Cyprus: The latest domino to fall
By Mike Andrew
The banks are closed, and no one knows when they will reopen. If you can find an ATM still stocked with cash, it will only give you $160. No one will take your checks anymore because no one knows whether the bank that issued them will still be in business tomorrow.
You’re just a regular working person, but you’re thrifty and you’ve managed to save up some money to see you through retirement. The government wants to take your savings away to pay off the German and Dutch bankers who are underwriting your country’s debts.
You wish you could move to Australia.
If you lived in Cyprus, this would be your daily reality. Cypriot President Nikos Anastasiades has called for a criminal investigation to find out who is at fault for the crisis, but this isn’t a crime story, this is the story of a small poor country struggling to survive rough handling by calculating international creditors.
A former British colony, Cyprus has always experienced slow economic growth and, as a result, relatively high unemployment. The northern third of the country is still occupied by the Turkish army, which invaded the island after the Greek military dictatorship unsuccessfully tried to overthrow Cyprus’s democratically elected government in 1974. Refuges from the occupied area still depend on government support.
Prior to the turn of the 21st Century, the country’s principal industries were shipping and tourism – both of them very vulnerable to global economic trends. Cyprus reportedly has important natural gas reserves, but it lacks the capital to develop them.
In an effort to diversify the country’s economy and attract additional capital investment, the Cypriot government decided to turn Cyprus into the banking hub for the eastern Mediterranean. To facilitate this, Cyprus joined the European Union (EU) in 2004 and the Eurozone in 2008.
Cyprus was so successful in expanding its banking sector that by 2013 it accounted for 30% of the country’s total economic activity. In doing so, Cyprus became the Cayman Islands of the Mediterranean – a tax-haven for European investment fund managers and Russian oligarchs. Prior to the global financial crisis beginning in 2007-2008, Cyprus’s debt was lower than the European average, and declining. But the crash of US subprime mortgage markets had serious consequences. By 2009, the Cypriot economy was in decline, mainly due to contraction of tourism and the shipping industry.
Because 80% of Cypriots are ethnically Greek, and Greece sponsored Cyprus’s entry into the EU, Cypriot banks invested heavily in Greek government bonds. With a total GDP of less than 20 million Euros, Cypriot banks held Greek debt amounting to 22 billion Euros. Cyprus was therefore extremely exposed when the EU imposed austerity measures on the Greek government, causing its economy to collapse. When the EU allowed Greece to mark down its bonds in 2011, Cypriot banks took a hit from which they never recovered.
In June 2011, explosives stored at a Cypriot naval base accidently blew up, killing dozens of people and destroying the country’s largest power plant, which was located next to the base. More than half the country was left without electricity, including the capital city, Nicosia.
Cyprus was then forced to borrow heavily from European banks to rebuild its power system, and secured an emergency loan from Russia to refinance its existing debt.
Finally, in November 2012, the Cypriot government secured an EU bailout. The bailout did not come without a price, however. As they did in Greece, the EU insisted on severe austerity measures – layoffs of public employees, deep cuts in pensions and social benefits, increases in medical deductibles, reductions in salaries, and increases in regressive sales and fuel taxes.
The formula was the same as in Greece, and the result was the same. Rather than improving Cyprus’s financial situation, the austerity program led to further economic contraction. Unemployed workers began liquidating their bank accounts to pay their bills. At last, Cypriot banks could no longer cope with the situation, and they shut their doors on March 15.
The EU agreed to an additional payment to Cyprus of 10 billion Euros, but only on condition that the Cypriot government kicked in 5.8 billion Euros by confiscating savings accounts held in the country’s banks.
According to the BBC, European fund managers knew this was coming, and had already taken the precaution of moving their holdings elsewhere, leaving the Russians – and the Cypriots themselves – to take the hit.
The Cypriot parliament unanimously rejected the EU plan on March 19, and tens of thousands of workers poured into the streets to protest their government’s willingness to make them the victims of EU demands. Alternate plans, which may hit only the largest accounts, are now being negotiated.
Banks reopened March 28, but Cyprus’s second-largest bank is now out of business, and its largest bank is being acquired by foreign investors. It remains unclear whether Cyprus will be able to remain in the Eurozone.
Jeroen Dijsselbloem, head of the Eurozone’s finance ministers, has suggested the Cyprus model – forcing local savings account holders to pay for EU loans – might be applied in future EU bailouts.