You will recall that we prefaced the first part of this article with a series of proverbs in honour of Chinua Achebe. Well, Engineer Azih from Okota has reminded me with another proverb that traditionally, you do not explain proverbs to the recipients! But I also know that whenever you are dealing with the uninitiated, there are usually, some exceptions. Continuing with the Cyprus crises, another proverb is appropriate: he who gathers an ant-infested bundle of firewood should be ready to host a party for all types of lizards. A country that cannot manage its economy or mismanages its economic crises has made itself an economic laboratory for the world; it has also lost its economic and even political, sovereignty. After all, USA and UK also had serious crises and nobody dared dictate to them!

Cyprus is a very small country with GDP of $23bn and the 3rd smallest EU economy. It is the 5th Eurozone economy to obtain bailout[Portugal-$102bn; Greece$490. Ireland,#111, Spain$54]. What Cyprus has may however be called a ‘bankonomy’ rather than an economy because the small country is an agglomeration of banks, banking services and bankers. The banks are eight times the size of the economy and that is why when the banks have ordinary headache, the country experiences heart-attack! Economically, Cyprus is a Russian ‘colony’, attracting more than $120bn FDI from Russia in 2011 while Russians hold more than 50% of the bank deposits. Russians started stashing funds in Cyprus since the unceremonious collapse USSR[one of the legacies of Thatcher the snatcher!], encouraged by low tax rate and light regulation. Many people would not bet on the ‘cleanliness’ of those monies from Russia. But Cyprus is not the only country with an extra large banking sector. Britain[is it still Great?] also has a similar challenge but not as alarming as Cyprus.

Cyprus or their banks or both have been in crises and have been begging for assistance from every available source. I believe that they would have taken from the devil himself or herself [I am being gender sensitive!]if he/she had Euro or Dollars to offer! Nine months after they first requested a bail-out, euro-zone finance ministers, offered a €10 billion ($13 billion) package, when they were fully aware that Cyprus needed €17bn. In their desperation and frustration, Cyprus decided to raise the shortfall of €5.8bn by levies of 9.9% on deposits above the €100,000 and 6.75% on lower deposits.

There was compound anarchy in the streets of Cyprus but silent grief and panic in Russia. How can the white-man who adores private property, who preaches the rule of law, who even has a deposit protection limit suddenly confiscate peoples’ property like a thief in the night? Why would that include the poor? Why punish depositors who are neither the owners nor the managers of banks? In the 147 banking crises since 1970 tracked by the IMF, none inflicted losses on all depositors, irrespective of the amounts they held and the banks they were with. Why will that start now? Is it because it is small Cyprus or is it to get at the Russian depositors? The Cypriots took to the streets, vowing ‘no retreat, no surrender’ and the parliament voted out the package. Even members of the ruling party did not vote in support of the package! As a commentator remarked on that day [19/3/13], it was neither defeat nor victory because whatever happened, austerity,

job-cuts, hardship were sure-bankers; the operation was successful but the patient died! Europe has imposed austerity on Cyprus despite the fact that at the G8 meeting of May 2012, there was resistance to German led austerity for Eurozone southern members. They readily forgot the advice of Mark Roe that austerity does not work everywhere and every time because ‘Macroeconomic policies interact on the ground with micro economic realities in subtle but powerful ways’[Greece and the limits of Anti Austerity: Business Day, 20/6/12]

Eventually, a revised package was passed on 25/3/13 which involves 40% haircut for deposits above €100,000, closure of Popular Bank[Laiki], shrinking of other banks and sever austerity measures. As advised by the ‘benevolent lenders’ the CEO of the biggest bank[Bank of Cyprus] was sacked on 27/3/13 for improper handling of the banking crises the second largest, Laiki had already been closed. So, who is in charge? The government and people of Cyprus? Germany and/ or Eurozone? IMF and/or other Multilateral institutions?

Even now, no one is apparently sure of what is needed from Cyprus government, the economic units or from EU/IMF and other ‘benevolent’ lenders. The PM has already written to the EU asking for extra €6bn and a change of policy towards Cyprus; depositors in the Bank of Cyprus are likely to lose 37.5% in the first haircut and 22.5% in the supplementary haircut [converted into banks shares-assuming the banks survive!] while 40% of big deposits would be frozen at an extra 10% interest. Thus the ‘raids’ on bank deposits are likely to continue for an uncertain period, for uncertain amount and under uncertain terms and curiously depending on the bank which one is patronizing. So the customer of bank A may lose 80% while the customer of Bank B may lose 39% while the customer of bank C would lose nothing! That is why The Economist described the entire package as disastrous while Robert Perton, the Business Editor of BBC declared that the Cyprus rescue broke all the rules! [Next week]

IK MUO

Muo is a lecturer and management consultant in the department of business administration, Olabisi Onabanjo 

University, Ago-Iwoye

muoigbo@yahoo.com

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