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From The Socialist newspaper, 27 March 2013

Cyprus bailout: Return of the eurozone crisis

Tony Saunois , Committee for a Workers' International (CWI)
Bank of Cyprus

Bank of Cyprus

The eurozone crisis has dramatically intensified. Events in Cyprus have blown away the optimism of the European ruling classes in recent months that they had resolved the crisis.

Once again, the continuation of the eurozone, as currently constituted, is seriously threatened. The Cyprus crisis could also dramatically pose the viability of the euro.

This time the threat has not erupted from one of the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain).

It is a measure of the parlous state of the eurozone and the European Union (EU) that (Greek) Cyprus, which accounts for 0.2% of the EU's GDP (total output), threatens the continuation of the eurozone.

Cyprus was also, at least initially, the first country to apparently call the bluff of the Troika. This threatens to set a 'trend' for other faltering eurozone countries to do likewise, something which terrifies German Chancellor Angela Merkel and the other EU leaders.

After a week of turmoil an emergency meeting on Sunday night (24 March) of eurozone finance ministers with the International Monetary Fund, European Central Bank and European Commission (the Troika), and the Cypriot government, agreed a draconian bailout package. This will be imposed on Cyprus.

It involves the closure of Cyprus's second largest bank, Laiki, whose assets will be transferred to a re-structured Bank of Cyprus.

A cash limit of 100 has been imposed on ATM withdrawals and limited capital controls have been introduced to stop a flight of capital.

Although only larger depositors with over 100,000 will be hit and not the smaller depositors as originally proposed, the measures will plunge Cyprus into a depression and choke off credit.

A 20-25% contraction of the economy in two or three years is expected. It will effectively destroy Cyprus's offshore banking sector - its main economic base, along with tourism.

The bailout deal will have a devastating effect on the Cypriot people. It is very close to the original measures demanded by Christine Lagarde, head of the IMF and rejected by Cypriot president, Nicos Anastasiades.

Arrogantly, like a colonial master, the Troika initially insisted that the Cypriot government confiscate a percentage of the bank deposits held by both rich and poor, 9.9% for those holding over 100,000 and 6.75% for others, as a condition for a 16 billion bailout.

The Troika would provide 10 billion with an additional 5.8 billion raised by the Cypriot government.

This was rejected by the Cypriot parliament, enraging German imperialism and the Troika which then adopted a harder line as an example to other countries of what to expect if they too reject the Troika's demands.

As German Finance Minister Wolfgang Schauble, put it: "I won't allow myself to be blackmailed, by no one or nothing".

According to Edward Scicluna, Malta's Minister of Finance, at Sunday's meeting: "All this was agreed to by the Cypriot government representative who, with a pistol at his head, was naturally unusually cooperative.

"But it took nearly ten long hours before the Cypriot minister's body and soul became exhausted enough for him to assent to this accord".

According to reports Cypriot MPs will not be allowed to vote on this latest package!

The original package was perceived as a dictat by colonial rulers. Yiannaki Omiras, president of the parliament, argued that, "Europe wants Cyprus to return to be a country of limited sovereignty - neocolonial".

The history of colonial rule under the Ottoman Empire and British imperialism is an important part of Cyprus's history, fuelling opposition to measures being imposed by the Troika.

The confiscation of a percentage of the deposits of all savers provoked a massive backlash in Cyprus and other EU countries caught in the centre of the storm, especially Italy, Portugal and Spain.

In one stroke, the imposition of this measure fatally undermined the insurance guarantee for depositors throughout the EU. This can lead to a flight of capital from other weak economies in the EU.

If the Troika could impose this on Cyprus, then why not Italy, Spain or Portugal and other countries when the next bailout is needed? It was a blunder by Merkel and the Troika, driven by the 'hardline' Dutch, Finn and Slovak governments in support of Merkel and German imperialism.

The deposit 'tax' threatened to trigger a run on the banks in other countries, as depositors withdrew money from their accounts in fear that they could lose at least a percentage of them.

The consequences of this miscalculation - reflecting the arrogance of the EU leaders and that they are thrashing around for solutions - has only intensified the crisis.

Following news of the latest deal stock markets rose sharply, only to fall back when one European finance minister suggested that future bailouts could be based on the Cyprus bank restructuring model.


In Cyprus, the newly-elected president, only in power for over two weeks when the initial deal was proposed, was left humiliated.

Bullied into accepting the deal in Brussels, Anastasiades returned to Cyprus to face a revolt of the mass of the population and all the political parties, including his own.

In the end, not a single MP voted for that deal and the governing party, DRP, abstained on the vote! They effectively called the bluff of the Troika, which threatened to cut off emergency ECB funds by Monday 25 March.

Such a move would have effectively put Cyprus outside the eurozone and possibly even the EU itself.

Apart from the pressure by the mass of the population to oppose this measure there were other important factors which also allowed the Cypriot ruling class to initially withstand the demands of the Troika.

But the vote to reject the deal in the Cypriot parliament was not a vote against an austerity package.

The cuts package had already been accepted by the previous government, led by Akel (the Cypriot Communist Party), which has significant support among workers, and passed on to its successor.

The Cypriot government attempted to strike a bailout deal with other capitalist powers outside the EU, in particular Russia.

Cypriot banking is awash with money from Russia - $31 billion invested in Cypriot banks by the Russian banking system alone - due to very favourable tax rates.

The vote against the Troika package by the pro-capitalist parties was partly a vote to maintain Cyprus as an offshore tax haven.

Its banking system, which is currently eight-times the size of the country's GDP, has been teetering on the verge of collapse after being exposed to heavy losses as a result of the crisis in Greece.

At the same time, Cyprus has gas reserves worth an estimated 475 billion. This, the ruling class had hoped, would give them the opportunity to broker an alternative deal with Russia.

Instead, it revealed a clash of national interests among the capitalist and imperialist powers.

The prospect of Russia acquiring a share of the gas reserves, in return for at least a percentage of the bailout, enraged Merkel and German imperialism, in particular. Even US imperialism was disquieted at such a development.

The extension of Russian influence into an EU country will aggravate tensions with German capitalism and other EU powers.

At this stage, President Putin and the Russian oligarchs do not want to come into a sharp collision with Germany and other EU powers, which would threaten trade and other commercial interests.

Italy next?

The fragility of the eurozone has already emerged following the recent dramatic elections in Italy. Despite the lack of a socialist alternative for the Italian workers and masses, a clear majority voted for the anti-austerity parties.

The populist Five-Star Movement, led by Beppe Grillo, took 25% of the vote, campaigning against the euro, for a return of the lira and a restructuring of Italy's mountain of 9 trillion public debt.

There is still no government in Italy. Financial meltdown in Italy, the EU's third largest economy, would make the drama of the Greek crisis seem like a minor sideshow in comparison.

Moreover, Spain and Portugal are also set to follow an eruption of the euro-crisis in Italy.

The Cypriot government has been compelled to levy a higher tax on wealthy depositors. Russian depositors are set to lose billions in the latest deal which is certain to increase tensions between the EU and Russia.

This may allow Cyprus to remain in the euro for a period although this is far from certain.

A new crisis will inevitably emerge, posing again the prospect of Cyprus's ejection from the euro, if Italy, Spain or Portugal have not already gone through the exit door.

These events also show again that every measure taken by the Troika in attempting to 'resolve' the crisis is followed by an eruption elsewhere.

Socialist alternative

The crucial issue facing Cypriot workers and the middle class is the urgency of building a mass movement to reject any austerity programme demanded by the Troika and capitalism, and to oppose any measures making the masses pay for a bailout of the banks.

Unfortunately, the leadership of Akel is not organising a mass mobilisation and presenting an alternative programme to break with capitalism, as a way out of the crisis.

When in government, and holding the presidency until only three weeks ago, Akel accepted the austerity package demanded by the EU and simply passed it on to the new government to implement.

Today it calls for a "powerful response by the people" and "mass resistance". It demands "the popularisation of the vision for the liberation of Cyprus from the suffocating embrace of the monopolies". (Akel statement, 16 March).

Akel is not offering a concrete alternative of what should be done in the face of this crisis and the prospect of Cyprus being ejected from the euro.

Akel is currently calling for opposition to the Troika but not the eurozone. Yet membership of the eurozone means acceptance of the austerity demanded by the Troika.

Many Cypriots will question what it did when it was in government. In the recent elections, Akel lost up to 25% of its vote compared to 2008.

There can be no trust in the capitalist government. In or out of the euro, these same capitalist politicians will attack the rights and living standards of the Cypriot working class. Working people reject austerity to keep the euro.

The current Greek Cypriot govern-ment, elected on a promise of securing a 'softer' bailout, is now largely discredited.

It is urgent to fight for an alternative government of the workers and others exploited by capitalism.

Such a government would oppose the terms of the bailout and reject the austerity programme demanded by the Troika.

The banks should be immediately nationalised, under democratic workers' control and management.

Such a government would face immediate ejection from the EU and the euro. A government of the working people of Cyprus would need to prepare for such a prospect.

It would need to immediately introduce capital controls to prevent a flight of capital and introduce a new currency.

An emergency economic programme would be necessary to defend the interests of workers and the poor. This would be possible on the basis of a democratic socialist plan of the economy through the nationalisation of the major companies and financial institutions under workers' control and management.

However, this crisis of the EU is also a crisis of the global capitalist system. A socialist government of the workers and poor in Cyprus would immediately face the wrath of European and global capitalism.

Temporary loans and trade arrangements could be negotiated with other states as an interim step. But it would need also to forge links with the working people of Greece, Spain, Italy and Portugal. It would be necessary to appeal to them to follow such an example.


Together, the working people of these countries could form a democratic, voluntary federation of Mediterranean and Iberian states.

This could be a bridge to reach over to the workers of the rest of Europe with the aim of forming a democratic socialist federation of European states as an alternative to the capitalist EU and Troika.

The crisis in Cyprus has opened a new chapter in the crisis in the eurozone and the EU. It has illustrated that the crisis is far from resolved.

Deeper and further crises are certain to erupt in the coming weeks and months. On a capitalist basis there is no solution to them. The struggle for a socialist alternative is now more imperative than ever.

According to Guardian commentator Larry Elliot, Cyprus "has been left in a near impossible position by the terms of its rescue.

The 10 billion (8.5 billion) loan from the European Union, the European Central Bank and the International Monetary Fund means Cyprus will have a debt-to-GDP ratio of 140% and an economy that is on course to shrink by at least 20% in the next two or three years." The Wall Street Journal estimates the contraction could be as high as 25%!

The Committee for a Workers' International (CWI) is the socialist international organisation to which the Socialist Party is affiliated.

The CWI is organised in 45 countries and works to unite the working class and oppressed peoples against global capitalism and to fight for a socialist world.

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In The Socialist 27 March 2013:

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