Cyprus is the latest Eurozone economy to require rescue from a major financial collapse. Its two largest banks—the Bank of Cyprus and Laiki—faced bankruptcy without a massive injection of capital.
On 25 March a last minute deal was struck with the Troika for a $12.5 billion bail-out, equivalent to 60 per cent of Cyprus’ GDP. Cyprus was forced to raise a further $9 billion itself.
Initially the Cypriot government planned to impose a tax on all Laiki and Bank of Cyprus deposits—even the most modest amounts. After public protest it backed down and will now only target deposits over $120,000. A series of public assets also face privatisation.
The Cypriot financial system marketed itself as a tax haven to international investors. Russian oligarchs invested heavily in the economy as a way of avoiding tax. The Cypriot government still boasts of having the “lowest non-offshore corporate tax rate” in the EU of 10 per cent and has signed legislation with Russia to eliminate double taxation on investments.
The rapid inflow of money inflated the financial system to five times the size of Cyprus’s economy. This fuelled a domestic property bubble. Cyprus’s banks invested deposits outside the economy in search of higher profits. Both Laiki and Bank of Cyprus had major investments in Greek government bonds. When Greek debt held by private creditors was written off by 70 to 90 per cent in October 2011, the losses of the two banks totalled $6 billion. Both banks hit the wall and required re-capitalisation.
But many working people will lose their life savings through the raid on bank deposits. Over 5000 bank workers have threatened to go on strike as they face losing 37.5 per cent to 60 per cent of their pensions. A number of the big international investors, including Russian oligarchs, managed to get their money out of the country before crunch came.
“Many of our clients had a heads-up on this issue,” Ed Mermelstein, a real estate lawyer who advises wealthy Russians, told the British Guardian. “Cyprus had started having the conversations about what it was intending, and that’s been going on for half a year.”
The Laiki bank will be shut down after its remaining deposits are transferred to the Bank of Cyprus. The restructuring will cause major job losses. Although a financial meltdown has been avoided, Cyprus faces years of depression. This year alone the economy is expected to contract by 10 per cent.
The use of bank deposits to cover financial losses is unprecedented—this constitutes a “bail in” rather than a “bail out”. Until now bailouts have simply been provided in loans from the EU and IMF, to be paid back through cutbacks to public sector jobs and spending. The new approach in Cyprus is an admission that this has been a recipe for disaster. Greece is in its sixth year of recession, and despite the bailouts its debt to GDP ratio continues to rise.
Cyprus is the fifth Eurozone economy to be bailed out after Ireland, Greece, Portugal and Spain. The risk of further defaults and the collapse of the single currency persists. Slovenia is likely to require a bailout next.
To avoid deposits flying out of the Cypriot economy, the government has now imposed capital controls restricting domestic and international withdrawals. This goes against EU treaty laws and effectively means Cyprus has left the single market of the Eurozone, because it restricts the movement of capital in and out of the economy.
The Eurozone crisis has fuelled massive political discontent. In Cyprus students and workers took to the streets under the banners of “Your Mistake Our Future” and “Troika Out”. Greece has seen several general strikes, and worker occupations. On November 14 last year millions of workers across Europe went on strike together against austerity.
Only the strengthening of these movements can win an alternative to a broken system.
The Cypriot government could have nationalised the banks, writing off their debts through seizing the deposits of tax dodging international investors. This could have guaranteed jobs and seen bank funds put towards domestic loans and job creation.
Instead, like governments across the Eurozone, it remains committed to squeezing workers to pay for the crisis through cutbacks, privatisation and seizing their life savings. As Bank of Cyprus worker Dinos Frangoudis explained: “Our future depends on the prospects of workers across Europe. We need to link our struggle with workers in Greece, Spain and Portugal—and even Germany and Britain.”
“We’re making an appeal of solidarity to the workers of Europe, to join forces and fight back.”
By Eliot Hoving