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Saturday, 16 March 2013

Eurogroup: Bail out of Cypriotic banks takes partially place at the expense of savings’ accounts holders. Is it “because we don’t like to bail out Russian black money”?!

Cyprus is a divided island in the Mediterranian sea with a large Greek and a smaller Turkish population, separated by a kind of iron curtain. In earlier years the island became notorious for the enduring fights between Greek and Turkish factions on the island. Fortunately, these fights are mostly a thing of the past.

More recently, however, the country came in the news, due to the instability of its banking system. This instability had a lot to do with the intimate connections that exist between the  island and Greece. These connections caused a contagion of the Cypriotic banks, through the branches of Greek banks on the island. 

Another factor to be reckoned with, is the fact that the island has been used as a safe haven, annex transit area for Russian black and ‘almost white’ money. Through fiscal constructs and letterbox companies, Russian black and grey money can be laundered on the island and subsequently be reinvested in Russia itself: white as linen!

The result of these financial constructs has been that Cyprus became one of those countries, of which the size of the financial industry is as big as or even bigger than the Gross Domestic Product, put together by the whole population.

This is nice in times of economic prosperity, when investments by such banks yield more than enough proceeds to keep all savers and investors happy, with a minimized amount of losses at the same time. However, when there are times of ubiquitous economic hardship, like nowadays, such a top-heavy financial industry can generate losses that cannot be borne anymore by the population of such a country. This was the case with the Cypriotic financial industry.

For the leaders in the European Council and (especially) the Euro-group, the question was this: should we drop the financial industry in Cyprus like a hot potato or should we rescue the country? It seems that the Eurogroup, in cooperation with the International Monetary Fund (IMF) and the European Central Bank (ECB), reluctantly chose for the second option. 

However, they did so with a twist that will send shockwaves through the financial markets and that might give savers the willies.

Saturday, 16 March 2013 was the day that a plan was presented by the Euro-group, led by Dutch Finance Minister Jeroen Dijsselbloem, to save the Cypriotic banks. The Financial Times wrote the following lines:

International lenders agreed to a €10bn bailout of Cyprus early on Saturday morning after 10 hours of fraught negotiations, which included convincing Nicosia to seize €5.8bn from Cypriot bank deposits to help pay for the rescue, a first for any eurozone bailout.
The cash from Cypriot account holders will come in the form of a one-time 9.9 per cent levy on all deposits over €100,000 that will be slashed from their savings before banks reopen Tuesday, a day after a Cypriot holiday. An additional 6.75 per cent levy will be imposed on deposits below that level.

Cypriot finance minister Michalis Sarris said his government had already moved to ensure deposit holders could not make large withdrawals electronically before Tuesday’s open; Jörg Asmussen, a member of the European Central Bank executive board, said a portion of deposits equivalent to the levies would likely be frozen immediately.

“I am not happy with this outcome in the sense that I wish I was not the minister that had to do this,” Mr Sarris said. “But I feel that the responsible course of action of a minister that takes an oath to protect the general welfare of the people and the stability of the system did not leave us with any [other] options.”

While the levies fell short of the full-scale “bail-in” of all deposits larger than €100,000 that had been advocated by some bailout lenders, particularly the International Monetary Fund, it was still sweeping in its scale and unprecedented in the three-year-old crisis.

Officials who had resisted imposing losses on bank accounts, which included leaders in the European Commission and the Cypriot government, had feared forcing losses on ordinary deposit holders could spur panicked withdrawals in Cyprus and, potentially, in other eurozone countries with shaky financial sectors, like Spain.

Mr Asmussen justified the measure by saying it broadened the number of people who will shoulder the burden of the bailout. Without the measures, he said, much of it would fall on Cypriot taxpayers; by going after all large deposit holders – many of whom are Russian or British – outsiders would help fund the rescue.

While Jeroen Dijsselbloem, the Dutch finance minister who chairs the group of eurozone finance ministers that hashed out the deal in all-night talks, declined to categorically rule out hitting depositors in future bank bailouts, he insisted that it was not being currently considered for any other country.

Personally, I don’t think that the events in Cyprus will lead to bank-runs in other countries. Unless the bank system in one's own country is at the brink of collapsing, people won’t go to the bank to collect their savings most of the time. They have to put their money somewhere (physically or in a non-cash form) and there are hardly any banks that are really rock-solid in these trying times. So probably people leave their money where it is, currently, unless there is a real emergency situation. Still, the Euro-group takes a considerable risk by acting like they did in the case of Cyprus.

By itself, I can defend the measures that have been taken by the Euro-group in order to save the Cypriotic banks. It is fair, when not all expenses for such a rescue-action will be borne by the Cypriotic and European tax-payers.

Still, such measures always come at the expense of small, middle-class savers, who have to put their savings somewhere and don’t want to lose a substantial share of it through an opaque deal between governments, the IMF and the ECB.

On top of that, there are some circumstances that make this Cypriot case slightly particular: 
  • It is clear that Cyprus received a ‘treatment’ by the Euro-group, that has not been administered at the time of the Irish banking crisis. This is quite remarkable, as both countries had a ‘banking industry to GDP-ratio’ that was about equal. In other words: with their banking industry, both countries took a bigger bite than they could chew. Savers in Cyprus will be punished for this, while the savers in Ireland got away with it;
  • I can’t take away the notion in my head, that the savers needed to be punished, because some of them were RUSSIANS with probably lots of BLACK MONEY. While everybody knows that black money is a global problem, with global offenders, it seems that the word ‘Russian’ is enough to restore some of those Cold War feelings and rethorics. “Those darn Russians need to be punished”; 
Understand me correctly: I personally pay my taxes and don’t try to avoid or evade them. Consequently, I don’t have much sympathy for tax avoiders and evaders, regardless from which country they come from. And I have even less sympathy for black money that comes out of real criminal activities, which could be the case with the Russian money.


Elsewhere, few European SIFI-banks (Systemically Important Financial Institution) ponder much upon the origin of the money that f.i. Greek or Italian savers bring in, regardless whether it is black, grey or white money. Banks go through the motions, when it comes to due diligence and ‘know your customer’ and accept the money with a pearl-white smile and a firm handshake.

When these SIFI-banks run short of funds, they are saved. No questions asked! And the savers are fully compensated up to €100,000 and beyond, when such a bank collapses. No doubt about that!

However, in case of the Cypriotic banks with their ‘spooky’ Russian customers, suddenly other rules are applied. Or, like Dutch MP Mark Rutte said in an interview to Dutch newspaper Het Financieele Dagblad:

“We support this financial aid program with considerable reluctancy and annoyance. Especially the presence of Russian money gives me a very bad taste in my mouth. We would like very much to drop Cyprus, because of the Russian money and practices of money laundering. Still, we can’t, due to the intertwinedness of Cypres with the other countries in the Euro-zone”.

That was our brave and strong Prime Minister Mark Rutte. He is the same MP that will do his fair share of driveling, when the Russian President Vladimir Putin visits The Netherlands soon, with pockets full of industrial orders and lucrative offers ‘that Rutte can’t refuse’.

He is also the same PM, who gave the black / grey money of f.i. Mitt Romney a warm welcome and who helps companies like Google, Starbucks, Pingo Doce and other multinationals to pay as little taxes as possible, through great fiscal constructs.

What a man…

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