Friday 22 March 2013

Cyprus: Let the Banks Go Bankrupt!

It seems like the euro crisis is entering yet another phase. Negotiations on the bail-out of the Cypriot banking sector seemed to initially go so smoothly. Cyprus appeared to be just another country making use of the European Stability Mechanism (ESM), and while Greece was humiliated, no one saw Cyprus’ application for the European bail-out fund to be particularly shameful. Operation Cyprus was part of a routine that had entered the Council after years of bargaining. Perhaps that was where the problem can be found. Europe’s policy-makers underestimated the Cypriot problem. The Greek state has survived, the euro is still alive; Portugal, Ireland, Spain, Italy – austerity has been harsh, unemployment has skyrocketed, and poverty is on the rise, yet life somehow goes on. Taking out 6.5% of people’s savings from their bank accounts? Well, the Greeks have been treated like crap as well, and parliament still waved things through, right? I suppose technocracy has reached its limits in Cyprus. Alex pointed out the irony of it all in her last post though. People in Cyprus were enraged by the idea of anyone taking out money from anybody’s bank account, whether they were affected or not. When the government suggested not to touch anyone’s savings if they are below €100,000, people still got angry. Sheep protecting wolves, and deer protecting hunters. I supported the expropriation of savings above a certain threshold, because I believe that the alternative, to introduce Greek-style austerity measures, is even worse. However, to understand what is really going on here, one has to understand whose interests are really being protected.

Germany and the EU: really the right target?
I am certainly not a liberal, yet I believe that in this case, a liberal response of non-intervention is the right way to proceed. Europe ought to rid itself of the plague of investment gambling. I regard the purpose of a bank to be to supply people with loans if they want to build a house or start a business. I took a loan to finance my studies in the UK and in the Netherlands. Banks also serve the purpose of keeping my money safe for us. Rather than storing stacks of money under the bed, I bring my money to a bank, expecting them to store it for me. When I do that I do not expect to take a risk, on the contrary! I believe that whatever else banks do is their problem. No one should have to pay for their greed for profit. The Cypriot banking sector was way out of proportion, and parallels to the Icelandic banking crisis in 2008 are numerous. An economy based on the totally non-productive financial ‘industry’, can, in the long run, not succeed (this also applies to Luxembourg, which seems to follow a similar business model; money laundry is by no means a particularly Cypriot problem). If the Cypriot banks face bankruptcy, then to hell with it, let them sink. Rather than using our money to finance immoral business activities in the banking sector, use the funds of the ESM to guarantee people’s savings for up to €100,000. There is no need for private banks. So many people who studied with me now work for the banking sector, which produces absolutely nothing, and which grows on the soil of greed and selfishness. People should spend their creativity and their energy on doing something useful. The Cypriot government should select the bank with the most solid business model, and nationalise it. There is no need for more than one bank in a country with 750,000 inhabitants, and that bank’s total assets do not have to amount to €40bn (more than twice the total GDP!). Let the banks go bankrupt! Rich people would lose their savings (which were useless to the economy anyway, if they were lying dormant on a bank account), shareholders would lose their shares. People need to realise that few people will be affected by this, and that our economy, not just in Cyprus, but in all of Europe, requires an ablution of the financial industry.

The affairs of the Cypriot state must obviously be allowed to continue, and funds from ESM can be made available for that. The main reason Cyprus got into trouble is the entanglement of the Cypriot banking sector with the sovereign debt crisis in Greece, which was of course itself partially caused by the financial crisis in 2008. Nevertheless, while the Cypriot state may of course be criticised, I think that many of these criticisms apply to the dominant members of the eurozone as well. Reforms are necessary all over Europe especially in Luxembourg, not just in Cyprus.

I don’t think that this is what’s going to happen of course. The new phase of the euro crisis is that the bankruptcy a member has very much become an option, and I would not be surprised if that’s what we’re going to see in the next couple of days. Just remember that there would have been an alternative. Supporting further bank-bailouts turns us into sheep protecting wolves.

Harald Köpping

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