Lessons from Cyprus

Simply a Great Manager
September 25, 2013
A Jew. Of course.
December 1, 2013
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(Originally published in the Summer 2013 issue of Esquire magazine.)

It’s not easy to make bankers look good these days. We’re still not finished cleaning up from the global mess they created just a few years ago. But if anyone can make even bankers look good, it’s the politicians and regulators who are here to protect us from them. What recently occurred in Cyprus shows that when the going gets tough, we are all potential roadkill along the very bumpy highway of EU reform.

Sitting here in Romania, you might have missed most of the fun. There were just some minor disruptions. The Bank of Cyprus in Romania was closed for some weeks and its deposits were transferred to the local Marfin Bank, which in turn will be recapitalized by its Cypriot owner before the deposits will likely change hands again. In all, though, the meltdown affected only about 1 percent of the whole industry here. So that’s not so worrisome. At least, not on the surface.

But there is a more dangerous level, and it’s scary for us all.

At first, it seemed like nothing new. Some ravenous bankers, this time on the small island of Cyprus, took advantage of the country’s extensive tax benefits, EU membership, willing politicians, and lackadaisical regulators to attract and accept ridiculous levels of deposits by paying ridiculous rates of interest.

In fact, there was so much money thrown into the banks there, the industry’s assets grew to seven times the size of the entire country’s annual gross domestic product of about 18 billion euros. And this growth, to be sure, did not come from the 1 million or so residents. It’s now thought that 70 percent of deposits came from people overseas with an estimated 40 percent, or roughly 25 billion euros, from Russians and their companies.

The banks, of course, invested the funds in lots of places, including making enormous loans into Greece, (half the island is Greek) and they also invested in Greek sovereign debt (remember that debacle?). And boom, before you knew it, Cypriot banks lost 4.5 billion euros and the country quickly sank.

It was no different than we’ve seen 1000 or more times. It’s so familiar, it’s boring.

Only this time things were about to get truly ugly. In the past when banks were in trouble, it was always the big players who got hurt: the investors, the owners, the gamblers who threw their money into risky, high-yield deposits. No matter what happened, most of us poor guys with less than 100,000 euros knew our money would be safe. The money was protected. The deposits were insured. At least, we were promised they were.

But not in this case. The Cypriot government could not survive if the banks were to fail. And thanks to an incompetent government, it could not borrow any more. Something had to be done.

So like others before it, it was forced to turn to its “friends,” the other EU countries who accepted Cyprus as a member way back in 2004 – and then sat back and watched as it created this mess. Eventually, Cyprus went to the troika – the so-called coalition of the EU, the European Central Bank, and the International Monetary Fund. (Does it make anyone else nervous that they are known by a Russian nickname?)

And these regulators and politicians – collectively known as the policymakers (or should we call them the politburo?) said they were willing to help. But like the Wizard of Oz, there was first one small condition: raise 5.8 billion euros to get the other 10 billion you need.

After all, there were German elections coming up and there already had been enough trouble in Greece, Spain and Portugal. Save the Cyprus banks full of laundered Russian money? “Genug ist genug,” you could hear the Germans shout.

But where should Cyprus get the money and who had enough? Well, its banks, of course. They were sitting on billions. And with just a small haircut to every depositor, the money would be raised and the banks could be saved. Just take 6.75 percent of all small deposits and 9.9 percent of those more than 100,000 euros. Maybe no one will notice. It’s just a small bite.

Nevermind that the Cypriot parliament refused and a different plan was approved in which small depositors were spared and the big ones will lose – maybe 60 percent of their money or more. The damage was already done.

It all came too late and word quickly spread: small depositors were not safe and the rest of Europe was not going to protect them.

Suddenly, it seemed that nothing was taboo. No deposits would be safe. Indeed, a research report from the investment bank Morgan Stanley concluded the first Cypriot plan could have “potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future.”

And really, why shouldn’t we “fear a similar treatment?” EU politicians made clear it is not enough to take our money in taxes and then play politics with that. Now a government, if needed, can also take some of what we have just laying around – if not inside our mattress.

So what happens now? Well, the Cyprus economy will shrink and the cost of saving its banks will grow. Russians will move more money to Latvia, and other tax shelters and banks, including in Switzerland and Malta, will probably profit from all this.

For its part, EU politicians and regulators are still fighting over what to do. The European Central Bank will get some new supervisory powers over Eurozone banks next year, but where it’s enough remains highly in doubt. The European Banking Authority will continue to watch the EU’s 6000 banks and presumably flounder the way it does so well. Bank regulation and deposit insurance will remain the responsibility of each member country, some of which most certainly don’t have enough money put aside. Oh, and bank failures will continue as long as we have banks.

Ironically, the most unfortunate part for Romania is that here, in some ways, we’re perhaps affected least of all. For it is estimated that at least half our population does not even use a bank. That in all the EU, we have the most salaries still being paid directly in cash. And that at least 80 percent of our purchases are also made in cash.

And that’s the real shame. Because as long as we see what just happened in Cyprus, the more difficult it is to bring this country up to date. How do you convince a skeptical public that their money is safe when too often, it seems, politicians and bankers prove that it’s not.

The fact is the very least that these politicians and regulators could do, while they bicker and fight and try to figure all this out, is to stop running us over on their road to the future.

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