The rise and fall of Cyprus is a cautionary tale for any economist or politician. In 2008 Cyprus elected a Communist government which was replaced by a centre right government in February this year. The first action of the communist government in 2008 was to increase government spending:
This had the same effect as it did in the UK, a severe recession:
It is interesting that the communist government in Cyprus, like the postmarxist Labour government in the UK, purchased votes by pumping up the public sector:
(Graph: The Financial Mirror)
Like the UK the Cypriots gambled heavily on financial services as a major element of their economy but unlike the UK their economy was too small to pay for bank recapitalisation:
You cannot really be an "offshore" banking haven if you are in the Eurozone because you cannot devalue and if you get it wrong it infects the whole Eurozone. The
British stole 30% from savers by devaluing by 30% but the only option
for the Cypriots on the table at the moment is a 10-15% tax on savings (but see Postscipt below). The British postmarxist Labour government and the Cypriot communist government may well have been mounting a deliberate attack on the "capitalist system" but it would be almost impossible to prove such an accusation.
There has been a lot of loose talk about Cypriot bank accounts being largely Russian, according to France24 this is not the case, most deposits being Cypriot:
According to the BBC "The ratings agency Moody's estimates that there is about $31bn (£21bn) of Russian money in Cypriot bank accounts - $12bn from banks and $19bn from businesses and individuals." This figure is slightly higher than the 20.8 billion euros deposited by the "Rest of the world" in the illustration above.
The Cypriot banks have lost so much money that they are below reasonable capitalisation and cannot continue as banks unless they are re-capitalised.
It is only when politicians provide a regulated market that allows the continuous creation of independent new businesses and the abundance of employment that people can have freedom. The failure to regulate the banks has stolen the capital needed to ensure this freedom.
Postscript
On 25th March a deal was done with the ECB and IMF in which:
"Laiki, or Cyprus Popular Bank, is to be closed, with its good assets transferred to Bank of Cyprus, the country's biggest bank, where savers would suffer big losses in return for equity shares. Those with more than €100,000 in Laiki would also be hit hard." ( Guardian article).
It turns out that large investors will not just be hit hard, they will be wiped out as Laiki is closed. Furthermore large investors in the Bank of Cyprus are likely to lose about 30% of their investment.
I am still slightly puzzled by the story of the Cypriot banks.
According to the Wall Street Journal: "Cyprus Popular and Bank of Cyprus have booked combined losses of €4.3 billion on their Greek government-bond holdings." and this was the main cause of the failure. However, the Wall Street Journal also says that Laiki (Cyprus Popular) bank and Bank of Cyprus passed ECB stress tests in 2011.
Lets take a closer look at Laiki bank. According to the Wall Street Journal article (above) Laiki held 3.41 billion euros of Greek government debt and made losses on this debt of 2.42 billion euros, the net result was that Laiki was 1.97 billion euros in deficit.
According to the Guardian the ECB had loaned Laiki 9 billion euros and the Cyprus government had stumped up 1.8 billion euros in June 2012 and had taken over Laiki. Laiki bank is now closing and its large depositors are paying for this closure (according to the Guardian article there are 4.2 billion euros in deposits with Laiki that exceed the protected level of 100,000 euros). This means that a total of 6-15 billion euros have been used to pay off the 1.97 billion deficit, not including the amount contributed by shareholder's funds and other creditors!
Probing more deeply, a Laiki prospectus notes that the Greek bonds were only 7.9% of Laiki's total assets. The bank also declared over 3 billion euros of equity which should have been ample to cover the Greek losses.
The prospectus and Annual Report have balance sheets in which about 14 billion euros of liabilities are unexplained (for instance, there is no explanation of why most deposits are short term "time deposits"** - the riskiest type of deposit - and no full description of the 'billion' in derivatives). We can only really get to the disaster that was Laiki by assuming that some of the components of the balance sheet were partly invented and the audit was inaccurate; in other words there was criminal activity.
The IMF/ECB bailout was for 10 billion Euros which, together with the 6 billion euros already raised, 30% of large accounts in the Bank of Cyprus and the near total loss of equity in Laiki, means that well over 20 billion euros have been raised to pay off a 1.97 billion deficit in Laiki and 1.56 billion euros deficit in the Bank of Cyprus.
There is something fishy here. I smell government aided corruption. This would also explain why the media are saying "its the Greeks" or "its the Russians"* when the truth is that its the previous government of Cyprus and its banker chums. Of course it was the government, 20 billion euros is about 20,000 euros per head of the Cypriot population, no responsible government would have allowed such exposure unless they were complicit.
*According to the Annual Report only 1.7 billion euros of the 20 billion in customer deposits in Laiki came from outside Greece and Cyprus. Russian money laundering could not have been massive. Why are the media saying its OK, its only the Russians who will lose out?
**of 20 billion euros in customer deposits 15 billion was deposited for less than 3 months and 14.3 billion was "time or notice" (see excerpts from Annual Report below). This means that at least 9 billion euros, and probably more, were on short term time deposit of less than 3 months ie: invested as a gamble on the interbank loan market or similar. The auditors should have noticed this problem. Few sober private investors would touch such time deposits nowadays. The auditors should have explained this, in the absence of any explanation we must assume that the "customer deposits" figure is either composed of some sleight of hand or the bank was doing some dubious gambling.
The largest shareholder in Laiki was Dubai Financial Limited Liability Company
who seem to have appointed 3 non-exec directors in the summer of 2010.
Published 23/3/13
See also:
When will the Eurozone crisis end?
On being "outside" in Europe. Isolated or free?
The Eurozone, EU, Cameron and Crisis
Globalization and Great Depressions
Europaische burgerkrieg anyone? The Germans lost the 'European Civil War' in 1945
Extracts from Laiki Annual Report
Notice 14.3 billion euros in time or notice deposits
but it can be seen below that nearly all customer deposits were for less than a year and a vast amount (11.3 billion) were on less than 1 month notice so much of the "time or notice" deposits were actually short, fixed term gambles. The auditors needed to explain this problem.
23/3/13
 |
| http://www.cato.org/blog/simple-predictable-story-fiscal-bankruptcy-cyprus |
This had the same effect as it did in the UK, a severe recession:
 |
| http://www.tradingeconomics.com/cyprus/gdp-growth |
 | ||
| Cyprus: public sector earning double the private sector |
Like the UK the Cypriots gambled heavily on financial services as a major element of their economy but unlike the UK their economy was too small to pay for bank recapitalisation:
 |
| Pop goes the Cypriot economy. |
There has been a lot of loose talk about Cypriot bank accounts being largely Russian, according to France24 this is not the case, most deposits being Cypriot:
According to the BBC "The ratings agency Moody's estimates that there is about $31bn (£21bn) of Russian money in Cypriot bank accounts - $12bn from banks and $19bn from businesses and individuals." This figure is slightly higher than the 20.8 billion euros deposited by the "Rest of the world" in the illustration above.
The Cypriot banks have lost so much money that they are below reasonable capitalisation and cannot continue as banks unless they are re-capitalised.
It is only when politicians provide a regulated market that allows the continuous creation of independent new businesses and the abundance of employment that people can have freedom. The failure to regulate the banks has stolen the capital needed to ensure this freedom.
Postscript
On 25th March a deal was done with the ECB and IMF in which:
"Laiki, or Cyprus Popular Bank, is to be closed, with its good assets transferred to Bank of Cyprus, the country's biggest bank, where savers would suffer big losses in return for equity shares. Those with more than €100,000 in Laiki would also be hit hard." ( Guardian article).
It turns out that large investors will not just be hit hard, they will be wiped out as Laiki is closed. Furthermore large investors in the Bank of Cyprus are likely to lose about 30% of their investment.
I am still slightly puzzled by the story of the Cypriot banks.
According to the Wall Street Journal: "Cyprus Popular and Bank of Cyprus have booked combined losses of €4.3 billion on their Greek government-bond holdings." and this was the main cause of the failure. However, the Wall Street Journal also says that Laiki (Cyprus Popular) bank and Bank of Cyprus passed ECB stress tests in 2011.
Lets take a closer look at Laiki bank. According to the Wall Street Journal article (above) Laiki held 3.41 billion euros of Greek government debt and made losses on this debt of 2.42 billion euros, the net result was that Laiki was 1.97 billion euros in deficit.
According to the Guardian the ECB had loaned Laiki 9 billion euros and the Cyprus government had stumped up 1.8 billion euros in June 2012 and had taken over Laiki. Laiki bank is now closing and its large depositors are paying for this closure (according to the Guardian article there are 4.2 billion euros in deposits with Laiki that exceed the protected level of 100,000 euros). This means that a total of 6-15 billion euros have been used to pay off the 1.97 billion deficit, not including the amount contributed by shareholder's funds and other creditors!
Probing more deeply, a Laiki prospectus notes that the Greek bonds were only 7.9% of Laiki's total assets. The bank also declared over 3 billion euros of equity which should have been ample to cover the Greek losses.
The prospectus and Annual Report have balance sheets in which about 14 billion euros of liabilities are unexplained (for instance, there is no explanation of why most deposits are short term "time deposits"** - the riskiest type of deposit - and no full description of the 'billion' in derivatives). We can only really get to the disaster that was Laiki by assuming that some of the components of the balance sheet were partly invented and the audit was inaccurate; in other words there was criminal activity.
The IMF/ECB bailout was for 10 billion Euros which, together with the 6 billion euros already raised, 30% of large accounts in the Bank of Cyprus and the near total loss of equity in Laiki, means that well over 20 billion euros have been raised to pay off a 1.97 billion deficit in Laiki and 1.56 billion euros deficit in the Bank of Cyprus.
There is something fishy here. I smell government aided corruption. This would also explain why the media are saying "its the Greeks" or "its the Russians"* when the truth is that its the previous government of Cyprus and its banker chums. Of course it was the government, 20 billion euros is about 20,000 euros per head of the Cypriot population, no responsible government would have allowed such exposure unless they were complicit.
*According to the Annual Report only 1.7 billion euros of the 20 billion in customer deposits in Laiki came from outside Greece and Cyprus. Russian money laundering could not have been massive. Why are the media saying its OK, its only the Russians who will lose out?
**of 20 billion euros in customer deposits 15 billion was deposited for less than 3 months and 14.3 billion was "time or notice" (see excerpts from Annual Report below). This means that at least 9 billion euros, and probably more, were on short term time deposit of less than 3 months ie: invested as a gamble on the interbank loan market or similar. The auditors should have noticed this problem. Few sober private investors would touch such time deposits nowadays. The auditors should have explained this, in the absence of any explanation we must assume that the "customer deposits" figure is either composed of some sleight of hand or the bank was doing some dubious gambling.
The largest shareholder in Laiki was Dubai Financial Limited Liability Company
who seem to have appointed 3 non-exec directors in the summer of 2010.
Published 23/3/13
See also:
When will the Eurozone crisis end?
On being "outside" in Europe. Isolated or free?
The Eurozone, EU, Cameron and Crisis
Globalization and Great Depressions
Europaische burgerkrieg anyone? The Germans lost the 'European Civil War' in 1945
Extracts from Laiki Annual Report
Notice 14.3 billion euros in time or notice deposits
23/3/13
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