WASHINGTON MERRY-GO-ROUND
Founded by Drew Pearson 1932
Why Cyprus matters
By Douglas Cohn and Eleanor Clift
WASHINGTON – When news broke early this week that the tiny country of Cyprus planned to tax the savings accounts held in its banks, the initial reaction was derisive laughter. It seems absurd to tax savings, and why should it matter to the world economy what Cyprus is doing anyway. The nation is too small to make much of a difference.
Well, no one’s laughing anymore. Cyprus has since backed off on the 15 percent levy it was thinking about imposing, but unless Germany and the rest of the Eurozone leaders step up with a bailout plan, the Cypriots will have to find an alternate scheme, and fast, or face a collapse of their banking system.
The government was trying to get at the fortunes stashed in its banks by Russian oligarchs, much of it ill-gotten gains that were being laundered through the Cyprus banks. The situation is very much in flux but there are two critical components that make what’s happening in Cyprus very much a matter of U.S. national interest.
First, Russian President Vladimir Putin showed more of his true colors when he threatened to cut off gas supplies to Western Europe, especially Germany, if they persisted in penalizing the wealthy Russian depositors. Objecting to the proposed plan is one thing; threatening economic retaliation vaults Putin into a whole other sphere of roguish leader.
Imagine if President Obama spoke out on behalf of investors in the Cayman Islands, which like Cyprus for the Russians, is a favorite parking place for U.S. investors to avoid scrutiny and U.S. taxes. Obama did the reverse during the presidential election, castigating Republican Mitt Romney for allegedly hiding his fortune overseas. To threaten economic retaliation like Putin has done sets a dangerous precedent in today’s inter-related global system.
Russia is putting tremendous pressure on Germany to back off, and to put more of its own money into the banking system of Cyprus, as opposed to extracting a fee from depositors. As much as 40 percent of the deposits in Cyprus are from Russians, and it’s an open secret that the accounts are in part the product of money-laundering. Moscow boasts more billionaires than any city in the world, and though many may be legitimate, there is a segment that is profiting from the Russian Mafia and using the banks in Cyprus as a convenient place to shelter money gained illegitimately.
Second, by declaring a bank holiday early this week, Cyprus is guaranteeing a run on its banks when and if they open. Cypriots are marching in the streets, outraged that their savings might be taxed. Under normal circumstances, this wouldn’t affect the rest of Europe or any of the industrialized democracies, but with so many economies so shaky, it could be a virus that spreads. Cyprus is small, but its economic sector is big relative to its size, and a run on its banks could have a ripple effect around the world.
Banks don’t typically have enough cash on hand to fulfill their obligations if depositors all show up at the same time to claim their funds. A collapse of the banking system in Cyprus is a bigger deal than anyone first supposed because the country has no real means to stage a comeback. It only has two industries, tourism and banking, and the lack of financial diversity is complicated by ethnic rivalries. The country is divided between Greeks and Turks, who don’t get along, and there are few places the government can turn to for the 7 billion Euros it needs to prop up its banking system.
Given the dire circumstances, the European Central Bank could increase its contribution, and in order to buy time, the government in Cyprus could extend the bank holiday into next week to avoid what everyone expects will be a massive flight of deposits out of Cyprus and into who knows where, that’s anybody’s guess.
© 2013 U.S. News Syndicate, Inc.
Distributed by U.S. News Syndicate, Inc.
END WASHINGTON MERRY-GO-ROUND