At the dawn of the financial crisis in September 2008, Cyprus was one of the first European countries to reassure bank savers of relatively humble means by guaranteeing their deposits up to a limit of €100,000. What this meant was that the government made an assurance to its citizens. Anything could happen to a Cypriot bank. It could collapse. It could crumble into pieces, servers could plunge into flames, cashiers and mortgage consultants could explode into a pile of debris, and small savers would still walk away unscathed with all of their savings in their pockets.
It is important to note that the popular tourist island of Cyprus is the third largest tax haven for Russian investors. Many wealthy Russians and Ukrainians deposited their money in Cypriot banks to avoid higher fees at home; they would then reinvest it from their Cypriot accounts into their businesses back in Russia and Ukraine respectively. In 2012, $3.92 billion was invested in Ukraine from Cyprus-that is 65% of total foreign investments in Ukraine[i], according to the Ukrainian state statistics website. The majority of foreign direct investments from Cyprus are in fact, Russian and Ukrainian capitals hidden offshore for tax and legal protection purposes.
Suppose, for instance then, that Cypriot banks engaged in high-risk practices. Suppose they took in deposits from trusting small savers and pooled it together with funds from large Russian investors only to lend this money to risky businesses. These lax practices then weakened the bank to the point where it went into liquidation. Under such a deposit guarantee plan, this would not be an issue for the smaller middle-class investor. A lousy business would as a result have collapsed under the pressure of the troubled European market. The big losers would be the bankers and the wealthy with millions deposited in the banks: they would lose heavily and the lower to middle class would have a safeguard on their original deposit.
How is it, then, that when real banks in Cyprus face actual financial destruction as a result of their conduct, it is not the banks themselves that suffer, nor the foolish rich who stashed their money there, but those savers of humble means who were promised their money was bulletproof? Those who thought they were safe with the guarantee are now being hit with a tax of 6.75% on every hundred euros they have in savings, in order to save the banks that have left them high and dry. If we were to think of Cyprus as somewhat of a Treasure Island that is sinking, only the fat cats and bankers are being allowed life-rafts. It is true that those with over €100,000 are being made to pay more – 9.9% for every hundred euros – but the percentage game is in itself a game for the rich, whereas the less well-off live in a world of absolutes. A Euro savings millionaire still has €901,000 left after the levy. If you’re saving up for a €200 CT Scan, on the other hand, and your savings go from €200 to €186.50, you can’t purchase that much needed medical examination.
At this present moment, Cypriot and German politicians are arguing over who is to blame for the terms of the bailout agreement. Yet they all seem to be missing the bigger picture. Whether it was Germany who was to blame by insisting bank customers help pay for a loan to restructure the Cyprus banks, or Cyprus who was to blame by not wanting to over-tax the rich Eastern Europeans who have pumped so much money into the island, the fact is that neither side was prepared to insist on honouring the agreement to protect the less well-off. Nor has either side, it seems, dared to consider asking the big foreign financial institutions who have agreed to lend Cyprus banks €1.7 billion over the next few years if they would mind taking a loss on that investment.
Recent events in Cyprus have nothing to do with routine government spending, with austerity or stimulus. What’s happening in Cyprus is not, at its core, about a government failing to pay its way, but about banks failing to pay their way, and having to be rescued by government. If there is a government failing, it is not that it spent beyond its means but that it allowed the banking sector to swell to unsustainable proportions- like a water balloon that has been filled to its capacity and exploded- leaving everyone around it to clean up the mess. In Cyprus, those who are less well-off face a deposit tax to pay for the rescue of their banks by Europe. The Cypriot lower and middle classes are being forced to rescue their banks, but who might we ask is going to rescue them?
[i] The Epoch Times, (English Edition) ‘Cyprus Bank Collapse Hits Ukrainian Investors,’ March 28, 2013 http://www.theepochtimes.com/n2/world/cyprus-bank-collapse-hits-ukrainian-investors-370450.html