The EU has thrown Cyprus to the wolves

Tony Gosling tony at cultureshop.org.uk
Mon Mar 18 13:48:45 GMT 2013 

The EU has thrown Cyprus to the wolves
Steve Keen - 18 Mar, 6:56 AM
http://www.businessspectator.com.au/article/2013/3/18/politics/eu-has-thrown-cyprus-wolves 

http://www.911forum.org.uk/board/viewtopic.php?t=21846

John Lennon’s best line in a lifetime of 
song-writing was “life is what happens when 
you’re busy making other plans”. I had planned 
today to write about the excellent Atlantic 
Monthly The Economy Summit 2013 conference I 
spoke at in Washington on Wednesday, where it 
seemed that senior figures in the US were finally 
starting to realise that private debt, not 
public, was the main game in a debt-deflation.

Then “I read the news today, oh boy”. I woke at 
4am on Sunday to the news that the EU has 
confiscated 10 per cent of depositors' funds in 
its 'bailout' of Cyprus, in a move that will 
raise around €6 billion. Lennon didn’t go far 
enough. It seems political suicide is also what 
happens when you’re busy making other plans.

Now, Cyprus is racing to prevent a possible 
meltdown of its financial sector with 
parliamentary negotiations that aim to reach a 
compromise which will enable the bailout to pass, 
as its two largest banks are rapidly running out of money.

If there was one lesson that I thought the world 
had learnt from the Great Depression, it was the 
need to guarantee depositors’ funds. So much for 
that fantasy. Now the EU has shown that its 
obsession with austerity has gone so far that 
even this historical wisdom has been abandoned. 
Not only are depositors’ funds not guaranteed, 
they are being lost even in banks that have not (yet) failed.

Many banks are likely to fail however, if 
depositors come to believe – as this action gives 
them every right to believe – that their savings 
are not safe in banks. The public’s first 
response will be to no longer trust the digital 
ones and zeros in their bank statements, and to 
demand their funds in cold, hard cash. The only 
way to do this is to front up at the bank, 
present it with a withdrawal equivalent to the 
deposit balance, and wait for the teller to count out the notes.

The public will be waiting a while: the cash 
currently simply doesn’t exist. Currency 
constitutes only a tiny percentage of the 
aggregate money supply – whether defined as that 
found in bank at-call cheque and savings accounts 
(M2), or including term deposits and other 
not-at-call accounts (M3). If everyone wants it, 
then only one in twenty will get it, if Europe’s 
figures are at all comparable to America’s (see 
figure 1). That’s why a collapse in confidence in 
deposits is called a bank run: only those who run 
first to the bank get their money.

Figure 1: Currency is only a fraction of the money supply
Emacs!



Only Cypriots – and Russians, who apparently put 
substantial funds in Cyprus, probably in search 
of either a safe haven or high returns (that’s 
one trivia question I don’t know the answer to) – 
have an immediate motivation to demand cash, but 
they won’t be able to, thanks to a 'bank holiday' 
in Cyprus on Monday, and withdrawal restrictions 
from Tuesday on. But what about depositors in the 
other Mediterranean states – in fact, anywhere 
other than Germany? I can’t imagine them not 
queuing at their banks on Monday, and in large numbers.

With the inability of individuals to freely 
withdraw funds will come a political credit 
crunch. Commerce relies upon the easy transfer of 
funds from buyer to seller. Companies can’t have 
these restrictions imposed on their accounts 
without causing commerce to grind to a halt, but 
surely their suppliers – particularly tradesmen 
and small businesses – are going to demand cash 
payments in future. What happens when companies 
start demanding cash from their banks, rather than relying upon e-commerce?

What will happen to e-commerce after this? Would 
you trust the swipe of a card for a cappuccino 
now, or would you demand coin – even if they were 
euro coins? And what on earth will money markets 
make of this? What will a euro be worth on Monday morning?

Goldbugs will rejoice, I am sure – here comes the 
currency apocalypse they have eagerly 
anticipated. The Bitcoin community is going to 
rejoice as well – theirs is one form of 
e-commerce that is likely to prosper after this 
insane act. The great attraction of Bitcoin is 
that it is the creature of no state, and 
therefore it can’t be confiscated by one.

There will be political demands for the return to 
national currencies: better the national state 
you can control than the supra-national state 
that controls yours. I can’t think of any other 
act that could do more to bring the euro to an 
end than the news that a country has had 10 per 
cent of its deposits confiscated, because that 
nation was foolish enough to cede the right to 
issue its own currency to the European Union a decade ago.

This will also surely stir the Russian Bear. I 
have no idea which Russians have funds that are 
now being used to bailout European banks, but I 
doubt that Vladimir Putin will take kindly to 
this effective seizure of Russian assets. Putin 
certainly has to act: his strongman image in 
Russia would be in tatters if he does not.

What might his comeback be – turning off Russian 
gas supplies to Europe perhaps, until Russian 
depositors are repaid? And probably in dollars 
rather than euros? What then in Europe, if 
strongman tactics force compensation for 
Russians, but none is forthcoming for Cypriots?

The most ominous political portent lies in the 
legitimacy this will bestow on the Far Right. 
This betrayal of the people of Cyprus by its 
politicians and bureaucrats will be seized upon 
by the fascist (and leftist) parties throughout 
Europe. The centrist parties whose politicians 
and bureaucrats have insisted on depositors 
contributing to a bank bailout to appease German 
voters have just thrown the centre away.

Gawd knows what the long-term consequences will 
be, but if I had to identify one single act that 
could lead to a rerun of the political chaos of 
the 1930s in Europe today, this would be it. I 
began this post with John Lennon. Maybe the story 
will end with the resurrection of Vladimir Ilyich 
Lenin. But in the interim I expect that the Right 
– and most immediately, Golden Dawn in Greece – 
will make the most political capital out of Brussels’s incredible folly.

I’ve written this quite literally 'up in the air' 
– flying from Washington to Los Angeles – 
wondering what else will have occurred by the 
time I touch down. Surely there will be further 
reaction by Cypriots and demonstrations elsewhere 
in Europe by both Left and Right. These might 
cause some backdown by the idiot bureaucrats and 
politicians who forged this plan, but even then 
it will be too late: the damage to the 
credibility of the euro and the entire European 
banking system will already have been done.

Monday is going to be a very interesting day in 
Europe. And Tuesday in Cyprus? I would not like 
to be a bank teller on that day.

Steve Keen is professor of economics and finance 
at the University of Western Sydney and author of 
Debunking Economics and the blog Debtwatch. His 
Minsky Kickstarter page is here. 
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