The Depositor Haircut

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.

In 2008, interest rates in the Eurozone as a whole and interest rates in Cyprus began to diverge. For the past five years, even though they’ve been subject to the same base interest rate set by the European Central Bank in Frankfurt, savers with deposits in Cypriot banks like Laiki and Bank of Cyprus have been getting rates two whole percentage points higher than their counterparts in Helsinki or Amsterdam or Paris. Right up to the moment of its destruction, Laiki Bank was running ads for its Step Up account, which promised to give loyal savers an interest increase every month, up to 5.6 per cent. Ads on Cypriot TV showed an attractive young man in a suit jacket over an open-collared, untucked white shirt, smiling with seductive sincerity through his beard as he rode up an escalator. With a funky bass line playing in the background, he looked into the camera and said, in Greek:

It’s good taking the next step – but only if it’s going up. My deposits are on a high thanks to Laiki Bank’s Step Up plan. They’ve got it all! Returns? Interest rates that keep rising, and rising, and rising. Flexibility? If I want to withdraw, I just withdraw. And security! Over and above everything else.

Demetriou’s wife brings home a civil servant’s salary, and Laiki was giving him a return of 4.5 per cent on his savings – enough for an annual income of about €8000. ‘I didn’t need a lot of money,’ he said. ‘That 4.5 per cent was good enough for me.’

The rate should have been a warning signal. For a bank to be giving savers 4.5 euros a year for every hundred they kept in the bank, when the European Central Bank base rate was only 75 cents, was a sign either that the bankers were wonderfully clever, or that they were taking a terrible risk. It was the sort of average return that a decent broker would hope to make by punting on the stock market, an activity normally far riskier than putting cash in the bank.

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. He worked for thirty years in Britain, and is eligible for a British state pension, but that won’t kick in until he’s 65. ‘I can’t afford to go back to the UK,’ he said. ‘Can you imagine me going back to the UK with no house, no money, living off the dole? Where am I going to get a job at 58 in London?’

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. I thought back to the last time, not long ago, when I bought a property, my sole residence, and for a short, perilous time had a six-figure sum floating in one bank account. I remembered that when the sale went through the fingers of the woman in the bank clattered over the keyboard and, just before pressing the key to finish the transaction, she looked at me, smiled and said: ‘Bye bye money!’ The mythological Ordinary Person might be unscathed by the raid on these deposits, but in the real world, ordinary people buy houses, and in modern Europe, they can seldom do that without having a sum higher than €100,000 in their account, even if it’s for one day.

Like other members of the business elite I spoke to, Papaconstantinou puts the emphasis on Europe’s duty of care towards the republic. ‘The way European structures are approaching Cyprus,’ he said, ‘they give the impression they just want to wipe Cyprus off the map. OK, we made mistakes, we need to be punished, but allowing the banking system to collapse completely and turning Cyprus into a poor country isn’t the way to do it.’ Demetriou’s anger, on the other hand, was directed within the island. He believed the rumours that rich Russians were tipped off in advance about what was going to happen. He didn’t believe it was coincidence that a company owned by the parents of the president’s son-in-law moved €10.5 million to London a few days before the bank freeze (the company denies it had any prior knowledge). The superficial ideologies to which Cypriot presidents proclaim loyalty – communism, until recently; now, under Nicos Anastasiades, free market capitalism – mean less to Demetriou than the fact that Parliament has a solid majority of lawyers. ‘We have 56 MPs,’ he said. ‘Forty of them are solicitors. Everything that goes on in Cyprus is with their consent. If they didn’t want the tax dodgers and the laundered money, they would have done something about it years ago. I’ve been here seven years and I’ve yet to see a tax dodger or anyone from the stock exchange come up before a judge so we can say: “This is the man, he’s behind bars.” Not one person. Nobody gets punished in Cyprus. Nobody gets punished and the same thing is going to happen this time round. At the end of the day they punish the ordinary person.’

When Lawrence Durrell moved to Cyprus in 1953, his ticket from Trieste to Limassol (he went by boat) cost £47, while the beautiful old house he bought near a monastery in the hills above Kyrenia cost £300. Sixty years later, you can still get a one-way air ticket from Northern Europe to Cyprus, out of season, for £47 – in other words, the price has plummeted, in real terms – while houses have increased in value a thousandfold. The two points are related, and the discrepancy explains much of what has happened to Cyprus over the past couple of generations. The ease and cheapness with which people can come and go from the island, its climate and its beauty, brought not just tourists but prospective residents and second-homers. Cyprus prospered. House prices rose. Ticket prices fell. More visitors, more residents, more houses, more money. First it was people with money seeking homes; then, in a shift that was barely noticeable until after it had happened, it was people seeking a home for their money.

Is there some special tingle of wellbeing that stirs deep in the bellies of the moneyed at the thought of moving their wealth to small islands? Does the great moat of the sea all around give a sense of security to the insecure, a sense that the great powers with their interfering supervision, their high taxes and their petty regulations are far away? The incomers feel more worldly than the locals, the locals feel they can take advantage of the incomers’ naivety about local mores; together, each thinking they’re being served by the other, they quietly conspire to make the island a perfect haven for money, not realising that it is the money itself that is taking over. In an astonishingly short time, the institutions set up to foster the money, the banks, get out of control. It only took a decade for banks on my island, Great Britain, to go from being worth 2.5 times as much as the national economy to 4.5 times as much. Two of the biggest had to be rescued, at vast expense to citizens. In Iceland, the banks swelled to nine times the size of the economy before collapsing; in Ireland, it was eight times. In Cyprus, when the music finally stopped, the banks were seven times as big as the republic.

Things looked different on 10 July 2007, when Lucas Papademos, vice-president of the European Central Bank, welcomed Cyprus and Malta into the euro. Property prices were racing upwards; the economy was so boomy the Cypriot government was running a surplus. In joining the eurozone, Cyprus, Papademos said, became ‘part of what can be called a “community with a common destiny”, or – it is maybe better to use the German term – a Schicksalsgemeinschaft’. It was at that moment that the property market, infested at the bottom end with speculative, shoddy projects designed to snare gullible British retirees, went off the boil. For Cyprus, this was disaster. As in Ireland, Spain, the US and Britain, the banks were grotesquely over-extended in property. And, as a report for the Cyprus government by the investment firm Pimco found this year, there were Cypriot idiosyncrasies that made things worse. When they offered mortgages to borrowers, Cypriot banks tended to focus on the price of the property being bought or built, paying little attention to whether the borrower could meet the monthly payments on the loan. Buyers and builders who struggled to get loans were able to bolster their case by getting friends, family or business partners to put their property up as collateral. Networks of friends and relatives would clump together in ad hoc borrower clusters, all pledging each other’s properties as cross-collateral in each other’s deals. It seemed to work when property prices were going up, but when property prices fell, the system froze. Borrowers stopped paying their instalments. Their properties, and those of their guarantors, were no longer valuable enough to make it possible to remortgage. To make things worse for the banks, repossession of a house after a borrower defaults is impossible in Cyprus, and it takes ten years or more for a lender to force a sale through the courts. But bankers were hampered from admitting the problem to themselves by a philosophical attachment to concrete and mortar that was embedded in their books. In most of Europe, the value to banks of a loan depends on it being paid off regularly: if that stops happening, the loan gets marked in the accounts as dodgy. In Cyprus, the banks’ practice was to assume that as long a loan was backed by property, it was OK.

Two banks in particular, the two biggest, Laiki and Bank of Cyprus (BoC), found, in the late 2000s, that they couldn’t ignore the brutal message in the numbers. It wasn’t just the loans going bad, those to borrowers in Greece as well as in Cyprus (the two Hellenic banking systems were closely entwined). It was where the banks got the money from to lend in the first place. In other countries with similar problems, like Britain, the banks got a high proportion of their capital by borrowing money from institutional investors. Most of the money Laiki and BoC used for their loans came from depositors, some foreign but many Cypriot, like Demetriou and Papaconstantinou. In order to keep the depositors on side, the banks had to pay high rates of interest; but with so many property defaulters, the money to pay interest to the depositors wasn’t coming in. In desperation, Laiki and BoC turned to a source of income few others wanted to touch. They bought Greek bonds. The two banks were paying excessively high interest rates to depositors because they needed their money; the Greek government was doing exactly the same to anyone who would lend it money. Laiki/BoC and the Greek government were like two drunks who manage to avoid falling over by leaning on each other.

Exactly where Laiki/BoC got the money to buy so much Greek debt isn’t clear (at one point in 2011, 95 per cent of Laiki’s core capital, the closest thing a bank has to actual money in a vault, was made up of Greek bonds), but we know that in at least one case Bank of Cyprus used a large part of a €3 billion emergency loan from the European Central Bank, designed to help banks stay afloat while they clear out their loan books, to buy Greece’s doomed IOUs. It was madness; the Eurozone’s paymasters, Germany and France, had already made it plain that the price of rescuing Greece would be that all those who had already lent it money would have to accept losses, or ‘haircuts’. Across Europe, big banks were selling Greek bonds as fast as they could: Laiki and BoC kept on buying, and the Central Bank of Cyprus, their regulator, did nothing to stop them. Nor did the European Banking Authority, a continent-wide body that stress-tested large banks in 2010 and 2011.

The beginning of the end came in October 2011, when, in exchange for a new €130 billion bailout – i.e. loan – from the EU and the IMF, Greece applied a 50 per cent haircut to its old debt. When the details were finessed in February 2012, the loss of value on Greek bonds, in real terms, was close to 75 per cent. The two Cypriot banks lost a total of €4.29 billion. Without urgent help, they were finished. In fact, things were even worse than the possibility of bank failure. Cyprus was caught in a vicious loop. Because its banks were about to collapse, the financial markets believed the Cypriot government would have to rescue them. But because the markets didn’t believe Cyprus could afford to do that, they made it harder and harder for it to borrow money, making the government’s financial position worse, and making it less likely it would be able to rescue the banks and so on.

Last June Cyprus became the fourth Eurozone country, after Ireland, Greece and Portugal, to seek a bailout. The banks, and the country, were put on life support from Frankfurt while the terms of the deal were thrashed out. The Cypriot authorities were in a tight spot, but don’t seem to have realised quite how tight until March this year, when Anastasiades, the new president, discovered that the IMF, together with Germany and its allies, were demanding that Cyprus help pay for the bailout by taking money from depositors’ accounts in the broken banks – something no other bailed-out country had been asked to do. As early as February, when the Financial Times reported that a raid on bank accounts was being considered, the Cypriot authorities not only dismissed it: they said it would be illegal. Yiannos Georgiades, a lawyer planning to sue for the return of depositors’ lost money, showed me a letter from the Central Bank to the head of Laiki, Takis Phedias, dated 10 February, denying the FT story. ‘Any action aimed at reducing, depriving or restricting the property rights of depositors, contradicts the provisions of the Constitution of the Republic of Cyprus and of Article 1 of the First Protocol of the European Convention of Human Rights,’ the letter declares.

To the Cypriot delegation arriving in Brussels on 15 March to negotiate the final terms of the bailout, agreeing to plunder individual bank accounts went against everything the republic had done in the previous generation to make native Cypriots prosperous, and provide a haven where foreigners could shelter their wealth and feel safe. In the conference room itself there seems to have been a divide about what exactly a bank account is. On one side of the table were the IMF chief, Christine Lagarde, and the Dutch finance minister, Jeroen Dijsselbloem, with their conceptual notion of what you do when you put money in a bank – in effect, you lend the bank money, on the understanding that it will lend the money to third parties, charging interest for the privilege, interest which it will split with you. A bank account, in this view, is an investment like any other; it’s always a bit of a gamble, and the higher the return, the higher the risk you’ll lose your stake. Using expressions like ‘plunder’ or ‘raid’ to describe losing money in a bank crash is like calling a fall in the share price of a company you invested in ‘robbery’. Account-holders should have followed the news more closely; they should have chosen a safer bank.

It’s always easier to take an abstract view of money when it isn’t your own, and although we don’t know whether any members of the Cypriot delegation stood to lose money, they were closer to people who did. They had a visceral sense of the way most people who aren’t IMF directors or Dutch finance ministers regard bank accounts: as a box where you store your money so you don’t have to keep it under the mattress. Few think about where the interest comes from. Technically, our money isn’t in the bank at all, but in some abstract, wider realm of financial cyberspace that only computers know. Emotionally, it’s there, and it’s ours, and taking part of it away is stealing.

Lagarde, Dijsselbloem and the Germans held the trump cards. What were the alternatives? Cyprus could have rejected the terms of the bailout and allowed Laiki, and possibly BoC, to go bankrupt, following the Icelandic scenario, where the parliament passed emergency legislation to give depositors first call on whatever assets were left when the banks were wound up. But it wasn’t clear that the banks had the assets to cover depositors’ losses, and the government of Cyprus, virtually broke itself, couldn’t afford to reimburse depositors up to the first €100,000 of what they’d lose. Besides, if Cyprus had taken this course, the ECB would have cut off the flow of euros keeping the country going. In essence, Frankfurt would have made it impossible for the Central Bank of Cyprus to issue more euros. Cyprus would have fallen back on whatever version of the old Cyprus pound it could cobble together, and everyone on the island would have suffered still more severe losses. The final blow was to make clear to the Cypriots that they wouldn’t get the bailout without taking billions from depositors, because it would burden the government with too much debt.

Anastasiades admitted defeat. After a week of unsuccessfully pitching a demented compromise which would have violated the €100,000 insurance guarantee, giving more protection to richer account-holders, the deal was done and the banks reopened. Cyprus doesn’t have a big population – about the size of Leeds or Indianapolis – and the latest expert calculation of the amount to be begged, borrowed and (as many Cypriots would put it) stolen to fund the bailout comes to €24,000 for every man, woman and child, a total of €20.2 billion. Of this, €10 billion will come from the EU and the IMF, €8.3 billion from the confiscation of account-holders’ funds – officially defined as a ‘tax’ – and the rest from a combination of defaulting on institutional loans to the banks, delaying government loan payments, privatisation and selling gold reserves. Laiki was closed down and absorbed into BoC, its account-holders stripped of anything over €100,000. BoC account-holders don’t yet know exactly how much they will lose, but up to 60 per cent of everything over €100,000 could be forcibly converted into shares in BoC.

Was there anything else the IMF and the Northern Europeans could have done? Yes; they could have rescued the Cypriot banks directly, from pooled European funds, as a trial of what is due to happen in future Eurozone bank emergencies. That would have got Cyprus off the hook. But there was never the will in Northern Europe to do this. Dijsselbloem wanted to set an example to other Eurozone tax havens like Malta and Luxembourg. The message, he said after the bailout talks, was ‘deal with it before you get into trouble. Strengthen your banks, fix your balance sheets, and realise that if a bank gets into trouble, the response will no longer automatically be that we’ll come and take away your problem.’

Germany, facing bailout fatigue and an autumn election, took an even harder line. Politicians talked openly about Cyprus being too small for it to matter if its economy and banks collapsed. The German finance minister, Wolfgang Schäuble, said that the republic wasn’t ‘systemically relevant’. In November, halfway between Cyprus asking for help and getting it, Der Spiegel ran details of a leaked report from the German foreign intelligence service, the BND, accusing Cyprus of being a centre for laundering billions of euros’ worth of dirty Russian cash, despite its repeated denials. Punishing the Russians became an election issue. ‘We can’t use German taxpayers’ money to guarantee deposits of illegal Russian money in Cypriot banks,’ one Social Democrat told Spiegel. Indiscriminate punishment of supposedly wealthy depositors in Cypriot banks became Angela Merkel’s way of showing German voters and her rivals that she was ready to stand up for the ordinary German against what was consistently portrayed as a sinister Mediterranean outpost of Slavic sleaze. This was not the Schicksalsgemeinschaft Cyprus had been promised when it joined the euro. If they think we’re so corrupt, I was asked, why did they let us join in the first place?

As the road from Nicosia to Limassol leaves the central plain and passes through an Arcadian landscape of low hills and small fields, each with a roll of hay baled on the stubble and a carob tree at the centre, you begin to pass roadside hoardings in Russian. One of the Cypriot political parties has paid for an enormous poster with the stirring, if cryptic Russian slogan ‘DO NOT BETRAY US, BROTHERS!’ Limassol, nicknamed Limassolgrad by the wits, resembles a seedier, more rustic Cannes. There are palm trees on the esplanade but they are somewhat dog-eared, and the marina is not one where a self-respecting oligarch would want to moor his yacht. A new one is being built, to be run by the British firm Camper & Nicholsons; it will have houses – Nereids and Thetis Residences – built on artificial reefs, offering the inestimable advantage of being able to moor next to your garden, allowing you to step straight off the boat onto your poolside recliner. So the brochure has it, anyway, the same brochure piled up in the lobby of the Four Seasons that describes Cyprus like this: ‘A stable economy and low cost of living is complemented by one of the most beneficial tax regimes in Europe … with a legal framework based on the English system, buying property is easy.’

It was a Saturday morning, and in a little bar by the seafront Phivos Stephanou, a young Cypriot lawyer working for the Moscow-based legal consultancy Korpus Prava, was beginning his first day off since the full-blown crisis had hit three weeks earlier. He seemed baffled by the outburst of German hostility towards the Russians on Cyprus, which to him referred to an earlier era: ‘After perestroika happened there were Russian government officials who took advantage and put money here, I’m sure they did, or used standard tax havens like Belize. Now we have due diligence. We offer tax vehicles for clients who do legitimate business, big business, in Russia, and who come to reduce their tax burden. They’re not coming here from selling drugs or prostitution or avoiding tax, or with bags of money.’

Stephanou said he knew one Russian who’d lost €15 million he deposited in the bank four days before the haircut, in order to buy Cypriot citizenship. Like many countries, including Germany and Britain, Cyprus offers citizenship to wealthy immigrants (although Germany requires applicants to renounce all other citizenships and wait eight years). The ease with which Russian tycoons could acquire an EU passport from Cyprus was one of the problems picked up in the BND report, but the effect of the bailout has been to make things worse, from the German point of view. Cyprus has now slashed the price of a passport from €15 million to as little as €3 million, and the processing time for applications to forty days. The interior minister, Socrates Hasikos, hopes to attract the Chinese.

Stephanou studied law in England. He had a narrow escape in the depositor haircut: had it happened a couple of days later, he would have been personally responsible for the loss of €20 million of client money for which he was just about to set up an escrow account in Laiki. The depositor haircut, Stephanou said, was robbery. But he went on: ‘We were living a fake high life. That was our fault. You could have a family with a huge house, two current accounts, two Visa accounts, loans for the car, loans for the house … there was no control. This was the main mistake of families here.’

Not all Russians on Cyprus come and go. There are 30-40,000 living more or less permanently on the island, about 4 per cent of the population. They have been coming for a long time. Before leaving Britain I came across a cheerful article in the Russian business newspaper Kommersant from 1994 – only three years after the collapse of the USSR, when it still seemed likely the communists would return and persecute the newly prosperous – explaining to its readers how to open a bank account on the island. ‘The authorities, including the tax police, may never guess you have an account in a Western bank,’ the piece says. On the terrace restaurant of the Limassol Four Seasons Hotel, overlooking the blue haze of the Mediterranean, I overheard a conversation between two Russian women of a certain age. At first it seemed they were talking about a tragic loss of money; it turned out they were talking about a tragic loss of love. Nearby I spoke to Leonid Gousev, who met and married his Cypriot wife, in the face of fierce official resistance, in the Soviet Union at the height of the Cold War. When the first Russians arrived in Limassol after the collapse of the USSR, he was there to greet them. ‘It really was paradise,’ he said. ‘But it was all about tax.’ Gousev didn’t lose in the depositor haircut, but he knows Russians who did. ‘There was one, a publisher; another was a builder. They had capital, and they did business in Russia, and they left their money here just because of the favourable financial system. It’s a very bad situation for them. They earned that money in a perfectly normal way, and now they’re losing it.’

Away from the urbane, melancholy reflections of well-to-do Russians served by white-jacketed waiters in the Four Seasons, there are Russians who take a harsher view. Natasha works on the till at a Russian supermarket in a side street off the esplanade. She’s from Pskov, a depressed garrison town near the Estonian border. She told me her last name but asked me not to use it, although, as the wife of a Cypriot taxi driver, she’s in the country quite legally. ‘The poor people, they don’t have money,’ she said. ‘The richest, they were warned. The rich Cypriots knew they were coming for their money and they took out all their savings in two days. [The haircut] touched, basically, the middle class, small business people. We’re Russians. We had our default, we lived through this. We’ve got bitter experience of the government taking our money. We keep our money at home.’

Many middle-class Russians on Cyprus, she said, had done exactly what Germans and Britons do all the time: sold their relatively high-priced properties in the cold north in order to retire or start a business in the sunny south. The real problem on the island was the Cypriot governing class, which preferred chasing easy gains by servicing foreign money to collecting taxes from their own people.

‘The accent,’ she said, ‘should be put on the fact that there is complete disorder in this country. The Russians suffer and Cypriot businessmen don’t pay their tax. I’ve worked here for five years and in all that time nobody’s come to check how much I earn. They could have raised plenty of money from small businesses, but the government doesn’t do any checks. If they just started digging a bit they’d get some money for the state. Not a single restaurant, café, hotel – nobody checks anything.’

The Russians were not the only fellow Orthodox Christians whose money was welcomed into Cyprus. In the 1990s, the island became the centre of a vast international money-laundering operation run by the outlaw regime of Slobodan Milosevic, ruler of the remnant Yugoslavia. Defying United Nations sanctions, planes carrying bags of cash from Serbia would fly into Cyprus, where they would be deposited in banks, usually in Laiki. So much money came in that at one point the head of the Cypriot bank workers’ union complained his members weren’t being paid enough overtime to count it after hours. The money – about €3 billion, according to the then governor of the Yugoslav central bank, Mladjan Dinkic – was used to fund the Serbian side in wars in Bosnia and Kosovo.

In 2001 the International Criminal Tribunal for the Former Yugoslavia, preparing its case against Milosevic on charges of genocide, torture, murder and plunder, hired an experienced Norwegian forensic auditor, Morten Torkildsen, to investigate the financing of Serbian forces under Milosevic. ‘In my career,’ he told the tribunal the following year in his report, ‘I have never encountered or heard of an offshore finance structure this large and intricate.’ Torkildsen described how in one year alone, from March 1998 to March 1999, a single courier took 453 million Deutschmarks in cash from Serbia to Cyprus, depositing it in a single Laiki account. He outlined a four-stage operation involving four different kinds of jurisdiction. First was the outlaw jurisdiction, Yugoslavia, whose banks were under a strict sanctions regime. Money would be moved from there to accounts in a laundering jurisdiction, Cyprus. It would then be transferred to a nameplate jurisdiction, such as Panama or one of the British Crown Dependencies, Jersey, Guernsey or the Isle of Man, where a firm would have been set up, with its own bank account, by an agent of the Yugoslav regime. Finally, it would be transferred to a supplier in a shopping jurisdiction like Ukraine, Britain, Germany or Israel, where the regime could buy what it wanted – guns, ammunition, helicopters, sports cars, or designer clothes.

When I visited Cyprus, I happened to be coming from Istanbul. This meant arriving at the little airport in the northern part of the island. The north is a self-proclaimed country, recognised only by Turkey, that calls itself the Turkish Republic of Northern Cyprus. Elsewhere it’s officially known as the ‘occupied territory’ of Cyprus. A Turkish Cypriot taxi driver drove me across the straw-yellow plain, dotted with dust-coloured clusters of four and five-storey apartment blocks in rendered concrete, to the Green Line which, since mainland Turkey invaded in 1974, has separated a Turkic north from a Hellenic south. The music in the car came from a Greek Cypriot radio station – the driver drew my attention to the fact – and when we got to the crossing point he took a roll of insulating tape out of the glove compartment and tore off a couple of strips to cover the Turkish markings on his licence plates.

His consciousness of sharing an island small enough to drive round in a day with another polity – two others, in fact, if you count the military enclaves of Akrotiri and Dhekelia on the south coast, technically still a British Overseas Territory – was not shared on the Greek side. The Green Line runs east-west through the centre of the capital, Nicosia, and like the inhabitants of parallel urbes occupying the same space in China Miéville’s The City and the City, citizens live in a state of not-seeing and not-hearing the propinquity of Turkdom or the United Nations force that monitors the divide. Locals don’t twitch at the amplified rasp of the muezzin’s song, reaching across the line and ringing through Christian alleyways. When the UN helicopter, white as a clay pipe, clatters low over the town hall, no one looks up. When the sun sinks into the Mediterranean and dusk falls, drivers rushing north on the Larnaca-Nicosia motorway can’t fail to see the gigantic, taunting Turkish flag picked out in flashing lights on the slopes of the Kyrenia Mountains in the distance on the Turkish side; but I suspect they wouldn’t notice it unless the lights went out.

In 2004, the European Union hoped that offering membership to Cyprus would encourage Turkish and Greek Cypriots to vote ‘yes’ in a referendum on a plan to reunite the island in a loose federation. The omens seemed good; the two sides had spent years coming up with a compromise it was thought they could both live with. Yet a few days before the referendum, the leader of the Greek Cypriot delegation in the talks, the country’s president, Tassos Papadopoulos, begged his people, with tears in his eyes, to reject it. Which they duly did, while the Turks voted ‘yes’. The EU commissioner responsible for enlargement at the time, Günter Verheugen, said he felt the Greek Cypriots had cheated him. Nonetheless, the Greek Cypriot republic was allowed to join the EU, while the north of the island was left in limbo.

Tassos Papadopoulos was still president three years later when Cyprus joined the euro. Where was the BND then? For Papadopoulos, the man who body-swerved the EU over reunification in 2004 and had now persuaded Brussels and Frankfurt to inject Cyprus into the Eurozone financial system, was the same Papadopoulos whose law firm, back in the 1990s, set up the front companies used by Milosevic to launder Yugoslavia’s war money. After Papadopoulos died in 2008, a US State Department cable put out by WikiLeaks quoted Chris Patten describing him as ‘Milosevic’s lawyer’.

In the 2000s, in the conference rooms of New York, Frankfurt and Moscow, Cyprus seemed like a small island with many issues. The UN worried about reunification of the two communities. The European Central Bank looked at the quarter-by-quarter economic numbers. The International Criminal Tribunal for the Former Yugoslavia investigated money laundering. Big Russian companies liked the country’s tax regime. None of them saw the bigger picture. The ethnic-sectarian narrative, the Yugoslavian conflict narrative and the Cyprus economy narrative were never seen holistically for what they were – three facets of a single issue, that of a tightly knit Greek Orthodox community, bound together by a sense of mutual vulnerability and a weak fourth estate into grudging acceptance of rule by oligarchic political-business families, which became skilled at playing big foreign institutions, state and commercial, off against each other for short-term gain. The karmic aspect of Cyprus’s fate may please some outside the island, but nothing has really changed in terms of Europe’s institutional inability to see a problem in the round. The continent cannot afford to be run by so many moralists who are ignorant of finance, and so many financiers who are ignorant of morals.