Cyprus crisis: Clouds of uncertainty as banks reopen
- 28 March 2013
- From the section World
Banks in Cyprus have reopened after a two-week closure sparked by discussions over an EU-IMF bailout, amid tension over possible large scale withdrawals. I am in Cyprus to find out what is going on.
"In two months' time all this will be brown," says the taxi driver, breaking the spell of the fresh, green landscape rolling past us.
"We have 43 degree heat here. This is Cyprus."
By July the island's fields will be a crisp yellow, the deserted buildings at the Green Line - which marks the ceasefire with the Turkish Army in 1974 - will crumble a bit more; the green almonds you can chew without peeling from the trees now will be hard and brown. All that is certain.
But everything else is uncertain.
Cyprus has been deemed small enough and unique enough to try out something new: a smash and grab raid on the savings of the rich, the deposits of companies, the accumulated funds of charities and churches.
To make a country's finances safe the savings of its people will be reduced - and made permanently risky.
The "haircut" process is quite brutal: the bank creates a new account for the Republic of Cyprus's treasury and transfers a portion of everybody else's account, over €100,000, into it.
One finger on the return key of a computer is the sum total of effort required.
As I write, there are small queues forming outside the banks in the streets of the capital, Nicosia.
People are grim-faced rather than angry. The anger, I expect, will come once they find out hard facts about where their money's gone, and that may not be possible for everybody today.
So far this has been the face of the Cyprus banking crisis: the resignation of a perennially laid-back people, on an island where networks, family and church exert a powerful counterbalance to the forces of financial panic.
But give it two months and it will look different.
As of today businesses will find out how much of their cash has gone; family dowries and pension pots will see their value slashed.
The cheque written two weeks ago by the boss of the biggest halloumi cheese factory will turn up in the accounts of the farm co-operative possibly 40% smaller than intended.
Businesses already stressed by weeks of low liquidity will be forced to the point of failure.
The International Institute of Finance - which designed the rescue plan - estimates the Cyprus economy will shrink by 10% for each of the next two years.
And this is a place that is by no means rich.
The roads are good but the flashy SUVs are driven by Russians, not Cypriot farmers.
The typical piece of farm machinery has two colours: the original paintjob and red rust.
Cyprus will be forced to endure a slump designed in Brussels and Frankfurt because it had made mistakes that were rubber stamped there too.
It let its banks grow to eight times GDP; those banks bought Greek sovereign debt as an act of solidarity and lost their shirts. It became an offshore finance haven.
Offshore finance is not a crime but a business model. Like it or not, it's an essential part of globalised capitalism: it's what allows rich people from heavily taxed countries avoid tax; it's the conduit for massive business deals, and massive trade.
Go down a side street and look for a certain door in Nicosia and there's the nameplate, still, of TNK-BP, the Anglo-Russian oil joint venture that has kept headline writers busy for the past few years.
That was no branch office: that was technically its HQ.
Two thirds of the German shipping industry is based here and 25% of all the EU's ships are registered here.
They pay no tax on profits, no tax on the sale of ships, the crews pay no income tax, there are no rules limiting the borrowing of shipping companies.
But now Germany is, like Captain Renault in Casablanca, "shocked, shocked" at the morality of offshore business.
Anyway, it's over.
Most of the smart money fled when the warning signs were flashing, and the rest will flee the country soon. With one bank - Laiki - bust, the European authorities have managed, and this is some achievement, to make the other big bank, Bank of Cyprus, more risky.
The Cyprus story now merges with the Greek and Portuguese story: austerity, falling wages and recession shrink the economy so that the debt sustainability projections of Bailout 1.0 fail, and lead to Bailout 2.0.
But the biggest hit of all in the past two weeks has been to confidence in the troika as a crisis-manager.
The troika consists of the IMF, the ECB in Frankfurt and the European Commission. It triggered the crisis two weeks ago by forcing the new Cyprus government to accept a draconian bailout, by withdrawing emergency liquidity assistance, which was keeping its banks alive.
Its original bailout proposal: 6% losses for all savers, 10% for those over €100,000, were knocked back.
But nobody will forget that the troika's first response was to over-ride the European deposit guarantee on savings under €100,000.
Nobody will forget that, in exceptional circumstances, an EU guarantee is as flammable as the EU flags that are getting burned on night-time demonstrations here.
The Dutch finance minister, Jeroen Dijsselbloem, triggered denials when he told Europeans this was the new shape of bank bailouts: losses for depositors before taxpayers; losses for bondholders.
But people in the markets did not need either the statement or the denial.
Blogger Pawel Morski, a London-based fund manager, put it like this.
He says: "There are two important problems here 1) depositors over €100,000 control enough money to overturn the European economy if they stampede; 2) there's - to a fairly fine level of precision - zero evidence that the people in charge know what they're doing."
White knuckle crisis
Mr Morski points out, using official data, that across the EU something like 28% of all deposits (by value) are not covered by the €100,000 guarantee, and that the white knuckle crisis of last spring was caused by a fraction of that amount leaving the banking systems of Spain and Italy.
He further points out that, the aforementioned "shocked, shocked" burghers of northern Europe are running a banking system leveraged to three times GDP.
Dinos Constantinou, who manages a small Latvian bank in Cyprus, makes a similar point: "If the EU is saying, terrible Cyprus with its eight times leverage - why can't the USA, which has a banking system smaller than its GDP, say to Europe, you too must cut your sector in half?"
The upshot of all this is that, first, the troika is appears no longer to be acting as a unified and competent crisis manager: the IMF advocated something close to what has now happened; but the eurozone bankers and politicians were quite happy to renege on promises and hammer the little guy.
And let us remember it is not the IMF that was overseeing emergency lending to Laiki, effectively funding its management to destruction: it was those stern faced central bankers in Frankfurt.
And it was the European Banking Union that signed off both Laiki and Bank of Cyprus in the July 2011 stress tests (no-one who was at that press conference can forget the dismissive tone used to those of us who suggested the tests might be wrong).
There is, of course, a solution in sight: a true European banking union, accompanied by fiscal transfers that underpin an orderly resolution of the imbalances in the continent's banking system.
The main threat to this is as follows.
The IMF now admits it has consistently under-estimated the impact of austerity on growth. On Wednesday Spain tripled its estimate of the size of the recession it will go through in 2013, to minus 1.5%.
Of taxes collected in Spain last year, 30% will go to paying interest on its debt, up from 20% the year before.
The danger is Europe gets trapped in a two-speed debt deflation cycle, with the south as the vortex and the north at the perilous edge.
The second threat is more imminent, and it is political.
There is a growing fear, not just among tiny, powerless eurozone countries, that Germany is running the eurozone in its own national interest.
At every juncture where compromise, statecraft, guarded language and a care for outcomes rather than principles are called for, somebody German pops up - be it Merkel, Weidmann, Asmussen or Schauble - and points out "the rules" dictate otherwise.
It is easy to understand north European exasperation with central bankers who admit they have kept quiet about anomalies for political reasons, or with bankers who blatantly manipulate their holdings, or property guys who flee the country: they conform to cultural stereotypes.
But the eurozone will only survive if it can accommodate all the cultures of Europe.
Cyprus was never going to be systemic in terms of size. But if it demonstrates the authorities cannot handle a solvency crisis in a tiny country it will have lasting impact.
As for the psychological impact on savers it will not be clear until the next pulse-racing moment happens.
In every previous euro crisis, savers have behaved calmly. Even the Cypriots queuing outside the banks, right now, in the spring sun, are behaving calmly.
But, as with the countryside here, give it two months and things may look different.