentary support.
I think the EU is pushing Cyprus to accept this deal as if there was no other alternative, when in fact there is. Iceland is a country very similar to Cyprus in several ways .They are both small islands with banking systems much larger than they should be and funded by foreign deposits. A few years ago Iceland went through a banking crisis which resembled the one Cyprus is facing now. The way Iceland dealt with its crisis was much different than the apparent route Cyprus will take. Iceland decided to let its banks fail while protecting domestic depositors, thereby leaving foreigners with the biggest burden. Today Iceland’s unemployment rate is much lower than that of Europe and the United States. Cyprus cannot even consider this option because it is part of the Eurozone which means it does not control its currency and the EU has fought to maintain banks afloat since the 2008 financial crisis. The EU’s threats and apparent bullying towards member nations will be an obstacle in the road to the political and economic unification of Europe. This attitude is giving indirect support to the nationalist and fascist ideas which were thought to be dead after World War II.
Eclectic Affinities 