The story goes that in ancient Greece, Archimedes was in the bath when he realized that you could measure the mass of an irregular object (himself!) by measuring the displacement of the water when he got into the bath. To this day, we have an image of him running down the street in the nip, shouting “Eureka!” or “I have found it!”
In modern southern Cyprus, politicians have fashioned what they believe is a plan to solve their country’s funding needs and they believe it will be finalized today, and that tomorrow, the ECB will approve it and continue to provide liquidity to their banks, and that on Tuesday, the banks will open after a 10-day hiatus, and all will return to normal. Sure, there may be some panic withdrawals of deposits from Tuesday onwards, but the ECB is presently providing €9bn of liquidity in an economy with a GDP of €18bn and remember that at our peak need in Ireland, the ECB was providing €190bn or 120% of GDP so the ECB has some room for providing further liquidity to Cyprus. The politicians will have convinced themselves “Mission accomplished”
But politicians have been locked in their privileged environment for the past week, with economists and bankers shoveling advice into their ears. They’ve been subjected to tunnel vision where the only objective is to devise a funding solution. Politicians have the luxury of being in charge, and knowing that solutions are in their remit to devise and implement so threats to their livelihood have been theoretical and distanced. But here you have 56 politicians in a country of 1.1m, not any larger than Dublin, and their finance minister a week ago thought that a levy on all deposits of at least 6.75% was a good idea. They haven’t covered themselves in glory.
As they finally relax with having devised a solution later today, let us go then, you and I when the evening is spread out against the sky like a patient etherized on a table, and see what Cyprus looks like this Sunday evening. The banks are shuttered but they are usually closed on Sundays anyway, so no change there. There are lines outside most banks and people are withdrawing cash. The €260 daily limit is regarded as a target, not a maximum, but people are sometimes unable to even get this limit despite having funds in their accounts. On a Sunday evening, a politician might be tempted into a restaurant where they will find that trade is down 50% on a fortnight ago. They might see signs saying “no credit, debit cards or cheques” or “cash only”. In shops, they will notice perishable foods like strawberries being cut in price by 60% which should really set off alarm bells – people are not hoarding or panic-buying food which would drive up prices, they are hoarding cash. There are 8,500 employees at Bank Laika alone, most in Cyprus and most have not been at work this past week. The estimate on here is that 40,000 bank workers in a country with 1.1m have not been working in the past week. There have been no standing orders or direct debits since Friday 15th March 2012. Most people are paid at the end of the month, but anyone else hasn’t had payment, and even if they had, they would have been restricted in accessing their wages. Credit cards are not being paid, large purchases are not possible. And of course, ordinary people don’t know what politicians will eventually devise; after all, a week ago, they were willing to take 6.75% of all deposits regardless of size or “guarantee”,so someone with a €10,000 balance faced losing €675.
The betting on here is that over the next 24 hours as politicians emerge from their tunnel vision, and at last examine the practical impact of the last 10 days on the banking system and its domestic and foreign depositors, that they will conclude – “in their waters”, at least – that Plan B won’t work. Being politicians, who stubbornly cling to a vision and agreed way of doing things particularly at supranational level, they will be reluctant to abandon their Plan B however, and you might expect a few days of experiment with draconian capital controls, before the inevitable happens and a Cypriot pound is introduced with a newly independent central bank of Cyprus. Economically and politically, it doesn’t make sense for Cyprus to abandon the euro, particularly if there is a funding deal in place and the ECB is continuing to offer support, but in a reverse of that Men-in-Black philosophy of “a person being smart, but people being dumb” in the Cypriot case, each household and business will act in its own interest based on what has been a traumatic 10 days, even if for Cyprus generally, it would be better for households and businesses to support the banks.
Just when will they shout “Eureka!” and run down the streets in the nip.