Euro in crisis: see Cyprus run
The panic in Cyprus — the spectre of every adult Cypriot lined up at reopened banks on Tuesday with wheelbarrows for their supposedly guaranteed € 100,000 — has unsettled even the most sensible financial observers.
Gillian Tett wrote hopefully in the Financial Times of London that there might be a “snowbird” solution to Cyprus’s problem. Much as white-haired Canadians helped stall Florida’s decline, perhaps “German pensioners could be forced to holiday in Cyprus.” Or perhaps not.
Germans don’t vacation in Greece any more, put off by the open Nazi-toned resentment shown by locals whose expectations of German Chancellor Angela Merkel’s generosity were long ago dashed. Greece used to have Sick Man of Europe status. Now Cyprus, a faraway nation of which we know little — it’s really two hostile Greek and Turkish zones cobbled together — is the sickest of all. The fact that it’s smallest in the EU doesn’t help a bit.
Meanwhile, the FT reported, Cypriots were lining up at cash machines on Friday even as the government agreed to impose capital controls, including restrictions on bank withdrawals. On Tuesday, the banks — shut down to prevent a run — will reopen for business.
The second-largest bank, Laiki, or Popular Bank, had cut withdrawals from € 800 to € 250 and the lineups continued. “We are waiting for a messiah to come and save us,” an official told the FT, “and of course, there is none.”
Russia refused. What a fatal friendship. It’s astounding to discover that Cyprus is Russia’s largest single foreign direct investor, meaning that Russian money is making round trips via Cyprus. Cyprus’s welcome to Russian money in its monster-sized banking sector (assets eight times GDP) didn’t save it but merely attracted hostility from the EU. It seemed easier to dock Cypriot savings accounts knowing that much of the money belonged to Russian oligarchs who were using them as parking spaces.
The Russians are fully expected to haul billions out of Cyprus as quickly as the lowest-paid seamstress can grab her bits and bobs, and Cyprus has made legal preparations to stop them. But the oligarchs will do fine, having parked in many places.
The rest of us may not. The effect of the suggestion that bank accounts of citizens be docked taxes to pay for a bailout was catastrophic. Even when the plan was changed to hit only accounts over € 100,000 (about $133,000), it was still shocking planet-wide to suggest that money specifically guaranteed by the government — at the standard level across the EU — was no longer safe.
Once the euro in Cyprus is handled this way, it’s no longer the euro as such. Arguably, it’s simply a local currency.
Canadians with an eye to safety place their money in certain accounts covered by the Canada Deposit Insurance Corp., up to $100,000 per depositor. It cannot be imagined that Ottawa would fail to cover a bank collapse. It cannot, it could not, it will not.
But if it can happen in a nation, however tiny and ill-regulated, that is actually in the EU, investors and savers around the world are left shivering, never a good thing in times of high unemployment. No one feels safe, few will spend, fewer will invest. Thus the Cyprus crisis became a catastrophe in immeasurable ways. So many things were unhelpful, even the reference to wheelbarrows in my first sentence, and I did that to hearken back to Germany in the 1930s. The question is confidence. “How many people does it take to start a bank run?” asks commentator Neil Collins. “The conventional answer is two: one to draw the money out and another to form the queue.” We think we have learned from history and repeatedly prove we have not. The more we say something could never happen again, the more likely it is that it will. We are too smug about how people behave under severe economic stress. Look at the rise of fascism in Greece, Hungary and Austria. But even now that Cyprus has decided to split banks — there will be a good bank and a bad one — who will be truly reassured by that? Financiers are waiting to see if the contagion spreads throughout Europe, and it appears that it has not so far. Interest rates on Italian, Spanish and Portuguese debt, the Guardian reports, have not spiked, which is good news. Even if Cyprus makes a painful deal that keeps it in the EU, its future is miserable. There are bigger failures to worry about. Cyprus, if anyone cares, “will have a public debt-to-GDP ratio (145 per cent) above that of Greece even on the assumption that it gets € 10 billion of financial help (from the EU, the European Central Bank and the IMF) and writes off € 5.8 billion in bank debt,” the Guardian reports. The word its financial editor uses is “unsustainable,” especially with the austerity program that’s coming. It’s not a word one sees applied to European nations. Cyprus will be a virtual writeoff, its people bedraggled and despairing in a way not seen in Europe for decades. On Tuesday, wake up, it’s a Cyprus morning. Watch and weep.