Monday, March 25, 2013

Cyprus - II

Looks like finally EU and Germany have got things right here by going with a textbook solution in such situations:
- separation of bank assets into good bank and bad bank category, closure of bad bank (Laiki); 
- honoring insured deposits in full; and
- uninsured getting the haircut, compensated by equity in remaining banks.

Basically Cyprus political class made the 'call' that after Moscow dispatched their original entreaties, there was no particular reason to protect those 'fat cat Russian depositors' (above 100,000 Euros); nor there was any possibility of avoiding a hit to 'treasure island' business model which the Cyprus President tried so hard to protect all along. I do not think, adopting 'treasure island' business model is a particular problem of Cyprus. If Global Economic structure allows avenues for smaller island nations to pursue 'financial and tax heaven' business model, why would a particular island not adopt that? So long as these big G2 or G8 or G20 - whatever Gx - group of economies do not bother to get their act together in 'closing loop holes' in global financial structure to regulate Cyprus or Cayman Islands of the world; such 'treasure islands' will continue to exist and wealthy all over world will continue to take hit from time to time as like how Russian Rich Folks are at the receiving end in this case. There are number of reasons why global financial powers (read USA, IMF, EU, ECB, etc.) do not make any headway in regulating such rogue financial centers:
- First of all, Global Banks are still extremely powerful even after causing 2008 recession and Frank-Dodd law.
- All these nations, given a chance, want to protect Global Banks originating from their nations whenever the issue of adopting common regulations, capital structure comes up. National governments naturally feel the pressure to preserve 'jobs' involved and hence would be cautious in adopting policies which would impact banks with larger presence in their own countries. (UK government has always been protective of London Financial Sector while EU-America are not on the same page when it comes to adopting Basel Bank Capital  Structure.)
- Countries within EU find it hard to co-ordinate tax policies despite being in a common market and  uniform regulatory framework. Ireland wants to have lower Corporate Taxes to keep its edge in luring global corporations. One can imagine Republicans in Congress wanting to reduce Corporate Tax dramatically (actually not a bad policy necessarily if paired with cleaner Individual Taxes to catch rich dollars) while Democrats worried about loss in federal revenue and how all that 'football' would be making it impossible to co-ordinate on corporate taxes on global scale. (It is not easy to single out Banking Industry for separate Corporate Taxation, though a case can be made strongly after how badly all these Global Banks caused the recession of 2008.)
- Finally, when these 'treasure islands' go kaput; those who loose are 'rich' - politically never an easy constituency to fight for as well as their votes are minuscule (all over the world 'rich' are far less in number, except when you are in Norway...). Besides, the model is 'offshore financial haven'; meaning necessarily we are talking non-native islanders who would not be involved in the local political system.

So long story short, Cyprus may have avoided its sudden financial death for now. Meanwhile as it is hard for French Ministers to avoid taking potshots against Cyprus by calling it as 'casino economy'; it is not right to forget that Cyprus is not Macau nor Cyprus banks invested anything outrageously - those banks bought Greek bonds; all blessed by Europe. In other words, one cannot escape the basic observation that it is the European Mess and Greek bonds, which pulled down Cyprus. It is natural then that EU needs to offer the helping hand here apart from the obvious self-interest of avoiding 'bank run' in weaker economies of EU. (While Greece has been drowning for years, how come Cyprus banks did not adopt a cautionary policy of investing into other safe instruments? That is something Cyprus Government and Cyprus People will have to investigate separately. I mean 'Greek ruination drama' has been unfolding over years; giving sufficient 'early warning signs'.)

In the earlier proposal, EU and Germany in particular, were not politically attentive to details about what kind of 'deal' Cyprus Government was about to sale to their own people. EU let go Cyprus with a lousy and down right politically tone deaf proposal. This time it seems like Germany got it's act together to ensure that politically it is all 'palatable' - German Minister even says that Cyprus Politicians would not have to take any 'tough' vote here at all! That is excellent, finally German Chancellery is learning something.

The only worry in all this is, the losing party (apart from thousands of bank job losses) - Russian Rich People - has some reputation to adopt Godfather style Mafai techniques to settle disputes (murders and intrigues). With a previous KGB guy firmly in saddle in Kremlin, some of these rich Russians with connections and favor with Russian rulers; may be tempted to opt for some unconventional ways to hand 'pay back' to some of these Cyprus Politicians. So vigilance is required; else Cyprus Crisis would not remain just 'financial' but 'criminal' with far more sinister consequences.

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