Around the World (April 6, 2013)Posted: April 13, 2013
The Cyprus Crisis
The crisis in Cyprus seems to have started in 2009, when state expenditures started rising, under communist president Demetris Christofias. Due to these policies, in 2011 Cyprus lost access to capital from the international markets, and instead of turning to the international institutions for a loan (which would have involved social costs), it negotiated a €2.5 billion loan from the Russian Federation. At the end of 2011 the Cypriot banking system suffered a serious hit, when the value of the Greek state bonds, in which it was (patriotically) invested quite heavily, was cut in half, as a result of the crisis in Greece; in consequence, the banks lost about €4.5 billion (while Cyprus’s national GDP is of about €17 billion). But Cyprus is a member of the euro zone, and as such the state and its banking sector need to respond to certain financial strictures, required in order to manage the common currency. The key demand at that time was the re-capitalization of the banks, but as the international investors had little interest in buying from Cyprus, in 2012 the government had to enter into a slow and much delayed process of negotiations with the Troika (the European Commission, the International Monetary Fund, and the European Central Bank). The fact that it was an electoral year (the lead-up to the presidential elections of 2013) further muddled the situation, slowing down the decision-making process and not allowing for a clear picture to emerge. Finally, after prolonged negotiations, on March 16, 2013, the Troika and Cyprus agreed on a €10 billion bailout deal (the fifth country to enter such a deal, after Greece, Ireland, Portugal and Spain).
This crisis seems to have started in 2009, but Cyprus’s systemic problems are much older in fact, and have to do with it becoming an offshore financial center (explanation). This started a few decades ago, when Cyprus signed double taxation treaties with a number of countries, including the USSR. The way it works, is that economic entities from other countries transfer their earnings through Cyprus, where they are taxed at a very low level, en route to some offshore accounts (like the Cayman Islands etc.). The advantage brought by the double taxation treaties is that these economic entities are not taxed again in their home country, and thus retain a larger part of the earnings. In addition, due to the aforementioned economic relations, after 1991 Cyprus has also became one of the favorite banking locations for the nouveaux riches of Russia (with all the shady implications). Providing financial services was such a productive activity, that offshore tax planning became a key branch of the Cypriot economy; in fact, even the current president used to earn his living in that sector. But this also meant an immense disparity between the size of the banking sector and the actual economic power of the country; by 2011, the assets of the banking sector represented an astonishing 835% of the national GDP.
This is why, when the bailout deal was agreed with the Troika, these irregular aspects had to be taken into consideration. As part of any bailout deal, the receiving government has to contribute by raising a part of that capital and by making structural reforms; accordingly, the Cypriot government was asked to raise €5.8 billion. Initially, the agreed plan was to introduce a one-off bank deposit levy of 6.7%, on all accounts under €100,000, and of a 9.9% one on larger deposits. Due to public pressure and to a lack of political support in the parliament, the law needed to implement this measure failed to pass the legislature. The requirement for national capitalization did not go away, however, therefore the measure was changed: two major banks, Laiki and Bank of Cyprus, will undergo restructuring; the first one will be split into a “bad bank”, with the rest of the accounts being transferred to Bank of Cyprus; all the resulting accounts under €100,000 will be fully protected, but all deposits over that sum will have 40% to 60% transformed into shares in the bank (recapitalization). In addition, in order to prevent a run on the banks, strict limits were placed on the amounts customers can move from the banks; in fact, for a while, the entire banking sector was in a prolonged vacation, until the details of these policies were being worked out.
What does the future hold for Cyprus? Let us look at Iceland: in 2008 it went through a similar crisis, caused by an over-inflated and over-exposed banking sector; after a period of social and political turmoil, its government passed a series of determined measures, which included similar capital controls (some of which are still in place), but which also focused on protecting the individual citizens, instead of a wholesale bailout of the banking sector; today, it is enjoying a remarkable 2.7% annual growth and a 1,5% budget deficit. Capital control measures were also passed in Malaysia during the Asian economic crisis; while widely criticized at the time, they have proven very effective. In Cyprus, however, the problem is compounded by a socio-political status quo riddled by inefficiency and lack of transparency; investigations published in opposition newspapers in recent days claimed that many politicians had their loans quietly written off by Cypriot banks, while more than 130 companies had the opportunity to move out more than €500 million from Laiki, in the run-up to the March negotiations with the Troika. A positive thing is that Cyprus still has a lot of state -owned enterprises, which could be privatized; and there has been talk of off-shore gas reserves around Cyprus, which could also constitute a solid source of cash (at least theoretically). The economic situation is also compounded by the peculiar and cumbersome context of an island still-divided between the Turkish-controlled north, and the Greek-governed South (which constitutes the actual state of Cyprus we are discussing); as well as by the geopolitical implications of its immediate neighborhood – Turkey, Greece, Syria, Israel, Lebanon.
Finally, there is the lingering feeling that, once again, tough economic measures have been imposed by international institutions, under German leadership or influence (a Germany which is understandably reluctant to impose on its own citizens the risks and sacrifices involved in such bailouts). In any case, this is the general feeling among the population of Cyprus – that they are being punished by the EU for no fault of their own. If this will lead to a greater accountability of the Cypriot government, from the same general population (as it happened in Iceland), that would certainly be a good outcome.
Sarkozy’s Return in Peril?
Less than a year after a relatively close electoral win over Nicholas Sarkozy, Socialist president François Hollande is “enjoying” some of the lowest approval rates of any sitting French president. Appropriately, there has already been talk of a possible Sarkozy comeback into politics and participation in the 2017 elections, as he is still the most prominent representative of the center-right, and an exponentially more charismatic personality than Hollande. These perspectives are threatened, however, by the very visible recent actions of the French judiciary system versus Sarkozy . These recent developments have to do with long-standing accusations that in 2007 Sarkozy had profited from the mental and physical weakness of one of the richest persons in France, Liliane Bettencourt, to obtain financial support for his presidential campaign. Even without knowing the outcome of the investigations, the image of the former chef d’État being summoned to interrogatory are due to leave a mark on his public image, adding to the divisive legacy of his previous public persona.The current events also give us an interesting insight into the relatively enclosed and rigid world of the French elite; which is even more interesting, given the official mythology of egalitarianism. It also signals the increasing power and courage of the French judiciary, whose institutional independence developed gradually, in the last few decades; and perhaps on the decreasing staying power of the president’s (formal and informal) immunity. It has been a slow process, from several of Mitterrand’s collaborators ending up in jail twenty years after the fact, to Chirac receiving a two-months suspended sentence a few years after leaving office, to Sarkozy being asked to come in for questioning only a few months after the end of his presidency.
Oligarch & Opponent of Putin Found Dead
On March 24, Boris Berezovsky, another Russian oligarch who had been a loud critic of Putin and had found refuge in London, was found dead in his apartment. The cause of death is not clear, but, unlike in the case of Alexander Litvinenko, the police have not found any traces of radioactive materials – or of foul play – at the home. This seems to be supported by reports that in the last year or so Berezovsky had been under a great deal of financial and personal pressure, undergoing a major financial loss, of about £3 billion, as a result of a lawsuit between him and Roman Abramovich, and being involved in another costly lawsuit with his former girlfriend (and mother of two of his children). According to some, he was increasingly dissatisfied with his life in London, he had been suffering from depression, and wanted to reconcile with the Kremlin and return to the homeland – having changed his mind about Russia, the West, and his positions; others, however, adamantly dismiss this scenario and insist on the possibility of foul play. Whatever the facts, Berezovsky was one on a long list of oligarchs who had obtained their immense wealth in dubious circumstances during the early 1990s, and who, after Vladimir Putin’s rise to power, had to choose between working with the new regime, and organizing against it. Some chose to adapt to the system (see Mr. Evtushenko), and some chose to oppose it – the most famous case being that of Mr. Khodorkovsky, who is still in prison.
Coup D’État in the Central African Republic
On March 24, Séléka rebels took control of Bangui, the capital of the Central African Republic (map). This is a country rich in many coveted resources (such as diamonds), but also a country that has suffered from chronic political instability and under-development ever since its independence. President and strongman François Bozizé, who himself came to power in 2003 through a coup, and was until recently supported by neighboring Chad, and periodically by the French forces in the country, fled to Cameroon, and blamed the attack on Chad. Meanwhile, South Africa withdrew its soldiers from CAR, supporting reports that they had become the new patrons of Bozizé, to the discontent of Chad’s strongman Idriss Déby. One of the Séléka rebel leaders, Michel Djotodia, has declared himself CAR president, suspending the existing institutions of the state – and stated his intention of preparing the country for democratic elections in three years’ time. Most observes received these statements with skepticism; it seems that this is just another case of taking control of the main source of wealth, the state; indeed, although there would be plenty of natural resources, the main source of income for the Central African Republic is foreign aid. The African Union and the major countries invested in CAR (like the US) have until now refused to recognize the new Djotodia regime. The disorder and turbulence characteristic to such power-grabs continue, meanwhile, in Bangui.
Escalation of Belligerent Rhetoric From North Korea
Given the very little verifiable information, and the poor channels of communication with the regime, it is still not clear what the actual intentions are, behind the escalation in the rhetoric and actions of Kim Jong-Un‘s regime. For some, this seems like a continuation of his father’s policies of periodically provoking the West and South Korea, and receiving aid in return; this might also have to do with an attempt from the young ruler to assert and concentrate his control over the military and the party structures (which would be a reasonable assumption, given Kim Jong-Un’s relative inexperience and newness to the position). However, some of the communication coming out of Pyongyang, including the publicizing of contingency plans to strike at mainland USA (although they do not possess this capacity), as well as the closing of a key industrial complex ran in partnership with South Korea (which is one of the main sources of income for the country), and the little influence that China seems to have at the moment over the regime, have put many on the edge. One of the greatest dangers in such conditions is for a conflict to be started accidentally, as military assets are within range of each other, and bellicose rhetoric has put everyone on high alert.
Here is some footage of the drumming up of “support” from the poor people of North Korea; note the ill-fitting uniforms and the obviously coerced choreography.