Satyajit Das: Cyprus - a faraway country, but more important than you realise

Midweek View: Politically expedient accusations of money laundering and tax evasion in Cyprus are hypocritical

In 1938, the British Prime Minister, Neville Chamberlain, decided to ignore "a quarrel in a faraway country between people of whom we know nothing". The world has now convinced itself that Cyprus is simply not systemically important. They may be wrong.

As with Greece, it is unlikely that the package, if approved, will work. The crippled financial system as well as the effect of capital controls and uncertainty on tourism will mean a prolonged recession which will make it impossible for Cyprus to meet its targets and repay its bailout debt, necessitating further bailouts and/or future debt restructuring.

The guarantee of small depositors (up to €100,000) is from the insolvent Cyprus government. Small depositors are also affected by "temporary" capital controls, which may need to be in place for a prolonged period. This means that small depositors' cash remains trapped and at risk in any future restructurings.

The EU's new position towards bailouts, shifting losses on to shareholders, bondholders and depositors, is self-serving. The German Chancellor Angela Merkel's statement that policy has always been that taxpayers can't save banks and that this remains the case for Cyprus represents a revisionist view of history.

To date, with minor exceptions, European, as well as the UK and US, governments have protected all creditors, including subordinated bondholders, of failed banks to avoid the risk of contagion and triggering a wider financial crisis. In Germany, the state bailed out depositors in IKB. Similarly, the government did the same for major Dutch banks until the recent case of SNS.

Alternatives such as Cyprus leaving the euro and restructuring its bank and sovereign debt were ignored to avoid losses to the ECB on its €9bn to €10bn exposure to Cypriot banks and to European banks on holdings of Cypriot government bonds.

As in previous European bailouts, the funding is mainly to be used to refinance existing debt owed mainly to European banks and investors. About €7.5bn of the proposed Cyprus package will be applied in this way

Whatever its merits, allocating losses to investors and bondholders may prove difficult in practice.

European banks own €692bn of Spanish government bonds and €832bn of Italian government bonds. They also still own €791bn of Greek, Irish and Portuguese bonds. The ECB has purchased more than €200bn of European sovereign debt, primarily that of Italy and Spain, as well as lending more than €1 trillion to European banks secured by sovereign bonds.

Any attempt to write down bank or sovereign debt of troubled nations would result in large losses to European banks, mainly in the northern European countries. The EU has conveniently forgotten that the bulk of Cypriot bank losses resulted from writedowns to loans to the Greek government, overseen by the EU.

Cyprus has merely highlighted Europe's "doom loop" linking European banks and sovereigns. This will make it difficult to pursue the policy that investors must be accountable for the risk they take, recently articulated and then quickly disavowed by Jeroen Dijsselbloem, president of the Eurogroup.

The German Finance Minister Wolfgang Schäuble's position that "savings accounts in Europe are safe" contrasts sharply with his earlier statement that deposit guarantees were "only as good as a state's solvency". The absence of a Europe-wide deposit insurance scheme and lack of funding for recapitalisation of banks (both opposed by Germany) means that all depositors are vulnerable.

Politically expedient accusations of money laundering and tax evasion are hypocritical. The majority of affected Cypriot bank deposits were from domestic residents, including around 60,000 British retirees and 40,000 Russians living in Cyprus.

Cyprus is not alone in its large banking system, involving substantial levels of offshore deposits. Cyprus is a low tax jurisdiction, not a tax haven. It is puzzling how Cyprus could have been admitted to the eurozone and been eligible for ECB funding until recently if it has such heinous and odious financial practices.

For the EU, Cyprus represents the familiar continuation of its serially clumsy efforts to deal with insolvent banks and countries. It also continues the strategy of ensuring that embarrassing losses are deferred past crucial election dates, or even more desirably until someone else is in power.

Satyajit Das is a former banker and the author of 'Extreme Money' and 'Traders, Guns & Money'

peoplePaper attempts to defend itself
voicesWe desperately need men to be feminists too
Life and Style
food + drink
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

IT Project manager - Web E-commerce

£65000 Per Annum Benefits + bonus: Clearwater People Solutions Ltd: If you are...

Trainee / Experienced Recruitment Consultants

£20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

Trainee Recruitment Consultant - Soho

£20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Secret politics of the weekly shop

The politics of the weekly shop

New app reveals political leanings of food companies
Beam me up, Scottie!

Beam me up, Scottie!

Celebrity Trekkies from Alex Salmond to Barack Obama
Beware Wet Paint: The ICA's latest ambitious exhibition

Beware Wet Paint

The ICA's latest ambitious exhibition
Pink Floyd have produced some of rock's greatest ever album covers

Pink Floyd have produced some of rock's greatest ever album covers

Can 'The Endless River' carry on the tradition?
Sanctuary for the suicidal

Sanctuary for the suicidal

One mother's story of how London charity Maytree helped her son with his depression
A roller-coaster tale from the 'voice of a generation'

Not That Kind of Girl:

A roller-coaster tale from 'voice of a generation' Lena Dunham
London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

London is not bedlam or a cradle of vice

In fact it, as much as anywhere, deserves independence
Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

Vivienne Westwood 'didn’t want' relationship with McLaren

Designer 'felt pressured' into going out with Sex Pistols manager
Jourdan Dunn: Model mother

Model mother

Jordan Dunn became one of the best-paid models in the world
Apple still coolest brand – despite U2 PR disaster

Apple still the coolest brand

Despite PR disaster of free U2 album
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits