Cyprus is moving into unknown territory today, if not wholly by choice. The deal now agreed to close Laiki Bank and massively restructure the Bank of Cyprus will mean substantial losses for depositors with more then €100,000 in their accounts, but that’s just the beginning of the tale.
Despite claims by some on the web and Twitter that Cyprus has not been a tax haven that is just nonsense, as I have shown here, and here. It was not the most egregious tax haven: that’s true, but it was a tax haven none the less. But note the past tense; Cyprus is not a tax haven anymore.
Tax havens sell their right to legislate and regulate. I define secrecy jurisdictions as places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so. Cyprus fitted the bill pretty well: it did not offer a perfect smokescreen of secrecy like some, but it was opaque enough. But now three things are going to happen.
First, it clearly no longer has the right to regulate itself: the deal that has been imposed makes that clear.
Second, its banks can no longer be trusted.
Third, the secrecy will go.
This is where the action of the Troika begins to come into doubt. Few can have done more to oppose tax haven activity than me, and I make no apology for that. But I am also an evolutionary, not a revolutionary and it’s a revolution that is being imposed on Cyprus. Rather like Lehman was a disaster due to hasty thinking and a belief it was too small too matter, I fear that mistake is being made in Cyprus.
First of all, blanket writing down of all balances in a bank seems extreme: wouldn’t it have been much more useful to have examined the provenance of all accounts over €100,000 and decide which might be foreit in full and which were valid claims instead? That would have an immediate and acceptable relevance, even if all would need to be frozen in the meantime. You can be sure those that represented honest claims could have been resolved remarkably quickly if a simple demand of full information exchange with tax authorities was made a condition for making claim on the balance. An opportunity to leave a clean banking sector has been lost it seems. Justice has gone by the wayside in the process.
Second, like it or not there are counter parties to these banks: I hope consideration as to how that fall out will be managed has been made. Just as, undoubtedly, Cyprus has suffered as a counter party to the Greek ‘haircut’ (because tax havens always act as conduits to their regional, larger, financing centre) there will now be those who suffer from the failure of Cypriot banks. If that cannot be managed quickly enough contagion follows, inevitably. I hope the scale has been estimated.
But thirdly, and importantly, I am concerned for Cyprus. I and the Tax Justice Network have always argued that any tax haven in transition to a new economy will need considerable financial assistance, and that providing it would be a price worth paying. There is no sign as yet that Cyprus is to get that assistance, and the result will be social chaos. That is a price Cyprus should not have to suffer. The price of saving the Euro cannot be extreme poverty as recession and mass unemployment hits Cyprus, but I fear it will be.
This is no way to solve the tax haven problem and is an unfortunate precedent to set: aid, selective account and asset forfeiture based on refusal to information exchange and programmed restructuring of banking is what is needed to counter knee jerk reactions if a transition to new and sustainable economies for tax havens is to happen. Cyprus is being used to set a bad precedent and one, that like Lehman, many will come to regret.