I prefer to cover a broad range of news topics on this website from week to week, so it is with a mildly apologetic tone that I return to the fast-changing crisis situation in Cyprus, and anticipate multiple articles on the Budget. It is also evident that I bored readers with my dwelling on Britain’s nuclear deterrent. I therefore apologize and pledge not to reopen the issue for… a little while.
The Parliament of Cyprus has voted decisively against the emergency levy on all bank deposits, which was a precondition of the loan from the EU. Now that the island’s financial system has been weakened by futile withdrawals by savers wishing to avoid the levy, the nation’s finances are in even more urgent need of repair. The EU have developed a reputation for being very inflexible lenders, and so Cyprus appears to be in a near-impossible situation.
If Cyprus defaults on its debts, even if only in the form of a “haircut”, observers say the country will be expected to leave the eurozone- a damaging blow to a broken economy.
However, there is a rival lender available to the former British colony. It isn’t the IMF, and it isn’t the World Bank (both are institutions capable of what has been emotively described as ‘evil’). In an unusual move, the Russian Federation, which is already a major creditor of Cyprus, has asked to begin formal talks for an alternative bailout. The motives behind the offer are not as selfless as they initially appear, obviously. The fact that affluent Russians and businesses, attracted by lower tax rates, have deposited over €30 billion in Cypriot banks.
That said, Russia has not lost interest in lending now that their savings are not at threat. However, a cynic would point out that the viability of the country’s financial system remains in question, and so Putin will throw however many billions of whichever currency you care to name to protect the Russian elite. It remains unlikely that either lender will offer an alternative course to the rigid austerity which is now damaging most of the western world. Iceland is perhaps the only country which has recovered fully from an IMF intervention in recent times. This is because they were allowed to invest and grow their way out of the problem, without absurd privatisations and tax cuts, exactly as Cyprus should be allowed to.
Oh, and next time, could the government consider increasing Corporation Tax to a more realistic level (i.e. not 12.5%) before grabbing pensioners’ savings?
