This Saturday morning Cypriot people woke up to the news that they were about to be robbed. In a pre-planned ambush scheduled to coincide with a local bank holiday weekend, Eurozone apparatchiks threatened to bankrupt the Cypriot banking system by immediate withdrawal of the ECB liquidity support.
The "deal" forced on the Cypriots by Frankfurt means a "bail-out" of the banks to the tune of 17 billion euros, roughly equivalent to the annual GDP of the Republic that makes up the EU-recognised part of this divided island. But only 10 billion will be provided by the ECB and IMF, the other 7 billion will be taken by a combination of a 1.4 billion privatisation programme, but in bulk by robbing anyone with a bank account in Cyprus.
Despite cynical attempts by the Germans to spin this as targetting shady Russian oligarchs who have used Cypriot banks as money laundering havens for their ill-gotten loot, the reality is that two-thirds of deposits are still held by ordinary citizens. The opportunity to take the money only from the accounts of the unsecured deposits of more than 100,000 euros was dropped in favour of breaking the spirit of deposit insurance which is supposed to guarantee all deposits of less than 100,000 from bank failure or loss. In this case they have avoided breaking the letter of the law by the legal nicety of claiming the confiscation is a new government tax, rather than losses due to bank failure, which is what deposit insurance is supposed to cover.
But this is a legalistic fig-leaf which ignores the effect on the role of deposit insurance in reassuring ordinary households that their income is safe in the bank. That is, the whole purpose of the protection is to avoid the possibility of bank runs - when all depositors all try and withdraw their money at once, causing a collapse of the bank, such as with Northern Rock five years ago.
Financial commentators across the board have been agog at the potentially disastrous stupidity of this move, which lest we forget has been in preparation since Cyprus first announced it would need a bail-out in June 2012, after major losses in the Greek debt write-down. As such, it can hardly be claimed as a fumble under time pressure.
Last year’s Eurozone crisis at one stage threatened what are called "sovereign bank runs" on the economies of Italy and, above all Spain. At one point the amount of money being withdrawn from Spanish bank accounts and sent abroad got to the level of not only putting the Eurozone TARGET2 system of inter-central bank settlements under serious strain, it raised the spectre of a sovereign run on Spain itself, effectively a bank run on the whole country - the outcome of which would be the chaotic breakdown of the Eurozone itself. The crisis was only averted by the ECB stepping in, tearing up the rule book and telling the markets it was prepared to do "whatever it takes" to prevent Spanish or Italian sovereign bond yield spreads going into breakdown territory.
The threat of the ECB printing press, combined with the unofficial acceptance that the German’s wanted things to quiet down in Europe, in the lead-up to their general election this coming Autumn, was enough to convince the markets to end speculating on Eurozone breakdown for now. On top of that, the official deal that was announced, was the creating of a European banking union, with Eurozone-wide deposit insurance, systems for the orderly wind-up of failed banks without depositor loss, a unified regulatory system and so on. All of which, despite being promised for some vaguely defined point in the future, rather than delivered, was intended precisely to avert the possibility of sovereign runs in precarious countries in the Eurozone. All that effort has now been thrown away in an act of astonishing stupidity by Frankfurt with this confiscation of 6.75% of Cypriot deposits under 100,000. It’s no wonder that the financial papers and blogs are awash with disbelief.
What most commentators don’t go into though, is the naked class warfare agenda behind this strategic blunder. The programme of making ordinary workers pay for the crisis the rich created, from Greece to Portugal and Ireland and now Cyprus, is the dogma that makes such stupidity comprehensible. Only dogma can overcome sense, above a certain minimal level of collective wit and intelligence, and no one is suggesting that the personnel of the ECB or the European Commission are all half-wits.
In addition to the general class principle of robbing to poor to give to the rich, we must also note, as have others, the fact that all through the so-called Eurozone "debt" crisis, the tempo of events has been set by the rhythm of the German electoral calendar. From the delays in resolving the initial Greek crisis in 2010 in order to wait until the regional Nord-Rhein Westfalen election had passed - delays which plunged Greece into a chaotic social breakdown which continues to worsen - to the current situation. The chief executive of PIMCO, the world’s largest bond dealer, Mohammed El Arian obliquely referenced this in a typically astute but diplomatically coded piece in the FT.
One of Frankfurt’s motives that he alluded to was the fear of being seen to encourage "moral hazard". That is, that the hardliners feel that all this talk by the buffoons in the media of "the end of the eurocrisis" has encouraged "complacency" amongts us peripherals, and made us think that we’ve got away with it and can now legitimately put basic welfare and subsistance issues back on the agenda. But cracking the whip has another useful function for the German right. In the run-up to their election, financial sadism exercised against "the lazy mediterraneans" goes down very well with their electorate, projecting an image of toughness and fiscal rectitude. Bullies always like to demonstrate their power by beating up the little kids in the playground.
What happens in the next few days, whether the Cypriot parliament will vote to accept this deal, in a vote that has been postponed twice already; whether the banks will be shelled out by runs when they finally re-open tomorrow; whether the bovine international markets will take fright at the sudden "reappearance" of a eurocrisis that they had in their ruminant ignorance thought, only last week, had been put to bed; all this is to be seen over the next days. But as many commentators have already said, even without being able to predict the future, Paddy’s day 2013 could well go down in history as the day they threw the euro away. In the meantime our struggle continues for a Europe fit for all workers to live and prosper in. A struggle against our supposed leaders, not in spite of them, but because of them.