Events unfolding in Cyprus may yet wrong foot economic arguments in the campaign for independence, writes Peter Jones
Small countries can be a great success. They can also be an economic disaster, as events now unfolding in Cyprus show. While it may be a small faraway country of which we know only a bit, Alex Salmond may yet curse it mightly, for the Cypriot banking crisis could cause severe trouble for his independence project.
Yesterday, talks about an EU bail-out of Cyprus were coming to a conclusion. Unprecedentedly, it looks like entailing an official raid on bank accounts, swiping 3 per cent from deposits up to €100,000. Above that amount, 12.5 per cent will be swiped. It should add up to a €5.8 billion heist which, when added to EU and IMF money, will total €10 billion.
Shocking stuff. But what makes it all the more appalling is that this money will be pumped back into Cypriot banks to keep them solvent. According to Alberto Gallo, head of RBS European Macro Credit research, Cyprus’ banks have loaned out €126bn, seven times Cyprus’ GDP, much in Greek property which ain’t worth a lot these days.
They are facing big losses and, with deposits of £72bn (a third held by foreigners) and a loan-to-deposit ratio of 175 per cent, insolvency. So it is an officially-sponsored bank hold-up to make up for banks’ mistakes. Can you believe that could happen?
Actually, if you leave aside the outrage for a moment, it is an ostensibly elegant solution. If you think about it, our British banks bail-out, excluding guarantees, cost us all £123 billion, which the government had to raise by borrowing. We are paying for this now and for maybe a decade through higher taxes and poorer public services.
The Cypriot move however, gets the money now and avoids borrowing costs, which would be huge. The IMF reckons that Cypriot government debt, now about 94 per cent of GDP, would rise to an unsustainable 145 per cent of GDP. And with the Cypriot economy in the sixth quarter of a double dip recession which has depressed output by more than 4 per cent and seen unemployment climb to 14.7 per cent, who would lend Cyprus money except at usurious rates?
So for unfortunate Cypriot taxpayers, it looks like a cheaper deal than an orthodox bank bail-out. It is also a better deal for taxpayers. Though they will face higher taxes, they could have been a lot higher still. That won’t appease public outrage one iota. People resent but understand the link between taxes and government debt, but public hands pick-pocketing people’s wallets is just incomprehensible.
Why has the EU gone down this economically clever but apparently politically insane route? Quite simply because to meet a golden goal – saving the euro from collapse – it has a golden rule: the EU cannot become responsible for complete bail-out costs, at least half of which have to fall on national governments and their taxpayers.
In the Cyprus case, all the usual means of making the Cypriots pay their share are unworkable. This bank account raid works, and of course all manner of top EU people are saying this is a one-off, caused by Cyprus’ unique circumstances. Ordinary folk like you and me, however, might think: hang on, these same top people also said our bank deposits were 100 per cent guaranteed up to €100,000 (£85,000 in the UK) if our bank failed. But in Cyprus, this is now only a 97 per cent guarantee. In other cases, maybe even less.
The tax is “a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future,” Joachim Fels, chief economist at Morgan Stanley, said. Mr Gallo at RBS agreed: “This will hurt peripheral mid-sized banks and may create contagion across credit markets.”
Translated, they are saying that bank customers in Spain, Italy, Portugal, Greece, and Ireland might decide that the best way to protect their money would be to take it out of the bank and put it somewhere safer. That could be anything from gold bars to a bank account in Germany, and result in runs on banks in these countries.
These risks illustrate the desperation of EU policy-makers and the extreme measures they are prepared to take to preserve the euro. So, what has this got to do with the Scottish independence debate?
Last week, I chaired a seminar discussing the chances of an independent Scotland transiting smoothly to membership of the EU.
Two experts, Neil Walker, professor of public law at Edinburgh University, and Graham Avery, a fellow at St Anthony’s College, Oxford, who worked at the European Commission for 33 years including on EU enlargement, gave evidence.
In a nutshell, they said that the route might be a little bumpy, but they could see no outstanding barrier to Scottish EU membership. That was, however, before this latest Eurozone crisis blew up.
Cyprus, it should be noted, is a tiny little country of 840,000 people. It also has a secessionist problem, namely the 265,000 people who have lived quite happily, since the 1974 invasion by Turkey, in northern or Turkish Cyprus but whom Greek Cyprus, despite the failure of reunification efforts, still wants back in its fold.
This rankles so much that it has refused to ratify the statehood of Kosovo, the mainly ethnically Albanian republic which we, along with other Nato members liberated from Serbian genocide in 1999 and which declared independence in 2008. On similar secessionist fears, Spain, Greece, Slovakia, and Romania, all EU members, have also refused to recognise Kosovo.
Messrs Avery and Walker did not think this would also make them oppose Scottish EU membership. But this latest Cyprus crisis highlights another reason why the European Commission and other EU states might fear Scottish independence – that it would encourage the Basques and the Catalans to break away from Spain.
Because these are the richest parts of Spain, and even if they took away their share of Spanish sovereign debt, the rest of Spain would have less ability to service their share. This would put more pressure on Spanish debt and its stressed-out banks, risking a repeat, on a much bigger scale, of the Cyprus bank raid or the Greek public debt write-off, causing yet another euro crisis. And since the euro is, throughout Europe, infinitely more important than anything Scotland might bring to the European party, on which side of the independence fence do you think EU interests lie?