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Archive for the category “Cyprus”

It takes two to tango

Clothes maketh the man?

Clothes maketh the man?

Apart from the snow-white attire, it could have been, quite literally, two Old Joes getting together for Saturday lunch and a chinwag. Joseph Ratzinger and Jorge Bergoglio made history at the Castel Gandolfo outside Rome last week when, for the first time in at least 600 years, two popes met face to living face.

Watching their rather wooden performances before the cameras (neither of these gentlemen was groomed for Prime Time), it was the awkwardly staged prayer session  that caught my attention most. Here were two highly influential individuals who, despite their united front,  personified diverse spiritual and temporal states of the world.

Theologians have debated the contradiction inherent in God’s attributes of Justice and Mercy for Millennia. Here was the austere Pope Emeritus Benedict XVI, an aloof intellectual who had made his career looking for Truth through reconciling religion and science, praying with Pope Francis I who, despite his Jesuit background, has an emotiocentric approach to his calling. While Benedict XVI was more at home clinically wrestling with the scientific discovery of the God Particle than confronting the unfolding human tragedy within his own Church, Francis I (why do they insist on calling him “The First” ?) is more at home with the Sermon on the Mount. To anybody other than a dogmatic Christian, the meek inheriting the Earth might make no moral, rational or logical sense, but it does make people  feel good (especially if they are meek).

Then there is the temporal contrast. The German Pope, from the Northern Hemisphere and Northern Europe, for whom rules, discipline and tradition are sacrosanct, and the Argentinian/Italian (his father emigrated) Pope from the Southern Hemisphere and the Mediterranean basin of Europe, for whom life is too short to get caught up in the red tape so it makes more sense  just to hug and be friends.

The Euro crisis  involves both the trade-off between justice and mercy and a clash of cultures between Northern and Southern Europe. It was interesting to note how the citizens of Ireland coolly accepted their  fate (and, with a recent successful bond issue, the country is well on its way to recovery) while the Greeks and Spanish  kicked back with emotional protests.

All these guys pale into rational insignificance when compared with Cyprus. Cyprus is not in severe financial difficulties –  it is bankrupt. There is little room for useful restructuring.  Justice, mercy, logic and emotion will not help the country that has become Europe’s biggest basket case as it careers headlong towards Purgatory.

There has been a mixture of rational and emotional reporting on the Cypriot crisis over the last few weeks. It all started with negotiations for a bail-out package with the Troika – the European Central Bank, the IMF and the EU Commission.

Cyprus’s banks had invested rather too heavily in Greek banks and, when  the EU Council of Ministers decreed, as part of the Greek bail-out in 2011 that private investors would need to take a 50% haircut the then Cypriot Finance Minister  – who was present at the meeting – didn’t seem to realize that he needed to object so as to save his own country from bankruptcy. This speaks volumes about Cyprus which, quite incidentally, had a  genuine communist president at the time (even Russia and China had already given up on that nonsense).

Did someone mention haircut?

Did someone mention haircut?

With a new conservative government installed in January that was reputed to be capable of walking and chewing gum at the same time, a deal was negotiated whereby all depositors in Cypriot Banks, including the average Joe with deposit insurance up to €100,000,  would take a haircut – defined for some reason best known to the parties involved as that dreaded word “Tax”. The universal haircut is understood to have been the suggestion of the Cypriot Finance Minister. Now, at this point the Troika should have woken up and remembered from 2011 that the Cypriots do not have a very good track record on these financial things. Instead, they did not seem to realize that – by exposing insured deposits – they were risking a run on every slightly dodgy bank in the Euro-zone. This speaks volumes about the ECB, IMF and EU Commission.

In the event, when the news hit Cyprus all hell broke loose and Parliament threw out the proposal. Although the Cypriot people and much of the world’s popular press took a tear-jerk position on this (the BBC interviewed eloquently irate retired British expats living on the island with authoritative Home Counties accents) the Parliament’s decision gave the EU a second chance. The Cypriots, on the other hand, were left  needing to find €5.8 billion in order to be eligible for a €10 billion loan.

The deal that has now been reached is that small depositors (up to €100,000) will be protected while Cyprus’s second largest bank will be wound-up and its largest bank restructured. Although not yet clear, apart from shareholders and large creditors of the bankrupt bank being more-or-less wiped out, the haircut of large investors in the Bank of Cyprus is likely to be up to 60% with compensation in the form of worthless shares. In the meantime, as banks reopened a few days ago, draconian capital controls are being enforced to prevent a run on the entire system.

The result for Cyprus is that, with the restructuring of the banks, its offshore financial business – which is fundamental to the economy –  has been effectively eliminated. Much of the money invested in Cypriot banks is thought to be Russian laundered funds such that a Russian investor who sent a bed sheet to the Cypriot Laundry can now expect to get back a pillow slip (if he is lucky). He will not be a happy investor which may make the average Western European citizen smile, but this probably means an end to the Cypriot economy as we know it, which also means that the average Western European citizen will soon have the smile wiped off his face. It seems the only hope for Cyprus is reunification with the Turkish north paving the way for increased tourism and successful exploitation of the gas found off its coast. Confidence is so high in Cyprus that those English residents with clipped accents mentioned above will take comfort in the decision of the British government to divert their State pensions into UK accounts.

They never had this trouble when the Church was in charge

They never had this trouble when the Church was in charge

It is tempting to think that there could have been another solution for Cyprus involving, perhaps, a less onerous bail-out. Rationally and in the name of justice there was not. It is a country that built its future on, at best, legal offshore financing that is going out of fashion and , at worst, Russian money-laundering. But what about emotionally? Could, and should, the Troika have turned a blind eye and advanced more funds?Didn’t someone once say “Let he who is without sin cast the first stone”?

Did you hear the one about…..?

Once upon a time timing was everything

Comedians  fear the moment in their careers when they lose their timing. Evidently not the Cypriots.

This week Cyprus proudly assumes the six month rotating presidency of the EU. Last week, after knocking on the doors of friends and distant neighbours to see if they could spare a dime, they finally asked the EU for a bail-out to prop up the banking system that has, understandably, been heavily exposed to that accident of comic timing, Greece. So far, embarrassing but containable.

However, at the end of May – fully aware that the EU presidency was just around the corner and that the bailiffs were approaching fast across the Mediterranean, the Finance Minister announced a new tax regime for Intellectual Property. Put in brutally simple terms, find an excuse for painting income routed through Cyprus as deriving from intellectual property – in the broadest sense – and they will tax you at the exorbitant rate of …2%. Never mind that they have one of the lowest tax rates in Europe. Never mind that they are begging for money from their colleagues. They are clearly grabbing some more of the zero sum international economic cake and biting off the hands that feed them.

Of course, just as Churchill explained the use of diplomatic language when declaring war on Japan: ” When you have to kill a man, it costs nothing to be polite”, they put up a smokescreen. Rather than offering 2% tax it was announced that an 80% deduction would be granted for investments of this nature, the headline tax rate being an already  rock-bottom 10%. Brilliant. Like the rest of us are really stupid.

“From each nation according to its ability to each nation according to its needs” – Marxist-Cypriot philosophy?

Now being the product of a daft and naive western liberal education, I would have said that the immorality of this scam was pretty slam dunk. Not so. If their past pronouncements are anything to go by, members of right-wing economic, and totally loony right-wing libertarian economic, fish (sorry, think) tanks would have jumped on the first carbon guzzling plane to kiss cheeks with the Cypriot president (who happens to be a communist which makes the mind really boggle) in gratitude for saving the world economy.

Why? I will explain.

In the good old days of the twentieth century, when there were barriers to trade, when international travel took so long you had to check luggage, when there were great recessions and depressions, when one world war followed another – newly socially concerned governments would fret over their sovereign tax systems. The received wisdom on all sides of the economic divide was that “tax neutrality”  – trying to make sure that taxation did not cause distortions in economic decisions – was a desirable goal. On the other hand, as with everything else in the real world, this policy was more honoured  in the breach than in the observance. Individuals were exposed to progressive taxation – a form of redistribution of income. Consumption taxes such as VAT were regressive in that poorer people spent a higher proportion of their income. There were Pigouvian taxes such as those on alcohol and cigarettes (and more recently carbon emissions) designed to compensate for social costs. And then, there was tax relief  to encourage savings. 

Another option

Overall, the attitude to tax neutrality for most nations was the temporal equivalent of the British approach to the Church of England – a good lamppost when you are looking for something to lean on. However, what was important was that electorates could vote into office  parties that promoted “Big Government” (like in Britain, France and Germany) “Small Government” (like the Americans like to  think they were doing) or “No Government” (like the Greeks didn’t realise they were doing). Thus, tax rates were free to be high, low or, if you happened to be living it up in the Cayman Islands , non-existent (go on – how many people reading this could pinpoint Georgetown on a map at the first attempt?).

And just as the Americans, Japanese and Europeans were starting to understand the Laffer Curve (the relationship between government revenue and tax rates) and were reducing tax rates in order to actually increase revenue, globalization kicked in.

Have a Tax Break. Have a Fair Trade Kit Kat

Of course for most people who don’t walk around with straggly hair, beards and open leather sandals (or happen to be the Commie president of Cyprus) ,  the liberalization of the world economy has been generally viewed as a good thing. Competition encourages efficiency and, as long as there are certain bells and whistles included such as the amazing Fair Trade movement aimed to help producers in developing nations, more power to the global elbow. Lower tax rates have also proved a boost – average corporate rates came down drastically across the world from the 1980’s onwards as noted above without destroying the ability of sovereign governments to determine fiscal policy.

Now an unaffordable luxury. Like the 12.5% tax rate

But then things started to get out of hand. Not satisfied with economic competition, countries started to go for tax competition. The star player in this game was Ireland with its 12.5% corporate tax rate that made them so successful in attracting American investment. Other countries followed and the race  to the bottom commenced. Meanwhile, both the OECD and the EU introduced various measures against harmful tax competition to try and contain the epidemic – but these inevitably led to ever cleverer schemes and enhanced competition. The result (leaving aside the Euro Crisis) is less ability of governments to choose between social welfare and survival of the fittest which, judging  by the nature of opposing major parties in many national parliaments, should be a major part of the democratic process.

However, reading the literature of such right wing organizations as the Cato Institute and the Adam Smith Institute you would think the turbo competition of nations like Cyprus and common-or-garden tax havens is an economic ideal. The theory, as is so often the case with right wing thinking as far back as Adam Smith himself , is simple (dare I say, simplistic). Governments will be forced to lower their tax rates which will increase Tax Neutrality, ensure that economic flows are not distorted and leave individuals in charge of their fates.

This is every bit as cynical as Cyprus’s latest game. What they are actually saying is that harmful tax competition, such as the utterly contrived Cypriot IP regime,  is good because it does away with “Big Government”. That is wrong. The question of size of government should be decided, as far as still possible,  at the ballot box and not by the underhand tactics of small nations.

So, the members of those illustrious think tanks should  indeed be flocking to the Cypriot president whose nation is, not for the first time, contributing to the hammering of Big Government. As a Communist, while he would presumably wail at the thought of the decimation of government , he should at least recognize  the concept of the ends justifying the means. What a joke.

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