Comment: Wrong–headed diktat is causing Cypriot crisis

George Kerevan
George Kerevan
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CYPRUS is one giant offshore tax haven, a sort of Switzerland with sunshine. Which is the real explanation for the animus being shown to Cyprus by Germany and the EU.

Corporation tax is 10 per cent and foreigners don’t pay taxes on interest earned by their offshore Cypriot bank accounts. And you can do all this in total privacy. Cypriot Bank employees have to take an oath of secrecy.

America and the EU have devoted considerable efforts since the credit crunch to curtailing offshore tax havens, to stop tax evasion and block money laundering by unsavoury regimes. Foreign deposits in Jersey are down 60 per cent as a result.

But the wily Cypriots have tried to avoid such interference, signing only two bilateral tax treaties. Result: foreign deposits in Cyprus banks have jumped by 60 per cent since 2008.

Cyprus argues that its offshore deposits are small beer – only $40 billion (£26.3bn) out of $2.7 trillion salted away in global tax havens. But that does not take account of “round-tripping”, the cash that flows in and out of Cyprus each year.

According to Global Financial Integrity, a financial-watchdog, Russians deposited $199.7bn in Cyprus in 2011, while Cyprus banks sent $128.8bn back to Russia. That’s five times the island’s GDP. (It’s not money laundering, you understand.)

The Cypriot relationship with Russia is not necessarily a bad thing given the latter is a developing economy with big investment opportunities – a better bet, in fact, than investing in Greece. In fact, Russia could be the main loser if Cypriot banks collapse, which makes Moscow’s decision not to help in the crisis very short-sighted.

What turned the Cyprus fairytale into a nightmare is the huge exposure of its banks to worthless Greek sovereign bonds. Obediently, Nicosia has followed the usual austerity diktat from Frankfurt, plunging the economy into recession.

But not content with their pound of flesh, the IMF, EU and European Central Bank then ordered Cyprus to raid private bank accounts on the island, in return for a bailout. This piece of stupidity has turned a problem into a full-blown crisis for the eurozone.

Cypriot banks need re-capitalising, not a confidence-sapping assault on their depositors. Solution: a eurozone climb-down and the bailout deal already agreed with Greece extended to cover Cyprus.

BP oiling wheels of finance with buy-back

The free cash held by US non-financial companies jumped by 10 per cent last year, according to a Moody’s report published this week. That’s a record £1tn of shareholders’ money sitting in the bank.

The biggest corporate hoarders are Apple, Cisco, Google, Microsoft and Pfizer. Europe’s corporates are no better, with another £1tn languishing on the balance sheets.

Karl Marx would call this a crisis of over-accumulation. Those of a more capitalist bent (myself included) think it is tantamount to robbing shareholders. Capitalism only works if surplus cash is recycled to where it earns the highest return. In Europe, car firms are sitting on £100bn of cash they won’t use because the industry already faces endemic overcapacity.

So well done BP for handing back £5.26bn to shareholders, the proceeds from the sale of its Russian arm TNK-BP to Rosneft. That’s twice what analysts predicted BP would pay out and raises the share price to more than compensate for the asset loss. Whose next for a share buy-back?