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From Cyprus with Love – the latest Eurozone crisis

Tony Bradley Thursday 21 March 2013

Rev'd Tony Bradley, Director of the SEED (Social and Ethical Enterprise Development) Centre at Liverpool Hope Business School looks at the situation in Cyprus as it unfolds.


The problem with earthquakes is that you never know whether the latest seismic activity is an aftershock of the previous main event or the forerunner of the next catastrophic quake.  It is much the same with banking crises.  But, let’s think of a more positive scene.

Imagine Tatiana Romanova (Bond girl in From Russia With Love, aka Daniela Bianchi) emerging onto a sun-drenched Mediterranean beach, rather like Ursula Andress (Honey Rider, Dr No!), at Aphrodite’s Rock, on the coastal road to Paphos.  She hops into James’ Alfa Romeo for a quick dash to the millionaire playground of Pissouri Beach.  “Hold on, darling, I must just nip to the ATM to get some cash for a spot of lunch and a vodka martini”.  But, Bond is both shaken and stirred to discover the hole-in-the-wall has a simple notice: “cash unavailable due to bank closure”.  Cut!
Let’s remember some of the timeline that had brought Bond to this apocalyptic moment:

2004 – Cyprus joins the Euro, as the Zones richest country, per capita.  But, over the next years, a mix of over-heating Russian investments (Roman Abramovic based his mining empire in Cyprus, as a lead for a bevy of Russian billionaires) and loans to bail-out Greek debts, sees public debts mount.

September, 2011 –agencies downgrade Cypriot credit rating after Naval Base explosion, long-term yields on Cypriot bonds top 12% (7% is usually regarded as tipping into unsustainability).

October, 2011 – Cyprus enters pact with Athens to reduce value of Greek debts by 70%, creating 4BN euro haircut (losses) in Cypriot bank deposits.

January, 2012 – Cypriot debt has reached 90% GDP (UK is currently c 71%), in a banking-dependent economy, and is reliant on $3.3BN Russian emergency credit (at 4.5% yield) to bridge the crisis.

March, 2012 – Moody’s downgrades Cypriot credit to ‘junk status’ because of level of indebtedness to Greek credit-default swaps (CDSs); 25 June – Fitch does the same (BB+) disqualifying Cyprus from receiving collateral via the European Central Bank (ECB).

25th July, 2012 – Troika issues terms of its bailout deal to Cypriot Government, negotiations continue until 30 November, when massive public sector cuts to civil service, pensions and welfare benefits alongside VAT increases on the usual suspects, plus property (affecting rich Russian and northern European villa owners) and health care charges (affecting the poorest Cypriots) are announced.

Nov-Dec, 2012 – protests, marches and riots in Nicosia, Limassol, Larnaca, Paphos  and outlying towns spark civil unrest.  Massive public outrage at the extent of “European intervention in Cyprus’ sovereign affairs”, closely observed in Brussels, London and Moscow.

16th March, 2013 – EU and IMF agree a 10BN euro deal with Nicosia (5th such, after Greece, Ireland, Portugal and Spain), with conditions of a one-off bank deposit levy (wealth tax) of 6.7% on savings deposits up to 100K Euros and 9.9% for higher savings.  The cry of pain reverberates from behind gated mansions in Moscow, Paris and Berlin (not to mention London, where Commander Bond lives). Savers will receive compensatory bonds in Cypriot banks (thanks!) whilst withdrawals from accounts, to avoid the tax, are frozen (ouch!).

19th March, 2013 – Cypriot Government rejects the terms, under ostensible pressure from Moscow (36 votes against, 19 abstentions, 1 not present, 0 votes in favour).

20th March, 2013 – World financial opinion pronounces on European Plan:  2008 amnesia, looney-tunes policy is “like hanging a sign on the bank door saying ‘your money is no longer safe in here’ (Art Cashin – yes, really  – Director of Market Floor Operations, UBS).  Instead of doing what Alistair Darling did in the wake of Northern Rock, which was to immediately underwrite all savings, to protect confidence, Europe has done the complete opposite.  This means a bank run is highly likely (inevitable?) when the banks re-open in Cyprus on Tuesday.

So, it isn’t, actually, very funny.  Unlike our fictional hero, most ordinary Cypriots can’t hop onto a private jet, with most of their savings intact.  Nor does it spell much good news for other small countries considering joining the Euro.  The tactics of Berlin and Brussels look shoddy and betray a lack of options. 

This leads to the conclusion that there is a real potential for contagion to take place. What is the indebtedness of bloated Cypriot to smaller Portuguese, Spanish and Italian (as well as Greek) banks?  Will the citizens of all these countries feel at ease, as Cypriots are threatened with losing 7% of their savings, as the only, or first, such action?

This afternoon (March 21st, 16:00 GMT) there are emotional scenes outside the Cypriot Parliament, whilst depositors in Laiki Bank (Cyprus’ second largest) queue to take money out of ATMs. At 18:00 GMT European Finance Ministers meet. The bond at risk is not James or even Governments’, but the bond of trust between citizens and their political leaders in many smaller European nations. And we can’t say what earthquake that may trigger and where it will end.

 

 

 

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