Paul Krugman, apropos the Cyprus kerfuffle, wonders what it is about European islands that causes them to turn into havens for runaway banks. He mentions Iceland and Ireland, though the description also fits Britain. Cyprus is actually the odd one out here. Unlike the Atlantic islands, the isle of Aphrodite has traditionally been a gateway between Europe and the Near East. It was a logistical hub during the Crusades and, acting as a shield against Ottoman Turkey to the north, it was of strategic importance for the sea-trade routes from Genoa and Venice to the Levant. The title of this post, by the way, comes from the book of the same name by Lawrence Durrell, more famous for that other Levantine work, The Alexandria Quartet.
Though Cypriot banks were heavily exposed to Greece, this should be seen in the context of traditional enosis, the desire for union that motivated the independence movement in the 1950s. On an island still divided between Greeks and Turks, investment in Greece was a strategic imperative and a way of connecting with the EU prior to accession. While commentators have noted the large amount of Cypriot investment in Russia (essentially laundering of illicit Russian money), few have considered the knock-on effect that a bank crash would have on the Middle East. I have no particular insight into how this will all pan out, but I suspect an injection of funds from the Gulf is as likely as one from Russia. Assuming that the shadowy investors of Qatar aren't going to buy Arsenal, they might care to snap up a Cypriot bank or two and get an option on the much-touted gas field.
There are claims that the Troika expected the Cypriot government to honour its existing (and EU standard) depositor guarantee of 100k and limit the levy to larger deposits (i.e. Russian and mainland Greek tax-dodgers), but the government feared losing Russian goodwill and decided to dun its own citizens, claiming in turn that the 6.75% was imposed upon it. This sounds like simple buck-passing, but what it serves to do is highlight the sensitivity of the issue of depositor safety, which is as much an issue for us in the UK (or anywhere else in the EU) as it is for Cypriots, particularly if this move is the harbinger of wider financial repression - i.e. paying down debt by a de facto tax on savings.
Unless you go overdrawn, your bog-standard UK bank account is unlikely to levy a fee for the service - it's free of charge, and has been among high-street banks for many years now. If you have a savings account, you probably earn a small amount of interest. How does this work commercially, given that the bank has to pay the costs of the branch, the ATMs, the staff etc? The answer is that the bank puts your money at risk by using it to fund loans to other customers or for proprietary trading. The bank will take the lion's share of any profits arising, hence the nugatory interest on your savings. It is able to do this (and thereby pay its management and traders big bonuses) because you, the depositor, don't think that you have any skin in a game of speculation.
Your innocence (and peace of mind) is ensured in part by deposit insurance. In the UK, the government-backed Financial Services Compensation Scheme provides a guarantee up to £85k (roughly equivalent to 100k Euros). In theory this is funded by a levy on banks and other deposit-taking institutions, however the back-stop is the government via the Bank of England, which simply means that, should your bank go bust and funds be insufficient, they will organise a non-voluntary whip-round among all taxpayers to compensate you (another de facto tax, and one which is inevitably regressive as any compensatory spending cuts will hit the poorer hardest).
While I think we can all sympathise at the individual level with small depositors in Cypriot banks, the idea that their money is being "stolen" by the government, or the Troika, is absurd. Their money was taken by the banks, who then misused and lost it. Caveat emptor. That said, it is legitimate to criticise the Cypriot government for reneging on their deposit guarantee. The political fallout of this is to leave depositors across the EU wary, which is not a clever move on anybody's part.
The significance of this event is that it lifts the veil and makes clear what should be an obvious truth: your money cannot be safe in a bank unless it operates on a full reserve basis - i.e. it does not speculate with your cash and charges you a fee for banking it. Unfortunately, such a system would severely constrain funds for investment (fractional reserve banking means investment is a multiple of deposits) and thus leave us all the poorer. It is therefore necessary for banking to operate a massive confidence trick. This is not a trick in the sense that we are hoodwinked into parting with our money for no return, but that we allow ourselves to be deluded, by the opacity of finance, into the belief that we can make our money available to others at no risk and at some reward, which is plainly illogical. The truth is bitter.
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