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The Cyprus syndrome

The glacial but generally level-headed manner in which the EU dealt with ailing countries before Cyprus is in sharp contrast to the mess it has now precipitated.

Jeroen Dijsselbloem, president of the Eurogroup, assured us that “we’ve put an end to the uncertainty that has affected Cyprus and the euro”. My guess is that the Eurogroup has just dropped a nuke in a volcano.

To make matters even worse, Dijsselbloem was reported by Reuters to have said that Cyprus “represents a new template for resolving eurozone banking problems”. I then read that he has since retracted this statement, now stating that Cyprus is sui generis. If he doesn’t know for sure, who does?

In investment, one looks for patterns, both those that continue and those that break.

So, while I understood that Edward Scicluna’s motive behind his graphic article in this newspaper on the 10-hour flagellation of Michael Sarris, the new Cypriot Finance Minister, by the EU-ECB-IMF troika was meant to demonstrate the importance of strict fiscal discipline – and the names and placements were there to add realism and immediacy – my mind was off in another direction. I was wondering why is Cyprus being treated so differently from Ireland, Greece, et al? And what was the real incentive to bully this tiny State?

Importantly, why all the rush and the threat of terminating emergency liquidity assistance so quickly? And what was the real reason why other financing facilities were not proffered?

The reason, we were told, was that the banking sector in Cyprus was unduly large for the population and that the island was used as a financial safe haven by Russians.

I guess it never occurred to these uber-powerful guys around the table that any small State that is a financial centre has more banking and corporate business per capita than one which is not. Does it surprise anyone that a country with, say, a lot of natural resources has more mining business than another with no natural resources? Or that Belgium has more office space per capita than, say, Bath in England?

While my grey hairs are proliferating, even fresh young guys who have just entered finance know – and know as a certainty – that not all money that leaves a country is tinged with evil. Indeed, it is often innocent money that is forced to leave. I can mention many countries, and some are very familiar, where money left home because home was getting dangerous. Not all Russian money is evil.

And, surprisingly, I found proof of this: I have just read an online article in the Financial Times stating that a lawyer informed the FT that clients “had already been approached by half a dozen European banks in locales ranging from Latvia to Switzerland to Germany, some of them promising they could open new bank accounts for his clients in under an hour...”

I say, these banks must be very sure this Russian money is as clean as a whistle if they are willing to forgo their anti-money laundering procedures to grab it.

So, already, one reason why the pattern was broken has quite a nasty smell: what if some of those EU members dictating terms wanted, primarily, to scare Russian money away from Cyprus so that this money found its way into their financial centres?

After all, the same money tinged with suspicion in Cyprus might quickly be sanitised by going through the larger financial centres of the core countries. It happened before: heads you smell, tails we get the money. The key, as always, is ‘to follow the buck’ (or ‘euro; in this case).

But let us suppose that, all of a sudden, some bleeding heart elements within the EU wanted some bail-in (investors pay) thrown in instead of just a bailout (taxpayers pay).

If they wanted a bail-in, the logical place to start would be with shareholders, then, maybe, subordinated and then senior bondholders, even though the latter were fully safeguarded in Ireland and Spain. You first hit risk-taking money, not money supposed to be safe. Who in his right senses would bang a child on the head to teach him/her a lesson?

So, if this principle of protecting bank depositors is now shattered, especially since the EU’s first attempt was to put a levy even on small accounts of under €100,000, and the Eurogroup seems undecided whether Cyprus is a ‘template’ or a ‘specific case’, how would one expect big depositors in wobbly countries to react?

Slowly, but surely, money will migrate from countries considered to be in danger to others deemed safe, including financial centres outside the EU. The odds are that this migration will precipitate financial difficulties, if not actually trigger crises.

I would not be surprised if countries other than Cyprus would, in future, have to resort to capital controls and extended bank closures. I would not be surprised if stocks and other capital markets in the stronger countries, including Germany and the US, would get a welcome boost from these capital transfers. Nor would I be surprised if these countries, strengthened by capital inflows, will step up their acquisitions of companies in the weak States, now rendered weaker.

By shaking the ground beneath such a fundamental trust, it would, in future, be much more difficult – if not impossible – to manage crises. As soon as an alarm is raised, people will withdraw deposits, big and small.

This noose-like set of March maladies may, in future, come to be known as the ‘Cyprus syndrome’.

I’m astounded that the imposition of these measures on Cyprus, even though they pose such clear and present dangers, were so unanimously accepted by all member of the Eurogroup, even by members that could well be the next victims.

Perhaps these measures and their unanimous acceptance are merely the symptoms of an acute lack of solidarity among EU States and, if so, signal even wider rifts to come, perhaps even the end of the euro.

While the banking and financial services situation in Malta is very different from that of Cyprus, there is another lesson in all of this which is pertinent to Malta and other small States. If you have anything worth taking, someone will do so, if not today, tomorrow; if not under one pretext, under another.

So diversify by investing in different industries, be pragmatic, sterilise economic policy from fads that regularly make the rounds around the globe (such as this idea that manufacturing is dead) and be strong enough to put and keep your house in order. We can now clearly see, for example, how the prudence that Malta has shown in financial matters has served it in good stead and will continue to support it.

It’s more than fiscal discipline we have to worry about, though. We have to keep enemies close and friends even closer.

Paul Azzopardi is a financial and investment adviser.

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