Cyprus? Really? The population of Cyprus is just north of 1 million people.
In comparison, the Boston area has a population of 4.6 million. Greece has a population of about 10.8 million. Central Massachusetts has a population exceeding 800,000. Would a financial crisis involving two banks in Worcester shake the financial system the way the financial crisis in Cyprus has?
Of course not. Then again, Worcester is not a tax haven for Russian billionaires, who use Cyprus as their Cayman Islands. Russia has kept many Cypriots gainfully employed through the country’s two largest banks, Bank of Cyprus PCL and Laiki Bank.
According to The Wall Street Journal, “Bank of Cyprus and Laiki Bank held a combined €85 billion in assets, or five times Cyprus’s gross domestic product, and €58 billion in deposits. The American equivalent would require multiplying those numbers by 600: $66 trillion in assets, $45 trillion in deposits. The amount of deposits in all U.S. banks today is around $9 trillion. Cyprus had become two banks with a country attached.”
Cyprus had requested a euro-zone bailout last year, but the tiny country’s financial issues were largely overshadowed by the financial crisis on the continent. So the crisis gestated for nine months, before giving birth to a financial monster.
Initially, the island’s banks were closed down, while euro-zone officials contemplated what to do about the latest crisis. Rather than take the usual path of sending billions of euros along with a warning to not let it happen again, a decision was made to tax bank depositors for the banks’ wrongdoings.
Shareholders Absorb Risk
Understandably, depositors revolted. A new deal was reached to restructure the two banks and to shift the risk to shareholders, where it belongs. Bank of Cyprus will be restructured and will take over whatever good assets remain from Cyprus Popular Bank, which will be shut down. Money held in accounts at Bank of Cyprus will be converted into shares of the restructured bank.
Unfortunately, in the tangled web of finance, nothing is ever that simple. While Cypriots were left to stand in line this week to take withdraw small sums of money, Russian tax evaders had long since moved on.
Even while the banks were closed, the wealthy Russians who kept their money in Cyprus withdrew their funds through bank subsidiaries in London.
Meanwhile, many others are caught in the financial crosshairs. Small businesses are suddenly strapped for liquidity and the Church of Cyprus, a major shareholder in the Bank of Cyprus, faces potential ruin. The Church of Cyprus won an injunction that will temporarily keep the church afloat.
The church is seeking to have its shares converted into shares in the new entity. However, doing so would create a legal precedent for other shareholders.
If a country as small as Cyprus can create a financial mess of this magnitude, what will happen when the U.S. debt comes due?
The Rest of the Euro-Zone
Cyprus simmered while the rest of Europe boiled over last year. Likewise, just because Cyprus is on the front page, it doesn’t mean that other European trouble spots are any less troubled.
It turns out, for example, that Spain has been lying about its debt, which is becoming a Spanish tradition. Many numbers are being thrown around, but how much debt Spain truly has today is anyone’s guess.
Then there’s Italy, with its unresolved election, as summarized by The Economist:
“The election gave a majority in the lower house of parliament to a centre-left alliance led by Pier Luigi Bersani. But in the Senate the centre-left fell short, and the M5S now holds the balance of power between Mr Bersani’s group and a conservative alliance fronted by Silvio Berlusconi. That appears to leave other possibilities open. The first to be rejected was a “grand coalition” of left and right. Mr Bersani ruled this out because a deal with the scandal-ridden Mr Berlusconi would be electoral suicide. On March 7th Mr Berlusconi was sentenced to a year’s jail for publicising a wiretapped phone call (he can appeal against the decision). The centre-left proposed a link with the M5S. But Mr Grillo slammed the door on this and accused Mr Bersani of trying to poach M5S lawmakers.”
The only thing missing from the Italian election is hanging chads. So far, every attempt at undoing the mess has failed.
As in the U.S., nearly five years into the financial crisis, nothing has changed – at least not for the better.