Wednesday, April 3, 2013

The Cyprus Banking Disaster

The Cypriot banking industry has collapsed.
The Cypriot banking industry
Photo by Jonathan Boeke
By now you may have heard of the infamous Cyprus "haircut", a tiny little euphemism which obscures the fact that there's a serious issue with the European economy and rather than fix the underlying problem — a common currency without a common economic policy — Europe thought it would be a good idea to fix Cyprus' economic woes by partially paying for the national debt by confiscating part of the money that people had kept in Cypriot banks. Northern Cyprus, a state recognized only by Turkey, was once upset that Cyprus joined the EU, but now they may be having the last laugh.

That's a gross oversimplification, but it tells you in a nutshell what is scaring the hell out of a lot of people in Europe, including me. You see, as I'm going freelance in a few weeks, my wife and I have been looking at other countries to see if we could find a better cost of living. In fact, Cyprus was one of the countries we looked at before the government-sanctioned bank robbery occurred.

You know where else we were seriously looking at? Luxembourg and Malta, two countries whose banking industries also have Europe worried. Needless to say, the Cyprus actions means that we are very unlikely to pick up roots and move our business to either of those countries. Thus, we're in the (admittedly enviable) position of having to scour France for the best place to live. Taxes may be higher than in other countries, and President Hollande is about as useful as an ice pick on the Titanic, but the French public would tear this country apart if there was even a hint that their money was going to be taken from the banks to pay for the country's economic crisis; there's a benefit to the French national sport of going on strike.

Frankly, I think the Cyprus haircut was an astonishingly bad move on multiple fronts, but in telling people that the money in the banks they've worked hard to save isn't safe, they're setting this continent up for bank runs in any country where a bailout is discussed. I'm not the only one to think this is a bad idea. Now we're hearing reports that the president of Cyprus may have transferred millions of dollars out of the country prior to the haircut and Infowars (admittedly, a site with a questionable reputation) has a summary of news stories showing that the rich had already pulled their money out of Cyprus, leaving the lower and middle classes to take the losses.

Now, the Cyprus finance minister has resigned, the anonymous electronic (and stateless) Bitcoin currency is spiking in value, the Cypriot economy is likely to collapse further and I think there's a hell of a lot more in the Cyprus story in the future — and it's not going to be good. It's one thing to impose austerity; it's another thing entirely to confiscate people's money.


  1. I've had a hard look at the Maltese economy recently, as I'll be moving there soon and was curious how it compared to other EU countries. I was a bit startled to see you mention is as a potential risk, but after reading the article I'm happy to see that it came to the same conclusion as I have (or, well, the IMF have at least):

    'But overall, international observers are less worried about Malta than they are about Cyprus. In May 2012, the International Monetary Fund (IMF) judged: “The sensitivity of the Maltese banking sector to sovereign risk events in Europe is low given very low direct exposures to vulnerable countries, as well as domestic banks’ reliance on a traditional retail deposit-based banking model.”'

    So, I'm not too worried. The economy seems fairly healthy to me, and especially the IT sector there is great - mostly because of their early regulation of online betting. But that's a whole other story.

    PS: are you Ovid? :)

    1. Yes, I am Ovid :)

      I've also read that Malta's "safe", but at this point I'm not entirely comfortable with it. Also, I'd be concerned about going anywhere near the online gambling industry. The US likes to arrest people for that.

    2. Hey. We've chatted a bit before on Perlmonks (my username there is mischief), but I doubt you'd remember me. Anyway...

      One of the nice knock-on effects of the igaming industry that because they've hired a whole bunch of IT people, there's a big enough pool of talent that other companies have started opening offices there to take advantage of the lower costs. So fortunately there's plenty of opportunities that aren't directly linked to igaming!

    3. pgl: Perlmonks? That's a blast from the past :) I'm not much there any more (and from what I see, neither are you).

      Do you work in Malta? I'd love to hear more about it.

    4. Curtis: Indeed, it is a blast from the past! I only logged in yesterday to check your profile, the last time before that was months ago.

      I don't work in Malta yet - I start in few weeks. I'll be working for a non-igaming company though, and had three other interviews, none of which were for igaming companies. There *are* plenty of positions in the igaming industry though, and being examples of recruitment agencies that specialise in this area.

      Dead excited to move - currently in the Netherlands and can't wait to get some sun and sea!

      If you're interested, has a great forum for Malta that's pretty active with a bunch of really helpful regulars:


      It's been an invaluable resource for me while researching the country. is pretty good as well.

  2. As unlikely as it would have seemed prior to today, we actually agree on something.

    Basically, if the EU was going to do this, then there should have been no talk of a bailout from the get go: Let the band-aid rip. On the other hand, if you're going to set up a bail-out, make sure it actually is a bail-out ;-)

    1. Even a stopped clock is right twice a day. I full concede that I may be the stopped clock :)

  3. I think all "Offshore" tax-havens are vulnerable to this kind of attack, though I don't expect the exact same method will be used again. As a former Manager and sometime Director of the Cayman Islands Chamber of Commerce - and, more to the point, a longtime resident of Cayman - I remain extremely interested in any and all threats to the tax-havens.

    Last week I noted on my personal blogsite that Cayman's status as a British colony might save it - at least for as long as Britain wants to save it! The title of the piece was "Cyprus and Cayman", if anybody wants to check it out.

    1. Gordon's article is Cyprus and Cayman.

      And Gordon, feel free to share your links here. They're relevant enough to my reader's interests that I don't mind at all. You're hardly doing it enough to worry about spamming :)

  4. Is there much practical difference between a government-mandated levy on bank balances in Cyprus, and government-mandated currency devaluation (inflation) in Iceland? Both countries had similarly sized banking sectors, and both have to deal with that by in effect, making their citizens lose some of their wealth. It seems to me that the only difference is that inflation is more difficult for the average person to recognize as a loss of wealth, whereas in Cyprus, it is in your face.