National Post (National Edition)
EU, IMF making an example of Cyprus
Nation punished for being dirty money haven
Cyprus story is more than another profligate nation begging for help
The adage is that when you owe the bank a million dollars and cannot pay, you’re in trouble. But if you owe the bank a billion dollars and cannot pay, the bank is.
Cyprus is the guy who owes a million and cannot pay, unlike Greece or Italy who were too big to fail and were cut some slack. Cyprus, by contrast, is too small to bail.
Its GDP is a mere 0.001% of the EU’s GDP. This is why the EU and IMF, led by Germany, are pushing it around, demanding that before the country can get 10- billion euros, it must raise ¤5.8-billion by garnishing local bank savings accounts. Underlying this is the fact that if Cyprus leaves the EU and goes bust, it’s no big deal.
The hard line is due to the electoral pressures faced at home by German chancellor Angela Merkel.
The subtext of this saga involves Turkey in an unholy and coincidental alliance with Germany that has put Cyprus into a proverbial fiscal box.
Nicosia rejected the first EU deal and refused to garnish its bank depositors, as prescribed by the EU lenders, and has scrambled to find alternative ways to raise ¤5.8-billion. The EU and IMF are not budging and are unwilling to accept political IOUs for months as they did with Greece.
Cyprus’s finance minister fled to Moscow to ask for the money, to be secured by ownership in natural gas production from Cyprus’s vast offshore fields. That failed and the government is scrambling to plunder its pension plans for the money.
But Moscow did not reject the plea outright. The gas was not available to pledge against loans because Turkey has a de facto veto over Cyprus’ offshore resources. It controls the northern part of the island.
The south of Cyprus is the Republic of Cyprus and a member of the European Union. The North is the Turkish Republic of Northern Cyprus. People move freely across its border.
The south is in grave financial trouble, thanks to a real estate and banking bubble caused by dirty money deposits from Russians, while the north is on a sounder footing.
For several years the two have fought over natural gas rights and drilling permits. This has made liens to lenders impossible adding greatly to the Republic of Cyprus’ fiscal woes.
But the Cypriots had to trek to Moscow because of fear of reprisals from the Russian depositors who face the prospect that 10% of their US$31-billion in Cypriot banks may be confiscated as part of the bailout.
Moscow’s aid rejection places the island nation between two knee-capping choices, one by international lenders and another by some unsavoury characters.
The lenders are unwilling to bailout dirty money deposits in Cyprus, and are fed up with its non-existent banking standards.
One American victim of Russian skullduggery has been outspoken that the IMF (mostly financed by the U.S.) should not be involved in bailing out out a dirty money haven like Cyprus.
William Browder, Hermitage Capital Management CEO, told CNBC this week a bailout for Cyprus has become difficult because “no one wants to bail out a bunch of Russian criminals.”
“About 10 years ago, Russia took over the Cypriot banking system,” he said. “There’s a tax treaty between the two countries, and as a result, Russian companies, Russian oligarchs keep their money in Cyprus and use Cyprus banks. Cyprus is essentially a part of Russia, not a part of Europe.”
Another enforcer looming over Nicosia is Turkey, which has recently threatened military action if drilling permits on the Turkish portion of the island continue to be issued by the government residing in the Greek portion.
“This resource belongs to two communities and the future of this resource can’t be subject to the will of southern Cyprus alone. [We] may act against such initiatives if necessary,” a Turkish official told Reuters this week. “The exclusive use of this resource ... by southern Cyprus is out of question ... and unacceptable.”
Germany’s resolve has been bolstered by the fact that post-war immigration from Turkey to Germany has been enormous and now 5% of Germans, or four million, hold dual citizenship because they have at least one Turkish parent. The Turks have prospered and many German actors, artists, athletes and politicians are of Turkish descent. They vote as a bloc and have influence. They side with Turkey not the Greek Cypriots.
Germany is also captive to Russian natural gas and oil, with its high prices. It also would not welcome a Russian takeover of Cypriot gas fields but would favour Turkey’s involvement. This would diversify sources and the competition would lower prices throughout Europe, now inordinately high because of Moscow’s hegemony.
The natural gas issue is material. Between Cyprus, Lebanon and Israel is an estimated 122 trillion cubic feet of gas offshore. Enough has been discovered in Cypriot waters to cover 40% of the European Union’s annual gas consumption.
Turkey escalated the contest for the gas this year when it warned energy companies they would lose access to its market if they negotiated drilling deals with the Republic of Cyprus.
So the Cyprus story is more than just another profligate nation begging for help. This mess may force the unification of this island, and tapping of its resources, at long last for the betterment of all its citizens. It may stop the takeover of a nation inside the EU by Russia.
Most importantly, this toughness represents the first international crackdown on the world’s dirty money island havens. The Cypriots are the first to be punished and we can only hope the Caribbean will be next.