The last few weeks could go down in history as the beginning of the end of the Western world's dominance of international banking. Finance ministers in developing economies, like Brazil, China, India and Russia, have repeatedly expressed their frustration that the existing international banking system favors Europe and the United States at their expense. Now the situation in Cyprus has brought the lingering resentment to a boil.
The dust is just settling on the deal between Eurozone bankers and Cypriot politicians on the Cyprus bank bailout. In an unprecedented move, Eurozone officials required upfront cash as a bailout condition and suggested that Cypriot leaders simply confiscate a percentage of bank deposits to come up with the money. Originally, the plan was to impose a 10 percent "tax" on all deposits in Cypriot banks. But to make the seizure of deposits more palatable to the general public (who were justifiably outraged), Cypriot leaders followed the advice of Christine LaGarde, head of the International Monetary Fund, to "introduce more progressive rates in the one-off tax." Cypriot leaders decided to exempt all deposits below ?100,000 from seizure. This move had the desired affect — the crowds dispersed, the public outrage subsided, and Cypriot leaders were free to proceed with their plan to seize deposits. The full burden of the bailout conditions fell upon "the rich" who will lose up to 60 percent of their life savings. Nobody in Europe, it seems, feels too badly for those who were financially ruined by these seizures.
We've not seen this sort of state sponsored robbery since Stalin confiscated grain stores from kulak farmers in the 1920s. Ironically, Russians who had entrusted their money with Cypriot banks were hit the hardest. Russia's Prime Minister Dimitry Medvedev condemned the seizure plan stating that it was "tantamount to theft." Russia does not take such treatment lying down, but instead of pressing the issue with Eurozone bankers, it went another direction entirely.
In 2006, Brazil, Russia, India and China started a trade association for emerging national economies knows as BRICS (South Africa joined the association in 2010, adding the S to BRIC). The BRICS nations have worked closely over the years to foster commercial, political and cultural cooperation. Last week, BRICS announced their intention to create a new banking system to better serve their interests. According to news reports, the BRICS bank will bypass the World Bank and International Monetary Fund (IMF) altogether.
Combined, the BRICS countries account for 43 percent of the world's population and 25 percent of the world GDP. They also hold $4.4 Trillion in foreign currency reserves (primarily dollars and euros). In the years to come, the BRICS bank will compete head-to-head with the World Bank and the IMF for supremacy. The stakes could not be higher. Should the BRICS bank prevail, the balance of economic power will shift to Russia, China and their allies.
This brings us back to Cyprus, which, like most European Union countries, has been living beyond its means for a long time. It has racked up huge debts and private lenders are no longer willing to finance its government. Eurozone bankers intervened to help forestall a Cypriot debt default, which could drag down the entire European Union. The only apparent reason Eurozone bankers demanded such tough terms to secure a bailout is that they do not believe that Cypriot politicians have the political will to balance their own budgets.
Sounds familiar, doesn't it? As Americans, we can either choose to live within our means, or be forced to do so by our creditors. I prefer the former.
Dan Liljenquist is a former state senator and U.S. Senate candidate.
Copyright 2016, Deseret News Publishing Company