Posts Tagged ‘iceland’

And so it came to pass that the Cyprus parliament was not happy and rejected what was possibly the maddest idea ever put forward to bail-out a country. The vote was a close run thing, with 36 members of the Cyprus parliament voting against the bank levy and 19 abstaining. The number of MPs voting for the proposal reached a grand total of zero.

Good for Cyprus. Now it has to decide what to do next.

It could do a lot worse than consider the lesson of Iceland. In 2007 Iceland’s GDP was 1.293 trillion kronor. In 2008, its external debt was 9.533 trillion.

You may remember that when the scale of Iceland’s problem emerged, and when the UK press found out that UK citizens and local authorities had exposure to Icelandic banks, the country was made to do the walk of shame. Its representatives were hauled up by the British media: “Are you ashamed?” they were asked, and: “What are you going to do about our money?”

The UK used anti-terrorism legislation to freeze Landbanki assets. This was not a move that endeared Britain to the Icelandic people, but maybe the UK felt it had an opportunity to exert revenge over the cod wars, and the Viking invasions before that.

Back in January of this year, the court of the European Free Trade Association – one of those cursed EU courts that should be banned because it tries to consider all points of view and not just the UK’s position, or indeed the position of the UK tabloids – ruled in favour of Iceland over the UK and Holland. Its decision means that the little island to the north west corner of Europe will repay the money it owes to the UK and the Netherlands gradually, and under its terms.

Today, Iceland and its people are still suffering. But then again, it has enjoyed seven successive quarters of growth. It is not easy repaying debts when the money you owe is valued in a foreign currency and the currency in which you receive your salary crashes. Iceland was pretty much left high and dry by the international community (you are on your own mate, was the general feeling attitude in the UK). The IMF did loan out money, but as usual under terms that were very painful. Iceland eventually responded by having bank loans to its citizens valued in foreign currencies declared illegal. Other legalization enabled many homeowners with negative equity to write-off much of their debt.

Ironically, Iceland may yet see a pretty sensational turnaround, and become one of the wealthiest countries in the world on a per capita basis thanks to its one of the island’s most famous natural resources, but one we don’t usually think of as resource at all. Plans are afoot to pipe heat from Iceland’s volcanoes and lava flows, and – via the magic of thermal energy – heat northern Europe. Iceland may yet have the answer, or at least a partial answer, to the energy crisis, and one that does not risk exacerbating global warming.

Iceland also has rather a lot of something else. What is it now? Oh yes, that’s right, ice. Maybe it could use that to cool down the Sahara – all we have to do to achieve that is to solve the minor problem of working out how to transport ice a few thousand miles without it melting.

Cyprus has neither ice nor lava, but it does have a lot of natural beauty.

Its future will be best served outside a Eurozone that has completely failed to come to its rescue in its hour of need. It may be better off with a cheaper currency, and laws designed to protect its citizens over the interests of foreign investors, whilst at the same time welcoming foreigners who can boost its economy. Best of luck to you, Cyprus. Anyone fancy moving there?

©2013 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

Cyprus’s first problem is that its banks are in debt.  Its second problem is that its banks are rather large relative to the Cypriot economy – at the end of 2011, money in Cypriot bank accounts was worth roughly 835 per cent of the country’s GDP.

It’s not all Cyprus’s fault – bad luck has played a role. Cypriot banks lent a lot of money to the Greek government, or – to put it another way – these banks bought bonds drawn on the Greek government worth around 160 per cent of Cypriot GDP. When Greece’s creditors were forced to accept write-downs, Cypriot banks suffered massive losses.

Cyprus is small, and the powers that be, and which control the Eurozone’s money, can afford to bail-out the country with ease. There is, however, something else at stake. Cypriot banks were also the place that many Russian Oligarchs chose as a home for their money. Lean in close, and a little secret will be whispered to you. Are you ready? There is talk of money laundering.

So why should wealthy bankers from the richer part of the euro area put their hands in their pocket and bail-out banks that do not apply the same, oh so very high standards that they do?

Some might cry hypocrisy, which may or may not be true, but maybe hypocrisy only applies if you are the one needing funding. After all, the ones with the funds are always right.

On Friday, when Cyprus’s Prime Minister President Nicos Anastasiades began discussions with finance ministers from the Eurozone and the IMF, he knew negotiations would be tough. He knew his options were limited. If the terms put to him were hard to stomach, he had little choice.

So Cyprus’s would be backers agreed to provide 10 billion euros worth of loans, but on the condition that Cyprus chipped in by contributing money from deposits held in its banks. Those with 100,000 euros or less will lose 6.67 per cent of their deposits; those with more than that will also lose 9.9 per cent on all monies over 100,000 euros.

Mr Anastasiades, or so say some reports, wanted to do it differently. He wanted those with 100,000 or less euros to contribute zero, but wanted those who had more to pay as much as 60 per cent of their bank deposits. “No!” came the response to his idea from the money men.

What about bank deposit insurance, you may ask? If you have less than 100,000 euros in a Eurozone bank, then your money is supposed to be safe, guaranteed.  How can those with less than 100,000 euros be expected to contribute to Cyprus’s bail-out? If you make them take a haircut on some of their money, the bank deposit insurance scheme counts for nothing.

Never fear, the clever old Eurozone financiers thought of that. Instead of forcing deposit holders to lose some of the money, they have been taxed instead.

Haircuts can be dangerous. Markets don’t like them. Samson didn’t like his much either, when it was administered by Delilah. But this was no haircut, it was a tax. It’s a bit like the difference between a haircut you have at the hairdresser and having your hair yanked out by pliers in the torture chamber.

You could say the people of Cyprus are a bit peeved by the whole thing. They knew something nasty was in store, but this nasty?

The Eurozone’s finance ministers are taking a risk. It is not the fault of the Cypriot people that its country’s banks made bad decisions. But they are paying the price. They might feel let down in much the same way that someone doing a bungee jump may feel let down if someone cuts their harness.

Cyprus is a small island, beautiful for sure, and its people seem to genuinely like the British too – or maybe they are welcoming to all tourists.

But they have been punished in a most cruel way. In Greece we are seeing the rise of the Far Right. Policies such as these can only have the effect of forcing massive resentment in certain pockets of the euro region. Cyprus is hardly going to invade Germany, but the discontent that is being created will surely cause resentment for years to come.

Cyprus has an alternative way forward. Take another island, at pretty much the opposite corner of Europe. After an horrendous 2009, Iceland has done okay, with its freely trading currency giving exporters a big lift. The chances that Cyprus will leave the euro must surely have risen, and frankly this may ultimately prove to be a blessing in disguise for the country.

If Cyprus does an Iceland, and – armed with an independent currency – starts attracting more tourists and more money from abroad, and then enjoys recovery, the rest of the troubled regions of the euro will look on and may eventually begin to feel envious.

What we can say without doubt is that from today onwards the chances of a Northern Rock style bank run in Europe has risen. So too, have the chances of a break-up in the euro.

p.s. Critics of the bank bail-outs of 2008/09 take note. The hardship being enforced on Cyprus is not that much different from what the UK would have experienced if its banks had not been rescued, except  that a UK banking crisis of that type would have caused a banking meltdown across the world, and repercussions would have been even more severe than what we are seeing in Cyprus.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here