Vol. 77/No. 13      April 8, 2013

Banks have been shut tight in Cyprus since March 16 after government officials announced they planned to move ahead with demands from the European Central Bank, International Monetary Fund and European Commission—often referred to as the “troika”—to tax all accounts in Cypriot banks as a condition for securing $13 billion in loans to stave off a total collapse of the country’s banking system.

Such a move would have amounted to “stealing money officially,” writes David Pryce-Jones in a March 18 National Review article, “what’s more, stealing from people in Cyprus who are mostly not well off.”

Thousands took to the streets in Cyprus to protest this move. Then the Cypriot parliament voted unanimously to reject the tax and the troika backed off. Instead, Cyprus government officials agreed to a new deal restructuring the country’s two largest banks—Laiki Bank and the Bank of Cyprus. Laiki will close, with smaller deposits and some other assets transferred to the Bank of Cyprus. Among the immediate consequences is the elimination of thousands of bank workers’ jobs and pensions.

Insured deposits under $130,000 remain intact—although still unavailable—while larger deposits and investments are either entirely or partially wiped out.

A large portion of the banks’ larger depositors and creditors are Russian “oligarchs,” as much of the press refers to big Russian capitalists. This relatively new bourgeoisie came into existence by plundering previously state-owned industries and other property following the collapse of the Soviet Union in 1991 and is regarded with a degree of contempt by the ruling families of Europe. According to some estimates, Russian companies and individuals, including government officials, account for one-third of the deposits—about $33 billion.

Reaching agreement on the current stop-gap measure was fraught with disagreements within the troika and among the governments that stand behind it. In a departure from previous “bailout” plans, the government of Germany, the strongest economic power of Europe, pressed to impose some losses on bondholders, big depositors and investors.

“The agreement closely resembles a proposal advocated by the IMF and Berlin,” wrote the Financial Times, “though under that plan both Laiki and Bank of Cyprus would have been liquidated.”

Cyprus is an island in the Mediterranean Sea, south of Turkey, with a population of 1.1 million. Eighty percent of the Cyprus’s economy is comprised of the service sector—mostly real estate and financial services. Industry comprises almost one-fifth of the economy, including cement and gypsum production, ship repair, textiles, and metal products. Cyprus’ banking sector is about eight times the size of its gross domestic product. The country has served as a haven for offshore banking and money laundering, tax free and with few regulations. The days of dependence on large infusions of money capital from abroad—with no relation to domestic production—are over.

Gov’t to set controls on bank withdrawals

Cyprus has been in recession for the past year. Its economy is expected to shrink by 20 to 30 percent in the next few years, reported the New York Times.

Cyprus’ government debt still stands at 140 percent of gross domestic product and banks not only face massive deposit withdrawals, but more looming loan defaults with deflation of the country’s massive real estate bubble.

Cyprus, like other countries that use the euro, can’t devalue its currency in response to massive indebtedness as a capitalist nation with its own currency would normally do. But recent developments have made clear that a “Cypriot euro”—held in Cypriot banks that are wiping out money capital, threatening taxes on deposits and imposing strict capital controls—is in fact worth less than a “German euro.”

Cyprus became a member of the EU in 2004 after Athens threatened to block admittance of east European countries if Cyprus was not admitted. It adopted the euro as its currency in 2008. Its two biggest banks are the largest holders of Greek bonds in Europe and sustained huge losses as part of the troika’s loan agreement with Greece.

The ramifications of the crisis and its “resolution” are being felt well beyond Cyprus’ borders. “No amount of declarations that Cyprus is unique will restore the trust in their banks for Italians or Spaniards or Portuguese when the crisis again reaches an acute phase in their countries, as it inevitably will,” stated Marketwatch.  
 
 
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