As we have explained previously, a crisis of overproduction such as the present one tends to express itself in the financial sphere because when the glut of commodities cannot be sold, the producers very often find themselves unable to pay their debts, and in particular their bank loans.
Banks therefore suffer severe losses due to bad debt. While these losses are borne initially by the banks’ shareholders, they are often so severe that shareholder capital is insufficient to cover them and the losses are then passed on to depositors. Unless, of course, there is a rescue in the form of a large capital injection.
But who will provide the necessary capital injection? In Britain’s case, the money came from the government, who now seek to recover the losses from taxpayers. However, in many countries, losses have been such that national governments are unable to cover them. This has been the case with the rescues of Ireland, Portugal, Greece and the Spanish banks, where application had to be made to European funds such as the European Stability Mechanism, or to the European Central Bank (ECB), or to the IMF – all of whom are entitled to, and do, put conditions on their bailout loans, involving – at the very least – the imposition of harsh austerity on the people of the countries concerned.
In the case of Cyprus, whose banking sector has been badly burnt by bad debts in Greece and a burst property bubble at home, €17bn were needed to rescue the banks, which the Cypriot government proposed to supply, appealing to the ECB for a loan to enable it to do so. However, the Europeans have been unwilling to come to the rescue unless at least €10bn of the rescue funds are provided by raiding the accounts of ordinary bank customers.
As originally conceived, the banks were supposed to ‘tax’ even those customers holding under €100,000 – an amount that is supposed to be insured and guaranteed for every EU bank customer. In the end, after mass protests, the Cypriot parliament refused to approve the original proposals. What was then decided was that the customer contribution to the banks’ losses should be borne exclusively by those holding over €100,000 who will have to sacrifice a significant percentage of their holdings.
“The current plan is closer to what one would wish to see in an orderly bank resolution. Laiki Bank is to be split into good and bad banks. Deposits of less than €100,000 in the bank and assets worth €9bn – the sum owed to the central bank as part of its liquidity support – will be transferred to Bank of Cyprus. The remainder will be wound down. Those with claims to deposits in excess of €100,000 will obtain whatever the value of the bad bank’s assets turns out to be.
“Meanwhile, savers at the Bank of Cyprus with deposits of more than €100,000 will have their accounts frozen and suffer a ‘haircut’ of still unknown size. That reduction in value is likely to be large: perhaps 40 percent. Finally, temporary exchange controls are to be imposed.” (‘Cyprus adds to Europe’s confusion’ by Martin Wolf, Financial Times, 27 March 2013)
It is now thought that depositor losses at the Bank of Cyprus could reach as high as 60 percent.
This is the first time that a eurozone bank has had to pass on its losses to depositors, which hardly inspires confidence in the banking system. One interesting consequence of this new departure is, in Britain, a rush of applications to open accounts at the Nationwide, which is still a building society and not a bank.
Cyprus – an exceptional case?
It would be a disaster for European banking if depositors from around the world were to remove their money for fear of losing it. Because of this, the European bourgeoisie is at pains to find excuses for the raid on depositors that has taken place in Cyprus, and to present this as a very ‘exceptional’ case that will not be repeated.
The first excuse is that most of the depositors are Russians who use their accounts for illegal money laundering; and the second is that Cyprus ‘irresponsibly’ allowed its banking sector to grow way beyond what is sustainable for a small country.
Let us look at each of these excuses in turn.
Allegations have been flying that those suffering the haircuts are Russian gangsters using Cyprus’s lax banking laws for money laundering purposes. But there is absolutely no evidence to support this exculpatory accusation.
Even if one supposed that Cyprus’s banking regime did facilitate some degree of money laundering (which is unproven), this would not be true of the vast majority of depositors, who are pensioners living off their savings and bona fide businessmen, many of them relatively small traders, using Cypriot banks to facilitate perfectly legitimate international business transactions.
It is true that Russians have been favouring Cyprus as a staging post for financial transactions, but quite untrue that the majority of them are gangsters. In 2011, the then Russian president, Medvedev, on a state visit, mentioned that Russian investment through Cyprus exceeded $50bn. In May 2010 alone, for instance, $18.7bn was paid into Cypriot banks from Russian sources – the overwhelming majority, if not all, of them entirely legitimate. In addition, there are some 60,000 Russian citizens living in Cyprus, who account for 40 percent of property purchases on the island.
The reason for Russians favouring Cyprus for banking purposes is not to conceal illegal transactions. It has to do with historic difficulties faced by Russian banks in the immediate aftermath of the 1991 counter-revolution in the Soviet Union, when the Russian economy was in a chaotic state.
Cyprus at that time was offering very favourable terms for offshore banking, including low rates of tax and easy immigration facilities, and these facilities became even more attractive when Greek Cyprus joined the European Union.
Another reason for Russian eyes to turn towards Cyprus when seeking offshore banking facilities was their countries’ historic links. The Soviet Union supported the island’s five-year struggle to free itself from British colonial rule (from 1955 until it won its independence in 1960).
Of course, when Cyprus is demanding help from the ECB, which derives its finances in the last analysis from the European taxpayer, it is facile to say: ‘Why should European taxpayer money be used to pay debts to Russians?’ However, this in turn raises the question ‘Why should Russians give their business to European banks?’ One assumes that in future they are much less likely to do so – which will cause far more problems to the European banks than to the Russians!
Unsustainably large banking sector
Cyprus’s bank assets are approximately seven times its GDP. However, this is on the face of it of no particular importance.
Luxemburg’s bank assets are 22 times its GDP, and even Malta’s are eight times larger than GDP, while Britain’s are four times larger. After all, there is no reason why one could not ask a pauper to guard a million-pound stash. It only becomes important if one expects the pauper to make good any losses to that stash – ie, if it is stolen. But by what right should anybody have any such expectations?
On the contrary, one might argue that if the pauper were injured when trying to guard the stash from theft, the owner of the stash should compensate him. In Cyprus, many innocent Cypriots, using the country’s banks for the most normal domestic purposes, have lost out because these same banks were being used as offshore facilities by not only Russians but also to a very considerable extent by many other nationalities, including British and other Europeans.
Ordinary small Cypriot businessmen have seen their businesses collapse, and farmers have seen their animals starve to death, all because they have been prevented from withdrawing money from their bank accounts to pay their bills. Yet no bourgeois hack or politician has suggested that these ordinary Cypriot citizens should be compensated.
It is notable that very many of the international clients of Cyprus’s banking system took the precaution of removing their money once it became apparent that the banks were afflicted.
Reuters write that “At least €3.6bn … was removed in two weeks by big depositors … documents … detail transfers of €100,000 or more from the Bank of Cyprus and Laiki Bank in the two weeks before Cyprus closed its banks on 16 March …
“Reuters analysed 129 companies that each transferred €5m or more over the two-week period, collectively accounting for €1.9bn. Of those companies, 95 could be traced.
“Out of that group, 34 have links to Russia, five have links to Ukraine and two to Kazakhstan. The remainder comprise companies from Cyprus and other countries including tax havens such as the Cayman Islands, the British Virgin Islands and the Dutch Antilles.” (‘Bank documents portray Cyprus as Russia’s favourite haven’ by Stephen Grey, Michele Kambas and Douglas Busvine, Reuters, 15 May 2013)
Interestingly, while Reuters used this information to suggest that it was mainly Russians involved in Cypriot banking, the figures make it clear that although Russian companies figure significantly, they still only represented a minority of those removing their money ahead of the collapse.
Furthermore, “Some 18 percent of the deposits held in Cypriot banks by residents of other Eurozone countries were pulled out in February, according to figures from the Bank of Cyprus. Such deposits in Cyprus had fallen 41 percent since last June to €3.9bn.” (‘Scramble to find Cypriot cash escape route’ by Michael Stothard and Courtney Weaver, Financial Times, 31 March 2013)
The family of Cyprus’s President Anastasiades is also suspected of having used inside information to get their money out quick.
“The president’s family has come under scrutiny following the publication in Haravghi, the Cyprus communist party newspaper, of a list of more than 100 companies and three individual account holders who pulled more than €500m from Laiki in the two weeks before Cyprus agreed on 15 March to a ‘haircut’ of bank deposits as part of a proposed bailout by the EU and the International Monetary Fund.
“A company controlled by the Loutsios family, which owns two car dealerships in Cyprus, emptied two accounts containing €21m on 12 and 13 March according to the list. Antis and Katia Loutsios had earlier cleaned out two personal accounts on 3 and 4 March holding another €6m. Mr Anasiasiades’ daughter Else, a partner in the family law firm, is married to Yannos Loutsios, the couple’s son.” (‘Cyprus leader invites family firm probe’ by Kerin Hope and Roman Olearchyk, Financial Times, 3 April 2013)
Why did Russia not step in to rescue Cyprus?
In an attempt to avoid having to haircut depositors, the Cypriot government did appeal to Russia for assistance.
On 19 March, Michalis Sarris, the finance minister, flew to Moscow to offer Russia trade preferences in the energy sector, gas exploration rights and controlling shares in Cyprus’s banks in return for a five-year extension of a 2011 Russian bailout loan of €2.5bn and an additional €5bn of support. However, “Two days later, he left Moscow empty-handed.”
The above-quoted article goes on to comment: “To many western observers, Moscow’s unwillingness to take Sarris’ initial offer appears to be a huge strategic blunder. It seems inexplicable that Cyprus’s most heavily invested economic partner – and the largest source of foreign deposits in the island’s banks – would refuse a deal on such apparently favourable terms. All the more confusing is Moscow’s apparent decision not to solidify its strategic foothold, given Russia’s geopolitical ambitions in the eastern Mediterranean [ie, its need to establish a friendly port for its military naval vessels].” (‘Why Moscow is playing the long game on the island of Aphrodite’ by Yuri M Zhukov, Foreign Affairs, 29 March 2013)
It is clear, however, that any money that Moscow might supply (on top of the €2.5bn it supplied two years ago) would simply go to shore up the EU’s banking system, with most of the money ending up in the hands of non-Russians. Just as the EU doesn’t want to pay up for the benefit of Russians, Russia doesn’t want to pay up for the benefit of the EU.
As far as Cyprus’s Russian depositors are concerned, Zhukov (quoted above) believes that the Russian government is now anxious to encourage them to stop using offshore banking facilities now that perfectly good ones have been set up at home. Zhukov explains: “In December 2012, President Vladimir Putin declared ‘deoffshorisation’ as a central policy priority … Russia … has over 20 special economic zones, which offer tax benefits on investment and business income. So far, however, most of these zones have had trouble attracting investment … But the EU’s growing opposition to Russian investment has created a new opportunity to lure capital back into Russia.”
This is a major concern to the Russian government, which is at present faced with a flight of capital (€63bn in 2011 and €44.5 in 2012) that it no doubt considers could be put to better use providing employment at home.
Furthermore, if Russia were to provide €5bn out of the €17bn that is needed, then it is reasonable to suppose that it will still be the European Central Bank and the IMF in charge of the situation – both of whom can be relied upon to ignore Russian interests. They have made it clear that Cyprus will not be allowed to continue its tax haven services, when this is in fact Cyprus’s major employer and generator of GDP. That being so, Cyprus’s ability to repay any loans is going to be minimal.
As for the acquisition of energy rights, “The Russian gas and oil giants Gazprom and Rosneft … were reluctant to negotiate investment in offshore tenders under such a compressed time frame, before seismic survey work could be completed.”
The price of the bailout
Quite apart from the closure of the Laiki Bank, with the loss of 250 jobs, and the loss of depositors’ money, the ECB/IMF knights in shining armour ‘rescuing’ Cyprus are demanding “the abolition of index-linked wage increases, and the first privatisations of state organisations, including the telecoms and electricity utilities and the ports of Larnaca and Limassol.”(‘Cyprus finance minister quits after Troika talks’ by Kerin Hope, Financial Times, 2 April 2013)
It would be amusing if the buyer of either or both of those ports turned out to be Russian!
However, for Greek Cyprus, loss of its tax haven business is a disaster. This business was developed after the Turkish invasion of 1974, when the consequent partition of Cyprus left the Greek part of the island bereft of its agricultural and industrial base. Its only thriving business was tourism, which wasn’t enough.
Offshore banking proved its lifeline, which is why it offered such advantageous terms to depositors. That lifeline has now been snatched away, with the inevitable result that Cyprus will sink if nothing is done to stop it. “[W]ith many economists now estimating that the Cypriot economy will contract 5 percent to 10 percent this year, it could well be that depositors will have to take a bigger loss so that the bank can free up cash to protect its rapidly deteriorating loan book.”(‘In Cyprus, big losses expected on deposits’ by Landon Thomas Jr, New York Times, 27 March 2013)
As a result, “Nicosia is now an eerie place, deserted streets with people glued to their television sets for the latest news … There is total desperation. The smiles have gone. Nothing like this has ever happened before. Where do we go next? … There are gas reserves off our coast giving some hope, but ‘they’ might take them away too.”(‘Cyprus finds not all nations are equal’ by Christopher Pissarides, Financial Times, 28 March 2013)
Europe pays the price for its disloyalty
There are already significant signs that European banks have been irretrievably damaged by the Cyprus debacle. If the European Union wasn’t prepared to protect depositors in Cyprus, how can investors assume that it will be ready to protect depositors anywhere else?
“The way Cyprus has been treated by its Eurozone partners shows that far from the currency bloc acting as a partnership of equals, it is a disjointed group of countries where the national interests of the big nations stand higher than the interests of the whole. Meanwhile, the haphazard decision-making in the eurogroup continues.
“Following the Cyprus agreement, the chairman of the group declared that this would be a template for the future. Panic spread in the eurozone, the value of the euro dropped, and then the denial came, on the same day … Cyprus is a ‘special case’, apparently. We wait to hear what is special about it.”(Ibid)
As ever, the bourgeoisie in times of crisis are trying to save themselves not only at the expense of the working class but also at the expense of each other. Let the weakest go to the wall so the strongest can survive.
If one’s world outlook is confined within the capitalist box, then this logic makes perfect sense – except that even the strong in Europe will be adversely affected by the damage they are causing to the European banking system, and Cyprus will end up dragging down the whole of Europe anyway.
What is necessary is to think outside the capitalist box about the sheer irrationality of the masses increasingly suffering want at a time of ‘excessive abundance’. This irrationality is the inevitable consequence of trying to move forward with an antiquated economic system that is no longer fit for purpose and has been a liability for humanity for over a century.
The alternative to capitalism is economic planning that matches the resources available to the needs of the masses of the people, abolishing the whole concept of profit as the motivator of production. The Soviet Union proved that, notwithstanding capitalist encirclement and hostility, economic planning produces results which appear totally miraculous by comparison with what can be achieved under capitalism. And it will be recalled that these miraculous results were achieved in the 1930s, when the whole capitalist world was mired in catastrophic crisis.
Let communists redouble their efforts: they hold in their hands the only possible solution to recurring capitalist crisis and all the misery and war that this inflicts. It is time to make sure that this message is heard clearly by the masses everywhere, who will sooner or later take up the weapon of Marxism and become their own liberators.