How did the EU regulators allow this whole Cyprus matter to get to the current position?

After all the EU bureaucrats are 'hell bent' on determining (interfering with) the dimensions of a carrot, banning curved cucumbers, or some such equally fatuous exercise, so why did they fail to spot the Cyprus situation brewing or address it in a timely manner

In reality it is a culmination of bad regulation, bad politics and EU incompetence which has brought about the Cyprus situation, resulting in savers and the rest of the Cypriot population paying the price for banking failure. Most of which was avoidable if the EU had displayed a modicum of competence

The Background

Lets just look at Cyprus in greater depth

Prior to joining the EU in 2004, Cyprus had a stable economy growing at around 4% per annum with a healthy budget surplus, underpinned by financial services, tourism and property

After joining The EU, two major Cyprus banks reaped the benefits of membership by trying to attract money from Russia, Europe & the Middle East, with keen interest rates , low taxes, laisez faire (lax) local expansion policies and special deals (Russia)

As a result, money poured into the country from the targeted regions and the greater the inflow of money the more the Cypriot banks lent out

The Problem

Now this is where it gets interesting

Traditionally the Cypriot central bank only permitted banks to use up to 30% of their foreign deposits to support local lending in order to avoid massive external deposits fuelling a bubble

However, all those rules changed when they joined the EU (2008) and Euro Region deposits were re-classified as domestic rather than external/foreign money - accordingly the Cypriot Banks loan books increased by about 32% over the period of a single year

In a very short time (by 2011) the Cyprus banks were almost 8 times the size of their economy and their financial services sector accounted for half of GDP

A huge bank bubble had appeared and all the danger signs were there. However, instead of addressing the issue, the Cypriot central bank exacerbated the problem by raising the limit on foreign deposits from 30% of capital to 90%; highly risky

At this point one might well ask - where were the EU checks and balances and why did no EU regulatory system kick in?

Cypriot banks purchased over €4bn of high-yield Greek debt and lent a further €22bn to Greek companies - this was more than the entire GDP for Cyprus. Cyprus assumed that even in a worst case scenario, the Ireland approach would be adopted and bond-holders paid out in full

Unfortunately for Cyprus, this was not the case and bond-holders took a massive 'haircut' to protect the private Greek creditors

Once Greece defaulted on its debts, the country of Cyprus, Laiki & the Bank of Cyprus all went bust overnight. Clearly the government was not in a position to take on the bank liabilities which would have amounted to 145% of the country’s GDP

Nevertheless, Cyprus had in fact been almost bust since 2009 and a great many knew about this but did nothing until it was too late - Why did the EU not intervene ?

Points at issue

The Cypriot people have every right to be angered at the conduct of the EU and most of the resulting disaster has been brought about by cause & effect

  • Greece should never have been allowed to join the EU in the first place. Many say that Greece with the help of Goldman Sachs 'cooked the books' by masking the true extent of Greek debt by the use of derivatives to 'legally' circumvent the EU Maastricht rules. Thereby deferring the cross-currency swaps maturity until after Greece had entered the EU and then bringing the problem back on Greece's books to increase the countries already bloated deficit
  • Once the Greece/Goldman 'scam' became apparent no-one in the EU did anything about either throwing them out of the EU or ensuring that Goldman Sachs under-wrote the liability of the Greek participation in perpetuity
  • Therefore without the collapse of Greece one could arguably say that Cyprus would at least be €4bn better off today and not in quite such dire circumstances
  • When it became apparent that matters had gone seriously wrong with Cyprus, the EU did nothing for 9 months except dither; thereby exacerbating a problem which needed to be addressed urgently rather than avoided
  • Finally a woefully inadequate plan was produced by the EU, led by the Germans. The EU wished to punish Cyprus for attempting to become and off-shore tax haven for Russian money laundering within the EU and the population would bear the brunt of the measures

Questions that need to be asked of the EU:

  • Once the EU became aware of the Greece/Goldman Sachs issue, why did they not investigate the matter and throw Greece out of the EU, or at the very least pursue Goldman Sachs to underwrite a situation they had brought about by assisting Greece's membership of the EU ?
  • What rules were in place to prevent EU member country banking systems from over-stepping prudent lending ratios inside or outside the EU - Why were they not acted upon and and what has been done to strengthen these rules in the light of the Cypriot problems ?
  • Although they knew about the position, why did the EU put their head in the sand for 9 months whilst the position deteriorated, before addressing the issue ?
  • What has the Eurozone or any other politician done to prevent futures problems in the banking industry threatening global stability ? For instance, simple measures, such as allowing bank depositors to place their money with banks either on a Client Money basis (segregated from the bank and held as a Trustee) or Deposit basis allowing the bank to hold the money as a banker and not as a trustee - Banks And Your Money
  • What responsibility does the EU take for its part in this whole Cypriot matter - from not throwing Greece out when it became apparent that their entry figures were 'cooked' right through to inadequate (lax) rules and failure to address matters in a timely manner

All in all, perhaps the EU should be fined (say €5bn to start) for failures in their own regulatory systems, and not controlling the financial markets within the Eurozone for the benefit of the population in EU member states

Perhaps any such fines could come directly from the pockets of individuals in the entire EU administration system with EU politicians (they have clearly failed in their mandate) bearing a greater percent of the fine personally - say 50%-75% of their entire salary and perks for all the years they have been an EU politician; after all any failure in regulation occurred on their watch, so it is only fair they should be held accountable and pay the price.

Any shortfall or balance needed to make up the rest of €5bn should be provided by Goldman Sachs as recompense for their contribution to this whole mess as well as having them indemnify all future Greek related problems for the duration of their EU membership

Only by taking such measures, will it be brought home to inventive 'chancers' such as Goldman Sachs, that they cannot simply come up with schemes that impact on the wider population, without being accountable for any ensuing fallout. After all they take the upside of lining their pockets initially, so they should also be subject to the downside of covering the eventual outcome of their actions - cause and effect!

Tags: | Categories: Banking | European Union