Cyprus port of Limmasol_311.
(photo credit: Reuters)
‘Why hasn’t there been a run on the banks yet?” A friend of mine posed this
question to me in a conversation we had about midday on Thursday. The topic, of
course, was Cyprus, and, to the extent that the question related to the people
of Cyprus and their banks, it was easy to answer: The banks have been shut all
week, and the “bank holiday” has been extended until Monday, which is itself a
holiday, so that means Tuesday. So there is not run because there are no banks
open to run to, or from.
New developments in the Cyprus crisis occur
almost every hour, but you should still make an effort to keep up with what is
going on there, even at the expense of your pre-holiday shopping, cleaning, etc.
– and certainly at the expense of reading or watching the local production
starring Bibi and Obama. This is because: a) the Cyprus crisis is much more
interesting and challenging, even for the detached observer; b) unlike the
carefully choreographed puppet show in Jerusalem, no one knows what is going to
happen in this drama; c) it really does matter, which means you are not a
There are many aspects to the Cyprus mess and hence
many reasons why it is so important. However, the critical one should be obvious
to regular readers of this column, in which I have repeatedly stressed that the
essence of the entire European crisis is the loss of confidence on the part of
the peoples of Europe in the leadership of their individual countries and of the
EU as a whole. This was starkly highlighted by the results of the Italian
elections last month, which were simply a revolt by the people of Italy against
the unelected government imposed on them by Brussels/Frankfurt/ Berlin and
against the political parties that sought to further the austerity policies of
It is important to note that the Italian political crisis
is entirely unresolved and is still simmering. That is par for the course in
Europe at this stage of the overall crisis; nothing is resolved in a fundamental
sense, but an effort is made to douse new fires that break out or, if this
proves impossible, to contain the fire and prevent it spreading.
poor Cyprus, in and of itself it is not important.
Its banks are bankrupt
because the Cypriots allowed the Russian oligarchs/mafia/whatever to use and
abuse their banking system. Because said banking system is seven times as big as
the Cypriot economy, it is too big for the Cypriots themselves to save. But for
the EU it is small beer.
The Cypriots need only 17 billion euros or so.
But they are the fifth EU member to apply for aid, and the political will in
Berlin to keep paying up is now in short supply.
The entities that
actually put up the money for the European bailouts – the European Central Bank,
the European Commission, Germany and, in the background, the IMF – determined
that the Cypriots must be made to pay a large chunk of their own bill.
Greece this was done by imposing “haircuts” on holders of Greek government bonds
and thereby effectively wiping out large chunks of Greek debt. In Cyprus this
approach won’t work, primarily because such Cypriot sovereign debt as exists is
issued under UK (not Cypriot or Greek) law, and this precludes the kind of
selective punishment imposed on the Greeks (where private bondholders were paid
cents on the dollar, while bonds held by the ECB and other foreign entities were
left untouched). It was therefore decided – no one understands how or why,
although The Wall Street Journal has made the best stab at unraveling the
decision-making process – that a tax would be levied on all deposits of all the
banks in Cyprus, irrespective of whether the account-holder was a local Cypriot
or a Russian oligarch.
This decision is a landmark in European financial
Countries like Argentina have been known to expropriate people’s
money by fiat, but no one believed that this could ever happen in an EU country
– let alone that the EU would be the agency ordering the expropriation (a polite
word for robbery). In the week since that decision was announced, the details
have been juggled with and the proposal itself has been rejected decisively by
the Cypriot parliament. It is not impossible that in the end the tax will not be
levied – although the EU on Thursday gave Cyprus an ultimatum to pass the law by
Monday or else it would stop providing liquidity to Cypriot banks, which would
send them into instant bankruptcy.
But even if the robbery does not
occur, the mere proposal has forever changed European and global banking and
finance by destroying the assumption that democratic government committed to the
rule of law would never seize their citizens’ wealth arbitrarily.
this decision has not already triggered a run on the banks across Europe is not
clear. But the license to crash the banks has been given and could come into
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