Cyprus: are banking shackles worth the cost?

6 min read

Anthony Peters, SwissInvest Strategist

Sure, Cyprus is very small beer – its GDP of give or take US$24bn is about equivalent to the quarterly earnings of JP Morgan. JP employs around 250,000 people. The population of Cyprus is 1,100,000. I know that it would be fatuous to begin comparing JP with Cyprus but the GDP figure does demonstrate just to what extent Cyprus – no disrespect meant – is just a pimple on the eurozone’s gluteus.

And yet, it is a full member in a one-person-one-vote union. Whatever concessions are offered to Cyprus in the process of bailing it out of its terminal economic problems must, for better or for worse, be offered in a similar form to other members too.

I recently returned from Antigua which, if you care to remember, was the base of one Allen Stanford who is currently serving a 110-year prison sentence for every kind of fraud you could list. I am of course not trying to compare his Ponzi scheme to Cypriot banking – perish the thought – but the collapse of the Stanford Financial Group took a significant source of income out of the Antiguan economy.

Cyprus does not have a lot to live on either and the offshore banking certainly must be deemed to be contributing a significant portion of the nation’s wealth. One of the conditions of the Troika’s support for a bailout will be a cleaning up of Cyprus’s money laundering procedures. That would hurt and could still be seen to be a price not worth paying.

In the same way in which quite a number of operatives in the City of London feel that a UK exit from the EU would release the banking business from constraints it doesn’t really like and which it does not want to see imposed, so there are ample numbers of Cypriots who are wondering whether the conditions which will be imposed on the country are really worth the cost. The rhetoric about euro exit is probably louder and more open in Cyprus than in any other country. That’s all well and good but the concomitant devaluation of a free-floating Cyprus pound would make importing nigh impossible and wipe out their living standard, a point frequently forgotten.

What is interesting is the way in which a number of eurozone politicians seem to be wondering too whether it is worth saving the island as it will in all probability remain on a financial drip-feed in perpetuity. Enter, stage left, Klaus Peter Willsch, the CDU member of the Bundestag (MdB) whose hard-line scepticism makes the UKIP’s Nigel Farage look like the shallow polemicist which he is. Willsch published his own 10-point programme on how the eurozone crisis is to be tackled. It is based on the premise that Germany should neither be treated nor behave as the benign sugar daddy.

One of Willsch’s key points is that monetary policy and fiscal policy should be strictly separated, something which he believes has fallen victim to the frantic attempts to keep the economies afloat and which has in his opinion undermined the role and the credibility of the ECB. He also demands that voting rights at the ECB should be allocated based on contributions of capital and liability. Be prepared to hear more of the man as the Bundestag elections in October draw closer.

Licking their chops

Meanwhile, Ireland and Portugal will be licking their chops. They have long been looking for a softening of the terms of their own bailouts and the successful completion of a rescue of Cyprus will make their case compelling. However, the key is not that Cyprus has been rescued but how. It has been done as quietly as possible. Eurozone leaders have learnt that the best place not to be is in the headlines. Markets are fickle creatures with short attention spans. Keep quiet for long enough and the world moves on, irrespective of whether things are getting better or not.

Elsewhere, China is also moving on as the National People’s Congress continues in Beijing. Outgoing Premier Wen Jiabao, in his valedictory address, has put the cat among the pigeons by warning that long-term growth will be at a strongly reduced 7-1/2% and that social problems are building up across Chinese society. Consolidation of gains is certainly a healthy development but I don’t think that the outlook for slower growth will excite either the US or Europe who are increasingly looking to China to act as the engine of global recovery.

The last acts of the outgoing administration – surely with much input from the new boys – has been to try to create a more sustainable growth model.

Chinese policy

Yesterday I mentioned the imposition of capital gains tax on property and received the following from a Hong Kong-based credit specialist and keen observer of government actions: “The Chinese policy is more well-thought out than the markets realise. In addition to the diktat to control overly hot property markets [eg. the big city centres] the government is also exhorting ‘support’ for undersupplied markets [eg. smaller cities]. The idea is to rebalance markets across the country; and by forcing more ownership through occupation the current bare shells in Beijing, Shanghai. etc may well be upgraded and so much cheer to the furnishings, plumbing and other Home Depot type businesses if not quite the DIY approach itself.”