Friday 22 March 2013

Learning From Cyprus

A Prophetic Voice: It is difficult to imagine a more profound breach of trust between the State and its citizens than for it to reach into their bank accounts and steal their savings. The political and financial crisis gripping Cyprus, precipitated by the IMF and the European Central Bank, will have a profound effect on ordinary peoples' political expectations all around the world.

THE CYPRIOT MATRIARCH who hid her life savings under the mattress doesn’t look quite so silly now – does she?
It’s difficult to conceive of a bigger betrayal of trust than the one unfolding before our eyes on the Mediterranean island of Cyprus.
We are told as children that the safest place for our money is in the bank. More than that, the building up of personal savings is encouraged by politicians and bankers as the mature and responsible course that all good citizens should follow.
Imagine the consternation, then, when the Cypriot Government announced that it was about to reach into the savings accounts of its citizens and commandeer a portion of them to meet the demands of the International Monetary Fund and the European Central Bank.
Failure to oblige these all-powerful financial institutions will see the multi-billion-Euro loan Cyprus so desperately needs to stave off bankruptcy withheld.
Upon hearing this incredible news, Cypriots immediately rushed to the nearest ATM to empty their accounts – only to discover that the banks had shut the machines down.
The Cypriot Government then poured even more fuel onto its citizens already blazing fury by announcing a “bank holiday” until the Cypriot Parliament – called into emergency session – was ready to pass legislation legitimising the IMF/ECB-sponsored bank heist.
Astoundingly, the European Union Summit, held in Brussels just days before the crisis broke, was so sanguine about the outcome of the Cyprus bail-out negotiations that it hadn’t even included them on the main agenda. According to a Bloomberg report, they would be dealt with “at a separate meeting of euro-area Finance Ministers.”
As news of the Cyprus bank raid spread across other debt-stricken European nations, and stock markets around the world registered the shock, the arrogant unwisdom of assuming innocent citizens would supinely acquiesce in their government’s garnishing of their life savings quickly became evident.
Apparently not one of the European leaders gathered at Brussels had thought to review the last occasion that ATMs were switched off and a government informed the world that it was messing with its citizens own money.
Argentina in 2001 experienced a similar debt and banking crisis. The outcome was the largest default ($US132 billion) on a sovereign debt in modern history – the very nightmare that European Union leaders most fear.
Not that Cyprus is large enough, in either political or economic terms, to bring the EU to its knees all by itself. But what those Finance Ministers apparently did not consider was the demonstration effect of the IMF/ECB-sanctioned Cypriot raid on the citizens of those EU nations also facing debt and banking difficulties.
A Spaniard, or an Italian, or a Portuguese, with his or her life savings deposited one of their country’s leading banks will now be asking themselves: “What if the situation turns critical here? What if the IMF and the ECB demand something similar from our own government? Doesn’t it make more sense for me to put my money somewhere else? Somewhere safe? Somewhere my government can’t get its hands on it?
The Cypriot bail-out “deal” was as ill-considered as it was high-handed. God knows what the “end-game” is.
And, just before you mentally congratulate yourself on being born a New Zealander, take a look at what Finance Minister, Bill English, and the Reserve Bank Governor, Graeme Wheeler, are cooking-up.
It’s something called Open Bank Resolution (OPR) and the National-led Government reckons it’s the best solution on offer to a major bank failure.
Under OPR, if a bank fails, all its depositors will have their savings reduced to fund the institution’s financial recovery. In other words, if the men and women who run the major New Zealand banks decide to follow the example set by American and European financial institutions, and sail themselves into waters they can’t sail out of, you and I will be on the hook to bail them out.
And, according to Bill English, we’ll have nobody to blame but ourselves. Apparently, it’s up to us to scrutinise the performance of the banks in which we have money deposited – and act accordingly. Never mind that, as the Greens’ Russel Norman objected in his press release: “Not even sophisticated investors like Merrill Lynch saw the global financial crisis coming.”
That’s true. But the world has seen what’s coming to the people of Cyprus.
We have been warned.
This essay was originally published in The Waikato Times, The Taranaki Daily News, The Timaru Herald, The Otago Daily Times and The Greymouth Star of Friday, 22 March 2013.


Ray said...

Had to snigger at this Chris here you are from the Left that for the last 100 years has been called for the taxing of wealth saying it isn't fair that the Government can take/tax money from its citizens

Brendan McNeill said...


I don't disagree with you, but I wonder how the events in Cyprus are any different from a left wing Government raising taxes on high income earners?

Both actions effectively remove money from their bank accounts. After all, the poor generally don't have savings to be raided.

MPledger said...

It's not like most people can even choose not to have a bank account. Money has to go to a bank account if you're on a salary or a benefit (including the pension).

All it will mean is that there will be more people like Shearer keeping their money in non-New Zealand banks. How will the government cope with the huge outflow of New Zealand funds. How will the banks here cope with money flowing overseas and under the fireplace?

Chris Trotter said...

To: Ray and Brendan.

Apples and oranges, guys.

Taxes are raised from citizens, for citizens and with the consent of citizens.

The IMF and the ECB demanded that Cypriots' savings be siezed to pay for the Cypriot banks financial delinquency.

I'm amazed you can't see that - then again, maybe I'm not.

Anonymous said...

Actually Ray, I thought the money was coming out of bank accounts of less than €100,000, nicely because the bigger ones were held by Russian criminals :-). So it wasn't really taxing the wealthy. Personally, having been through this with the bankruptcy of the PSIS, I think maybe they should just let the banks fail. That's what Iceland did and they seem to be recovering a damn sight faster than everybody else.

Brendan McNeill said...

"Imagine the consternation, then, when the Cypriot Government announced that it was about to reach into the savings accounts of its citizens ..."

Last time I looked Cyprus was still a Sovereign State. The IMF and the ECB can do nothing to seize citizens savings without the Government's consent.

Confiscation is confiscation regardless of how you perform it. Taxation is just as coercive as the raids planned on the bank accounts. It's not a question of tax payer consent vs savers non-consent.

Apples and Oranges are both fruit, just taken from different trees.

Anonymous said...

Taxes are used to benefit the community, confiscations are not. Also taxes are collected on a basis that is deemed fair to everybody, whereas confiscations hit only those with money in the bank. Thge rest get off scot free.

Anonymous said...

Taxes are used to benefit the community, confiscations are not. Also, taxes are distributed in a manner that is deemed fair. Confiscations hit only those who happen to have money in the bank. The rest of us get off scot free.

Grant Hay said...

@Brendan. Don't be deliberately disingenuous Brendan. Or it a case of straight out intellectual dishonesty? The difference is obvious to anyone. Ordinary taxation is part of the social contract which has been in force in most western democracies for the better part of a century. Even the current National Govt isn't going to stop taxing us and say; "Let the market provide roads and hospitals and schools and charge citizens to be able to use them." You need to travel a lot further to the right of the political spectrum before arriving at that destination. The fact that you think taxation of any sort is theft tells us a lot about your position on that spectrum. It is a position which is a acceptable to the wealthy 1% and almost no one else. The odious thing about the proposed raiding of Cypriots bank accounts (obviously again) is precisely the fact that it is not part of any social contract implied or expressed, but a bolt from the blue inflicted upon a citizenry who rightly felt as though they'd just been forced to bend over the back of the nearest sofa. If you're truly unable to see the difference I could, almost, pity you.

John Laurie said...

Or quantitative easing, a little bit of inflation has the same effect. Certainly hyperinflation does and I know people who lost all their savings in Serbia in the 1990s

David said...

Not that this is a good thing at all, but the best way to get around this is to not have any savings in the bank. I, like hundreds of thousands of other New Zealanders, actually owe money to my bank. It will be people earning good wages and those superannuitants who have savings who will actually have money taken from them.

alwyn said...

anonymous @1.22pm.
I think you are slightly offbeat as to what the Icelandic Government did with the banks. As I understand it they paid out the full deposits of all the people who lived in Iceland and refused to pay out any money, guaranteed or otherwise, to non-residents.
Basically they gave the finger to a lot of British residents.
The proposal for Cypus was that they were to take 6.75% from accounts of less than 100k euro and 9.9% of accounts that had more than 100k. That is actually proposing to take MORE from the rich, not less.
Incidentally the RBNZ proposal is not to "bail out" the bank. It is primarily to wind it up smoothly and quickly. Shareholders in the bank would lose everything before any depositors were affected.

bill said...

I can't believe how uninformed Brendan is! (I don't know why I bother, it's a waste of time). This 10% theft is not taxation. It's the already wealthy in Germany and elsewhere stealing wealth from poorer people to pay for loans the private banks can't pay. If Cyprus was Iceland they'd tell those same banks to f@ck off.

Davos said...

As a recently retired person who was on a comfortable 6 figure salary I was paying about the same amount of tax as a couple on the dole. Nothing fair about that. The channels to do so are there for the wealthy but not anyone else.
To refer to what is suggested in Cyprus and raiding ordinary persons bank accounts is piracy of the first order and I see that the Cyprus Parliament have dismissed it, good for them!
Bill English is a dipstick and how the hell he got that job escapes me. He's about as bright as a gate post!
We do need a fairer form of progressive tax here so that everyone pays their fair share of the costs of running the country. Many of the wealthy business owners are quite happy to dump people on the dole rather than paying them and then complain when we need more to cover those costs.

Can't have it all ways.

Fern said...

"their government’s garnishing of their life savings"
Chris, I would have no objection to the government draping a bit of parsley over my little stack of dollars. Perhaps you meant "garnering"?

Anonymous said...

Brendan @ 11:22am

Re theft from bank accounts.
National did this when raising GST from 12.5% to 15%
An immediate loss of purchasing power of bank deposits by 2.5%

Grant Michael McKenna said...

The big issue in Cyprus is that they have a depositor guarantee scheme, and have just attempted to renege on it. This is confiscation with specific significance to deposit insurance. Depositors, particularly small depositors, thought that they had an ironclad guarantee from the EU that their money would always be there, and then they woke up to find that 6.75% of it was going to be taken.

Cyprus is a warning that the system of deposit insurance is not going to last in the EU. Protest may have prevented it this time, but it will happen.

The RBNZ Open Bank Resolution is a scheme to manage a failing bank. When banks fail, depositors lose some [or all] of their monies; the OBR sets up a containment of that loss. This has always been the case, except for when the Crown retail deposit guarantee scheme operated from October 2008 until the end of 2011 at a cost to taxpayers of NZ$1 billion when South Canterbury Finance went under.

If we replace the OBR with taxpayer bail-outs [i.e. a depositor guarantee scheme], we get the US banking system, where banks lend without worry, knowing that the taxpayer will fork out to cover a failure.

NZ's system is to let bad banks bleed, pour encourager les autres. I like it, although a limited deposit guarantee scheme would secure family savings, and could prompt people with Shearer levels of loose cash in an account to invest it in something rather than leave it in the bank, but it would still make the taxpayer carry some of the cost of banking profligacy.

Sweaty Socks said...

If I was in Spain or France, etc. I wouldn't have my money under the mattress but I would have it in a German bank.

Separately, the Cypriot citizens kept on voting for governments that got them into this position, kept on taking the profits from money laundering, kept on spending much much more than they earned, kept on thinking someone else was going to pay when the bill turned up. Well here's the first installment.

Anonymous said...

no doubt you missed the part yesterday when the Russsians debated setting up their own tax haven on the Kuril islands as a replacement, should Cyprus not turn out as Russia wants.

"Medvedev has also came up with a novel solution to turn Cyprus' problems to Russia's advantage. The Kremlin should develop the Kuril Islands and Sakhalin in the country's Far East as new offshore banking destinations, Medvedev told government ministers."

All those bleating about the ordinary Cypriots being hammered by the EU again should consider the detail of how the Cypriot economy got into this state in the first place.

And they should exmaine the 'alternatives' which the Cypriot elites are propsing to find another way to meet their portion of the required bailout - nationalising the pensions of ordinary cypriots, how is that prefferable to transferring a percentage of current savers deposits into shares in the banks that nee recapitalising?

And to what end for this 'alternative'?
simply to ensure that Cypruus can operate a no questions asked banking regime which rewards low taxation with high interest rates - to ensure that cyprus can remain the tax haven of choice for Russian oligarchs.

Cyprus' banks require a bail out of apprximately the same size as its national GDP.

It currently has deposit acocunts from foreign investors of approximately the same size as its GDP.

Quite where the moral case for letting those foreing 'investors' have their investment (high return = high risk) avoid any form of loss, in exchange for enabling a tax haven to remain in place with the pain to be felt by pensioners and genuine tax paying residents through the loss of services and benefits for decades to come escapes me.

No 'ordinary' cypriot has even 20 000 sitting untouched in a bank savings account.

That is about 30 000 NZ Dollars. Do you know anyone with that amount sitting in a savings account? Can they afford a 7 % levy in exchange for bank shares, in order to prevent an argentinian style collapse?

I think so. 'consenting to taxes' is a falacious argument when the problem is by and about tax avoiding foreigners who will never have to stump up a single red cent under any alternative proposal.

they are the ones who will pay this levy - and quite right too.

Chris Trotter said...

Hi Fern,

Here's a definitive response to "garnishing"

Gar·nish·ment (gärnsh-mnt) n.

1. Law

a) A legal proceeding whereby money or property due a debtor but in the possession of another is applied to the payment of the debt owed to the plaintiff.

b) A court order directing a third party who holds money or property belonging to a defendant to withhold it and appear in court to answer inquiries.

Not just a term for fancy flourishes to food.

Fern said...

Thanks for taking the trouble, Chris. I live and learn.

Anonymous said...

Well we used to own the B.N.Z.and have at present Kiwi Bank.If the majority of N.Z where to sign on to Kiwi Bank, a bank collapse would be unlikely.

As for the I.M.F.and the rest of the global lenders who demand harsh and austere conditions for bailing out failing economies is nothing less than criminal usury.

Paulus said...

I believe it is the Russian banks in Cyprus who are likely to be the most affected, should it actually happen - which is doubtful.
Russian are believed to have over 40% of funds held in Cyprus, mainly from corruption in Russia.
Should it now not go ahead there will be an almighty rush on the banks for those who did not have prior knowledge of this move. It is believed that many wealthy people were tipped off (Russians of course) and had automatic contingent plans put into operation

Davo said...

Need I mention that when Greece flipped over, Cyprus like all good EU citizens bought Greek Bonds. Junk Bonds and now they have all these bonds that are worthless. Germany didn't buy the bonds just pressured the other countries to buy them.

Anonymous said...

Paulus,i hope ive got the spelling of your name right.They say that their is two or three respected high rise dwelling lawyers that handle accounts for the favourable tax laws that New Zealand provides.

artist taxi driver said...

Troika put gun to head
of Cyprus and scream "Take the bailo

Anonymous said...

Good article Chris, but I seriously object to your claim that:
"Failure to oblige these all-powerful financial institutions will see the multi-billion-Euro loan Cyprus so desperately needs to stave off bankruptcy withheld."
'Cyprus' needs no bailout. It is Cypriot-based banks that are bankrupt, and are squealing for Cypriot taxpayers and depositors to bail out the bank's debts.

Is the Cyprus government in fiscal trouble? (before it takes on any bank debts as part of any bailout). No. So this is not a problem for 'Cyprus', but for the shareholders of the banks in trouble.

And how did aforesaid banks get in trouble? As Davo mentioned above, the Cypriot banks were lured/coerced into buying Greek junk bonds (ie lend money to Greeks who have now welshed on paying that money back).

So, let the Cypriot bank shareholders stump up the extra cash to 'bail out' the bank they own (ie pay their debts to creditors). If they can't, let the bank close, and the Cypriot govt can cover just the local depositors funds.

(Ironically, this shows why all banks should be state owned - if the taxpayers are always going to pick up the tab, why let the 'shareholders' make profits between failures? Ditto for deposit insurance schemes, and natural disaster insurance vis Chch)

The latest 'deal' the crooked Cypriot govt has done with EU/IMF crooks is to hand over the profitable parts of Laikos bank to another bank (ie privatise the profitable bits), while stealing money from all bank depositors to pay off the creditors of the failed bank Laikos (ie socialise the losses).

The Cypriots should revolt and kick out their crooked politicians, who no longer even try to pass a law to justify their theft of people's money (because they are scared it will fail, like the last Bill). That is a call for revolution. The Cypriot govt are relying purely on the force of their thug police to stop Cypriots from rebelling.

Mad Marxist.

Draco TB said...

And, according to Bill English, we’ll have nobody to blame but ourselves. Apparently, it’s up to us to scrutinise the performance of the banks in which we have money deposited – and act accordingly.

And he's actually right.

When you loan someone money you're taking the risk that you're not going to get it back.

A bank deposit is a loan to the bank and thus it is at risk of being lost. The mistake was made by governments after the 1929 crash and the massive run on banks to actually tell people that their money in banks was safe and to offer government guarantees. They should never have done this.

What they should have done was set up a government account/bank where your money wasn't risked, didn't earn interest and was guaranteed and then let the private banks continue as they were. The banks would have driven themselves out of business in short order and now we wouldn't have to be cleaning up after them - again.

Anonymous said...

And now it is being revealed on radio that the failed Cypriot banks had been writing off loans to firms owned by politicians. No wonder those banks got into financial trouble - they were doing exactly what Alan Hubbard did at South Canterbury Finance (though Hubbard gave interest free loans and write-offs of loans because he had lost his marbles).

You would hope arrests and prosecutions (and lengthy jail terms) would follow for the crooked bankers and politicians, but realistically, .... the corrupt look after their own.

Which is why at Easter, we have to look to God for some justice on a longer timescale - we won't get it from human leaders.

Mad Marxist.

Davo said...

@Anonymous 9.05pm. Not quite true my friend. Allan Hubbard was exposed when SCF financed Property Development. When the housing crunch hit Developers went bust taking the company down with them.
SCF had some very sound investmentss, Ports of Auck.,Ports of Wellington, Auck. International Airport etc.
It was the exposure to property developers that brought it down.

Remember Sideshow Bob's bail out of David Henderson using ratepayers money.

The big problem we have in NZ is the lack of high risk capital for those developers and we must resort to using finance companies which, in turn, exposes them to a much higher risk of collapse.