FacebookTwitterGoogle+RedditEmail

The Battle of Cyprus

by ELLEN BROWN

“If these worries become really serious, . . . [s]mall savers will take their money out of banks and resort to household safes and a shotgun.”

Martin Hutchinson on the attempted EU raid on private deposits in Cyprus banks

On Tuesday, March 19, the national legislature of Cyprus overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout.  Reuters called it “a stunning setback for the 17-nation currency bloc,” but it was a stunning victory for democracy. As Reuters quoted one 65-year-old pensioner, “The voice of the people was heard.”

The EU had warned that it would withhold €10 billion in bailout loans, and the European Central Bank (ECB) had threatened to end emergency lending assistance for distressed Cypriot banks, unless depositors – including small savers – shared the cost of the rescue. In the deal rejected by the legislature, a one-time levy on depositors would be required in return for a bailout of the banking system. Deposits below €100,000 would be subject to a 6.75% levy or “haircut”, while those over €100,000 would have been subject to a 9.99% “fine.”

The move was bold, but the battle isn’t over yet.  The EU has now given Cyprus until Monday to raise the billions of euros it needs to clinch an international bailout or face the threatened collapse of its financial system and likely exit from the euro currency zone.

The Long-planned Confiscation Scheme

The deal pushed by the “troika” – the EU, ECB and IMF – has been characterized as a one-off event devised as an emergency measure in this one extreme case. But the confiscation plan has long been in the making, and it isn’t limited to Cyprus.

In a September 2011 article in the Bulletin of the Reserve Bank of New Zealand titled “A Primer on Open Bank Resolution,” Kevin Hoskin and Ian Woolford discussed a very similar haircut plan that had been in the works, they said, since the 1997 Asian financial crisis.  The article referenced recommendations made in 2010 and 2011 by the Basel Committee of the Bank for International Settlements, the “central bankers’ central bank” in Switzerland.

The purpose of the plan, called the Open Bank Resolution (OBR) , is to deal with bank failures when they have become so expensive that governments are no longer willing to bail out the lenders. The authors wrote that the primary objectives of OBR are to:

ensure that, as far as possible, any losses are ultimately borne by the bank’s shareholders and creditors . . . .

The spectrum of “creditors” is defined to include depositors:

At one end of the spectrum, there are large international financial institutions that invest in debt issued by the bank (commonly referred to as wholesale funding). At the other end of the spectrum, are customers with cheque and savings accounts and term deposits.

Most people would be surprised to learn that they are legally considered “creditors” of their banks rather than customers who have trusted the bank with their money for safekeeping, but that seems to be the case.

According to Wikipedia: “In most legal systems, . . . the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit
account is a liability of the bank on the bank’s books and on its balance sheet.  Because the bank is authorized by law to make loans up to a multiple of its reserves, the bank’s reserves on hand to satisfy payment of deposit liabilities amounts to only a fraction of the total which the bank is obligated to pay in satisfaction of its demand deposits.”

The bank gets the money. The depositor becomes only a creditor with an IOU. The bank is not required to keep the deposits available for withdrawal but can lend them out, keeping only a “fraction” on reserve, following accepted fractional reserve banking principles. When too many creditors come for their money at once, the result can be a run on the banks and bank failure.

The New Zealand OBR said the creditors had all enjoyed a return on their investments and had freely accepted the risk, but most people would be surprised to learn that too. What return do you get from a bank on a deposit account these days? And isn’t your deposit protected against risk by FDIC deposit insurance?

Not anymore, apparently. As Martin Hutchinson observed in Money Morning, “if governments can just seize deposits by means of a ‘tax’ then deposit insurance is worth absolutely zippo.”

The Real Profiteers Get Off Scot-Free

Felix Salmon wrote in Reuters of the Cyprus confiscation:

Meanwhile, people who deserve to lose money here, won’t. If you lent money to Cyprus’s banks by buying their debt rather than by depositing money, you will suffer no losses at all. And if you lent money to the insolvent Cypriot government, then you too will be paid off at 100 cents on the euro. . . .

The big winner here is the ECB, which has extended a lot of credit to dubiously-solvent Cypriot banks and which is taking no losses at all.

It is the ECB that can most afford to take the hit, because it has the power to print euros. It could simply create the money to bail out the Cyprus banks and take no loss at all. But imposing austerity on the people is apparently part of the plan.  Salmon writes:

From a drily technocratic perspective, this move can be seen as simply being part of a standard Euro-austerity program: the EU wants tax hikes and spending cuts, and this is a kind of tax . . . .

The big losers are working-class Cypriots, whose elected government has proved powerless . . . . The Eurozone has always had a democratic deficit: monetary union was imposed by the elite on unthankful and unwilling citizens. Now the citizens are revolting: just look at Beppe Grillo.

But that was before the Cyprus government stood up for the depositors and refused to go along with the plan, in what will be a stunning victory for democracy if they can hold their ground.

It CAN Happen Here

Cyprus is a small island, of little apparent significance. But one day, the bold move of its legislators may be compared to the Battle of Marathon, the pivotal moment in European history when their Greek forebears fended off the Persians, allowing classical Greek civilization to flourish.  The current battle on this tiny island has taken on global significance.  If the technocrat bankers can push through their confiscation scheme there, precedent will be established for doing it elsewhere when bank bailouts become prohibitive for governments.

That situation could be looming even now in the United States.  As Gretchen Morgenson warned in a recent article on the 307-page Senate report detailing last year’s $6.2 billion trading fiasco at JPMorganChase: “Be afraid.”  The report resoundingly disproves the premise that the Dodd-Frank legislation has made our system safe from the reckless banking activities that brought the economy to its knees in 2008. Writes Morgenson:

JPMorgan . . . Is the largest derivatives dealer in the world. Trillions of dollars in such instruments sit on its and other big banks’ balance sheets. The ease with which the bank hid losses and fiddled with valuations should be a major concern to investors.

Pam Martens observed in a March 18th article that JPMorgan was gambling in the stock market with depositor funds. She writes, “trading stocks with customers’ savings deposits – that truly has the ring of the excesses of 1929 . . . .”

The large institutional banks not only could fail; they are likely to fail.  When the derivative scheme collapses and the US government refuses a bailout, JPMorgan could be giving its depositors’ accounts sizeable “haircuts” along guidelines established by the BIS and Reserve Bank of New Zealand.

Time for Some Public Sector Banks?

The bold moves of the Cypriots and such firebrand political activists as Italy’s Grillo are not the only bulwarks against bankster confiscation. While the credit crisis is strangling the Western banking system, the BRIC countries – Brazil, Russia, India and China – have sailed through largely unscathed. According to a May 2010 article in The Economist, what has allowed them to escape are their strong and stable publicly-owned banks.

Professor Kurt von Mettenheim of the Sao Paulo Business School of Brazil writes, “The credit policies of BRIC government banks help explain why these countries experienced shorter and milder economic downturns during 2007-2008.” Government banks countered the effects of the financial crisis by providing counter-cyclical credit and greater client confidence.

Russia is an Eastern European country that weathered the credit crisis although being very close to the Eurozone. According to a March 2010 article in Forbes:

As in other countries, the [2008] crisis prompted the state to take on a greater role in the banking system.  State-owned systemic banks . . . have been used to carry out anticrisis measures, such as driving growth in lending (however limited) and supporting private institutions.

In the 1998 Asian crisis, many Russians who had put all their savings in private banks lost everything; and the credit crisis of 2008 has reinforced their distrust of private banks.  Russian businesses as well as individuals have turned to their government-owned banks as the more trustworthy alternative. As a result, state-owned banks are expected to continue dominating the Russian banking industry for the foreseeable future.

The entire Eurozone conundrum is unnecessary. It is the result of too little money in a system in which the money supply is fixed, and the Eurozone governments and their central banks cannot issue their own currencies. There are insufficient euros to pay principal plus interest in a pyramid scheme in which only the principal is injected by the banks that create money as “bank credit” on their books. A central bank with the power to issue money could remedy that systemic flaw, by injecting the liquidity needed to jumpstart the economy and turn back the tide of austerity choking the people.

The push to confiscate the savings of hard-working Cypriot citizens is a shot across the bow for every working person in the world, a wake-up call to the perils of a system in which tiny cadres of elites call the shots and the rest of us pay the price. When we finally pull back the veils of power to expose the men pulling the levers in an age-old game they devised, we will see that prosperity is indeed possible for all.

For more on the public bank solution and for details of the June 2013 Public Banking Institute conference in San Rafael, California, see here.

ELLEN BROWN is an attorney and president of the Public Banking Institute.  In Web of Debt, her latest of eleven books, she shows how a private banking oligarchy has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://WebofDebt.comhttp://EllenBrown.com, and http://PublicBankingInstitute.org.

 

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 300+ blog articles are at EllenBrown.com.

More articles by:
June 28, 2016
Jonathan Cook
The Neoliberal Prison: Brexit Hysteria and the Liberal Mind
Paul Street
Bernie, Bakken, and Electoral Delusion: Letting Rich Guys Ruin Iowa and the World
Anthony DiMaggio
Fatally Flawed: the Bi-Partisan Travesty of American Health Care Reform
Mike King
The “Free State of Jones” in Trump’s America: Freedom Beyond White Imagination
Antonis Vradis
Stop Shedding Tears for the EU Monster: Brexit, the View From the Peloponnese
Omar Kassem
The End of the Atlantic Project: Slamming the Brakes on the Neoliberal Order
Binoy Kampmark
Brexit and the Neoliberal Revolt Against Jeremy Corbyn
Ruth Hopkins
Save Bear Butte: Mecca of the Lakota
Celestino Gusmao
Time to End Impunity for Suharto’’s Crimes in Indonesia and Timor-Leste
Thomas Knapp
SCOTUS: Amply Serving Law Enforcement’s Interests versus Society’s
Manuel E. Yepe
Capitalism is the Opposite of Democracy
Winslow Myers
Up Against the Wall
Chris Ernesto
Bernie’s “Political Revolution” = Vote for Clinton and the Neocons
Stephanie Van Hook
The Time for Silence is Over
Ajamu Nangwaya
Toronto’s Bathhouse Raids: Racialized, Queer Solidarity and Police Violence
June 27, 2016
Robin Hahnel
Brexit: Establishment Freak Out
James Bradley
Omar’s Motive
Gregory Wilpert – Michael Hudson
How Western Military Interventions Shaped the Brexit Vote
Leonard Peltier
41 Years Since Jumping Bull (But 500 Years of Trauma)
Rev. William Alberts
Orlando: the Latest Victim of Radicalizing American Imperialism
Patrick Cockburn
Brexiteers Have Much in Common With Arab Spring Protesters
Franklin Lamb
How 100 Syrians, 200 Russians and 11 Dogs Out-Witted ISIS and Saved Palmyra
John Grant
Omar Mateen: The Answers are All Around Us
Dean Baker
In the Wake of Brexit Will the EU Finally Turn Away From Austerity?
Ralph Nader
The IRS and the Self-Minimization of Congressman Jason Chaffetz
Johan Galtung
Goodbye UK, Goodbye Great Britain: What Next?
Martha Pskowski
Detained in Dilley: Deportation and Asylum in Texas
Binoy Kampmark
Headaches of Empire: Brexit’s Effect on the United States
Dave Lindorff
Honest Election System Needed to Defeat Ruling Elite
Louisa Willcox
Delisting Grizzly Bears to Save the Endangered Species Act?
Jason Holland
The Tragedy of Nothing
Jeffrey St. Clair
Revolution Reconsidered: a Fragment (Guest Starring Bernard Sanders in the Role of Robespierre)
Weekend Edition
June 24, 2016
Friday - Sunday
John Pilger
A Blow for Peace and Democracy: Why the British Said No to Europe
Pepe Escobar
Goodbye to All That: Why the UK Left the EU
Michael Hudson
Revolts of the Debtors: From Socrates to Ibn Khaldun
Andrew Levine
Summer Spectaculars: Prelude to a Tea Party?
Kshama Sawant
Beyond Bernie: Still Not With Her
Mike Whitney
¡Basta Ya, Brussels! British Voters Reject EU Corporate Slavestate
Tariq Ali
Panic in the House: Brexit as Revolt Against the Political Establishment
Paul Street
Miranda, Obama, and Hamilton: an Orwellian Ménage à Trois for the Neoliberal Age
Ellen Brown
The War on Weed is Winding Down, But Will Monsanto Emerge the Winner?
Gary Leupp
Why God Created the Two-Party System
Conn Hallinan
Brexit Vote: a Very British Affair (But Spain May Rock the Continent)
Ruth Fowler
England, My England
Jeffrey St. Clair
Lines Written on the Occasion of Bernie Sanders’ Announcement of His Intention to Vote for Hillary Clinton
FacebookTwitterGoogle+RedditEmail