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Shattering the Myths of Luxury

Fear and Uncertainty in Cyprus

by NIGEL O'CONNOR

Nicosia.

The municipal theatre of Nicosia sits directly behind the Cypriot parliament. Its prominence within the capital suggests the importance of such civic buildings to a population seeing itself as the inheritors to the grand heritage of Greek tradition stretching back millennia.

On the dusty window of the theatre’s box office, set behind the neo-classical columns of the building’s exterior, a poster advertises a production of classic Greek tragedies.  Given the events unfolding in the Greek portion of this divided Mediterranean island over the past week the choice of production seems poignant.

The irony is compounded by the fact that the poster is from the summer of 2008.  Performances of the production were cut short when the theatre’s roof collapsed that June – months before the onset of the global financial crisis which brought sharp shocks to European Union economies, including Cyprus.  After extensive renovations in 2004, during the boom years when Cyprus enjoyed the benefits of its newfound position as a growing financial centre and member of the EU, the building now sits empty, unused and unusable.

Many Cypriots may now feel their country went the way of Icarus who, according to Greek mythology, thrilled by the exhilaration of flight, flew too near to the sun before the wax holding his wings together melted – sending him plummeting into the sea.

The comparison may be an obvious one but it certainly looks to be the scenario facing the financial services sector of the Cypriot economy.

Fear and uncertainty pervade the atmosphere in Cyprus.

Last week’s announcement that the Cypriot government would seize a portion of all bank account holders’ deposits sparked anger in Cyprus and concern for a bank run in other euro zone economies affected by the debt crisis.

While it may be difficult to sympathise with financial institutions and their managers whose unquenchable thirst for profit has led their countries to the brink, it should be remembered that human lives are being affected too – in the form of the hardworking people being made to pay for the mess and unsure of the security of their savings, jobs and livelihoods.  A basic tenet of the social contract in our market capitalist society – that workers can trust banks to safely keep their finances – has been breached.

“People were making millions selling air and now they say we were all responsible for it.  It was like there was a party on for years and I was never invited,” said Panayiotis Stavrindis, a psychology professor at the University of Cyprus.  “Now I wake up and the party’s a funeral and they’re burying me. “

To tempt investors the lowest corporate tax rate in Europe was offered, at 10 percent.  Foreign money looking for safety in the euro zone arrived and the region’s third smallest economy, with an annual GDP of €18 billion, accumulated bank deposits to the value of €70 billion.  Many Russian investors arrived in Cyprus to establish companies and the ratings agency Moody’s estimates Russian deposits account for €24 billion of the total.  It is thought that last year alone saw more than €192 billion transferred between Cyprus and Russia.

Allegations of Cyprus being a centre for money laundering are commonplace.  A November 2012 article in Der Spiegelcited German foreign intelligence reporting the main beneficiaries of any European assistance to Cyprus would be “Russian oligarchs, businessmen and mafiosi who have invested illegal money in Cyprus”.

While lax scrutiny from national regulators attracted money launderers it was also the undoing of the entire system and placed Cyrpus into its current crisis.

Last May the Cypriot government nationalised part of the Cypriot Popular Bank – or Laiki – and took over management in order to avoid requesting a bailout from the European Union.  Cypriot leaders feared Europe would impose austerity measures should they request financial assistance – ruining its attractiveness to foreign investors. Nonetheless that appeal was made just several weeks later, making Cyprus the fifth euro zone economy to seek funds from the EU after Greece, Ireland, Spain and Portugal.

Last decade, business, as they say, was booming and in 2006 the Greek investment company Marfin Investment Group acquired Laiki with a cash injection from Dubai Financial, an arm of the state-owned Duabai Investment Group, by purchasing HSBC’s 21 percent share.  By year’s end MIG had acquired a controlling stake in the bank.  The purchase of Laiki coincided with MIG’s acquisition of Greece’s Egnatia Bank and the pair were merged to create Marfin Popular Bank – later renamed Cyprus Popular (Laiki) Bank.

Between 2007 and 2009, as the economic bubble burst and financial crisis set in, Laiki acquired around €3 billion in Greek sovereign bonds.  In 2011, Greek bonds lost over 70 percent of their value and Laiki registered a loss of €2.5 billion for the financial year.  The Cypriot government borrowed the same amount of money from Russia in December of 2011.

In addition to Laiki’s Greek bond purchases, many questions have been asked regarding hundreds of millions of euros in loans to Greek companies and investors that used the money to invest directly back into MIG.

The bank’s plight has sucked the national economy into a spiral.

Michaelis Sarris was the government-appointed non-executive chairman at Laiki and now serves as the country’s finance minister.  A June 2012 Reuters report quoted him as calling for an investigation into the loans used to buy MIG shares.

“We now have a loan portfolio in Greece of about €12 billion and funding of €6-7 billion,” Sarris was reported to say.  “There is a lot of smoke, which means there is some fire but how much of it, and to what extent can it be justified, I am not sure.”

The Cypriot government’s intervention into Laiki diluted MIG’s holdings to 1.5 percent.  In January, MIG announced its intention to sue the Cypriot government for the losses.

Cyprus was said to need €17 billion in assistance in order to prevent the collapse of its banking system.  By Friday 15 March, it was apparent that when the banks reopened the following Tuesday, after a national holiday on Monday, Laiki would be bankrupt before lunchtime.  It was feared this would trigger a run on the entire sector and cause national paralysis.

Following meetings in Brussel’s Cyprus’s president Nicos Anastasiades, emerged from talks with the European Central Bank, the European Union and the International Monetary Fund to announce a plan that would seize a percentage of all of the country’s private bank accounts in order to recapitalize two ailing banks, raising close to €7 billion and securing€10 billion in emergency loans from Europe.

Despite the insistence of EU officials to the contrary, the announcement – in addition to prompting anger amongst Cypriots fearing for their savings – caused panic in other troubled European economies, where people feared the Troika was establishing a precedent of raiding bank accounts in order to secure public finances.

Anastasiades, elected president in February, lacked support within the legislature to pass the tax into law and delayed the implementation of the plan in order to consider other options, including financial assistance from Russian investors.  Last Tuesday, parliament met to reject the tax.  Anastasiades’s own party abstained during the vote.

With no alternative forthcoming the government determined to hit accounts with more than €100,000 with a 30 percent tax and to split Laiki into so-called “good” and “bad” banks.  The Bank of Cyprus, the country’s second largest bank, would acquire the good portion and the bad would be sold off.

As Cypriot authorities continue to seek to minimise the effects to the national economy, banks remain closed until Thursday and limits have been placed on daily cash machine withdrawals from customers’ accounts.

The situation last week in Cyprus was fluid, with people not knowing what the next day would bring.  An economist with Laiki, I met Stavros (name changed on request) in his home on the Monday following the announcement.  He sat in his tracksuit glued to the television in his modest domestic surroundings on the outskirts of Nicosia.  Frustration crossed his face as he flicked through satellite channels offering a stream of talking heads giving their perspective on the crisis.

“This is a time for the economists and all we are hearing is the opinions of politicians and idiots,” he said, changing the channel with an exaggerated flick of the remote control.

He offered a frank analysis of the state of Laiki.

“If the bank opens tomorrow we will collapse within one or two hours,” he said.  “We’ll need police protection because there will be desperate people willing to do something crazy to get their money.”

Intermittently he glanced at a mobile phone and laptop sitting on the side table next to the couch.  He was waiting for a phone call or email to say whether the bank would open the next day for him to go to work.  For all he knew it might ring for someone to tell him he no longer had a job to go to.

“The Germans are sending a message to the banks, that’s all this is,” he said of the demands Cypriot account holders cough up to contribute to the bail-out.

Stavros believed Europe’s hard-line stand on depositor contributions to the refinancing was an attempt to move money from Cyprus into other European countries.

“The Germans talk about dirty money from Russia in Cypriot banks but when you use their matrix for determining the amount there is more in Germany or the Netherlands than in Cyprus,” he claimed.  “They see us as a small country and they can send a message to the Russians through our suffering.”

The final deal implemented by the Cypriot government, and agreed with the EU, saves ordinary Cypriots the severity of a raid on their savings while targeting the big money that has arrived on the island.  Things will not be the same when banks reopen on Thursday.

“All of the confidence will be gone from the Cypriot banking system now regardless of what happens next,” he said fatally.

That was certainly the view of Andriyanova Natalia Patsalidou a Russian living in Cyprus for over a decade and working in financial services.

“For the past two days I’ve done nothing but answer emails from clients in Russia seeking to move their entire accounts,” she said at a protest in front of the Cypriot parliament on the Monday following Anastasiades’s Saturday announcement.

Many Cypriots are sympathetic towards Russia, whose political support during the partition of the island and shared Christian Orthodox faith offers a stronger tradition of loyalty than with Western Europe.

“The Russians have always helped Cyprus,” said Paris Mavronikis, a 26-year-old lawyer, who attended last week’s protests in front of the Cypriot parliament.  “They helped us become a leading economic centre so why should we throw them away?  We are throwing investors out of Cyprus.”

Panayiotis Stavrindis, who in addition to his university work engages in political activism and commentary, explained the people’s rejection of the government’s original plan in a collective psychological context.

“There is a great disappointment and sense that in Brussels they don’t care about how people will be made to suffer,” he said.  “This is not what the people believed in when the European project was launched after the Second World War.  We were sold the idea of solidarity.”

He sees dangers in the use of stereotypes to justify the imposition of harsh economic treatment on Europe’s weaker economies.

“We have to stop stereotyping.  It’s the worst thing we can do.  First we had the ‘lazy Greek’.  Now we are the ‘Cypriot money launderer’.  Who’s next the Italians and the Spanish?”

In Cyprus, with a militarised population (every male is conscripted to the army) and a convenient ‘other’ in the form of Turkish Cypriots, Stavrindis sees the emergence of extremist politics as a serious threat.

“Things are changing and moving very fast.  In times of conflict and crisis, new and dangerous ideas come to the front.  The nationalist movement and the bigotry that is hidden during the prosperity years emerge,” he said.

Stavrindis cites the Golden Dawn in Greece as an example of the movements currently gaining momentum in Europe’s economic periphery.  “They offer people a sense of dignity and being able to stand on their feet through bigotry and strong language,” he said.  “In the past few years they have gone from two and a half percent to around 15 percent in popularity.  They’ve gone from being a clique of criminals to part of the normal political establishment.”

The youth of Cyprus, Stavrindis says, have been raised on myths – with an identity gained from the separation of the island and its Turkish and Greek populations.  He describes people in their early 20s as possessing “an exaggerated sense of their economic and political safety”.

“The young generation today grew up with physical and psychological walls of separation.  They saw these as evidence of how much better off we were without the Turkish Cypriots.  The first wall to fall apart was the prosperity delusion.”

For Cypriots of an older generation, the shock of reverting to more simplistic expectations is challenging many assumptions taken for granted a few years ago.

“I told myself I was safe but I don’t feel safe now,” says Maria Polli, a working mother of five and resident of Nicosia.  “It is a strange feeling when you don’t know what tomorrow will bring.”

Polli is struggling to find the money to continue living in her rented family home.  She works as an assistant to a manager at a pharmaceutical factory and her husband runs a business fixing computers, making between €60-100 on a good day.

In Cyprus, a country which contributed to each of the other four EU member states’ receiving bailouts, there is a sense of abandonment.

“We thought to be a member of the EU would mean each member would help each other.  But they don’t care,” she said.  “Now they’re pushing us, they’re threatening us.”

She sees many people as not ready for the changes about to come into their life, resulting from economic hardship.

“People had faith in money,” she said.  “It came so suddenly and we lost the meaning of being human beings.  It’s good to have a smack in the face to realize the meaning of real life.”

Stavrindis asks similar questions about the needs of people and the origins of their expectations.

“Can we live by spending less and reading more?  Producing our own goods and consuming less exotic commodities?  Do we need holidays in Disneyland or is a tent on a remote beach with some good food and music enough?”

The luxury of time to consider these questions may well have disappeared.

Nigel O’Connor is a journalist based in the West Bank. His Twitter handle is: @nigel_oconnor.