Sunday, 24 March 2013



1. Does the crisis of Cyprus which erupted in March 2013 and it is the latest of the EU members in the periphery to join the IMF-EU austerity regime, indicate the coming of a broader crack in the eurozone, at least in the weaker members, or is it an isolated case?

2. If Cyprus is a 'casino-economy' as the French finance minister characterized it, the question is whether Cyprus is the only one and if the solution to the problem is austerity and neoliberalism. Considering the casino-style banking operations of the US and EU that sunk the world economy into the recession of 2008-present, are many Cypriot politicians and analysts as well as ordinary people right to feel that their country has been targeted by large global capitalist interests, the IMF and Germany for 'punishment' intended to impoverish it?

3. Does the spread of austerity regime measures across the weaker members of the EU illustrate that Germany is out of control, or is neoliberalism that the strong nations along with the IMF and World are promoting out of control? While imposition of austerity is not a question of nationalism, why does it raise nationalist tendencies among the masses and their leaders, including the Orthodox Church leaders, who feel under neo-colonial control?

 4. Are the IMF, European Central Bank and Germany trying to send a message that they want to clean up money laundering and private sector and public sector corruption in one of their members? If so, why stop with Cyprus which is so small and insignificant? What about the fact that Cyprus ranks 114th in the world in money-laundering operations while Germany ranks 64th! And if Cyprus is the problem, what about the massive bank scandals in some of the largest Western EU banks? Would imposing austerity on Cyprus solve the problem of money laundering or transfer it to Malta, Liechtenstein, Monaco, Austria, and Italy, all on the US State Department list of major money laundering countries in the EU. 

 5. Is Cyprus insignificant and only important symbolically for the EU, or does it send a signal that integration models are becoming predatory at the expense of weaker bloc-zone members and to the benefit of larger members equally debt-ridden as the weak members? Why is there a perception that within the larger nations imposing austerity the benefits fall to large capital at the expense of the middle class and workers?

6. Does the case of Cyprus bring to the foreground the struggle between neoliberal ideologues who want to scale back Keynesian economics as they have been doing since Bretton-Woods in the mid-1940s, or is it simply a case of the strong nations draining capital from the weaker ones to pay for the crisis that started in 2008 and redefining the integration model of development?

7. If Cyprus is insignificant and only Japan matters as the next big impending crisis with global consequences, as FORBES magazine recently argued, what does this say about the struggle between neoliberals out to make money for large capital vs. Keynesian advocates fearing drastic scaling back of the public sector and credit in government may bring down capitalism as we know it. And what are the political and social consequences of these predatory neoliberal policies that in the end create greater gap between rich and poor people and rich and poorer nations? Does all of this stop when social revolution erupts?


One of the smallest countries in the world, Cyprus has just 9,251 square kilometers of land (3500 of which is Northern Cyprus, or Turkish-speaking area separated from the Greek-speaking south since 1974). The population of 1.2 million is tiny within the EU, but the geographic location of the island makes it valuable for NATO that has been and remains interested in securing energy sources from the Middle East.

GDP currently at $22 billion, (GDP based on Purchasing Power Parity -PPP- running at $24 billion from 2010 to 2012, This represents a mere 0.02% of the Eurozone GDP, or ten times smaller than the GDP of Greece that has been at the core of the eurozone debt crisis in the past three years. Cypriot GDP ranking places it 125th in the world, while per capita GDP runs at $29,000 or 51 in the world), both numbers indicating this is a small country with a very strong economy.

The economy in the last three decades or so has depended heavily on tourism and financial services, the latter which has been subject to controversy because the island offers low taxation, high interest rates, and offshore companies for money laundering operations, especially from Russian oligarchs whose fortunes have a questionable origin. During various outbursts of crises in the neighboring Middle East countries, money has flowed into Cyprus as a safe place, thus providing a stimulus to its economy that grew much faster than Greece and enjoyed a higher standard of living in the last three decades. All of this has now come to an end because the IMF-EU austerity package is intended to end the island's role as a money laundering-based economy where political clientism and corrupt business practices from human trafficking to narcotics have taken place.

On 16 March 2013, the Eurogroup met in Brussels with the presence of IMF leadership to impose a bailout for Cyprus. The terms included imposing 6.75% levy on all bank deposits under 100,000 euros and just under 10% on deposits above 100,000. In essence, this would mean that the government collects an estimated 5.8 billion euros so that the IMF-EU can contribute 10 billion euros for the bailout program, at least as a start, while many more austerity measures would follow in the next few years as they have across Southern Europe and Ireland whose debt-ridden banking sector drove the country into austerity. The Cypriot parliament voted down the IMF-EU proposals, and tried seeking Russian financial aid, to no avail.

On 25 March 2013, the IMF-EU imposed a new harsher regime on Cyprus, which includes no levy on deposits under 100,000 euro, but up to 40% haircut of bank deposits above 100,000 euro. The deal also includes merging two of the three largest banks (Bank of Cyprus will be absorbing Laiki Bank, but only the deposits of under 100,000 euro). Meanwhile, the IMF-EU are planning for massive restructuring along the same lines as Greece - privatizing public companies, massive cuts in the social welfare program, everything from education and health, and deep wage cuts.

The EU-IMF austerity proposals would of course mean massive losses not just for those laundering money, but for local businesses. It also means flight of capital from a country whose GDP depends on financial services and bank deposits by non-Cypriots, mostly Russians but also Arabs, Greeks, and Europeans. The initial reaction of the Cypriot parliament was to vote down the IMF-EU proposal, and to seek loans from Russia that officially complained about lack of consultation on the part of the EU. Not about to alienate either Germany or the US over Cyprus where a few oligarchs would lose some of their savings, Russia stayed out of the EU-IMF's way.

How can a country that has a debt to GDP ratio ranking 26th in the world, or lower than about 175 other nations, including Japan, U.S. among some of the largest ones, have a debt problem that threatens its economic viability? Depending on the source, Cyprus has debt to GDP ratio of roughly 81-84%, depending on the source, and an annual debt to GDP ration of just under 5%. How can a country with roughly 70 billion euros ($90 billion) in bank deposits representing about six times GDP, have a problem, even if one-quarter to one-third of those deposits represent Russian and other foreign money that has entered Cyprus owing to its low taxes and high interest rates?

 Genesis of the Crisis in 2013

 Essentially, the geography of Cyprus, near the Middle East, made it valuable for the British Empire that had extensive commercial and military interests in the area. Although Britain offered the island to Greece in WWI as an enticement to join them against Germany that Turkey had been supporting, Cyprus remained under British rule, becoming a colony in 1925. That there was a minority Turkish community along with the majority Greek-speaking one was something Britain used to keep its colonial control. Given that Cyprus has a cordial relationship with Israel with which it is cooperating on the natural gas reserves, and given that it is neighboring some of the world's most volatile trouble spots, the EU cannot walk away from the island and allow Russia to impose hegemony, as some Cypriots wanted.

Owing to the fantastic economic growth of the island came largely from financial services, and primarily dirty banking businesses in the last three decades, Cyprus did not need to join the EU and certainly not the eurozone. In 2008, it adopted the euro more for geopolitical considerations, given its antagonistic relationship with Ankara than anything else. By the time Cyprus joined the eurozone, it enjoyed a budgetary surplus. However, that was the same year that the world recession started in the US, dragging down the island's tourism and construction industries as was the case in the rest of the Mediterranean countries.

Added to the global recession, the European debt crisis and specifically the Greek fiscal and banking crisis made matters worse for Cyprus. Borrowing costs rose sharply, but it was not until the EU-IMF team essentially force Cyprus to participate in the Greek bond purchase, and then to accept a 'haircut' of those bonds, which placed the banks in serious trouble. In 2012, credit rating houses downgraded Cyprus, essentially cutting off the credit supply from international money markets, thus forcing the government to ask for a bailout from the EU and IMF in July 2012 - Cyprus becoming the fifth eurozone country to ask for a bailout. Given that Cyprus has massive natural gas reserves that have been discovered recently, the debt of the country is very manageable, and the money to bail it out is so small that just about every analyst who has looked into this matter concludes it is largely politically symbolic. But why didn't Greece help Cyprus, why did it side with Germany and the IMF on austerity?

The Role of Greece:

Greece has a very long history of using Cyprus for its own economic and foreign policy goals to the detriment of the people of the island. This was the case in 1974 when the Greek military Junta launched an military adventure that resulted in the division of the island into the Greek-speaking and Turkish speaking parts, with major losses of life and property for the people of Cyprus. It is interesting that most Cypriots compare the situation of their country in 2013 to that of the war in 1974, except that today the war has assumed financial-economic dimensions and the new enemy is Germany and Western neoliberal capitalism that strengthens the strongest nations and weakens the weaker ones.

Greece has played an important role in the devastation of Cyprus in 2013, just as it did in 1974. A Greek-based bank called Marfin Investment Bank, behind which are funds from wealthy Arabs, is at the core of the banking crisis in Cyprus. Andreas Vgenopoulos was heading Marfin that absorbed Laiki Bank of Cyprus. Vgenopoulos according to press reports has a long history of playing a 'front man' role and ruining just about every company with which he is associated. Marfin loaded Laiki Bank with massive unsupportable debt, including Greek bonds. IMF-EU have now demanded that Laiki Bank is to be divided into a 'good bank' that Banks of Cyprus will purchase and 'bad bank' (holding unsupportable loans and unsecured deposits of over 100,000) headed for dissolution. The fees that Vgenopoulos and  bank executives made were substantial, but the price was ruining the Cypriot banking system and forcing the country into the lap of IMF-EU austerity. 

During the Eurogroup meeting when the IMF and Germany determined the terms for Cypriot bailout,
Greece went along with the proposals. Fear of not going along with the IMF and EU would have meant dire consequences. Greece could have helped out Cyprus politically as well as with a Bank of Greece loan of two billion euros. That would have meant alienating Germany and IMF, and raised questions about Greece's commitment to austerity. By going along with the IMF-EU austerity on Cyprus, Greece stands to have short-term gains, in so far as Greek capitalists can purchase Cypriot assets on the cheap. Already the branches in Greece of two Cypriot banks - Bank of Cyprus and Laiki Bank - are planning to transfer over to a Greek-owned bank.

Greece has extensive commercial relations with Cyprus and many Greeks trying to avoid paying taxes in their country were stashing away money in Cyprus. As it now stands, they have to pull that money out, at least gradually after paying a massive haircut (up to 40%) that Cyprus will be collecting from bank depositors of above 100,000 euro. Given that Cyprus will be cash-starved and foreign capitalists will be pulling out, and given that labor values and cost of doing business will be lower, Greek capitalists will fill some of the gaps in that economy.

Politically, Greece had to side against Cyprus in favor of the IMF-EU for a number of political considerations as well. It would be impossible to explain to its own people why the Greek government accepted IMF-EU austerity, but was interested in shielding Cyprus from the same mechanism. If Cyprus was forced into IMF-EU austerity, the Greek government could argued that there is only one choice before every EU member, because the alternative is a very messy bankruptcy that would be even harsher than external financial dependence and a sharp drop in GDP with a simultaneous sharp rise in unemployment. That Cyprus sunk to IMF-EU austerity meant that the Greek political choice gained legitimacy in the eyes of its own citizens and the world.

Natural Gas and Global Corporate Interests

The recent discovery of massive natural gas reserves in the territorial waters of Cyprus make the moves of every country, especially the EU, suspect. Turkey also sent a message to Cyprus that it should not mortgage the natural gas reserves because a portion of those belong to the Turkish-speaking minority. Secretary of State John Kerry contacted the Cypriot Finance Minister to express US willingness to support Cyprus, in exchange for a stake in the island's natural gas reserves.Natural gas has been an issue of national pride and hope for Cypriots, offering them a sense of hope for a better future. As it now stands, those reserves will fall into the hands of creditors and they are unlikely to benefit the national economy to the degree politicians and ordinary people had assumed.

The Prospects of Cyprus

For now, Cyprus will try to stay in the eurozone, for it is extremely disruptive to leave without causing a panic for its people. The question, however, is what benefits will Cyprus have to stay in the EU? Already there have been proposals, none serious or plausible, of course, that Cyprus join the Eurasia economic bloc and Turkey proposed adopting the national currency and forge closer ties.

Apologists of neoliberalism and IMF-EU austerity argue that Cyprus had no choice but to accept what the IMF-EU demanded, for the alternative was a messy bankruptcy with devastating impact on the economy and people. They further argue that corrupt politicians are responsible for the country's current status. The eurozone has the right to preserve the integrity of the reserve currency Cyprus is using. Finally, they note that Cyprus has an economy too dependent on the finance sector and that was its own fault. Fair enough. Let us accept all these arguments as true. The questions that arise from them, however, are as follows:
1. Did Cyprus have an economy heavily dependent on the banking sector now, or for decades, including when the EU accepted its membership?
2. Did the EU know of Cyprus public and private sector corruption when it approved its induction into the monetary union, or did it just suddenly discover it in March 2013?  
3. Is it possible for a country as limited in resources as Cyprus to have a diversified economy like the US, or is it more realistic that it would depend on service, tourism, financing and now energy? Besides, how many of the EU periphery members have diversified economies that mirror those of the northwest core EU members?
4. Did the EU suddenly discover that Cyprus has no choice other than to accept the austerity measures, or did it impose them suddenly without much notice for a transition period toward gradual reform?
5. If the EU does not wish to carry risky members like Cyprus that could compromise the euro as a reserve currency, why not give them six months to a year transition period to exit and adopt a national currency? Why the shock therapy?

What is the future of Cyprus?  The short answer is a much poorer country with a much weaker middle class and impoverished working class, under a new integration model based on a patron-client relationship where the patron (Germany) will have a determining voice over the client's economic destiny.
Specific targets to impoverish Cyprus:

1. The IMF has already suggested that wages must come down to around $6500 annually (400 euros per month), a long way down from the current $30,500 annually.

2. There is no easy way to determine the drop in GDP, the rise in unemployment and underemployment, and the drop in labor values. Given what has taken place in the rest of Southern and Eastern Europe in the last three years, and given that the GDP of Greece has dropped by 25% and unemployment hovers around 27%, Cyprus would probably not do much better under austerity. There are estimate that it may lose at least 18% of its GDP in the next two years, and as much as 30% in the next three years. Naturally, positive development can always take place to reserve that inevitability, but the IMF-EU have announced massive austerity along the lines of Greece.

3. Cyprus had banking deposits of around 70 billion euros, 30 billions of which belong to Russians. It is highly likely that banking deposits will drop sharply, needing constant injections of liquidity. This new need to support the debilitated banking system will mean perpetual dependence on IMF-EU austerity.

4. If Cyprus eventually leaves the euro, and it may very well do so, things will not be much better for at least ten years, unless funds begin to pour in from natural gas resources and used for new development. 

5. After Cyprus, what country is next? After Cyprus, what do the people of the EU periphery do to take greater control of their own destiny and not permit the banks protected by the IMF and the strong state in the core nations?

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