I usually do not spend more than at the most two articles on the same subject, but the plan to seize bank deposits in Cyprus is such a pivotal moment in Europe’s political and economic crisis that it merits one last piece. In fact, this story from Reuters puts an important perspective on the crisis, a perspective that hints at what the true, long-term impact of this disastrous plan could actually turn out to be:
Cyprus pleaded for a new loan from Russia on Wednesday to avert a financial meltdown, after the island’s parliament rejected the terms of a bailout from the EU, raising the risk of default and a bank crash. Cypriot Finance Minister Michael Sarris said he had not reached a deal at a first meeting with his Russian counterpart Anton Siluanov in Moscow, but talks there would continue. Russia’s finance ministry said Nicosia had sought a further 5 billion euros, on top of a five-year extension and lower interest on an existing 2.5 billion euro loan. Cyprus is seeking Moscow’s help after parliament voted down the euro zone’s plan for a 10 billion euro bailout on Tuesday.
There are two reasons why they are turning to Moscow for help. Russians own 23 percent of all bank deposits in Cyprus, and most of their deposits are quite large. This benefits both parties: the Cypriots have been able to built a little bit of an offshore banking industry, which in turn has helped elevate the nation’s notoriously poor per-capita income scores; the Russians, in turn, get a quick and easy entryway into the EU, where they can buy upscale vacation homes and in general live a lavish lifestyle.
The second reason for the Cypriot government to turn to Russia is that the leaders in Moscow don’t give a fly’s fart about austerity. The people in the nation of Cyprus are of Greek descent – the island is technically divided with the north-east part being a deplorably poor Turkish province – and they know very well what the EU has done to Greece. They do not want the same treatment.
Closer financial ties between Nicosia and Moscow is, of course, not exactly what the Eurocrats in Brussels would want. Reuters again:
The European Central Bank’s chief negotiator on Cyprus, Joerg Asmussen, said the ECB would have to pull the plug on Cypriot banks unless the country took a bailout quickly. “We can provide emergency liquidity only to solvent banks and… the solvency of Cypriot banks cannot be assumed if an aid program is not agreed on soon, which would allow for a quick recapitalization of the banking sector,” Asmussen told German weekly Die Zeit in an interview conducted on Tuesday evening.
What he really meant to say is that the solvency of the banks can only be guaranteed if the government takes eight percent or so of what people have deposited into the banks. That is, after all, what the EU-ECB bank grab plan says. In other words, drain the banks for some of the money they can use to issue loans and make money, and the banks will be better off.
Makes perfect sense. Eurocrat sense.
As does this hollow threat from another European politician, as reported by Reuters:
Austrian Chancellor Werner Faymann said he could not rule out Cyprus leaving the euro zone, although he hoped its leaders would find a solution for it to stay.
Complete nonsense. The EU and the ECB have wreaked havoc with their destructive austerity policies on country after country to keep the euro zone together. They have hurled Greece into a full-fledged depression and pushed its parliament to the brink of fascism just so they could make sure the Greeks were not going to give up on the euro. They have turned middle-class Spaniards into food scavengers to guarantee that Madrid would not re-introduce the peseta. They have effectively neutralized parliamentary democracy in Italy and reduced Portugal to a whirlpool of social turmoil – all in the name of the common currency.
There is no chance that they will kick Cyprus out of the euro for going to Russia for loans. The Eurocracy may be arrogant enough to ignore the will of the European voter when it comes to fiscal policy, but they are smart enough to know that the euro is unpopular even among national leaders in Europe, and if they allow one country to slip out of the euro zone – for whatever reason – it will open for more countries to follow.
That is not to say that the EU won’t try to punish Cyprus. But they really do not have that many ways of doing it. The EU is a burden on most countries, though Cyprus is one of the net takers of EU funds. In theory, the EU could reduce or terminate parts of the grants they hand out to Nicosia. In practice, though, that would be politically very dangerous, as it would spark stronger anti-EU sentiments in many countries. National leaders would in all likelihood voice their strong opposition, especially the British government which is being pressured by a surging UKIP to sever ties with Brussels.
What we do know, though, is that there will be some kind of reaction from Brussels, and that it will probably be of the knee-jerk type. Reuters reminds us that:
The EU has a track record of pressing smaller countries to vote again until they achieve the desired outcome.
The difference is that no other country has had such comparatively convenient access to alternative credit as Cyprus has.
We won’t know the full fallout of the bank-grab scheme for some time. But there is no doubt that this story will have consequences for the entire European Union, not just the euro zone. And it will be worth following.