On Cyprus’ banks: why are they complaining?

I’m hopelessly naive about financial systems. (I have a grade C ‘A’-level economics, but that was in 1985, back when people still voted for Mrs Thatcher, so it’s like a degree in physics before relativity was discovered.) So I don’t understand the current lamentation about Cyprus.

Cyprus built up a gargantuan banking sector (835% of annual national income). It was a low-tax regime, in the sun, that encouraged lots of Russians (in particular) to invest their money there.

The World Bank’s Constantinos Stephanou wrote in his 2011 paper The Banking System in Cyprus: Time to Rethink the Business Model? (PDF):

The significant expansion of the Cypriot banking system in general, and of the big domestically-owned banks in particular, has been part of the broader push to promote the island as an international business centre …

The current size of the Cypriot banking system, and particularly of the two biggest banks, raises the issue of whether growth has unequivocally been a good thing that should continue indefinitely.

In the case of Cyprus, the two big domestically-owned banking groups appear to satisfy the criteria for being systemically important… Their role as intermediaries of foreign financial flows and as providers of domestic financial services means that the collapse of either of them would have significant negative repercussions on the real economy and deleterious reputational effects on Cyprus as an international business centre.

Lots of people invested their money in Cyprus because it had low tax and good returns. They put their money there, rather than somewhere else, because they believed that they would get more money in Cyprus than in their own countries.

Meanwhile, the banks in Cyprus were too big to fail. Those words – “too big to fail” – are to international capitalists what “YOLO!” is to mid-teenage girls as they guzzle five bottles of alcopops, take selfies of themselves doing duckfaces with their bezzies before they snog an ugly stranger, burst into tears and throw up.

In brief: investors got better returns for their money, but took no actual risk because the banks were too big to fail. Until they failed.

The EU decided to bail out Cyprus. If it hadn’t, presumably those banks would have collapsed and depositors lost everything. Because it’s being bailed out (with EU money), depositors with over 100,000 Euros will lose 30% of their deposits, and retain 70% of them. They took a risk in the hope of better-than-average returns, as is their right in a capitalist economy, and lost. But instead of losing everything, they keep most of it.

Meanwhile, I’ve given them some of my money as part of the EU bailout, yet I was never invested in the dodgy Cypriot bank in the first place.

So why are they complaining?

4 Responses to “ On Cyprus’ banks: why are they complaining? ”

Comment by Hardeep

Because it was supposed to be a win win situation. Invest and take the returns and if the bank fails someone will pick up the tab. As thats not gona happen their a bit peeved. Its obvious that standard economics dont apply anymore because if they did banks should fail like any other business. Its also obvious a single currency cant work without a single fiscal policy. Thats what i think anyways. HS A ‘A’ level economics 1998, Blair years.

Comment by Charlie

Hi Bruce,

they are complaining because it is much easier to blame someone else. The Cyprian politicians have made a good job of making the resolution as painful as possible so that they can blame the “others” (Germany is, for the obvious historical reasons, an easy target). Blaming the EU for failing to clean up their mess is typical behaviour for national politicians. Unfortunately, by refusing to acknowledge the problems in the banking system and inform the public, the politicians have only put off the inevitable: Cyprus is going to have to do something else to earn money in the future. The elephant in the room is peace with Turkey and unification with the North which would pave the way for investment in, say, the gas field and an associated pipeline.

Technically, including the creditors is called a “bail-in”. Maybe it’s time for ads for savings accounts to include an explicit reference to the risk of losses above any deposit guarantee scheme? Anyway, the creditors had been hoping for nationalisation and bail-out à la RBS and the Anglo-Irish bank.

Meanwhile, I’ve given them some of my money as part of the EU bailout, yet I was never invested in the dodgy Cypriot bank in the first place.

As a UK resident you’re not contributing directly to the Euro-zone bailout fund as the UK, along with the Czech Republic, did not opt to join. You, of course, continuing to pay twice for the overblown UK banks through nationalisation and the “financial repression” induced by the Bank of England’s money printing (known as “quantitative easing”) which has imposed a levy of about 6 % on savers since 2008 by holding interest rates below inflation.

Comment by Michael.

I think that the Cypriots are complaining because they put their money in a local bank. Which is perfectly logical and the sort of thing that most people around the world (if they use banks at all) do. And then the government was talking about taking their savings (or some number between 6 and 60 percent), despite them merely doing what loads of other people do without consequence.

Personally, I think that the Cypriots wouldn’t be complaining nearly as much (if at all) if the government merely said, 50% (or whatever) of foreign accounts over 100 000 euros.

And the fact the government is also restricting access to the banks (which in turn is making the economy even worse because people can’t get to their money to spend) is also pissing people off.

What the government should do is guarantee deposits up to 100 000 (or pick a number) euros, and then let the banks fail (or not). Let the free market sort it out, while still protecting a certain amount of deposits. If you have more than the amount guaranteed, then you just become another creditor to the bank.

As for foreigners complaining, I haven’t seen that from where I am (watching EuroNews and BBC World). But I assume they would be. And I guess I take the attitude that it’s like any other investment. You take risks. And if you lose some, that’s the game isn’t it.

Comment by Tim Print

There was an interesting interview on Today on Radio 4 this morning.

A guy who moved to the UK from Cyprus as a child in the 70s during the war with Turkey. His family lost their home in Cyprus and started over in the UK. He built up a Fish and Chip shop business and then when Cyprus joined the EU a few years ago he thought it would bring the country stability and it would be a good time to move back.

He sold his home and business and bought a small restaurant in Cyprus. At 50 years old he had his life savings in a Cypriot bank and was waiting to find out how much of it he had lost, possibly 30%-50%. He should definitely be complaining.

It’s not all Russian Oligarchs.