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Cypriot Bankers get ready for one last feed.

Date: 26/07/13

Some years ago after the Berlin wall had fallen and Soviet "perestroika" had given way to capitalism Russian companies found Cyprus to be a convenient staging post for funds.

New Cypriot companies owned by Russians took root in Cyprus and money from Russia started to flow to the island. This money took a breather in Cyprus before making its way to another destination – back to Russia or to another country with even more favorable tax laws. Contrary to claims of international media this was not mafia cash or the proceeds of some tax fiddle, but generally absolutely legal way of tax optimization for multinational companies.

As money came in and went, large amounts remained in transit or were left to pay the running costs of the Cypriot companies. It is this money that was used in a reckless lending boom to Cypriot developers, fueling a building boom over 8 years. Bank stocks and profits soared, while the salaries of simple pen pushing clerks skyrocketed. When these developers stopped feeding, back in 2008, the loans could not be serviced and the banks quickly got themselves into trouble. But this was only the beginning…

In the attempt to improve the financial health of the Cypriot banks came up with a brilliant expert idea - to invest in Greek government bonds. The bizarre decision to buy financial instruments of the country that was on the brink of bankruptcy is simply beyond comprehension. As an inevitable result of such professional management in March 2013 depositors of the two largest banks in Cyprus experienced a bail-in. Depositors of Laiki bank had a haircut on their savings over 100.000 Euro while depositors in the Bank of Cyprus had a forced conversion of 47.5% of their cash over 100.000 Euro into bank's equity. After such unprecedented measures you would expect the banks to quickly get to grip with the costs. But nothing could be further from the truth with Cypriot banks. Months after money was stolen or converted into valueless stock, no compulsory redundancies have been made. On the contrary, 2.500 employees of bankrupt Laiki have been transferred to the Bank of Cyprus, getting to keep their jobs. Did the Bank of Cyprus really need more staff and related expenses? 

Moreover, the greedy bankers' union aided and abetted by the new Cypriot finance minister, has negotiated a 50% reduction in the level of bail-in for the bankers' pension fund. All this is taking place while legitimate companies, both domestic and foreign are forced to fund the pension fund with even more of their bailed-in funds.

Also helping themselves to private money is the co-operative network in Cyprus that looks and quacks like a bank, but isn't one. Like all Co-op movements across the world these antiquated institutions are owned by their members (savers and borrowers) with all profits flowing back to the members …… except when they make stratospheric losses with bad loans. Then, they can have a bailout of 1.5 Billion Euro from Troika and for this the tax payers of Cyprus must pay back in full with interest. Why have they dodged the bullet that destroyed Laiki and Bank of Cyprus is unknown and yet to be explained.  

Every day that goes by leads us closer and closer to a more stable banking system that will be able to serve local businesses while making a healthy profit for shareholders. The greed and incompetence of bankers will be consigned to the past... But, never forgotten.

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