More on Cyprus: Bye Bye Money!

James Meeks reports:

Before I went to Cyprus, before I met Panikos Demetriou, it seemed to me that ordinary people hadn’t done too badly in the rescue of the Cypriot financial system. Ordinary people with up to 100,000 euros in the two biggest banks, Laiki and Bank of Cyprus, got to keep their money; surely only the rich would suffer when the government confiscated the rest? Surely only rich people – and, in the case of those two banks, rather foolish rich people – would have more than €100,000 lying in a bank account? It was bitter medicine to swallow. But given that someone had to pay to save the country, wasn’t it better that it should be those with a lot, rather than those with a little, as in previous bailouts? Once in Cyprus I saw that I hadn’t, in fact, been thinking about ordinary people. I’d been thinking about a mythological individual, the hero of modern democracy, Ordinary Person. Sometimes known as Ordinary Hard-Working Person, he is the opponent to mythological villains like Fat Cat Banker, Workshy Scrounger and Faceless Bureaucrat. He obeys the law, pays taxes, puts money by and raises a family. He’s one of us. The trouble is that in real life you don’t meet ordinary people. Who’s one of us? I know I’m not.

Panikos Demetriou had more than €100,000 in Laiki Bank – €178,000, to be precise. He has just €100,000 now. But even when the banks were working normally, even when the government hadn’t yet come along and, as Demetriou put it, dipped into his pocket for €78,000 of his money, it wouldn’t have been fair to call him rich. He lived, as he still lives, with his second wife in a small, comfortable apartment in a block on the outskirts of Larnaca, amid hundreds of other, similar modern blocks. I got lost trying to find the place among the loops and malls of Larnaca’s hot-money residential bloat and he came out in his car to show the way, a slim, handsome 58-year-old British Cypriot with a full head of neatly trimmed grey hair and an immaculate polo shirt. His expression of incredulous, wide-eyed pain at what had happened contrasted with his swagger and loud, assertive speech. He was born in Nicosia and moved to England with his family in 1962 when they went looking to escape poverty at home. After leaving school he ran his brother’s dress factory in London, married, had two sons, and bought a house in Enfield. When his first wife died the life insurance payout allowed him to clear the mortgage and in 2005 he sold the house, left his sons settled in Britain with half the proceeds, took the other half and retired to Cyprus, where he already owned a flat. He was fifty.

The thing about €178,000 is that it’s a lot of money if you can spend it. It’s not so much if you’re 58 and trying to live on it for the rest of your life. Unlike Britain or the United States, where middle-class retirees tend to boost their state pension either with a pension paid for by their employer or a privately invested fund designed, by tax law, to be eked out till death, it became common in Cyprus to retire with a large, tax-free lump sum with which you could do what you liked. For Cypriot workers, it was the norm. Many would stick it in the bank and live off the interest, which was hefty.[...]

The government kept saying Cyprus’s banks were safe, but there was enough troubling noise around the financial system in February this year for Demetriou – ‘I’ve never gambled in my life’ – to go to his local Laiki branch and tell them he wanted to shift some of his money to Britain. He was, in effect, making sure there’d be room for his savings in the lifeboats of the financial system. Banks across Europe offer a deposit insurance scheme guaranteeing that, if the worst happens and a bank fails, the first €100,000 of each depositor’s cash will be rescued (the equivalent amount in Britain is £85,000). Demetriou’s bank manager suggested that instead of moving his money into pounds he keep it in Laiki, splitting it into two and putting half in his wife’s name. That way they’d get two places in the lifeboats; with €100,000 deposit insurance each, they’d cover the whole amount. Demetriou agreed. But when he looked at the documentation afterwards, he saw they’d put his name on both accounts. He complained. The manager told him not to worry, saying the deposit insurance was per account, not per person. She added: ‘We just put your name on the account so your wife wouldn’t take money out without your consent.’ Remembering that in the 1980s his British building society had played down the risks of taking out an endowment mortgage, Demetriou asked if they were 100 per cent sure. He was told they were.

The advice was 100 per cent wrong. The deposit insurance is per person, not per account. Soon afterwards, the banks closed for more than a week, and when they reopened, he’d been stripped of 44 per cent of his savings. [...]

Adonis Papaconstantinou, a businessman in Nicosia who is organising a campaign group of depositors who lost money in the bank crash, told me about a man who’d retired three months earlier, stashed his €350,000 pension fund in Laiki and lost a quarter of a million euros. ‘You’re talking about somebody who doesn’t know about financial advisers or stocks and shares,’ he said. ‘It’s widely accepted that the safest thing is to put your money in a bank account.’ Again, €350,000 sounds like a lot of cash to most people – not, on the face of it, Ordinary Person money. But even at the kind of interest rates Demetriou was getting from Laiki, you’d need a fund that size in the bank to get the sort of monthly pension a British schoolteacher receives, as a matter of course, when they retire.

One member of Papaconstantinou’s group used €800,000 he had on deposit in the bank to get a €500,000 loan to buy a house in Britain, so as to be closer to his children. Before the deal went through, the crisis broke. When the dust settled, instead of having €800,000 in ready cash and a mortgage on a house worth half a million, he found his €800,000 reduced to €100,000, and the whole loan still to pay back – a net debt of €400,000.