The Fall of Cyprus a Lesson for all - 14th April 2013
The fall
of Cyprus a lesson to all
·
THEO
THEOPHANOUS
·
HERALD
SUN
People queue to use an ATM
outside of a Laiki Bank branch in Larnaca, Cyprus.
YOU can hear the emotion in
their voices on the phone as they tell of people losing their jobs, their life
savings or their pensions.
Their stories are heart-wrenching, but it is the insecurity and
the loss of trust in basic institutions that is most unsettling.
Imagine not knowing if your savings in a bank are safe; or whether
you will have a pension when you retire; or even whether there will be a
welfare system to help you in your hour of need.
Soon I will be travelling to Cyprus, and if these calls are
anything to go by, there will be many tears and many sad stories from friends
and relatives alike. It's hard to understand how this small island in the
Mediterranean where I was born could find itself in such a mess after decades
of prosperity and strong growth.
A young friend of mine in Australia recently told me rather smugly
that this kind of financial disaster couldn't happen to us. The words,
"This town is going to run out of money" or "I can see soup
kitchens" are not words you will hear in an Australian city. Yet these are
the very words spoken by the mayor of Geelong, Brian Fowler, some 20 years ago
when the Pyramid Building Society collapsed and a nightmare descended on
200,000 Victorian depositors. I well remember the emotion and the tears of
people in Geelong at the time, and I cannot help thinking that Nicosia, the
capital of Cyprus, is about the same size as Geelong.
Victoria recovered and went on to introduce better financial
controls. But many people lost a large chunk of their investments, thousands
lost their jobs and we sold our gas and electricity assets to reduce state
debt. To add insult to injury, we sold the State Bank of Victoria which was in
danger of going under.
The Cypriots have been forced to adopt even tougher measures.
Depositors with accounts over 100,000 (A$125,000) will receive a haircut of up
to 70 per cent to raise 5.8 billion to make Cyprus eligible for a 10 billion
loan from the European Security Fund. The economic and social impact will be
devastating.
So how did it come to this? Cyprus had two banks. The Bank of
Cyprus and the Laiki were so profitable they funded most of their loans and
investments, not from borrowings, but from depositor funds. For years, Cypriots
promoted their island as a financial centre with low company tax, good returns
and a relatively stable Cypriot pound. After Cyprus joined the eurozone,
overseas investors, began investing billions in Cyprus. Up to 20 billion was
invested by Russian investors alone and Cypriot banking assets reached almost
eight times the GDP of the entire country.
Flush with money, the banks looked to find investments outside
Cyprus. Greece seemed a logical place. The Laiki bank, in particular, had seen
a large part of its ownership structure and effective control go to the Greek
Marfin bank. Thus, investment in favoured projects and banks in Greece ramped
up. When the Greek economy collapsed, the Cypriot banks suffered a haircut of
4.5 billion.
In 2011, the Laiki Bank flunked the European Banking Authority
stress test. The previous Communist-backed Cyprus Government borrowed 2.5
billion from the Russians and tried to prop up the Laiki.
Unbelievably, the Central Bank of Cyprus and the European
Liquidity Assistance fund, rather than addressing the underlying problems,
continued to provide emergency funds allowing the Laiki to rack up a debt of
almost 9 billion.
In March, Cyprus elected a new Centre Right Government which faced
an impossible situation.
Cypriots are highly educated and innovative. Through all the
suffering and tears, they will implement better regulation and find new ways to
develop their country.
Cyprus reminds us that when governments fail us, when regulation
is poor, when managers and investment decision-makers are unaccountable or
corrupt, the result can be devastating, not just for a few individuals but for
an entire nation.
Australians now have $1.4 trillion invested in superannuation.
While we debate the relative benefits for rich and poor of proposed changes, we
should keep in mind that it is the adequacy of management, regulation and
investments that will determine the financial security of millions of
Australians in the future.
It saddens me to see what is happening to Cyprus. But given what
has happened in our own recent past and our own vulnerabilities, we ,in
Australia, should think again if we think we are immune from such calamities.
Theo Theopanous is a former Victorian
government minister
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