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A new phase in the crisis of the euro

Thursday, March 21, 2013 The decision of the European Union (EU) and the Cypriot government to confiscate part of the deposits of small savers indicates a stepping up by the creditor countries to avoid, at all costs, the devaluation of the mountain of debt (an explosion of “fictitious capital”) that has been accumulated. In their […]

Left Voice

March 24, 2013
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Thursday, March 21, 2013

The decision of the European Union (EU) and the Cypriot government to confiscate part of the deposits of small savers indicates a stepping up by the creditor countries to avoid, at all costs, the devaluation of the mountain of debt (an explosion of “fictitious capital”) that has been accumulated. In their turn, the resistance encountered among the Cypriot parliamentarians to the dictates of the EU, influenced by the interests of the Russian oligarchs who have a strong influence on the island, is opening up the possibility of a default and a possible exit of Cyprus from the Eurozone. Ironically, one of smallest countries in Europe, with a population of just over a million, and with an economy that represents only 0.2% of the GDP of the EU, could turn into a new turning point in the crisis of the Eurozone.

A freeze on bank accounts in the middle of the European Union

In the early morning of Saturday, March 16, the EU Ministers of Economy and Finance agreed to provide a 10 billion euro loan to Cyprus, so that the country could rescue its banking system. In exchange, the conservative government was forced to establish a 6.75% tax on deposits of up to 100,000 euros and a 9.9% tax on deposits above that amount. By this measure, the Cypriot state hoped to collect 5.8 billion euros. To avoid the massive flight of depositors, the banks have, since that day, withheld that amount, and transfers have been limited, in order to prevent a massive withdrawal of funds. The banks will remain closed until Thursday, March 21, or even until the next Tuesday (imposing limits when they open is even being considered), to avoid a massive run of savers to withdraw their deposits. That is, a freeze on bank accounts, like that which the then Minister of Economy Cavallo in Argentina used in the 2001 crisis.

In the face of the fury that the unexpected decision produced among the population, the inability of the Cypriot government to achieve parliamentary approval of the measures and the damage done to confidence in the European banking system, especially in the countries of the periphery, European authorities sought to back away from the methods of their implementation.

However, the damage was already done. Confidence in the banking system of the countries most affected by the crisis was maintained in part by the ‘back door’ bailouts that the European Central Bank (ECB) used, but, especially among the population, in the belief that deposits less than 100,000 euros were protected. When this guarantee, that was given in 2008, after the collapse of Lehman Brothers, was called into question, the risk of a flight of deposits increased.

But, in their attempt to ‘rob Peter to pay Paul’, the disagreements of the European leaders have not stopped. After the unrest produced by the measure both inside and outside of Cyprus, these leaders urged the Cypriot government to raise the fee on deposits above 100,000 euros, so as not to harm small savers. Concretely, they proposed a fee of 15.6% for this type of deposit. However, Nicosia (the capital of Cyprus) appeared opposed to accepting this measure, because it is afraid that it could scare away foreign investors, mainly Russians, and harm the country’s business model, based on its banks (as well as tourism and the real estate business, connected to the same wealthy groups). The Parliamentary vote on March 19 which rejected the tax on private deposits proposed by the Eurogroup, despite the fact that the government had presented a toned-down version that left savings of less than 20,000 euros exempt, took the leaders of the EU by surprise. All the parties voted against the draft of the law, with the exception of the governing DISY, that abstained.

Germany’s new, tougher, policy encounters strong resistance

From the beginning, Germany entered the negotiations with a radical position, demanding a big blow against the depositors. With the elections in sight, the German government does not want to look like it alone is paying the bill, to avoid the contagion. This could be a big turning point for the crisis of the Eurozone. The fact that Germany is no longer willing to provide bailouts at any price marks a big change in the crisis. In other words, through Cyprus, the German government could be sending a harsh message to Italy and Spain, which are beset with serious political and economic problems: Italy with the impossibility of forming a government and Spain with the executive hounded by the scandals of corruption. Is German approval for other countries to access the European Stability Mechanism (ESM), with its fund of 800 billion euros and to the ECB’s Direct Monetary Transfers mechanism, at risk from now on? It could be that Cyprus is sufficiently small to be a special case, but, from now on, this is not a sure thing.

However, the result of this harshness from Berlin – which works in tandem with the ECB, that threatened to withdraw liquidity from the completely insolvent banks of Cyprus if they do not carry out a proposal on the terms that Europe wants – still remains to be seen. To the resistance of the small savers are also added the interests of the Cypriot political caste who are beholden to Russian investors. Nicosia’s rejection of the demands and the appeal to Moscow to find a way of alternative financing have dramatically increased the financial risk for the island. If the Cypriot authorities cannot collect additional funds in a way that satisfies the Eurozone authorities (Russian money, but not in the form of a loan that would increase sovereign debt to unsustainable levels, precisely what the first plan tried to avoid), they could find themselves forced to break the agreement proposed by the Troika and seek a bigger deal with Russia. On the other hand, if this fails, the island confronts the risk of a complete banking and economic collapse, and the possible exit from the Eurozone, with repercussions that could be felt throughout the EU.

As of now, the result of this struggle is totally uncertain, and all the choices enumerated are possible. For the moment, the Cypriot ‘no’ has had repercussions throughout Greece. As some commentators are saying, it could have inspired the Greeks to think that there is ‘another way’, that would make them question why their own government accepted the terms of the bailout so readily.

Are we heading towards a crisis in Germany’s relations with Russia?

The preceding shows that the measures adopted on this small island could have big geopolitical consequences. Historically, Cyprus, both in the final years of the former Soviet Union and then with Russia, was the destination of investment, whether for the government, the political elite, the businessmen or money laundering. Even during the West’s blockade of the former USSR, this island was one of the first to open its banking system to Moscow, as a reward for Moscow’s support in the Turkish-Cypriot disputes of the years 1960-1970.

When the current crisis in Cyprus began, Russia proposed rescuing the banks in 2008 and 2011, having the backing of the previous government of Cyprus (that was communist) to relax pressure from the EU, a solution that Germany objected to. In this context, most recently, Putin brought up his intention to help Cyprus, but as part of a plan of the EU and Russia, favouring his alliance with Germany. In turn, and because of domestic reasons, Russia has not sought to rescue Cyprus, in line with the current campaign against corruption that includes the repatriation of offshore accounts abroad to Russia, where the financial sector is now relatively more stable.

However, now that the plan is directly affecting Russian interests, the Moscow government has come out to denounce the plan. This could put Putin on a collision course with Germany (and other EU countries): by seeking his own solution to protect Russian interests in Cyprus (a Gazprombank investment), a measure that would not involve a direct bailout, Putin would be going against the German line. It is not excluded either that pressure from Germany on Cyprus will end up pushing the Cypriot government to strengthen its ties with Russia. This could be realized through some type of financial agreement between Cyprus and Russia that would permit Cyprus to reduce the pressure from the Troika, and Russia to increase its control over the island banking system and exploit its gas reserves (which would be very important for the Russian giant Gazprom, in decline in the European market). The possibility that Russia could open a naval base on this strategic Mediterranean island cannot be ruled out. The decisions that are going to be reached by Cyprus and its President, Nicos Anastasiades, in the coming days and weeks go far beyond the question of who is going to pay the bill. This new situation, of a possible Russian geopolitical advance on an island that was historically a pawn of the United Kingdom against Moscow, could increase the already existing tensions between Russia and the EU: Russia’s relations with Great Britain and France have already deteriorated because of Russia’s weapons shipment to Syria and its support for Assad. The bailout of Cyprus could damage relations with Germany, Russia’s most important European partner.

For the expropriation of the private banks and the nationalization of the credit system!

The crisis of the Eurozone shows that, in order to save the big private banks, the creditor states do not hesitate to use the most radical measures, in favour of their interests. Deflationary policies, otherwise know as austerity, seek in an increasingly arbitrary and violent way to guarantee drawing rights over the surplus value of businesses which are no longer profitable but for which the capitalists refuse to accept losses.

As in Greece, where workers paid for the restructuring of sovereign debt, so in Cyprus small and medium savers are the ones who must make the sacrifices in order to pay for the socialization of the losses on deals that they did not make. In Cyprus, while the Russians are being forced to pay part of the bill, the big European banks and investors that unwisely made loans to the Cypriot banks are being rescued.

The fact that Cypriot bank deposits were not guaranteed shows that legal security is sacrosanct for creditors but not for savers. If the same thing is repeated in other, larger EU countries the political and social implications could be explosive. As the Financial Times analyst Wolfgang Münchau said on March 18, 2013, “If it was desired to feed the political climate of insurrection in southern Europe, this was the way to do it.”

For that reason, faced with the increasing threat of individual savings accounts being seized to provide more capital for the banks, there is only one progressive solution: the expropriation of the private banks and the nationalization of the credit system. This solution “does not mean in any case the expropriation of small bank deposits. On the contrary, for small depositors, the sole state bank will be able to create more favourable conditions than private banks. In the same way, only the state bank will be able to establish for the peasants, the artisans, and small businessmen, conditions of privileged, that is, cheap, credit” (Leon Trotsky, Transitional Programme). Giving the fact that the capitalist state and its parties will always seek to save the big capitalists, we must impose a fundamental solution: the central resources of the economy must serve the vital interests of the workers and of all the other labourers. This can only be guaranteed if state power itself passes from the hands of the exploiters into the hands of the workers.

March 20, 2013

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Left Voice

Militant journalism, revolutionary politics.


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