Saturday, 6 April 2013

How Marfin looted Laiki and propelled Cyprus towards economic meltdown

Above is a report by Simon Cox from BBC World Service radio on the economic crash in Cyprus. Cox traces the collapse of Cyprus’ banking sector to 2006 when the second largest bank on the island, Laiki, was taken over by Marfin Investment Group, a Greek investment company run by Andreas Vgenopoulos who, it is alleged, with his cohorts, proceeded to loot the Cypriot bank.

In Cox’s report, Laiki employees describe having their doubts over the intentions and practices of the new regime from Greece assuaged by large, unwarranted bonuses or overridden by fear of being branded dead wood or trouble makers. Employees, it is claimed, were induced, and browbeaten, into buying and holding onto Marfin-Laiki shares as a demonstration of loyalty to the bank.

Cox also reports on the way Marfin siphoned money from Laiki’s Cypriot operations to finance unsecured loans to Vgenopoulos’ business associates, friends and family in Greece. These loans included one of €700m to a Greek shipping company; €500m to a Greek TV station; and €400m to Marfin-Laiki’s Greek directors.


Hermes said...

This book promises to say something interesting things about British involvement in Cyprus:

Hermes said...

Here is the latest ECB report on household wealth including Greece and Cyprus. See page 76 onwards on net wealth data. Of course, the methodology needs to be studied. And much of the data was collected before the crisis really worsened. However, going off this report and the media that will go with it, you can understand why many northern Europeans are reluctant to help us to any great extent.

John Akritas said...

The Cypriot economists who I follow on twitter are saying that all the ECB report reveals is that Cypriots are asset wealthy – i.e. there is high land and property ownership in Cyprus, whereas in Germany, France, etc, there is a much higher percentage of people who rent rather than own their homes, preferring to spend their money on other things – nor does the report take into account that Cypriots are also close to the top in the EU for indebtedness, i.e.Cypriots acquire land and property by taking out loans. But even if Cypriots have built up more assets than Germans, this doesn’t justify the blitzkrieging of Cyprus’ financial sector and the wholesale confiscation of people’s savings, investments and capital – unless we’re Marxists.

John Akritas said...


Hermes said...

John, as I said there are some issues about the methodology and the periodicity of the data. However, asset wealth derived from a home is a legitimate form of wealth and cannot be dismissed when trying to measure aggregate net wealth. Greek culture has always placed a high emphasis on home ownership which is also reflected in Greeks having the highest home ownership rates in Australia by ethnicity for first and second generations.

The report does take into account debt, that is why it measures net wealth, which is essentially assets minus liabilities.

There is no wholesale confiscation of people’s savings, investments or capital. That is hyperbole. A vast majority of people’s savings will not be affected. I think your emotional attachment in this instance is resulting in a loss of objectivity.

As I said the report has flaws regarding methodology and the periodicity of the data. For example, Greek real estate prices have declined by between 15-20% since 2009. Also, given the social safety net is not as strong in Greece, and I suspect Cyprus, people build wealth in real estate in order to partially fund their old age. The cost is borne by the individual rather than by the State as happens in northern Europe. Therefore, there should be some adjustment made for this. But, one thing this report does help to demonstrate, and what I have always suspected, is that there is an overinvestment in real estate in Greece and Cyprus. This is great in good times when incomes are steady but in a crisis it can be a disaster. I personally know people from Greece who have 8 houses/apartments but have nothing to eat. Also, it means that too much wealth is tied up in a largely non-productive activity rather than those savings being channeled into banks or governments via taxes which are then channeled into investment in infrastructure and human capital. In contrast, in northern Europe they save more or are taxed more, but their public services are much better.

What does beg the question, is that the survey was based on self reporting, then why didn’t Greek Cypriots under-report their wealth? Another characteristic feature of Greek culture is too always make out you are poorer than what you really are. One reason is to reduce your tax liability or obligations and another is because of deep suspicions about neighbours cursing you.

John Akritas said...

I appreciate Australia is a distant backwater and it’s hard for you to gauge with any accuracy what’s going on in Europe and particularly Cyprus, its economy and society, how people have accumulated and managed their money and assets (try and remember this: Cyprus is not Greece and Cypriots do not share many of the characteristics of the Greeks of Greece [this is largely a good thing]); but you should still have observed that the end result of the troika exercise will be to get Cypriots – in the form of shareowners (I doubt you realise that many middle class Cypriots have bank share investments), provident funds and depositors (including SMEs – the backbone of the Cypriot economy – which as well as having their working capital in Laiki and BoC seized will be stuffed by having no access to credit) – to pay for the failure of the island’s banks and this will directly affect large swathes of the population. (Even small savers are subject to capital controls – and what are capital controls if not seizing people’s money, the state denying you proper access to your money?). And those who won’t face a haircut on their money or investments will still be affected when businesses start to fail or downsize and they lose, or their husband or wife loses, their job or has their salary cut and they can’t repay a loan or mortgage (remember I informed you that Cypriots have one of the highest rates of household indebtedness in Europe) and so on and so on. It’s not hard to imagine what happens when an economy contracts by 20 percent and there is 30 percent unemployment – and these figures are regarded by many as optimistic – in which case your ‘objective’ assessment that the savings, assets and investments of the vast majority of people will not be affected by the haircut on deposits and the taking down of Cyprus’ banking sector is nothing short of ridiculous.

Hermes said...

Some Greek Cypriots ran a vast money laundering operation which essentially puts at a disadvantage the average Eurozone taxpayer. When you are part of a club you also have obligations and responsibilities. If Eurozone is expected to partially fund a bail out then they have every right to shut the operation down. Of course, there will be unintended consequences and the average Greek Cypriot should take this up with the authorities in Cyprus including the government, the Central Bank, the banks and so on. But, many people benefitted from this system from high deposit rates, tourist spending to over-inflated real estate prices. Therefore, some of the pain should be spread around.

This is not dissimilar to mainland Greece. The Greeks ran a vast wealth transfer mechanism to a few vested interests and then gave handouts to keep everyone else to keep them happy. When the whole circus shut down they needed help. Of course, when someone lends you money they will only lend with conditions. Unfortunately, hardly any reforms have been implemented. They cannot even sack public servants who have committed serious crimes.

If there is no permanent damage to the geopolitical situation, Greece and Cyprus will eventually come out leaner and stronger, and better prepared to weather future financial crisis.

Personally, I have also been affected. Some real estate I own is now worth 40% less and very illiquid. But then again, the prices should never have reached the levels they reached in 2008. So, seen in the broader context, I have lost wealth that I should never have really had in the first place. Many Greek Cypriots should take the same approach.

John Akritas said...

'Some Greek Cypriots ran a vast money laundering operation.'

Do you really believe this?

Hermes said...

Almost definitely. Why would so much money be funnelled through Cyprus from Russia and Ukraine and other countries and then find its way back into those countries and other ones? It would also go from there, through Cyprus, and then Switzerland or come back the other way around. The fact that it came from Cyprus raised less questions from the authorities. Also, Cyprus operated as a low tax haven (over 15,000 offshore companies with most having no physical presence), which meant that the wealthy from many countries would deposit their money on the island and evade taxes in their home countries. However, this meant that the tax burden was placed on less wealthy people in those countries to increase the tax base to a sufficient size.

Let's not kid ourselves about the recent investigations on money laundering in Cyprus. It will simply be token gesture as the firms conducting the audit are the same ones who help their clients evade taxes.

Of course, Britain and the City of London is essentially a very large money laundering/tax evasion operation with satellites around the world such as Jersey, Guernsey, British Virgin Islands and so on. The Queen presides over this sordid but sophisticated mess.

John Akritas said...

What you’ve described isn’t money laundering – no evidence that the money involved in Cyprus was illicitly generated – and it was tax avoidance rather than tax evasion. There also exist various double taxation treaties with countries like Russia and Ukraine, so the issue of Russians avoiding taxes was dealt with on a bilateral level between Russia/Ukraine and Cyprus. Why would it be of such a concern to Germany if Russians were using Cyprus to avoid Russian taxes and, according to you, placing a burden on less well-off Russians? All the reports into Cyprus have shown it was in compliance with EU and international money laundering regulations. Only one – by the German secret services – has indicated otherwise; a report, by the way, which has never been released. And, of course, even if Cyprus was a ‘vast money laundering’ operation, how did this escape the notice of the EU in 2004 and the EZ in 2008? And why would the EU/EZ demand the overnight dismantling of Cyprus’ banking system rather than insist, which is what is happening with Luxembourg, on the necessary reforms. All this stuff about money laundering is a convenient myth concocted by the Germans (coincidentally, in an election year) to fit in with the narrative of hard-working German taxpayers being forced to cough up money (loans, in fact) for dodgy Cypriots and corrupt Russians. I’m surprised you’re attracted to this nonsense.

Hermes said...

Yes, its all a conspiracy against poor old Cyprus. Sounds exactly like the thinking in Greece.

First, Luxembourg does not require a bail out. Cyprus does.

Second, I do not know what was going through the minds of the EU and EZ in 2004 and 2008. But I suspect they knew what was going on just as they know what goes on in Luxembourg or Switzerland or London. However, those places (ex the Swiss) have not asked for a bail out. Not yet, anyway.

Third, low tax havens and secrecy jurisdictions such as Cyprus are a concern to the average European and Russian taxpaper because taxpaying entities report their financials in Cyprus whilst conducting operations elsewhere. I suspect this is illegal in most places but entities can get around this through various quasi-legal mechanisms such as transfer pricing. This places a higher burden on the average taxpayer in the EU, Russia. This also includes people in Greece and Cyprus. Lower taxes is not such a problem as it could argued its part of tax competition. But, if those low taxes facilate tax evasion (why provide secrecy if all you are doing is avoidance?) then ethical that is wrong.

Fourth, everyone knows the money laundering reports on compliance by the EU and other organisations have not been conducted properly.

Fifth, the difference between tax avoidance and tax evasion on international money flows is quite murkey compared to onshore.

John Akritas said...

You seem to be relying quite a bit on crude suspicions, hypotheses and generalisations, which are mostly irrelevant to the specific case of Cyprus. I think you’d be helped if you broke out of this banal obsession with money laundering, which no serious commentator believes characterised Cypriot banking or was responsible for bringing it down. There are a number of good Cypriot economists who have intelligent and informed opinions on the crisis, which you would benefit from reading. These include: Stavros Zenios, Alexander Apostolides, Antonis Polemitis and Sofronis Clerides.

Hermes said...

The fact that Cyprus is the largest investor into Russia, and one of the largest investors into Ukraine, and on both cases, the investment is many times the size of the Cypriot economy, is somehow not a fact. Why would large depositors into Cyprus from these countries park their money in Cyprus? And why would Cyprus offer greater banking secrecy than almost all other countries? Further, the compliance measures are a joke. It is easy to write up great compliance measures and test them but much harder to adhere to them in practice.

Also, I do not believe money laundering brought the Greek Cypriot banking system down. The Greek Cypriot central bank, political parties, bankers and others brought the Cypriot banking system down. I think money laundering made potential saviours less sympathetic to Greek Cypriots once the crisis got way out of control.

I have read some of those Greek Cypriot economists. I would suggest you should also read non-Greek Cypriot economists and experts in offshore havens. Various European and non-Europeans have been making negative noises about offshore havens over the last few years since the onset of the crisis in 2008. The fact that Cyprus ran an offshore operation in the eurozone should have set off alarm bells in Lefkosia once these noises became more consistent. But they somehow thought they had re-invented the wheel and they simply let the show go on and on.

Unfortunately, widows and young couples in Cyprus, which in most cases did not benefit from this charade will suffer.

I am surprised you are defending the Cypriot bankers.

John Akritas said...

Where have I defended Cypriot bankers, many of whom will deservedly end up in prison? I have pointed out from the start – as have all intelligent Cypriots – that bankers significantly contributed to this mess with their greed, amateurism and fraud and that this was compounded by a political system that instead of reining them in was complicit in the ‘show’. Add to this, the penetration of Greek gangsters into the Cypriot financial system, the Greek haircut fiasco – the fallout being directly responsible for the collapse of the Cypriot banks – a cowardly and ignorant president, and we have a good idea of how Cyprus ended up needing a bailout.

What I have disputed is the way this myth of money laundering, Russian oligarchs, a casino economy (and even last week a bizarre German report suggesting southern Europeans are wealthier than northern Europeans), was used by the Eurozone as a justification to deal with the problem once it had landed on its doorstep. Despite recognition in Cyprus that the party was over, despite emphatically electing Anastasiades on a reform and memorandum platform, pledging to reduce the banking sector to the European average and so on and so on, the EZ came up with a botched, unjust, self-defeating and unsustainable plan, which has earned them global ridicule and plunged Cyprus into economic chaos.

It’s clear that the EZ acted not out of any real concern to tackle tax havens and money laundering – if banking practices were their concern they would also now be going after Malta, Austria, Luxembourg, Holland, and so on, regardless of whether they need bailouts or not – but was the result of politics, among the different components of the troika, between European governments and domestically – Cyprus got caught up in the election contest between the SPD and CDU – in which the Cypriot economy, Cypriot savings, Cypriot livelihoods became expendable.

John Akritas said...

And Cyprus does not offer 'greater banking secrecy than all other countries'. In fact, Germany ranks higher in the Financial Secrecy Index:

Hermes said...

John, I am glad that it seems you are starting to acknowledge who is at fault in this crisis but you are still clinging to some ideas which have been and will be refuted.

I am not sure why you are attaching links refuting that Greek Cypriot households are not richer than Germany. I did state on a previous post that there were problems with the methodology and the periodicity. However, the analysis provided by Vox EU is spurious. Higher total capital stock by Netherlands and Germany compared to mean or median net household wealth is a positive because relative wealth is concentrated in parts of the economy which can be channeled to productive uses. In comparison, in places like Greece and Cyprus too much wealth is held in households; and particularly real estate, rather than the government or government sponsored entities such as pension funds, where the wealth can be channeled to productive uses such as infrastructure investment and increases in human capital. A similar refutation can be made on the argument put forward in the Forbes article. Of course, the Netherlands, Germany and Austria have healthier pension systems which should be added to household wealth, but this is a good thing, whereas in Greece and Cyprus, people buy more and more houses because their pension systems are deficient. Again, the negative aspect of this is real estate is largely an unproductive investment for a country. Essentially, it is rent seeking. In comparison, pension savings can be used to re-allocate capital to productive uses by investing in businesses, ICT or other infrastructure.

The EU and Eurozone has sent messages to other tax havens such as Luxembourg, Malta and so on. Whether they genuinely tackle them is another matter as often the politicians become hijacked by strong vested interests. However, Cyprus was a casino economy because the prudential authorities and government turned a blind eye or were totally incompetent when the banks under their watch were offering significantly higher than market deposit rates and in turn lending to dodgy credits whilst the Cypriot tax base and borrowing potential was way too small to provide a backstop. They were gambling that the dodgy credits would not go bad. If that is not a casino economy I don’t know what is!!!

Also, the problem with money laundering is that it is very difficult to detect. However, it is easy to detect the offering of conditions and facilities that make money laundering possible. The fact that one of Cyprus’s main service offerings was the establishment of holding companies for the channeling of funds into and out of Cyprus was a red flag.

Lastly, I have said from the beginning that many other countries are guilty of these practices. The City of London is at the centre of a vast global tax haven network. However, that does not make what Cyprus did, and the impact on its ordinary citizens right.

Why should suckers like us duly pay our taxes and the wealthy get away with it?

John Akritas said...

Perhaps if you weren’t so preoccupied with this contrived, exaggerated issue of money laundering you would have noticed that I have been saying from the very outset that Cypriot bankers and politicians bear great responsibility for what has happened on the island. I stated this explicitly in this post on 28 March and, indeed, every Cypriot analyst I have referred to over the last month has been adamant in apportioning significant responsibility to inept Cypriot bankers and politicians for the mess. (Actually, I’ve been banging on for years about what an incompetent cretin Christofias is).

Where your attempts to understand the situation slip into facileness is in your description – or your acceptance of the politically-motivated French and German descriptions – of Cyprus as a ‘casino economy’ built on money laundering. This is wilful ignorance. You do not know enough about the Cypriot economy to make such an assertion. Those who are familiar with the specifics of the Cypriot economy – even those who have been critical for years of economic policy on the island, such as Alexander Apostolides and Michalis Persianis – would regard such characterisations as ludicrous. Bad banking practices – which occur in every jurisdiction – did not mean in Cyprus that the whole of the economy, which includes shipping, tourism, agriculture, hospitality and other aspects of the financial services industry not related to Laiki and BoC, were a ‘casino’. The Cypriot economy was brought down by two banks and in fact what brought them down in the end was not their connections to Russian money or the way it was managed on the island: it was the way these banks got involved with Greek bankers and Greek bonds and the losses taken on the PSI.

You cannot argue that money laundering was a pervasive feature of the Cypriot economy without providing one shred of evidence to support this. To rely on rumour and suspicion is weak. To suggest that instances of money laundering are too hard to prove but you will assume guilt anyway is absurd. All the reports – from European and global institutions – indicate that Cyprus was well placed and eager to tackle money laundering and that such an issue only arose when the SPD and Greens, desperately looking for a way to attack Merkel in election year, tried to make out that by bailing out Cyprus, Germany was in fact bailing out Russian oligarchs and mafia. That you have run and run with this trite German politicking is baffling. It was a ploy designed to appeal to the Swabian hausfrau and Bild readers but, for some reason, you seem to have accepted it as well.

To repeat, what brought Cyprus down is inept, greedy and corrupt Cypriot politicians and bankers who got so carried away by the amount of cash flooding into Cyprus (particularly after 2008) that they got mixed up with the rotten-to-the-core Greek economy and the gangsters that run it. This, eventually, landed the island’s economy in difficulty from which Cypriots naively believed they’d be rescued by the EU. However, instead of being rescued, the Cypriot economy has been shattered by European politicians and bankers who, it turns out, were not motivated by solidarity and fairness but by incompetence, arrogance and, above all, crude self-interest – all of which they have tried to disguise by accusing Cyprus of money laundering and having a casino economy. Remember it was the SPD and the Greens (whose leader is Cem Ozdemir), citing an unreleased German secret service report, which made a big issue of money laundering in Cyprus and it was Pierre Moscovici – struggling to deflect attention away from financial scandals engulfing the French government – who first referred to the Cypriot economy as a ‘casino economy’. I’d seriously question myself if the progenitors of an argument I believed in were the SPD, Cem Ozdemir and Pierre Moscovici.

Alexis Georgiades said...

Well said that man! I have a lot of respect for Germany and its people but one shoe doesn't fit all and, in the case of Cyprus' latest national crisis (it has had more than its fair share of them), politics and self-interest have got in the way of economic sense. Even after the EU decided to clear Greek debt by wiping out unwise investments in Greece of inadequately regulated Cypriot banks, there remain countries with greater debt as a % of national income than Cyprus which, somehow, manage to carry on almost as before, thanks to the forces that be. 80 years ago, there was another European country which, took a similar path - its own inadequate systems failing to stop the rot - and the consequence was mass murder and destruction throughout Europe. That same country was, afterwards, given generous terms to help rebuild its economy. The difference between Cyprus and the rest is a solidarity deficit that, at best, has robbed a country of its future gas revenues and, at worst, has robbed a small country of the industry it needs to recover. As various global leaders, including the head of the IMF, said at the time, "Cyprus is different". Regrettably, I must agree on that point.