This post, written in March and April 2013, has been updated on Oct 16, 2013; I fixed two typos. The rest of it remains unchanged.
I have written before about Jaruzelski Moments in modern Liberal Capitalism. Expropriating capital from banks is such a moment. Even I did not think it would come to so egregious a violation of THE most basic principle of Liberal Capitalism – respect for private property – so soon.
I hereby declare Liberal Capitalism dead.
On and on we go, with the folly of the bailouts in the Euro zone. Serge Halimi, in Le Monde Diplomatique (April), pointed out that had Hugo Chavez mandated the expropriation of 6.75 to 9.9% [sic] of the money in people’s bank accounts, the press in the liberal democracies would have pilloried him as a “killer of liberty, dictatorial, tyrannical.” Had Chavez done it, it would have been theft; when a “liberal democratic” government does it, at the expressed orders of international capitalist bureaucrats, it’s just fine. Cyprus is up to 70-80%, at last report. [See below for one explanation of why.]
Let’s stop using the term “haircut.” The Greek government declared partial bankruptcy, not a haircut. The Cypriot Government is stealing people’s money; we have a simple, one-syllable English word for it – theft. As far back as Hammurabi and the Ten Commandments, theft has been a crime. Even Orwell would be astonished to see the word “haircut” transformed into a euphemism for “theft.”
You may think that Cyprus is about “sovereign debt,” because that’s how the international press treats it, but it’s really about the German (and French) banks eliminating competition from Cypriot banks. As the Foreign Minister of Cyprus said on al-Jazeera, they are being used as an experiment. He did not say what kind of experiment, but I would say NOT an experiment related to “sovereign debt” but one related to a crackdown on banks in places like Cyprus and Luxembourg.
Liberal democracies historically have two ways out of debt: bankruptcy or inflation. So far, we have seen one Euro zone country after another choose the partial bankruptcy route. The French monarchy used similar tactics (in 1604, 1634, 1648, 1714-20, 1759-63, to cite a few examples). Greece has already operated its bankruptcy, writing off vast amounts of its debt (but not ALL of its debt, so it’s not technically a “bankruptcy” in the Orwellian language of modern capitalism). We have had partial bankruptcies in Ireland and Portugal, too. Press reports suggest Slovenia is next. Spain and Italy cannot be far behind. That means 4 out of 17 have declared partial bankruptcy, a fifth is on the verge, and one other (Spain) will have partial public bankruptcy to cover losses that cannot possibly be made good in an economy in free fall. Italy seems likely to join the list, but its situation is more complicated.
Cyprus takes us onto new ground, in which a CAPITALIST state simply expropriates massive amounts of capital. To put it into perspective, thought of in terms of % of GDP, Cyprus has already expropriated the equivalent of $3 trillion, were a similar action to take place in the US. Given the announcement (hardly surprising), that everyone underestimated the problem, and the bailout will now require much more money (I’m shocked!), all of which has to come from Cyprus, Cyprus will soon be in $6 trillion territory. So much for their promises that no more money would be taken. Even more embarrassing for the ECB et alia, the Dutch Finance Minister, Jeroen Dijsselbloem, let slip that the Cypriot solution would be the template for future bailouts. His colleagues immediately refuted his comments, which he subsequently withdrew, but what investor would have any confidence in these people after the Greek-Cypriot episode.
Only a fool is keeping his or her capital in a Euro zone bank at this point.
This story gets progressively sleazier the closer you look into it. A small number of people moved massive amounts of cash out Cyprus just before the expropriation; I have read reports that relatives of leading Cypriot politicians are among them, but have no way of knowing if such charges are true. [The Parliament of Cyprus is investigating this process. The Bank of Cyprus and the Parliament are engaged in stalling tactics, each blaming the other as of today, 13 April.] A story published in an English-language paper from Greece states that 6,000 people withdrew large sums – the article is poorly written, but implies each of them took out 100,000 Euros or more – from either Laiki or Bank of Cyprus between 1 and 15 March 2013. http://www.enetenglish.gr/?i=news.en.economy&id=592]
To its credit, CBS Money Watch had an excellent story on this issue (Constantine von Hoffman, March 27th, accessed on April 13):
“While the closures affected people back home, both banks have kept open branches in London and placed no limits on withdrawals there. There is also concern that money may have been withdrawn via Russia’s Uniastrum Bank, which is 80 percent owned by Bank of Cyprus and has no restrictions on withdrawals in Russia. Russians were among the largest depositors in Cypriot banks. Critics say Cyprus’s lax bank regulations made it easy for Russians to launder money there.
A secret bank run may have begun even before the bailout agreement was signed. The German newspaper Der Spiegel reports:
There are indications that large sums flowed out of the two banks just before the first bailout package was signed in the early morning hours of March 16. At the end of January, some 40 percent of all savings held in Cypriot accounts were on the books of those two banks. Since then, however, much of it has been transferred elsewhere, despite orders from the central bank that accounts at the two institutions be frozen.
[end of citation from CBS]
CBS quotes Mark Grant, of Southwest Capital, as saying that the increased rate of expropriation, from the initially announced 20-40% up to 80%, was due to the massive withdrawals made at the British branches of the two banks and at the Russian bank.
Let’s take a closer look at that process. The Cypriots, with some justification, point to the Greek debt fiasco as the precipitant cause of their problems. Cypriot banks did lose something like 5 billion Euros on Greek bonds; the Cypriots claim the European Central Bank (ECB) encouraged them to buy such bonds. Let us remember that the bailout for Greece allowed it to write off 70% of its PRIVATELY held bonds. Bonds held by the ECB, however, were NOT written down: Greece has to repay them in full. The ECB made a substantial profit in 2012 from interest on its Greek bonds. Where did the ECB get many of its Greek bonds? Why, it bought them from French banks, such as Societe Generale (SG). Between Nov 2011 and March 2012, SG reduced its Greek bond holdings from 2.9 billion Euros to 0.2 billion Euros: at the same time, the ECB was madly increasing its holdings of Greek bonds. Gee, I wonder if those two sets of transactions are related? The ECB reportedly bought such bonds at a discount (I’ve read estimates of roughly 70-80% of face value), and then insisted the Greek government honor them at full price (they turned them over at par value for new Greek bonds). The ECG made a tidy profit on Greek bonds in 2012, at a time when the country’s population is starving to death.
It’s an old trick. In the 1650s, Cardinal Mazarin, then running the French government, bought up government payment orders issued against receipts in districts that had not been paying their taxes. He would get them for 30% of face value, and then insist they be paid in full to his personal financial assistant (a guy named Colbert, who, after Mazarin’s death in 1661 took over the king’s finances). Who knew that Mazarin and Colbert had come back to life at the ECB?
Now, those poor chumps at the Bank of Cyprus did not get anyone to buy THEIR Greek bonds; no, they got stuck for the full 70% bankruptcy, as “private” owners.
The French and German banks had it in for their Cypriot counterparts, who have been attracting deposits with higher interest rates and looser banking laws. The French and the Germans sell off their Greek paper (at a loss, to be sure, but far less than the loss they would have taken at 70%), force the Cypriot banks to buy Greek paper, take the full 70% bankruptcy, and then have to have the Cypriot government expropriate the capital (a good part of it foreign deposits) in the Cypriot banks. The two main Cypriot banks are, for all intents and purposes, thus put out of business [Laiki literally so, its depositors likely to have forfeited nearly all of their money, if they have any still in accounts there].
This process reminds me of the story of the local financial district [election, as they were called] of Figeac in 1632-1633. The king had been selling many new offices and many new surtaxes to officers, in the period 1616-1633. Suddenly, in this district, the existing officers started to sell their offices at an astonishing rate, in late 1632 and 1633. Surprise, surprise, the king declared a partial default on all these surtaxes in February 1634 [a bit more than 70%]. Gee, I wonder if the old officers in Figeac had some insider knowledge?
Press reports indicate that the Euro bullies have turned their guns on Luxembourg, to force its banks to get into line with policies dictated by the Germans. Various government officials from Luxembourg are now regular participants on news programs, insisting that THEIR banking system is NOTHING like that corrupt, money-laundering Cypriot banking sector, and that they conform to Euro zone rules, and blah-blah-blah. Look for Luxembourg to move expeditiously to “reform” its banking system. Draghi, in his remarks of April 4th (in which he admitted the stupidity of the original Cyprus plan), stated openly that “international oversight” of national banks should be implemented in the Euro zone by 2015 (rather than by 2018, as current agreements would have it).
Powerful European governments have moved to protect their nationals. The British press ran stories about threats to Brits holding accounts, especially in Laiki, which was not covered by the British deposit insurance scheme (which protects L. 85,000). The Cameron Government moved swiftly to deal with that issue. The Guardian had the following story about British depositors in Laiki and Bank of Cyprus (2 April):
“Around 15,000 account holders at Laiki bank in the UK are to escape any levy imposed on savings by the Cypriot authorities.
After a week of talks since George Osborne told MPs that the government was trying to find ways to stop Laiki being “sucked” into the Cyprus bailout, the UK arm of Bank of Cyprus has taken over £270m of Laiki balances in the UK.
[…] as Bank of Cyprus UK Limited is a separately capitalised, UK-incorporated bank, it is subject to UK regulation and protected by the Financial Services Compensation Scheme which guarantees up to £85,000. Its customers will not be hit by any levy on accounts […]
Bank of Cyprus in the UK said the customers that have transferred to it “will not be subject to the imposition of any ‘levy’, ‘haircut’ or withdrawal restrictions applicable to deposits with banks in Cyprus”. [end of citation to The Guardian]
It’s all well and good for Germany, Holland, and Finland [and supine France] to bully Cyprus, but going after the UK is a different story. Putin seems just as happy as can be with the Cyprus problem, because it means that Russian capital may have to come back home, where he can squeeze it. The stories about the Cypriot capital being taken out in a Russian bank would support such an interpretation.
All of the above does not intend to exculpate the political and financial leaders of Cyprus, who have followed ruinous policies, and who deserve a considerable share of the blame for this fiasco. I just mean to suggest that the “white knights” from the troika do not have the purest of intentions, and that the interests of the banks/financial sector in the most powerful European states have far more to do with this solution than they admit.
Comment below written on March 19, 2013
Ah, the morning news says it all: the government of Cyprus says the idiotic plan to steal money from bank accounts has been forced upon it by the IMF, Germany, and the European Central Bank; the IMF and the ECB says they never proposed such a move, and that it’s all Cyprus’ idea. What better proof could we have of the stupidity of an idea than the finger pointing about whose idea it was? [Note, added on April 13: Draghi, of the ECB, admitted on April 4th that the initial idea of a expropriating money from all accounts in Cyprus was “not smart.”]
Stealing money from bank accounts, under the dubious fiction of a “tax” on savings, demonstrates precisely how far out of touch, and how desperate, the financial and political establishment of Europe has become. If Cyprus enacts such a tax – I’m writing on Tuesday morning, before their Parliament meets to vote on it – how long will people keep their remaining money in Cypriot banks? One would think that British banks will be swamped with deposits on Friday. The Cypriot economy will collapse overnight and its banking system will simply cease to exist.
We see here a perfect example of why I have objected to the term “sovereign debt” with respect to the national debt of Euro zone countries. Can there be a more transparent example of Cyprus’ lack of sovereignty in financial matters? It does not matter who proposed this moronic solution, the ECB, the EU, and the IMF ALL signed off on this measure as a MANDATORY part of their bail-out package for Cyprus. They are forcing a supposedly sovereign country to violate the basic principles of the banking laws of every one of the member states of the Euro zone (principles shared by most other modern economies). The tragedy of the European Union is that at this critical moment it has to follow the dictates of someone as narrow-minded and unimaginative as Angela Merkel. If everyone would just follow the German virtues of hard work, thrift, and government restraint, the problem will go away. No, Chancellor, it does not work that way. If everyone HAD followed those virtues, it’s quite true they would not BE in this mess in the first place, but the policies that prevent this sort of crisis are NOT the same policies that enable a country to get out of them.
There is only one way out of large government deficits: economic growth. In a large, mature economy, you cannot get out of debt through austerity. It can work in a very small country, like Latvia – metropolitan Madrid has three times as many people as all of Latvia – in part because Latvia’s tiny economy (and comparatively small debt) can fluctuate far more rapidly than the economy of a France or Italy or Spain. Fiscally irresponsible government is a very bad idea, and governments (including the US government) do need to restructure their spending and phase in substantial spending cuts, but massive immediate cuts lead to economic decline. Economic decline leads to reduced tax revenue; reduced tax revenue raises the deficit; the higher deficit means more spending cuts to achieve balancing targets. Vicious cycle.
We see a great example of short-term foolishness in the US. We brought SS withholding back up to 6.2% on Jan 1 (from its temporary reduced level of 4.2%). As I predicted in Nov 2012, that would sharply reduce US economic growth: a leading Walmart official described their early 2013 sales as catastrophic. Why? Take $1,000 of NET income out of the pockets of an average US taxpayer and s/he will spend a lot less money at Walmart. Not only will that taxpayer have $80 a month less to spend, but s/he will have (has had) the psychological shock of a sharp hit in the paycheck. Add to that increased medical insurance costs (mine went up 12% on Jan 1) and the average American has well over $100 less of spendable income each month. Multiply that times 140 million taxpayers and you are talking about a lot of reduced spending (on the order of 1% of the GDP, which would pretty much eliminate the government’s projected economic growth for 2013). [Note on 13 April: the US economy actually did better than expected in first quarter 2013. Obama’s recovery, which has lowered unemployment by historically high levels, has proven stronger than I imagined. I still think it will hurt the US economy over the course of the year, and that the return to the normal rate should have been at 1% per year over two years. Economists predict the SS increase will dampen the recovery in the second and third quarters of 2013, so that GDP growth – which reached 3% in the first quarter – is projected to drop to around 1.75%, that is, roughly by the amount noted above.]
Cyprus and the EU have started down the path to Hell. Once you establish a principle that national governments, “forced” by the EU and ECB and IMF, can simply steal money from bank accounts, there is no turning back. Either the accounts are safe or they are not. No one will keep money in an account in such a country when the alternative of another banking system, like the UK or Switzerland, without such a risk is available. What would happen to the Italian banking system if large depositors simply moved all their money to Swiss banks or British ones? Talk about an underfunded banking sector.
Yes, a lot of the money in Cyprus is laundered ill-gotten gains from Russia: the structure of the solution, with rate differentials setting in at 100,000 Euros, surely reflects a desire to “tax” these Russians above all. Yet Cyprus also has many British retirees: 100,000 Euros as your life’s savings is not really all that much money. Given today’s non-existent returns on savings, retirees are surely eating their capital every year. 100,000 Euros for one year is a lot of money; 100,000 Euros for ten years is way below the poverty level.
Legislating theft of people’s life savings is about the most dramatic evidence one could possibly imagine of the bankruptcy of liberal capitalism. Some of its underlying stress factors – above all the combined impact of rising medical costs for ageing populations and reduced investment by Baby Boomers, no longer paying into retirement funds as they hit 66 – are going to get a lot worse in the next 20 years.