The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (54 page)

Yet even after governments began charging for carbon permits, the carbon price still slumped to new record lows. The net result was rather depressing: massive multibillion windfalls to the very worst polluters. Anyone angry about the bank bailouts should perhaps pause to consider the impact of the carbon market. Not only were far too many permits handed out, all but 7 per cent were handed out completely free, to the worst polluters.

‘Giving out permits free is like giving out money free,’ says Professor Paul Klemperer, a British government adviser on auctions from Oxford University. ‘Having any system of emissions permits will raise consumer prices, and those price rises automatically compensate the companies for the costs of the permits. If you then give out the permits free, you’re compensating the companies twice. There is no need to give them extra windfall profits by giving away the permits.’

The result was predictable. Carbon trading forced up the price paid for electricity in Europe, benefiting power companies at the expense of consumers. Yet for the polluters, the cost of being part of the trading scheme was precisely nothing. In fact, the ETS was routinely mentioned by City analysts as a reason to buy shares in power companies and other heavy carbon polluters. In the end, a scheme designed to provide incentives to cut carbon emissions only succeeded in handing over billions to the worst offenders.

Precise numbers are hard to come by. A report for WWF (the World Wide Fund for Nature) by analysts Point Carbon puts the windfalls to power generators in Phase 2 of the ETS up until 2012 at an incredible £50 billion. Ofgem, the UK energy regulator, sees windfall profits at £9 billion in Britain alone, but billions have already been made in the first phase of the trading scheme, which ended in 2008.

It is no surprise, then, that major US polluters and power companies are lobbying hard for the same helping hand, the same multibillion-dollar windfalls, from embryonic US emissions-trading schemes. The surest sign of disaster was that the oil supermajors began to feel a little left out of this bonanza. The largest oil firms in the world lobbied for a system of ‘upstream cap-and-trade’ in the USA, in which carbon credits are earned and traded by the companies actually physically removing hydrocarbons from the ground, rather than those who actually burn the oil, gas and coal.

For economists such as Paul Klemperer, this jackpot for the supermajors was utterly predictable. ‘An emissions-permits system that’s implemented this way makes even the most polluting firms better off,’ he says. Carbon trading in and of itself should reward clean companies, punish dirty companies, and channel the world’s investment to those parts of the world where £1 can save the emission of the largest volume of carbon dioxide.

‘A tonne of carbon saved above Beijing is the same as a tonne saved above Birmingham,’ is a carbon market mantra, but free permits have, in essence, been a rather expensive bribe to get power companies to participate in the scheme. It’s an entire field of juicy carrots, with little threat of a stick.

In effect, consumers paid for a bailout of an industry on the grounds of environmentalism, which ended up rewarding the worst polluters most of all. Yet unlike the banks, those companies did not even need a bailout in the first place. It was the perfect example of the impact of complex ‘financialisation’ combined with vested-interest lobbying. The emergence of carbon trading was a clear effort to avoid the more straightforward solution: the imposition of a tax on carbon.

In the end, carbon emissions did go down in Europe, but this had almost nothing to with emissions trading, and everything to do with the economic collapses wrought by the financial crisis. Will a single barrel of Kurdish oil, a single therm of Siberian gas, a single basket of Indian coal remain unburnt as a result of the scheme so far? Brutally put, no. And that failure has been noticed elsewhere.

As Jairam Ramesh, India’s climate change Dr No, puts it: ‘It was certainly hypocritical of the Western world not to recognise that climate changes call for fundamental lifestyle changes in Western society.’ And so, in the very place where climate change could cause most damage to human beings, the Indian environment minister is clear: the climate change crisis is a matter for the West and its profligate lifestyles. He has an energy-supply crisis to address.

Dramatis personae

Anonymous Cypriot government adviser

Rebecca, a teacher concerned about the fate of her daughter

Michael Sarris, finance minister of Cyprus for five weeks (28 February
–2 April 2013)

Chris Pavlou, vice chairman, Laiki Bank

Andreas, an angry Cypriot pensioner

Nicos Anastasiades, president of Cyprus (2013
–), and a lawyer

Andros Kyprianou, leader of AKEL, Cypriot opposition Party (2009
–)

i
rsen Küçük, leader of the Turkish Republic of Northern Cyprus (2010
–13)

Jeroen Dijsselbloem, Eurogroup president, Dutch finance minister (2012
–)

Stella, distraught Bank of Cyprus worker

Gabriel Sterne, former International Monetary Fund (IMF) official, and economist

‘There is no business going on in Cyprus right now.’ I am speeding through the suburbs of Nicosia in the back of a taxi, and the man talking to me is a key adviser to the country’s embattled president. Cyprus is on the cusp of capitulating to an ambush on the newly elected government by the more powerful nations in the Eurozone.

‘People are just buying necessities and our banks are today being sold at fire-sale prices,’ the rattled adviser tells me. He struggles to contain his bewilderment at the way his country is being treated. ‘The Troika has caused a problem here, and they won’t give any money unless we go and tax deposits, which is unheard of. Most frustrating of all is that they just would not listen to us as equal citizens.’

Ultimatums from central bankers and threats from fellow finance ministers are a risk for any debtor country requiring a rescue loan – especially a small debtor country with no bargaining power. Like many of Cyprus’s elite, the adviser had entrusted his six-figure savings to a Cypriot bank. Incredibly, within days, he would end up losing a large chunk of his own personal wealth to pay for a new approach to bailouts determined by the Eurozone’s powers. A European bank deposit would never be the same again.

The people of Cyprus had been looking forward to the spring of 2013. A fluke of the calendar had lined up three bank-holiday weekends in a row, to celebrate Green Day, Greek National Day and Cypriot National Day. For the devout, this was also the period of Lent, a time of self-reflection, piety, fasting and repentance. For everyone else, the holidays presented at the very least some extra time to enjoy life and the eastern Mediterranean sun. Cyprus was not Greece. Sure, the property bubble had burst. And, yes, unemployment had risen, but not to Greek or Spanish levels. Standards of living and pay were still, on average, high. International negotiations on Cyprus’s economy lurked in the background, as they had for a year, but no one was too worried. Cyprus was a relatively liberal market economy with few of the structural problems of the Eurozone’s Club Med.

Then, halfway through March, the crisis blew up in everyone’s faces. Suddenly, the island was turned into a laboratory for dysfunctional Eurozone economics. The reasons for – and consequences of – Cyprus’s collapse went beyond economics and well beyond the rim of the choppy Mediterranean. The Cypriot economy was deliberately made to suffer a heart attack, as its banking system was closed down. Amidst acrimonious and botched international negotiations, the country ended up with draconian controls on capital, and with essentially one foot outside the Eurozone. And the people of Cyprus, not surprisingly, were left bewildered and upset. In 2013, Lent in Larnaca reached well beyond fasting and the giving of alms.

All of the drama of Cyprus’s fortnight from hell could have been witnessed from the airport town of Larnaca. The arrival hall was packed with offshore savers. Flights in were full of expatriates. Private jets lined up on the tarmac with foreign billionaires facing ruin for trusting the safety of a Eurozone nation’s banking system. Eventually Euro Force One, aka the cargo plane full of banknotes sent by the European Central Bank, would be obliged to make a flying visit even more precarious than the Athens Airlifts of previous years. In the meantime, the citizens of Larnaca, like all the people of Cyprus, found themselves threatened with a Eurozone-sponsored electronic mugging, before being locked out of their bank accounts. The cash machines rationed the amounts they were prepared to dispense, strictly and methodically. Queues began to form. Small businesses could not fund their payrolls, or pay their suppliers. For those who did get their cash, or who had thought ahead and withdrawn their savings in time, there was still a problem. If they had ideas about taking their money abroad for safety, they were obliged to think again, because at Larnaca airport, Cypriot customs officials were enforcing the first ever controls on the movement of currency within the Eurozone – or, indeed, within the European Union. Euros in Cyprus were now physically trapped on the island – and essentially worth less than euros elsewhere. For Cypriots, the single currency was looking rather binary.

While schoolchildren paraded through Larnaca on one of the national holidays, a teacher stopped me on the street. ‘I don’t think the parade should be taking place today,’ she told me, in tears. ‘These children should stand in front of parliament to tell them about their ruined futures. Our lives are ruined.’ The teacher’s name was Rebecca. She had saved for years to send her daughter to medical school in Germany, but now she feared for her savings – and for her job. ‘The people of Cyprus,’ she continued, ‘are beginning to realise that from a prosperous country we are going to be the beggars of Europe.’

The first move made by the government of Cyprus at the behest of the Eurogroup (the committee of Eurozone finance ministers) turned out to be a fatal blunder. They attempted to grab a portion of the bank deposits of the entire population, including the life savings of mothers, grandmothers and widows. Overnight, just under 10 per cent of balances above €100,000, and nearly 7 per cent of balances below €100,000, would be seized electronically before the banks reopened after the Monday bank holiday. International transfers were frozen. The deal was wearily brokered in the early hours of the previous Saturday morning in Brussels. At the meeting, the Cypriot president, Nicos Anastasiades, and his finance minster, Michael Sarris, had been effectively ambushed by their fellow Eurogroup ministers. Sarris was filmed at the meeting looking lonely and shell-shocked, scratching the back of his neck. He and his president were just weeks into their jobs. Their predecessors had stalled through a year of ultimately fruitless negotiations, aimed at plugging a gap in the island’s finances. The total required before the country’s economic cardiac arrest was €17 billion – an irrelevant sum for the Eurozone as a whole, no more than the acceptable level of error on German quarterly fiscal forecasts. Nonetheless, Cyprus was to become a testing ground, a show of strength, a statement of intent in Germany’s election year. Cyprus itself would have to find €7 billion internally, while northern European taxpayers would only be on the hook for €10 billion. With Cyprus, the euro’s overlords decided to take a different approach from the one they had taken with Greece. Cyprus’s financial system was mostly funded from small and large bank deposits. So the depositors were going to take a hit. Rather than being bailed out, they were, so to speak, going to be ‘bailed in’.

Neither the Irish nor the Greek banks were ‘bailed in’ like this in their first bail-outs. The market attacks on the Eurozone had eased up after the ECB’s Mario Draghi’s promise to do ‘whatever it takes’. The euro’s overlords had some space to try something new. The essential reason for this was political. In the case of Cyprus, there was a different balance of terror. Unlike Greece, Cyprus did not have the strong negotiating position of the mugger-addict with a syringe. Cyprus was
too small to bail
. Or, strictly speaking, it was too small to
have
to bail out. The finance minister Sarris was told this very clearly in the early hours of that fatal Saturday morning by several of his counterparts, notably the German finance minister, Wolfgang Schäuble. Sarris was told that Cyprus had no bargaining power because financial chaos in an economy that made up just 0.2 per cent of the total Eurozone had not and would not spread to Spain, Italy, Greece or anywhere else. Indeed, Cyprus’s impact on other countries’ bond yields had been carefully watched for ninety days. After all, even the strong election performance in Italy of ‘two clowns’ (as the former German finance minister Peer Steinbrück called politician-billionaire Silvio Berlusconi and politician-comedian Beppe Grillo) had barely interrupted the europhoria prompted by Mario Draghi’s actions the previous September. So what threat could little Cyprus present?

Therefore Sarris was told that the incredibly harsh medicine offered by Germany and friends was a take-it-or-leave-it offer. Chris Pavlou, one of Cyprus’s most senior bankers and a veteran of the City of London, was in the room for some of the preparatory meetings in Nicosia between newly elected President Anastasiades and the young economists and bureaucrats representing the Troika of the EU, the ECB and the IMF. I asked him whether the Cypriot leaders had really been told that they had no negotiating power and did not matter. ‘Unfortunately that’s what they said, yes,’ Mr Pavlou replied. ‘And it’s not very nice actually to see two or three people half your age, clever people, coming over there and shaking their [fingers at] the president and saying “You have to do this, otherwise we’ll bring you down.” They were 30- to 35-year-olds. It is very painful for somebody who’s just been elected to actually face that.’ ‘Humiliating?’ I asked. ‘At best,’ Pavlou said.