Cyprus: Why Cyprus Should Blame Itself and not Merkel

No – it is not all Markel’s fault

 

(A Cypriot woman wearing a mask of the German Chancellor, Angela Merkel,

takes part in a protest against an EU bailout deal. Photo AFP)

 

Cypriot citizens and politicians are busy blaming German Chancellor Angela Merkel, the International Monetary Fund, the European Central Bank and the European Commission for all of their current problems.  Here is a contrarian view of what is happening.
 

They might do better to look in the mirror for a bit and wonder how things got so bad in the first place.

For one, Cyprus has been known as an off-shore tax haven for money laundering for years. As long as this worked to the benefit of Cyprus, no one there complained too much, even when the rest of the Eurozone did complain.  You cannot enjoy the benefits of hot or corrupt money and then complain about it when something goes wrong.

For another, Cypriot banks took much of the “non-resident Russian” money and used it to invest in Greek government bonds.  When the Greek government bonds turned out to be a bad investment, the severely over-leveraged Cypriot banking system began to implode.  Cypriot citizens might want to ask their government bank regulators why they let the banks make such high risk investments.

Finally, the banking system of Cyrus is, according to Eurogroup president Jeroen Dijsselbloem, five times the size of GDP.  Why did the Government of Cyprus let this happen?  The answer is that they took huge risks in using overseas money to grow their banking sector, but believed that nothing could go wrong and if it did, the EU would bail them out.

As the folks over at American Express say “Membership has its privileges.”  When you read the fine print, however, you also find out that membership has its costs and responsibilities as well. For Cypriots, they are now finding out that membership in the Eurozone can work both ways. 

Hello Cyprus!  Welcome to the reality of what happens when you look the other way at unethical practices. 

Other citizens in Europe and around the world might want to take a harder look at their politicians and bankers and ask them what they are doing. (Hello to Luxembourg!!  You could find yourselves in the position with all of your "non-resident" money flows.)

This is economics for the rest of us – and unfortunately – it is economics for the average Cypriot citizen that trusted his/her bankers and politicians.  The savers will get fleeced and the debtors will get bailed out.  Ouch!

Cyprus Explained: Taking Money from the Savers

***Please feel free to leave comments or ask questions at the bottom of the article. We will reply or will write a special article to answer your questions.***


What just happened in Cyprus is not that hard to explain.

Savers have money. The government of Cyprus and the European Union needed money.

So they are trying to take the money from the savers.

It is that easy.

The Government of Cyprus needed money to bail out its poorly managed and over inflated banking sector. After years of mismanagement and months of negotiation, it became clear to the recently elected government of Cyprus that the rest of the Eurozone was not willing to bail out Cyprus like it had bailed out Ireland, Greece and the Spanish Banks.  This was partly because Cyprus is small and virtually powerless. But is it also true that many European politicians believe Cyprus handles a lot of money for what is politely called “non resident Russians.”  In other words, a lot of folks believe that the Cypriot banking system does money laundering for the Russians.  As such, it would not be good for the Troika (European Union, European Central Bank and the International Monetary Fund) to be seen to be using taxpayer’s money to bail out banks with questionable reputations.  Of course, lots of other banks do money laundering for criminal organizations (hello to the nice folks at HSBC) but they are large banks from powerful countries and they have been deemed “too big to prosecute” no matter what sort of dubious activities they undertake.

Therefore, the Troika told Cyprus that it would have to take money from their own working citizens and from foreign customers. The final outcome is unclear, but it looks like Cypriot bank account holders could lose anywhere from 6.75% to 9.9% or their money or more. In financial terms, this is called “getting a haircut.”

The shock this time is that it is not bond holders or major investors who are getting the haircut. It will be the average Cypriot citizen that is getting scalped – along with some “non resident Russians.”

Remember this if you have cash in a bank anywhere in the world.  If that government needs money they can do several things to get it. They can tax you, borrow more money, print money, create inflation or even selectively default on loans. When things get really bad, they can just take money from responsible citizens who save money – because these days they are often the only ones that have it.

This is economics for the rest of us - at least those of us who try to save some money now and again!

(See the video at http://www.youtube.com/watch?v=6Sgax5EgKf4&noredirect=1 - Protesters in Cyprus remove the flag from the German Embassy. Most Cypriots (and Greeks) blame Germany and President Angela Merkle for the austerity policies which are causing unrest).