18 March, 2013

Cyprus going south

I find it hard to have sympathy for the citizens of Greek, or Southern Cyprus, but things are not looking good for them. In financial difficulty, they asked the European Union for a bailout. The amount required, after scrutiny of the books, was €17 billion, 70% of its GDP.

It is hard to see how any country could get into this state, but then Greek Cyprus isn't an ordinary country; it is a satellite of Greece which, as we know, is also insolvent. And it is hard not to have some sympathy with the Germans, who are on the hook for all this nonsense, not wanting to pay for it. In the end the EU said it could cough up €10 billion, and the Cypriots would have to find €7 billion.

What they did was to impose a one-off tax on bank deposits, 10% for amounts over €100,000 and 6.75% for smaller amounts. So if a poor man has his life savings of €10,000 in Laika Bank he has to fork out €675 because the government he may not have voted for was corrupt and encouraged Russian money laundering. Bondholders, that is to say professionals who have invested in the bank, lose nothing.

But there are other issues aside from the moral inequity. After the crisis the EU made all countries have a deposit protection scheme, covering up to €100,000 deposits. The Greek Cypriot crooks have got around this by saying the banks aren't bust, so the deposit protection scheme isn't triggered, it's just a tax.

Second, it is clear that it is intended that this be the the precedent for future bailouts. So if you have your cash in a Spanish bank and it looks as if there's going to be a run on Spain, what would you do? Draw it out, of course. So now just the hint of a problem is going to cause a bank run.

Today is a bank holiday in the country, Clean Monday, when, laughably, the Greeks traditionally practise flying kites. The parliament in Nicosia is meeting in urgent session, and is new president Anastasiades has been on the 'phone to everyone who matters (Angela Merkel) but the damage is done. Italian and Spanish bonds were trading higher this morning, stock markets have fallen.

Either the Eurozone supports its members or it doesn't. Which is it?

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