’’After the battle of Crete in the second World War, we now have the battle of Cyprus in the 3rd World War – this time a currency war and a war for energy deposits, economic in nature. I’m afraid, especially as far as the ordinary German citizens are concerned, who suffered the most in the past, that this time the Planet will not be able to withstand a 4th Reich and a Prussian Germany – enslaving the country forever’’ (G. Gap).

ARTICLE

Based on what we have seen so far, we will most probably witness a «collective capitulation» of Cyprus – which means that when its Parliament proudly stated (voted) its opposition to the forfeiture of bank deposits, as well as to the «invasion» of the Troika, it had not yet thought of what to do next.

Now, given that the (supposedly) German position is being imposed, according to which deposits over 100,000 Euros should not be «taxed», what remains is the «seizure» of a large part of the remaining deposits – which, if correctly calculated at 24 Billion Euros, would «require» a confiscation rate equal to 25%, since Cyprus is obliged to contribute about 5.8 Billion Euros (in order to become «eligible» for bail out funding by the EU). So there are three «precedents» for today’s «Soviet-type» Euro-zone:

(a) The «punishment» of wealthy depositors, especially «Russians», through a special withholding of their deposits – if of course, one who has saved more than 100,000 Euros can be characterizes as being wealthy (while at the same time global conflict will be intensified, because of the «attack» on Russian deposits). Now, if deposits above 100,000 Euros will be committed, for an indefinite period of time, then we will have yet another novelty.

(b) The control over the free movement of capital, since the Cypriot banks have set a withdrawal limit,

(c) The sudden, arbitrary closure of banks for an undefined period of time, if decided so by the Euro-zone leadership – meaning Germany, with the help of the ECB and the liquidity shut-off blackmailing policy (since essentially the Euro-zone countries do not have their own central banks, monetary policy etc.).

Because of course, these decisions are not taken by Cypriots, but are rather directions coming from the Euro-zone, it is fairly justified to believe, that both major investors and small depositors will in the future keep the above «precedents» under serious consideration – as far as their investments are concerned (bank stocks, bonds etc.) and the security of their deposits.

In this context, it is believed that they will avoid engaging in further transactions with European banks, or in its lightest form, will increase their «sensitivity» towards news or simple rumors, related to banks and states – something that will definitely trouble countries like Greece, Italy, and Spain (among others).

This in turn means that the risk for a multiple «bank run» will increase dramatically in many countries – a situation to which the outcome is difficult to be predicted, with the hegemonic aspirations of Prussian Germany growing exponentially.

All this, has severely deteriorated the Euro-zone and the Euro image, especially after the abject behavior against Cyprus – outcomes that are definitely not to the benefit of the common currency and the «idea» of a united Europe belonging to its citizens.

On the other hand now, there is still the question, of why exactly Cyprus is in need to borrow 17 Billion Euros from Europe – since its citizen deposits are around 40 Billion Euros, with which an internal borrowing system could be organized (national bonds), without the need for the country to enter any «rescue» mechanism (something Greece should have done in 2009).

Furthermore, around 11 Billion Euros will be set for the recapitalization of the bankrupt banking system, at least according to what has been announced – although it is difficult to comprehend how a financial system can go bankrupt, even that oversized (152 Billion Euros in volume), when 68 Billion Euros in deposits are backing it.

Regardless of this, and also of the fact that the Church of Cyprus has placed almost all its assets in one bank (it holds 29% of the Greek Bank), the total value of the Cypriot financial system is now valued at only 500 Million Euros – it has therefore almost collapsed.

Continuing, Cyprus has decided to save the 500 Million Euro valued banks, by «spending» 11 Billion Euros of tax-payers money – i.e. with an amount that exceeds 20 times their «price» (without knowing if it will be enough), when both the economic model and the competitive advantages of the financial «industry» have ceased to exist (have literally died).

’’To protect the deposits of its citizens, valued at approximately 40 Billion Euros’’, one could answer. But, on the one side, deposits up to 100,000 Euros are guaranteed by Europe (whatever this warranty might truly stand for) and on the other, only a small part of them would be lost, if Iceland’s example was to be followed in «handling» its banking problems (good and bad banks, all deposits transferred to the good ones, nationalizations of banks etc.).

In the view of many, therefore, these actions equal to complete nonsense – especially when this «rescue» attempt, will only result in Cyprus’s public debt to skyrocket to 140% of its GDP, compared to a 80,9% in 2012 (Source: CIA World Factbook).

Of course it is undoubtedly an unsustainable debt, which will continue to grow, due to the expected recession and due to many other factors (unemployment, closure of small-medium sized businesses, poverty, etc.). At the same time, profitable, strategic and public utility companies of Cyprus will «have to» be sold, national sovereignty will cease existing and the country’s underground wealth will get looted – without all this having any particular benefit to its citizens.

So essentially, the government of Cyprus plans to protect some specific depositors, sacrificing all the rest of its citizens, as well as the country itself – since it cannot avoid bankruptcy, unless a great part of its public debt is being written off (a fact of course very well known to investors and international lenders, who will avoid the country in the future).

Another question is what Euro-zone rescue mechanism will be used to recapitalize the banks of Cyprus – assuming that the government will finally choose this way to commit «suicide», or better stated a slow death.

The best option available to Cyprus would undoubtedly be the «use» of the ESM – meaning the direct funding of banks, without the state having to burden the debt. But this is unlikely to happen –because it is a loss-making venture the ESM would avoid and because countries like Spain, Italy, Greece etc. would require the same thing, in which case the mechanism would collapse.

So the «Pandora’s Box» has opened in Cyprus, responsible for that being both Germany and the islands government, which does not want to admit the obvious: that after false handlings (Russian investment in Mari, seizure of bank deposits etc.), Cyprus, as a financial Center, belongs to history – it was literally «murdered».

Unfortunately for its citizens the right solution, i.e. the «processing» of the country’s indebted banks only, about the same way Iceland managed its own banking crisis, was eventually not selected – sacrificing them for no reason.

The table below depicts the economic comparison between Iceland and Cyprus in 2011 (values are in US Dollars):

TABLE I: Economic indicators of Cyprus and Iceland in 2011 (projected), in Billion Dollars (US)

Source: CIA World Factbook

Table: V. Viliardos

As clearly seen from Table I, Cyprus’s major problem was its trade deficit (a surplus in Iceland), relative to its GDP – with the explosive increase of Iceland’s public and foreign debt, because of the indebtedness of its banks, indicating the track Cyprus has chosen to follow as well, a country that suffers (additionally) from the same disease.

The major differences between the two countries of course, which have proven fatal to the island, is on the one hand its currency and on the other its participation in the Euro-zone, coupled with its «geopolitical» position – since Iceland, in a relatively neutral geopolitical area, had the (painful) possibility of devaluating its currency, as well as the independence, and the courage of course, to refuse to burden it citizens with bank debts (even though they are still included among the country’s external debts).

EPILOGUE

The future of the citizens of Cyprus is rather frightening – since, no matter what will eventually be decided for the country’s depositors, in the forthcoming negotiations the IMF will be sitting on the one side of the table, in support of the islands lenders, while on the other the government will have to confront it, with no one backing it: neither the people of Cyprus, nor Europe and Russia.

Unfortunately, the troubled island found itself unprepared «in the eye of the storm», having to choose between the Scylla and the Charybdis (ancient Greek monsters of mythology, both equally wise to stay away from).

Of course we all wish and hope that its citizens will be able to survive the storm expected to hit with fury not only Cyprus, but the entire Euro-zone – «wishes» also applicable to Greece, that continues to «betray» its friends and has ended up becoming a protectorate of its lenders.

PS: The strategy of deferment

’’Another way to make an «unpopular» (citizen opposed) decision acceptable by the general public (as for example austerity measures, the sell-off of state owned enterprises, the «haircut» of deposits, over-taxations on real estate, etc.), is to present it as «painful, but nevertheless necessary» – extorting/distracting the public consensus before executing the decision, in order to implement it in the future. The reason this process is followed, is because it is always easier for one to accept a sacrifice due in the future, than it is for one that is due immediately – mainly, because the effort is being deferred.

Later in the process, because the «public» has always the tendency to naively hope that «everything will be better tomorrow» and that it will ultimately avoid the sacrifice requested, it conciliates and capitulates.

Of course, this technique leaves the «people» a certain time, so that they can get used to the idea of change and accept it as «fate» – when the time of implementation has finally come’’.

Athens, 13.05.2013

Date of original: 23.03.2013

Translation of original: Dennis Viliardos

    Vassilis Viliardos is an Economist and an Author of several books on the Greek economic crisis. He has earned his Economics degree in ASOEE (Greek University of Economics) and in Hamburg, Germany.  He lives in Athens, Greece.