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Cyprus: The erosion of trust

Patrick L Young is expert in global financial markets working in multiple disciplines, ranging from trading independently to running exchanges.

Published time: March 20, 2013 10:39
Protesters shout slogans during an anti-bailout rally outside the parliament in Nicosia March 19, 2013 (Reuters / Yorgos Karahalis)

When the chips were down, the Parliament of Cyprus was unable to produce a single vote in favour of a rather dismally constructed bailout package.

In the economics textbooks, bailouts are dealt with in a cool detached fashion, noting that those who have taken risks such as equity and bondholders are the likely losers in restructuring. Ultimately with banks even savers may lose something. Footnotes point to bank deposit schemes which governments provide so small savers have confidence in the banking system. In the case of Cyprus, the citizens were on the march, understandably appalled by an act of theft.

Last weekend’s bailout proposal undermined a fundamental tenet of the EU’s approach to the ongoing Euro crisis. While bondholders were (incredibly) spared even the slightest loss, depositors in banks found themselves subject to the de facto theft of their cash. The EU’s long-held mantra that up to 100,000 Euros in bank deposits would be safe was circumvented.

With the Cyprus Parliament unable to ratify the swingeing terms of the bailout, the Euro crisis has entered another twist. Cyprus still faces a huge financial hole. Simple, sensible solutions would involve bondholders but this always faces opposition from the likes of Germany who have sought to protect their banks’ poor sovereign loan investments at the expense of the people’s welfare in Ireland as well as Cyprus et al. Cyprus may now turn to Russia for a bailout either separate from, or as a complement to the existing troika package.

For the EU, the situation is perhaps not so immediate but the fuse has been lit on a piece of pure economic dynamite. Since last weekend it has been clear to astute savers and investors that a fanatical fundamentalist cabal of Europhiles will stop at nothing to save the Euro. (Whether they can ultimately succeed is a separate issue), even penury on a Mediterranean arc from Athens to Madrid.

Lawmakers raise their arms to vote against a controversial bill to tax deposits in Nicosia March 19, 2013 (Reuters / Yiannis Nissiotis)

Economic confidence is often the most fragile of things. When savers see an oligarchy willing to sacrifice the savings of their fellow citizens, they will tend to discount that this is an isolated incident. 

Whether anything happens to this flawed bailout plan, the EU has fired a shot across the bows of every European citizen who has had the temerity to save for their old age. Given that Euro interest rates already pay a derisory return (thanks to that modern central bankers’ folly, Quantitative Easing), ordinary savers may prefer keeping notes under the bed to ‘risking’ a bank deposit. Perhaps they will keep notes denominated in a foreign currency. A supranational kleptocratic cabal has left contagion risk stalking the Mediterranean and the Euro.

Meanwhile, larger savers and corporates who found Cyprus an attractive climate for business have already set their eyes on other financial centres. Dubai and Singapore are early leaders - mercantile and politically stable but without the dreadful tinge of desperation which now hangs over the Eurozone. The deficit of trust is only exacerbated when listening to the cowardly howls from finance ministers that they never supported a ‘haircut’ of savers’ funds in Cyprus... If the Eurozone finance ministers didn’t make this decision while locked in conference for days, then who did?

The future prosperity of Europe is increasingly being held hostage by a cabal of Euro-fundamentalists rooted in denial. Their tragically deluded solution is “more Europe” despite a democratic deficit, vast swathes of unemployment and a potential lost generation of young, jobless, citizens.

Meanwhile, institutional bondholders will apparently receive their next coupon payments while the citizenry are being robbed. For those who might argue against capitalism, there is nothing to dispute. This is simply not capitalism: when the citizens bear the risk and the corporate investors are rewarded for investments gone wrong, then the system has become a perverse parody of anything liable to deliver the peace and prosperity which the EU supposedly cherishes. Ultimately the zealots running the asylum threaten the integrity of European co-operation with their cowardly political actions against small states and savers alike.

The Parliamentarians of Cyprus were faced with a genuine catch-22 situation. They have at least emerged with a shred of dignity which is more than can be said for the European Union where trust has been damaged. Perhaps irrevocably.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.

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