If you ever manage to get a troupe as diverse as Latynina, Mark Adomanis, the Cypriot Communist Party, virtually every financial analyst, Prokhorov, and Putin united in condemning your crass stupidity and cack-handedness, it’s probably time to stop and ponder. But it’s safe to say that’s not what the Troika – the European Commission, European Central Bank, and IMF – tasked with managing the European sovereign debt crisis is going to be doing any time soon. They seem to be living in la la land.
Here is the low-down. Contrary to German/ECB propaganda, Cypriot public finances, while nothing to write home about, are not in a catastrophic state. The debt to GDP ratio, far from ballooning out of control like Greece’s, was actually lower than Germany’s as late as 2011! This was despite Cyprus being steadily hammered by the global financial crisis and the massive explosion at a naval base in 2011 that cost it about 10% of its GDP.
The main problem was in its financial sector. Although it should have been safe on paper, Cypriot banks had the bad fortune to have had many operations in Greece – which hemorrhaged money as Greek debts were restructured under EU guidance. These involved painful austerity, but the principle that bank deposits would be inviolable held across the PIIGS. But for Cyprus, the Eurocrats – egged on by Schäuble in particular – decided to make an exception, demanding a “bail-in” as part of any financial rescue package. For the ultimately trifling sum of $6 billion, they were prepared to erode basic principles such as sanctity of property that the EU is founded on.
According to Edward Scicluna, the Maltese Finance Minister, his Cypriot counterpart Michalis Sarris was for all intents and purposes brow-beaten into accepting the deal – a 6.75% levy on deposits of less than 100,000 Euros, and 9.9% on everything above that – that the country’s parliament would later decisively reject. The Europeans, according to him, were dead-set on “downsizing” Cyprus’ supposedly overgrown financial sector and in particular its status as a tax haven and alleged center of Russian money laundering. After 10 grueling hours of discussions, Sarris finally conceded, and as soon as that happened, “Schäuble demanded that all wire transfers to and from the Cypriot banks would cease forthwith.”
In other words, they wished to destroy Cyprus’ financial system, and it seems certain that they have succeeded in this. As soon as the banks reopen (now delayed until at least May 26th), who exactly will continue to keep their deposits in a Cypriot bank?