Cyprus: bail-out balls-up!

Quote of the week: from the President of Cyprus

 

“I would like to send a message to the Cyprus people that there is no other way, there is no alternative apart from freeing (the country) from the troika’s and the memorandum’s bonds…by leaving the troika and the EMS behind us, we will ensure our national independence, our national sovereignty, our moral integrity and our economic independence…If we remain bound by the Troika and the memorandum Cyprus’ destiny is already foretold and there will be no future.”

 

(The troika is the EU, IMF and ECB).

 

This seems to put a departure from the EMS back on the agenda.

 

Nobody seems to have a good word to say for the settlement; even the spinners in Brussels have been ominously quiet. The one certainty emerging from this miserable shambles is that the suits in Brussels will stop at nothing, including expropriation, to preserve their zombie currency.

 

The countries that have  most on the hook for the bail-out are  Germany (€2.5 billion), France (€1.9 billion), Italy (€1.6 billion) and Spain (€1 billion). These are loan guarantees, of course, not payments.

 

It is now obvious that joining the Eurozone was a disaster for both Greece and Cyprus. The Cypriot economy is (or was) based almost entirely on tourism and financial services. The € makes for expensive tourism compared with non-€ competitors because it is over-valued for Club Med countries.

 

The Cyprus crisis has more in common with Iceland than Greece. Greece came to grief because it became an incorrigible spendthrift, maxing out on its national credit card and governing itself as if it were a third-world country. Tax evasion was commonplace, the public sector bloated and overpaid, and with eye-watering retirement benefits. Aspects of the public sector were risible; for example, the cost of running the railways was such that it would have been cheaper to send every passenger by taxi.

 

In short, they brought it upon themselves.

 

As with Iceland, the central problem in Cyprus was a banking sector so huge (8 times GDP) that over-extension brought down the entire house of cards. Cyprus banks went so heavily into Greek bonds that when these were ‘restructured’ under the bail-out  the banks were bust. Iceland could solve its own problem because it was not a member of the Eurozone. It devalued, tightened its belt and got on with it. Cyprus, of course, cannot unless it leaves the €.

 

The crisis seems to have been mishandled from the beginning. It must have been obvious that Cyprus was in deep trouble when the Greek crisis happened a long time ago. Not much was done about it – muddle and meddle was the order of the day.

 

The solution is an ongoing train crash.

 

As late as last year Cyprus was expected to emerge as one of the major off-shore financial centres aka tax havens. Purloining depositors funds has put paid to that. Banking depends on trust, and thieving from the customer has destroyed all confidence. Even worse is the leak from Brussels that Cyprus will not be a one-off but most likely a precedent,

 

The barely-legal clamp-down on capital transfers has only made things much, much worse, although it is surprising that people had not shifted their money months ago when the crisis first emerged.

 

There was also a thriving business in ‘round tripping’ – shipping money to Cyprus and then home again as foreign investment mostly free of tax.

 

So it’s farewell to all that, and to all the jobs that went with it.

 

The irony is that the bail-out sum was peanuts. The amount from all EU contributors to the kitty is about the same as the UK’s annual foreign aid budget.

 

This makes the decision to require Cyprus to raid the depositors (and this was made by Cyprus, not the EU) incomprehensible even though the insured depositors have since been made exempt, unless it is placed in the political context. In Europe, Germany call the shots. Merckel is facing an election. The German taxpayer is fed up with bank-rolling the Olive Belt. And it particularly resents the prospect of rescuing Russian money-launderers.

 

The irony is that Cyprus is way down the list of countries most likely to be a risk for money-laundering and terrorist-funding. It is ranked as 114 out of 144 countries. Germany is at 68!

 

Moreover the Germans were persuaded to give up the mighty DM by assurances that ‘no bail-outs’ was an inflexible rule written into the Maastricht Treaty, and that there would also be rules on the levels of permissible debt – deficits not to exceed 3% and debt not more than 60% of GDP(which were quickly broken by, amongst others, Germany itself). They feel bitterly aggrieved and rightly so.

 

Optimists maintain that off-shore gas will be the salvation.

 

This is possible but perhaps not probable.

 

The stumbling block is Turkey. Here chickens are coming home to roost. In 2004, Cyprus blocked a carefully constructed UN proposal for reunification of the Turkish sector. Cyprus ought not to have been admitted to the EU before reunification. Now the Turkish Cypriots are unsurprisingly laying claim to their share of the gas revenues. Without more, this could have been ignored because the Turkish zone has no existence in international law.

 

But Turkey itself has the clout to make things very difficult for Cyprus. The only feasible way to get the gas to market is via a pipeline to Turkey.

 

It is common knowledge that Gazprom would like to get its hands on the gas concession, and Cyprus has resisted this so far in expectation of getting a better deal through international competition. Its bargaining position is now much weakened. If Gazprom does get the concession the pipeline problem might go away because Gazprom’s strategy might well be acquire the concession to avoid undermining its current near-monopoly in its main markets and to leave the gas field fallow to avoid depressing the price.

 

Even if all went to plan there would be no cash-flow until 2019 at the earliest.

 

Cyprus is now facing the prospect of a ruined economy, huge unemployment possibly exceeding 25%, and a 20% drop in GDP.

 

Some rescue!