The Default Line: THE INSIDE STORY OF PEOPLE, BANKS AND ENTIRE NATIONS ON THE EDGE (58 page)

A former finance minister of Cyprus told me that for his country the second deal was ‘a complete cock-up’, even worse than the first offer. After the parliament rejected the first deal, the Cypriot newspapers screamed that David had defeated Goliath and that Cyprus had taught Merkel a lesson. When he saw these headlines, he told me, he thought, ‘My God, this is our end. There is no way in an election year she would let Cypriots humiliate her. For me it was clear that it made her stance very very tough.’ Ex-banker Pavlou also said that the second deal was ‘three or four times’ worse than the first deal. The depositors who would no longer lose 7 per cent of their money probably felt differently. Cyprus’s main industry, however, had been destroyed.

Various bank board members were fired. Bank workers led the protests outside the Central Bank of Cyprus and the parliament. Graffiti appeared on the walls of bank branches. In Limassol, one branch was attacked with a Molotov cocktail. BoC workers massed in the spectacular white atrium at the centre of its HQ. I sneaked in. Workers cried as they explained they just wanted a chance to work and put things right. ‘We are protesting because we do not understand why they are closing us down,’ Stella told me, with tears in her eyes. ‘We have children, we have families, and we are willing to work. Our debts are too big, yes, but we will work to repay it. But they don’t give us a chance.’

This was no ordinary demonstration. Workers held placards saying ‘Traitor’, ‘Shame’ and ‘Go home Demetriades’ (a reference to the governor of the Central Bank). One of the placards was carved out of a sign for the ‘Harvard Club of Cyprus’. In the foyer a selection of BoC’s ‘Bank of the Year’ awards were on display. The workers then marched on the Central Bank – effectively the embassy of the ECB in Cyprus. It was the Central Bank that had sold off BoC’s Greek unit for a song, and it was the Central Bank which, that very morning, had dismissed the BoC’s bosses. Hundreds of bankers mounting a sit-down protest at their country’s central bank – had the world turned upside down?

Even after ordinary depositors were spared, there was little lessening in the mood of moral outrage. Plenty of ordinary Cypriot retirees lost their life savings. House-sellers were caught mid-sale. The Orthodox Church was preparing food parcels. Businesses had closed. The banks had still not opened. Electronic transfers were blocked. The shutdown was the longest recorded by the IMF. Capital controls were being prepared, in contravention of the very point of the European Union single market.

The Cypriot parliament had little choice. The ECB was holding a gun to its head. After a majority on the ECB governing council voted for a public threat, Frankfurt issued a statement announcing it would cut off Emergency Liquidity Assistance to Cypriot banks if a deal was not agreed with the EU and IMF within four days.

On Day 12 of the crisis, plans were finally put in place to reopen the banks the following morning – subject to draconian new capital controls. And then, as dusk fell over Nicosia, the shouts of the increasingly irate protestors were drowned out as the air filled with the angry buzzing of helicopters and the deafening wail of police sirens. The uproar seemed to be converging on the Central Bank. Had the previous day’s sit-down protest by the bank workers turned into a riot?

The truth was even more extraordinary. At the Central Bank itself, tense meetings between international financiers, American management consultants, British Treasury advisers and Cypriot bankers suddenly broke off. Four very large green juggernauts laden with euros had arrived from the European Central Bank, just hours before Cyprus’s banks were due to reopen. An historic just-in-time delivery.

That afternoon a Boeing 767 cargo plane in the livery of Maersk Star Air had been spotted amidst a crowd of smaller private jets parked at the end of the runway at Larnaca airport. Flight logs record that the Boeing 767, registration OY-SRH, had flown from Cologne to Munich in the early hours, and then, via Athens, to Larnaca. Its cargo? Five billion euros in notes. The cash had been transferred from the Bundesbank logistical reserve at the request of the ECB. After the notes had been loaded onto the four huge trucks, their onward journey to Nicosia was accompanied by squads of police cars, while overhead the helicopters of the island’s security force kept a wary eye on the convoy’s progress. It was not quite ‘helicopter money’ – but almost.

In ordinary circumstances the extension of the ECB’s emergency liquidity would be an almost entirely electronic matter. In the case of Cyprus, given the public distrust of banks, the restoration of liquidity required a cargo plane full of actual euro notes. They had come courtesy of Cyprus’s
real
central bank, the one based in Frankfurt, 2,500 kilometres away – the European Central Bank. Effectively, the ECB’s threat made a week before to pull emergency liquidity funding to the island’s main banks, was a threat to withhold the cash that arrived on this plane. The consequences would have been dire. Maersk Star Air OY-SRH was what passed for a printing press in a nation that had ceded its monetary sovereignty.

Elsewhere at Larnaca Airport, at the customs desk between security and passport control, a new sign appeared. It said: ‘Movement of currency up to one thousand euro per passenger only.’ And this applied even to passengers flying within the EU. It was just one of a number of decrees restricting the movement of currency in and out of bank accounts, cash machines and off the island.

Meanwhile, fanning out from the Central Bank in Nicosia, G4S security vans sped across the island, shadowed by police cars. Their task? To deliver the cash before the reopening of bank branches at noon. In Larnaca there were queues of two or three dozen people waiting outside each branch. It was an orderly affair. At a BoC branch, names of clients had been placed on a list in arrival order, enabling people to sit in the shade of a nearby tree. At a branch of the Cooperative Bank, the elderly were ushered to the front of the queue. At a branch of Laiki, one businessman was furiously knocking on the window. He didn’t want to withdraw cash; he wanted to make a deposit. This was not the feared bank run, because capital controls rendered that pointless. It was controlled transactional demand for cash. Maria, a travel agent, told me that she was making a deposit ‘so that my cheques will clear’. Eventually the branch opened, twenty-five minutes later than advertised, twelve days after its last opening. Customers were invited in two at a time. A novel form of capital control.

Blame was being spread liberally – and correctly. The European Union and Germany were blamed for allowing the deposit bedlam. Cypriot regulators were blamed for allowing banks to destroy themselves on Greek gambles. Politicians were blamed for being outfoxed in negotiations. The previous Christofias government was blamed for failing to agree a deal on better terms. Bankers were blamed for taking Cypriot capital and international deposits, and allowing it to disappear into a black hole in Greece. The Greeks were blamed for palming off their fiscal and banking losses onto their Cypriot brethren. And Turkey was blamed – for being Turkey. The Troika authorities basically got away with not explaining their disastrous decision-making.

Economic forecasts for the official Cyprus aid programme played down the impact on growth and the deficit of the botched bailout. One IMF executive board member asked to approve Cyprus’s loan complained two months later: ‘This huge fiscal effort would be quite difficult to materialise in any country, but even more in Cyprus that needs to find a new business model in the midst of the deepest crisis it has ever had, in an unfavourable international environment and while its Eurozone partners are themselves striving for more fiscal adjustment. Every programme needs a pinch of optimism but in this one the required dose of goodwill – or suspension of disbelief, if you will – goes way beyond the average. The two pillars of the economy in Cyprus are banks and tourism. The two biggest banks are insolvent. One will be liquidated and the survival of the other cannot be taken for granted.’ The Eurozone is built on the premise of sharing sovereignty and decision-making for the greater good. Cyprus raises serious questions about competence and cluelessness.

By a complete fluke, the branch of Laiki I chose to film turned out to be the very branch that Slobodan Miloševi used to help fund his wars in the Balkans. Private jets with bags of Miloševi Deutschmarks arrived weekly at Larnaca in 1993 and 1994, defying UN sanctions. Billions were laundered in this way, according to a report by Morten Torkildsen of the United Nations war crimes prosecutor’s office, helping Mr Milošević’s pariah government pay for fuel and weapons to pursue wars in Bosnia and Kosovo. At the time, bank workers complained that they were not paid enough to count the mystery inflow of banknotes. It was a vivid reminder that there had been many things wrong with the Cypriot financial system. Something of a pattern had emerged, a pattern in which controversial foreign billionaires had become the clients of Cypriot law firms, whose senior partners had then become politicians. Perhaps German intelligence was right after all about Cyprus being a magnet for dodgy money.

If German intelligence
was
right, why was Cyprus allowed to join the EU in 2004, then the euro system in July 2007? Cyprus adopted the euro as its legal tender on 1 January 2008, after the financial crisis began. There was a balloon-filled party to celebrate, at which a beaming Cypriot EU commissioner Markos Kyprianou (later to resign as Cypriot foreign minister and face charges after the fatal naval base explosion of 2011) withdrew the first euro notes from a Cypriot ATM at the stroke of midnight. At the time Cyprus had been invited to join the club, Brussels, Frankfurt and Berlin knew all about the large Russian deposits in the country’s banks, and about the latter’s questionable activities in the 1990s. They were also aware that Cyprus’s banking sector was unusually large for such a small country.

Nothing much had changed in the intervening years. Between December 2007 and mid-2012, Russian deposits in Cyprus remained pretty stable. Although during this period the deposit base of Cyprus’s banks rose from €52 billion to nearly €71 billion, the great bulk of this was due to an €11 billion rise in deposits from Cypriot residents. The biggest foreign rise was not Russian, but the €5 billion increase of ‘safe haven’ deposits from Greece, after the crisis there.

Even on its own terms, Germany will probably end up shelling out more than it would have had it just simply shelled out for the bailout, says former IMF official Gabriel Sterne: ‘Basically the Troika had to choose between a bunch of unpalatable options and they went for the one that was worst according to sensible analytical criteria but more palatable to Germany. The Troika could have chosen to lend to Cyprus at low interest rates, and then take the gas revenues when they came in. Everyone would have been better off; Cyprus, Germany, Russia, the IMF. And the Troika could have haircut Cypriot government debt but they were scared of legal action and they had [promised that] Greece was “unique and exceptional”.’

The ‘justice’ meted out to Cyprus by the Eurozone was somewhat arbitrary. Arguments deployed in northern Europe to explain what had been done to Cyprus could have equally applied to Malta, or to Luxembourg. On the one hand, yes, taxpayers across the EU were being spared the brunt of the crisis. But across Europe depositors were now being told to treat a large deposit in a peripheral Eurozone bank as if it was a junk bond. Jeroen Dijsselbloem, president of the Eurogroup, made matters even more uncertain by implying that Cyprus was a model for future ‘bail-ins’. European bank shares slumped, as at this point it made no sense to have more than €100,000 in any periphery banks. Dijsselbloem was publicly slapped down, and was obliged to issue a ‘clarification’ of his remarks. But the doubt about the sanctity of a European bank deposit remained. Cyprus itself had been treated demonstrably worse than other Eurozone countries. Its main industry had been destroyed, its people had been starved of cash. The banking heart attack also destroyed the growth figures, miring Cyprus even more deeply in a man-made fiscal crisis.

There seemed to be some method in this madness. UK officials were surprised that Berlin never asked for a contribution to the bailout of an old outpost of the British Empire. ‘There was a lot of discussion over whether to help Cyprus: not only a large number of expats, lots of Cypriots in Britain, and two sovereign military bases, so we did consider it several times,’ George Osborne told me.

Cyprus did ask for help directly from other nations, but Berlin said that this would not reduce the amount of Cyprus› €7 billion ‘bail-in’. The UK assisted in other ways. Key UK Treasury officials helped Cyprus› negotiations with the Troika, and even to mediate between the Cypriot government and its central bank.

Faced with the fiscal crisis, the idea of a return to the Cypriot pound was privately gaining popularity amongst the island’s establishment – many of whom had lost large amounts of money. The country has only been in the Eurozone for half a decade, and there is a willingness – undetectable in other bailout countries – to consider, in the medium term, a complete exit. Alternatively, Cyprus may be pushed into a rapprochement with Turkey, which would be the quickest way for it to export its new-found gas. The development of real estate in the no man’s land along the Green Line could also spur growth. Cyprus is now suffering the aftermath of a crisis, under the shadow of the IMF. Turkey is booming. The rejection of the Annan Plan in 2005, when Cyprus was strong and Turkey weak, seems a world away. Many Greek Cypriots said to me that what happened to them in the spring of 2013 was punishment for how they had voted in 2005.

Above all, Cyprus was plainly unlucky that its banks required a bailout in the run-up to a German election, during a period already full of planned bank holidays. A year earlier, and like Ireland, Spain and Greece, its banks would have been bailed out in full, with no losses to any creditors. Instead it became a laboratory and an example to other countries. And the experiment is not yet over. Bank accounts are still difficult to open, and capital controls remained in place months after their ‘temporary’ imposition. Neither the country’s elite nor its highly educated youth are likely to forget the Lent of 2013. And what happened to them then will never be forgiven.