Europe, the ECB and the IMF have put a gun to Cyprus’ head.
The threat has been made public – you do as we say and seize depositor’s money or –
Germany to Cyprus: your banks might never re-open
Either Cypriot members of parliament ignore the will of the Cypriot people or the ECB stops supporting Cypriot banks and they implode. Which would mean either Cyprus leaves the Euro and re-introduces its own currency (which it could do) or it tells its people that ALL their money is now gone.
The problem is the private Cypriot banks spent a great deal of the money deposited in them on buying high yielding Greek bonds/debt which were partially defaulted by Greece with the say-so of the ECB et al. So bear in mind that whatever else Cyprus is guilty of (and there is plenty of guilt to go around) it is NOT a case of a government spending profligately. Cyprus debt to GDP at 87% was lower that the Europe area average of 93%.
The ECB doesn’t care about that it just wants Cyprus to dry-run the new idea of making depositors pay for the sins of private banks directly from their savings rather than through the lengthy and ‘political’ process of official bail outs that we have had so far. Cyprus is the test of a more ‘free market’, no messy voting, no lengthy arguments, technocrats-decide-for-us solution.
I expect the Cypriot parliament will do what its told by the man holding the gun. It will be interesting to see if they enforce it themselves or resign en-masse and allow Europe to install another non-democratic ‘Technocratic’ dictatorship. If so it will be just another sign we have left the modern era and that Europe, if not the whole West, is now Post Democratic.
So does Cyprus have an option? I think they do. A nuclear one.
It is true they have no fiscal bullets left. They never really had any. All they ever really had was a little plastic tomahawk they got from Woolies. Even that’s bent now. Even if they decide to let the ECB pull the life support on their banks the EU has said it feels confident no contagion will spread to the rest of Europe. What they mean is financial contagion. The contagion of one defaulted debt, causing another to default causing another. That danger, the EU thinks it has contained. And it may well have.
But Cyprus has one other option – not fiscal but legal.
The nuclear option of Cyprus is to not seize the money in peoples’ accounts but the information about that money. Such as where it came from, if it was criminal or laundered, and if so which banks, businesses and professionals knew about it and helped it on its way. The information which their regulators should have been collecting but never bothered to for the last 15 years. But even so, it is still there. Could still be used.
Cyprus has been laundering money. Its banks and businesses have helped. But so too have the banks and businesses of other countries. To my knowledge there is documentary evidence which implicates at least two huge European banks. A third, a German bank, would, I think, find itself dragged in also. As would dozens if not hundreds of British registered shell companies and the British authorities who do nothing to regulate them, and yet are implicated in four major fraud cases I know of personally.
You might say, ‘So what! Nothing ever happens to the banks when they are found guilty of laundering. How does that count as a nuclear option for Cyprus?’ and you’d be right. Nothing ever does happen to the banks. They pay a fine, and then carry on. But what would change everything and strike a cold fear into the heart of Europe, its banks and its ruling class, is if Cyprus decided to do what nobody anywhere has done – begin a proper criminal investigation.
And it is the word criminal which would set a fuse burning which if not extinguished WOULD spread a contagion that would threaten Europe’s banks and political system.
To understand why, you have to look at the monumentally important ruling in America in the case against HSBC. When the case first broke the headlines were all about the $1.92 billion fine HSBC had agreed to pay. What was made slightly less clear was that there had been an agreement between HSBC and the US Justice Department that HSBC would pay the fine in return for not being found criminally guilty of anything.
HSBC was not criminally prosecuted. They agreed on what is called a ‘Deferred Prosecution Agreement”. Which means they were only ever going to pay a fine, agree to improve, try to look sorry and walk away with a ‘No admission of guilt’ settlement.
This despite the FACTs that, as Lanny Breuer, Assistant Attorney General for the Department of Justice (DOJ) said, the evidence they had gathered proved,
“…stunning failures of oversight .… The record of dysfunction that prevailed at HSBC for many years was astonishing.”
To which U.S. Attorney Loretta Lynch a lawyer involved with the case added,
“HSBC’s blatant failure to implement proper anti-money laundering controls facilitated the laundering of at least $881 million in drug proceeds through the US financial system…”
Yet HSBC were not guilty of any criminal act, certainly not guilty of Money-laundering. Not only that but even though the case found that,
“…senior bank officials were complicit in the illegal activity.”
No senior management was taken to court, no one faced criminal charges, no one went to gaol. Officially no one was guilty of anything more serious than having “turned a blind eye”. That was the phrase used.
All of which festered quietly just out of public consciousness. Until Eric Holder, the U.S. Attorney General testified before the U.S. Judiciary Committee in March 2013 and made the astonishing admission,
“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy,”
In other words here was the starkest admission, from the most powerful judiciary in the world, that the big banks are officially above the law. The law will not be applied to them. The U.S. Justice department made clear is that if you criminally prosecute a bank, and find it criminally guilty, the bank would most likely lose its banking license and the many institutions that the bank relies upon to buy its bonds, lend it money and purchase its securities would no longer be able to. They would not be allowed by law to do business with a criminal institution.
So the answer is to allow the institutions to act illegally but not prosecute them. That way everybody can do business with people breaking the law but without the nasty word ‘criminal’ being around to stink up the party.
Only poor and ordinary people are Criminals. Rich people have regulatory failures.
Sorry for the lengthy digression. Now back to Cyprus. I think you can see where this is going.
Cyprus’ nuclear threat and option is to make it clear it is going to open criminal investigations into not just its own banks and those who run them, but the huge, systemically important foreign banks who have been dealing with Cyprus and its dirty money for years.
Every nation has so far done what the U.S. did to HSBC. They investigate and fine them making VERY sure there is no mention of criminal guilt. If one single country were to break this agreement and go after the criminals as criminals, the whole edifice is threatened with destruction.
It does not matter that Cyprus is small. Of course being found criminally guilty in a large country like the U.S. is an immediate death sentence. Guilt in Cyprus would not have the same immediate effect. But there would be a legal contagion because a judgment in one country is the basis of filing suit in others.
Currently the opposite is the staple of international banking. A regulator in one country ‘investigates’ one of its own systemically important banks and surprise, surprise finds that though there were ‘problems’, there was no criminal guilt. There are any number of ways of making sure you arrive at this happy conclusion. One way or another no one finds their important financial institutions criminally guilty – ever.
If Cyprus did, the plague would be out.
Even the knowledge such an investigation was underway would shake share prices at the banks under investigation. Once the evidence came out in court it could not be put back. That evidence would be there for all to use in their own countries. Even if governments refused to do it, ordinary people and NGOs could.
This is the option Cyprus still has. I know, as well as you it won’t happen. But it could. It should.
The Cypriot people know they have been guilty of turning a blind eye to tax evasion and laundering. They know the EU wants to strip them of their low tax regime just as they want to strip it from Ireland as well. But they also know the EU doesn’t really want to lift the stone and expose the extent of criminal activity that has been going on because of who and which banks they might find hiding under there.
The Cypriot people have to decide will they try to save themselves by trying to carry on with the same criminals or will they turn to the one option no one even seems to be aware is a possibility – the Truth.