by Daniel Albarracín
Desperate Cypriots will today only be able to take out 1,000 euros from ATMs . They know they will soon have to pay a “financial solidarity tax”, taken from their savings to rescue the private banking system. And to protect all those international creditors, so they can still receive money for debts incurred by Cypriot banks.
Recently a model for European banking union was agreed in which EU financial institutions were confirmed as the mechanism for the socialization of private financial debt and its conversion into sovereign debt, creating funds that guaranteed bank capital, but not the deposits of the people who have their money in banks. The case of little Cyprus, amounting to only 0.17% of EU GDP, and the freezing of the Cypriots’ bank accounts, is an experiment that may have to later be remembered as a warning to the peripheral economies.
The previous president, communist Demetris Christofias was hostile to the requirements of the Troika, and did not seek reelection. The recent election victory of conservative Nicos Anastasiades opened the door to a programme that involves the immediate application of the Troika bailout plan.
The roots of Cypriot economic bankruptcy are to be found in different factors. Its close relationship with the Greek economy has been well publicized, but the main thing here is the bankruptcy of the private banking sector.
Bank recapitalization needs a few months ago were estimated at 55% of GDP (in the failed Irish state it reached, at its worst, 40% of GDP). For this reason, the Cypriot State had to ask for financial assistance in June 2012, for a total of 1.8 billion euros. Having lost access to international markets, the state found itself unable to finance this process itself. It is from that time that the Troika’s Memorandum of Understanding was in the making; it included a fiscal adjustment worth a total of 7.25% of GDP (or 1.3 billion euros) until 2016. The weight of public debt to GDP was 140% of GDP after that first bailout last year, but now reaches 150%, which means there is a very serious risk of Cypriot debt default.
The [Cypriot] banking system works with a certain opacity, in an economy with a tax model comparable to a tax haven, almost like that of Ireland. This made it extremely attractive to very wealth foreigners, who placed a 24 billion euros in Cypriot banks, most of it from Russia. For this reason the banking sector reached a size that wholly inappropriate for the Cypriot economy – at five times its GDP, the banking sector’s insolvency dragged the country into bankruptcy.
In what was the fifth rescue programme in the Eurozone, the Troika provided 10 billion euros in funds, which due to Europe’s reluctance, was far lower that the amount requested by Nicosia. Cypriots could have requested an extension of the loan a 2.5 billion euros loan from Russia, which was willing to coordinate with the Troika.
The EU bailouts, whose main objective is to stabilize the private financial system, come with strong conditions for member states that imply a heavy burden for the productive classes. In this case, the first casualty are the depositor who will see their savings reduced, and who will be affected by restrictions on moving their money to avoid capital flight. A tax of 6.75% is to be imposed on deposits of up to 100,000 euros and 9.9% above that amount, a measure (demanded, above all by the IMF, and the government of Germany) that will generate 5.8 billion euros. This hit savers hard, especially the wage earners and pensioners, who could not foresee this situation (which, however financial experts had forecast for months) or who are unable to move their money to another country, because of their daily needs. As a compensatory measure depositors will receive shares of equivalent value to the tax in a bankrupt banking sector! You would need a lot of those share for them to be worth anything which means those with large savings are the only ones who will benefit, if any, from the recapitalization rescue!
The rest of the bail out conditions to meet cuts to the deficit, will very likely be cuts to investment and social spending; three billion euros of privatization and “agreements” to tap Cypriot gas reserves. All these measures are designed to ensure a guarantee that the debts (before those of the Cypriot banking system, now those of the public sector) continue to be paid. The gas will begin to extracted and exported in 2018-2019, after an investment in infrastructure at a cost of about 10 billion euros; this investment which would result in high performance and strong long-term revenue for the public purse, but now a large proportion will be diverted to repay debt and to form a sovereign fund to pay down the deficit under the Memorandum of Understanding. It is a generous plan for creditor and rentier banking capital; meanwhile natural resources will be plundered and workers’ rights slashed.
As counterpoint, there will be a small increase, from 10 to 12.5%, in corporation tax. It is a formula designed to income tax revenues for the state, but the increase should have been much sharper, given the role of the country’s fiscal dumping in this sad episode and the unfair burden being born by wage earners. At the same time it is clear that the purpose of this tax collection exercise will be completely unfair and ineffective.
The “Cyprus experiment” is a warning. It is time that the people of Southern Europe unite to reject these unjust conditions imposed by of the Memoranda of Understanding and the European austerity treaties. We must start walking together to build a supranational strategy of economic solidarity.
Daniel Albarracín is a Economist and sociologist
Translation/Edit by Revolting Europe