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Wednesday, June 12, 2013

The “Cyprus Experiment” and The Launch of a Global Trend

By Valentin KatasonovD.Sc. (Economics), Economist and the chairman of the S.F. Sharapov Russian Economic Society
"In March 2013 the events in Cyprus shock the world to hit the radar screen of world media.
The bank deposits were confiscated.
Some tried to make it look as an emergency measure, an exclusion from the rules that define banking activities and the functioning of market economy.
But there is a solid ground to believe the confiscations are to become a routine feature of everyday life.
Deposit confiscation: a well-planned impromptu
The events were normally painted as some kind of poorly planned ad libbed decision on the part of the European Union carried out by Cyprus government. It was a one-time action, a step taken under the pressure of circumstances. We view it differently, in our opinion it was a well prepared concerted action approved at top level including actors outside Europe. The very operation should be defined as a precedent, an experiment or a test. Or, to be exact, the test to launch a global trend and the confiscation spread around the world.
As far back as in 2009 – 2010, when the ways out of the global crisis were discussed at international summits (G7, G8, G20 and other structures), non-standard ways of banks rescue in contingency were part of the agenda, including the schemes of bailing them out at the expense of account holders. For instance, things like introducing cuts on deposits, full or partial, or freezing accounts (either till a bank has fully recovered or by compulsive conversion into shares (authorized capital stock).
Even after the first wave of the financial crisis died down, the ideas never stopped hitting the agenda of world financial agencies (the Bank for International Settlements (BIS), the International Monetary Fund (IMF), the Financial Stability Oversight Council – FSOC), central banks, banking and financial oversight agencies of the «gold billion» countries.
For instance in December 2012 the Resolving Globally Active, Systemically Important, Financial Institutions, a joint paper by the Federal Deposit Insurance Corporation and the Bank of England, saw light. The authors cede that the recent banking crisis was in great measure managed thanks to financial injections. As they see it, the measure is wrong because by violating the market economy laws it shifts the burden on taxpayers, aggravates budget deficits and boosts state debts. The report says the use of deposits for the purpose of rescuing creditors is a more just, effective and market oriented way to tackle the issue.
The prescription envisions the following ways to use the money of account holders: a) no return subsidies; b) credits; c) investments (acquisition of shares and stock). The paper admits the deposits converted into shares of the bank make a money owner lose the right for compensation of losses guaranteed by state insurance. Let me recall that the US Federal Deposit Insurance Corporation (FDIC) offered guarantees for the deposits below $250 thousand. It is also noted in the report that the state insurances of the United States, Great Britain and other states of «gold billion» will not be able to provide safety cushions to deposits. This way the use of deposits for banks rescue becomes inevitable.
Somehow the authors get around the question if the proposed measures are just, democratic or market like. They come to a rather under-substantiated conclusion that the state deposit insurance has obviously become an anachronism nowadays.
The idea of deposit cuts in Cyprus banks hung in the air a few months before the European Union and Cyprus announced their decision. On January 2013 the New York Times used the Russian word strizhka while describing the Cyprus happenings, «Russians, who hold about one-fifth of bank deposits in Cyprus, would take a big hit». No surprise the US journalists knew what would take place in Cyprus two months before the events. What is striking is the carelessness of many Russian clients who believed the offshore was a safe haven. According to European Commission estimates (evidently understated) the depositors of the two largest Cyprus banks – Laiki Bank and the Bank of Cyprus lost €8, 3 billion of depositors’ money because of cuts.
In April 2013 Cyprus President Nicos Anastasiades said, «Regrettably, this fundamental EU principle was not respected. On the contrary, decisions reached beforehand by the interested parties were coercively imposed». He added, «I sincerely hope that this precedent in relation to Cyprus is not going to be applied elsewhere in Europe, although, as it is well known, the main raison d’etre of a precedent is that it can serve the purpose of establishing norms and guidelines to be repeatedly and universally applied». Indeed. Thus some countries started to discuss the Cyprus experience for practical purposes.
Some states individual initiatives
Right after what happened in Cyprus, Portugal, Spain, Italy, Ireland, Greece; Slovenia came into the focus of public scrutiny. These are economically weak links; the banking bankruptcy risks are especially high. It was expected back in March the same bank rescue steps would be applied in one of these states. Significant deposit outflows went to the banks of states boasting more stable economies, especially Switzerland. Quite unexpectedly the Cyprus goings-on were echoed thousands of miles away – in New Zealand and Canada." (snip) ...
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