Will the lessons be learnt from the financial crisis in Cyprus?

This time, it is Cyprus’ turn to face a bitter financial crisis as bank depositors get hit and capital controls are imposed. 

Demonstrators in Athens. The roots of the eurozone crisis lie in its unwillingness to uphold fiscal discipline. Photograph: Louisa Gouliamaki/AFP/Getty Images

THE financial crisis in Cyprus has again shown that over-dependence on the financial sector and an unregulated and liberalised financial system can cause havoc to an economy.

The particular manner in which a financial crisis manifests itself may be different from country to country, depending on the ways the country became financially over-reliant or over-liberalised, and also on how ever-changing external conditions affect the country.

For the past two weeks, Cyprus hit the headlines because of the rapid twists and turns of its crisis, the terms of the bailout it negotiated with its European and IMF creditors, the hit that bank depositors are forced to take, and finally the “capital controls” that the government has imposed to prevent bank runs and capital flight out of the country.

Depositors with more than 100,000 (RM396,000) could lose more than half their savings.

Bank customers can only withdraw 300 (RM1,189) daily; cashing of cheques is prohibited; transfers of funds to accounts held abroad or in other credit institutions are prohibited; transfers due to trade transactions above 5,000 (RM19,832) a day require central bank permission; the use of credit cards overseas is restricted to 5,000 (RM19,832) per account a month; and travellers can only take out 1,000 (RM3,960) or equivalent in foreign currency per trip.

These capital controls, announced on March 28, were highlighted in the media as the first to be imposed by a country belonging to the European Union.

It was like the slaying of a “sacred cow”, because the freedom to move funds out of and into the European countries had been treated almost like a human right.

But it is this total freedom for the flow of funds that has contributed or even been ultimately responsible for so many financial crises in so many countries in the past few decades.

This liberalised system of capital flows enables residents to place their funds abroad or to purchase foreign assets like bonds and shares.

It also enables foreigners to bring in funds either for short-term speculation and investment or longer-term investment and savings.

After the Second World War, capital controls were the rule: flows of funds to and from abroad were mainly restricted to activities linked to the real economy of trade, direct investments and travel.

From the mid-1970s, the liberalisation of capital flows took place in the rich economies and gradually spread to many developing countries.

The finance ministers of Brazil and of other developing countries have been protesting against the easy-money policies in rich countries that have had adverse effects on emerging economies.

When the internal or external situation changes and investor perception changes with it, the inflow of funds turns into its opposite.

The sudden outflow of funds, and depreciation of the currency, can then cause an even more devastating effect on the economy.

In the 1997-99 crisis, East Asian countries that had over-liberalised their financial system found that local banks and companies had borrowed heavily in US dollars.

When their currencies depreciated, many of the borrowers could not service their loans.

The countries’ foreign reserves dropped to danger levels, forcing them to go to the IMF for bailout loans.

Malaysia fortunately had some control over the amount local companies could borrow from abroad, which prevented it from falling into an external debt crisis.

The imposition of capital controls over outflows in September 1998 enabled Malaysia to avoid a financial crisis requiring an IMF bailout.

The immediate response from the IMF and the Western establishment was that the capital controls would destroy the Malaysian economy.

Today, the economic orthodoxy has changed, and most analysts including at the IMF give credit to Malaysia for the capital controls.

The Malaysian controls included a temporary ban on foreigners transferring their ringgit denominated funds (for example in the stock market) abroad, a limit to the funds local travellers could take out of the country, and limits to overseas investments by local companies and individuals.

Today, the IMF itself has changed its position, saying that capital controls in certain situations are not only legitimate but may also be necessary.

It has partially recognised that unregulated capital flows can cause financial instability and economic damage.

In the case of Cyprus, analysts now conclude that its growth model was flawed because it was too reliant on a bloated financial sector, having become a haven for foreign savers, especially from Russia.

But a major factor in its recent crisis was that the country’s biggest banks invested in Greek government bonds.

In October 2011, a bailout package was arranged for Greece by the European Union and the IMF.

Part of the bailout terms was that holders of Greek government bonds would take a “haircut” or loss of about 50%.

This Greek debt restructuring meant a loss of 4bil (RM15.9bil) for banks in Cyprus, a huge amount in a country whose GNP is only 18bil (RM71.4bil).

Now, it is Cyprus’ turn to be reconfigured and re-created as part of a 10bil (RM39.7bil) bailout scheme. The two biggest banks, Bank of Cyprus and Laiki Bank are to be drastically restructured, with the latter to be closed.

The biggest innovation designed by the European Union and IMF creditors is that the bank depositors will have to take losses. Deposits less than 100,000 (RM396,000) are to be spared, after an original plan to also “tax” them by 6.75% was cancelled after a huge outcry and the fear of contagion, with bank runs in many European countries.

The final plan is for deposits over 100,000 (RM396,000) in the two banks to take losses not by the originally planned 9.9% but by much more.

The new European policy of getting bank depositors to take a big hit in bailouts of banks will have big ramifications for public confidence in banks.

The new perception is that money put as savings in banks is no longer safe.

The question remains: will the policymakers learn the real lessons from these crises?

GLOBALTRENDS BY MARTIN KHOR 

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Why call US tech giant rotten Apple?

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Apple products have gained huge popularity in China over recent years. Iphones and ipads are the "must-have" accessory, particularly in urban areas while the company’s stores are often overflowing with customers trying out the latest gadgets.

But there’s now a scandal brewing over Apple’s warranty and repair policy, and concern that Chinese consumers are being given a rough ride.

In a recent interview, Apple CEO Tim Cook said China will soon become Apple’s biggest market.

For Apple, business must stay business

Apple Inc has been having a hard time in China since China Central Television (CCTV) revealed on March 15 that the technology giant allegedly applies a different service policy to Chinese consumers than in other countries and regions. A wave of onslaught has surged in Chinese State media in the past few days, with Chinese authorities ordering the company to change its policies or face punishment according to Chinese regulations.

However, many Chinese fans have shown their loyalty toward Apple, allying with some foreign media outlets in saying that this is a "well-coordinated" campaign led by the Chinese government to pinch the US company. It is also said that Apple is merely the victim of China's vengeance against the US government's treatment of Chinese telecom giants. China's Huawei and ZTE have long been restricted in the US markets under security and other accusations.

The drama began as a typical business incident, as CCTV did not only point its finger at Apple in its March 15 exposé. It is no good for either side that the issue is gradually turning political.

Generally speaking, CCTV's annual showcase program on World Consumer Rights Day has played a positive role in digging out business scandals. It is also the reason why the program has remained influential among Chinese viewers for a long time.

Had Apple been more sincere in its response to the criticism, the result could have been different. The statement Apple made right after the CCTV exposé was very different with that of other multinational companies who were also reported to have consumer rights issues. With the sheer weight of the company behind it, Apple's detached tone could easily be seen as proof of arrogance.

Apple has won respect from Chinese consumers with its perseverance in developing leading technologies and styles. But the company is not impeccable. Like its continuing stride in exploring for technological breakthroughs, the company also needs to keep working hard to raise its service quality.

Apple should not follow the media speculation and consider itself the target of political persecution. As for its fans in China, if they do love this brand, they should let the truth emerge instead of joining the speculations.

If the issue developed into a head-on confrontation between Apple and the Chinese authorities, the US company will never be a winner, nor will China necessarily do well. Of course, Apple will suffer the most, as its products are already facing increasing competition in China.

It will be wise for Apple not to entangle itself into political debates. For Apple, it is still a matter of business. - Global Times

Why call US tech giant rotten Apple?

State broadcaster Central China Television (CCTV) took the first bite. The People's Daily followed, and now others like Guangming Daily and The Global Times have joined the fray.

China's state media has been piling the pressure on Apple since the American tech giant was criticised during CCTV's annual show on March 15 to mark World Consumer Day.

This week alone, the People's Daily has run articles four days in a row to lash out at Apple for allegedly discriminating against its customers in China.

"Why is it that Apple is so incredibly brazen and arrogant in China when it doesn't dare to be so in the United States and other countries?" asked a commentator in the People's Daily, the mouthpiece of the Communist Party. It also likened Apple to a wolf pretending to be innocent.

Many observers are wondering about the real reasons behind the coordinated media attacks.

Could China be retaliating against the difficulties faced by its tech behemoth Huawei in the US? Or is it Apple's lack of advertisements in the state media?

"I wish I knew," Bill Bishop, a Beijing-based analyst and founder of The Sinocism China Newsletter, told The Straits Times.

There are some who say there is nothing more to it than Apple behaving badly.

"When it comes to China, a market with great potential, Apple has taken advantage of its fans' crazy enthusiasm by using incredulous sales tactics," wrote blogger Shu Shusi, a frequent commentator on consumer issues.

Not only are iPhones released later and sold at a higher price in China than elsewhere, their after- sales service is bad too, he added.

Apple might also have violated Chinese regulations, noted others. CCTV on Wednesday said consumers had complained that Apple offered only a one-year warranty for its MacBook Air in China, when the country's rules mandate a two-year warranty for the main laptop parts.

Then there is the sense that Apple needed to be taught a lesson for not being contrite enough.

"Errant companies" featured on CCTV's 315 Evening Gala, like Chinese net firm Netease, had been quick to apologise and make peace. But Apple insisted that its China customers enjoy the highest service standards.

Some wonder whether the attacks are just a case of tit-for-tat.

A US Congressional report last October accused Huawei of being a security threat.

"Just as the US attacked Huawei, China is taking it out on Apple in revenge," claimed "Blank Neo" on his Sina Weibo microblog.

Another possible explanation could be Beijing's unease with the wide usage of iPhones in China.

"There is a serious official desire for an indigenous mobile operating system," noted Bishop.

Also, the iPhone's operating system may be seen as a foreign security threat as it is a closed one and not easily monitored. The Android operating system, in contrast, is open and thus less of a threat, say observers.

The attacks could be a way of attracting eyeballs, suggested a consumer rights advocate.

"Apple has a huge customer base in China. Its news value is high," Wang Hai said.

What can Apple do to stop the rash of attacks?

Said Bishop: "I expect Apple to have to change its policies, express public contrition, and then this particular storm will blow over.

"They may also need to buy some ads on CCTV, as (search engine) Baidu and many other Chinese firms who have been on the receiving end did."

By Ho Ai Li

The Straits Times

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BRICS change the world: doing development differently

A prospective new financial architecture promises to reform and improve development finance for the world.

FIVE countries came together during the week to grab international headlines over how they might, as a group, change the world: Brazil, Russia, India, China and South Africa (Brics).

And they would do so in the most tried-and-tested way imaginable: financially, as a single economic entity. As a bloc Brics may effect change on a global scale, but the grouping would still do so in the traditional way of flexing economic muscle.

The annual Brics summit held during the week in Durban, South Africa, focused on what that muscle can do – challenge the World Bank and the International Monetary Fund in the way development finance is conducted, as well as the Western dominance that has prevailed in both Bretton Woods institutions.

Those institutions were never meant to be that way, of course, as a reading of their founding texts would show. But any initial magnanimity soon gave way to self-interest: US and European dominance of the World Bank and the IMF respectively was to be a Western “consensus” imposed on the world like a global neo-colonial regime.

Interestingly, the original Bric as both a term and a grouping originated not in any of the initial four countries or the developing world, but in the US itself.

None other than Goldman Sachs’ Asset Management Chairman Jim O’Neill coined the term in 2001 for those countries he believed would outpace the US in total GDP by 2020.

At the turn of the century Brazil, Russia, India and China were merely regarded by some as emerging economies developing under their own steam.

After O’Neill’s coinage they held their first summit in 2009 and invited South Africa to join them a year later, and Brics was born.

Since then, Brics as both concept and entity has had vigorous growth and a vibrant youth. It compares favourably with the IMF and the World Bank, both pushing 70 years and weighed down by limiting conditionalities and outmoded economic ideology.

Both institutions typically adopt a cold, mechanistic approach to development that prioritises market interests over human needs. Their Western bias is also a throwback in a 21st-century world of shared global interests and aspirations, and a world in which Western economies themselves are in trouble.

In contrast, Brics as a bloc of emerging economies serves as a bridge between the developing Third World and the developed First World. It seeks to narrow that yawning chasm by focusing on reviving global growth and ensuring macroeconomic stability.

Those virtues that had once been the preserve of the West have become its elusive goals. The “developed” and the “emerging” (mostly, once “developing”) economies have traded places.

The new global bank that Brics wants to establish is expected to emphasise infrastructure development and trade. The first represents solid investment in development for the future, and the second works as an economic multiplier for further growth.

On paper, Brics countries account for almost half the world’s population and just over a quarter of world trade. But more important than these bare figures is how Brics economies have been driving global growth for years, as acknowledged by the World Bank itself.

The idea for a new global bank arose only last year. So how the measured progress at the Durban summit is perceived depends at least as much on the observer: is the glass half-full or half-empty?

Some of the most difficult decisions, such as financing modes, remain unresolved. Its primary purposes like the operation of funds in project financing and a contingency fund as crisis buffer will take more time to work out.

Pessimists may cite how the absence of agreement on even the quantum of fund contribution from each country bodes ill for Brics. Basing the contribution on economic capacity makes sense, but concerns were expressed over how that would inevitably make a hulking China dominant.

A standard sum of US$10bil (RM31bil) from each country as seed capital was then considered, following a Russian proposal, but the final decision was left until later.

Optimists would say that far from weak indecision, this showed an openness about not wanting any country to dominate, with agreement on equality with a fair and manageable quantum for all.

However, realists may say that in such financial matters China would still eventually dominate. To that, it can be said that dominance by a single country was never a problem before, given the prominent US role and influence in the World Bank and the IMF.

At this point some may say it was precisely because of single-power dominance that had compromised the work of the Bretton Woods institutions. It might then be observed that a new global bank dominated by China would only balance the World Bank (and the IMF), which it would complement rather than replace.

Some observers may see crippling incompatibility in the different political systems within BRICS.

But such diversity need not be an obstacle, particularly when all countries now work within a global capitalist system.

President Vladimir Putin, often cited in Western circles as a modern incarnation of the Soviet bear, even insisted that a new global bank “must work on market principles only.” And “communist” China is not only a major and enthusiastic player in global markets, but – to former British foreign minister David Miliband – has even acted as a saviour of Western capitalism.

What worries fans of the IMF and World Bank is not how a new global bank as competitor will “steal their business,” but how it may force both to be more democratic and more sympathetic to the developing world. Who else but those currently dominating them in Washington and Brussels would object?

Japan as an emerging economy itself decades ago had its chance to forge a new alternative in international finance with the Asian Development Bank, but blew it.

The former coloniser in Asia seeking to make good in its post-war period, with US partnership, soon settled into establishment mode alongside its Bretton Woods equivalents. A new global bank established by BRICS will be a welcome addition to the existing financial institutions.

Its continental and political diversity would also make a slide into betraying its noble purpose more difficult.

Late last year, Brazil suggested that the proposed bank should be modelled on Asean’s Chiang Mai initiative.

This is a time for a sharing of experiences when each can learn from the rest, not of jealous exclusion and unfounded fears of rivalry.

In time, perhaps even the World Bank and the IMF can find it in themselves to accommodate and welcome new financial institutions operating on their “turf”.

At least that would help them return to their initial noble calling.

Behind the Headlines
By BUNN NAGARA

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