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Wolf Richter: Luxembourg Is Not The Next Cyprus, Not Yet, But….

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Yves here. This article if anything underplays how much a one-trick pony Luxembourg is and what a fix it is in if Germany and/or the EU continues its campaign against tax avoidance and evasion (which as we argued was overstated in the case of Cyprus; a lot of the money was for investment in Russia, both by Russians and foreign nationals, because the Cyprus legal system uses UK law and is vastly preferable for contracting and resolving disputes. Notice that the party that would be the loser from tax avoidance by Russians, namely Russia, wasn’t the one leading the charge against Cyprus?)

Depending on how and when you measured it, Cyprus’s bank assets were roughly 800% of GDP. Luxembourg’s are roughly 2500% of GDP. Richter tells us that 38% of the Luxembourg economy is banking. That is presumably defined narrowly and does not include the accountants and lawyers who serve foreign investors and are major parts of the economy. I don’t have any firm data, but it’s not hard to imagine that they are as important as the formal banking sector.

Luxembourg hope to come to an understanding with the Eurozone and slowly reach accommodations, which would still shrink its banks, but in a less brutal manner than Cyprus. But with such a large financial sector, any action is still going to cause a fair number of customers to flee. It’s hard to see how any gradual path can be found, which then raises the question of whether a series of bank failures in Luxembourg would have broader ramifications.

By Wolf Richter, San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.

The Grand Duchy of Luxembourg, with a population of just over half a million, smaller even than the other speck in the Eurozone, the Republic of Cyprus, ranks in the top three worldwide in per-capita GDP. In a Eurozone wealth survey, it had the highest average household wealth – €710,100. Only Cyprus, a former off-shore banking center in the Eurozone, came close. Yet Luxembourg is threatened with ruin.

It has 141 banks – bank companies, not ATMs. One bank per 3,808 people. Most of them do private banking. The financial sector added 38% to GDP in 2010 and contributed 30% to the country’s tax revenues, according to the Luxembourg Bankers’ Association (ABBL). All due to bank secrecy and tax laws. But suddenly, after Cyprus had been massacred, Luxembourg buckled.

With the big German guns, and the smaller guns from other nations, swinging in its direction, Luxembourg agreed to participate in an international automatic data-sharing arrangement that would send banking data of foreign clients to their countries, starting in 2015. Prime Minister Jean-Claude Juncker, somewhat defensively, proclaimed that lifting bank secrecy wasn’t such a big deal, that Luxembourg didn’t live from tax evasion. For the banks, the “lights won’t go out in 2015,” he said.

During the entire Eurozone bailout debacle that he presided over until February as President of the Eurogroup, he’d proven to be time and again an inveterate optimist.

“It’s expected that only 60 to 70 banks will survive in the coming years,” declared Alain Steichen, a prominent Luxembourgian tax lawyer, at a conference about the consequences of the data-sharing agreement. He should know. Per his online profile, he “assisted Thomson in the merger acquisition of Reuters in order to form Thomson Reuters, with the group’s main holding location being Luxembourg.” He also “assisted Chase Manhattan in the merger acquisition of JP Morgan in order to form their main holding company in Luxembourg.” Yup, there are a lot of benefits to doing business through Luxembourg.

Combine bank secrecy with nominee corporations to get a particularly juicy cocktail. An entire industry of “fiduciaries” has formed around the banks for that purpose. These firms set up and maintain tax-advantaged nominee corporations, the infamous mailbox companies, whose directors and top executives are principals of the fiduciary firm. The client and the source of money remain anonymous to the outside world. A perfect setup for money laundering. Because the bank is doing business with a Luxembourg mailbox company, not a foreigner, and because the signatories are pillars of Luxembourg’s society, the setup is impervious to the automatic data-sharing arrangement. But now mailbox companies too are under attack, not only in Europe, but also in the US Congress.

“I expect a serious change of the banking landscape because there will be customer withdrawals,” Alain Steichen explained. Some banks, he said, “would lose the critical mass needed to survive.”

The private banks he was talking about managed €300 billion in assets, generated €3.14 billion in revenues, and contributed €503 million in taxes, according to the ABBL. They employ over 10,000 people directly and indirectly. Of the assets under management, 19% are from Luxembourg, the rest from other countries. Half of that system would disappear; the survivors would have to shrink.

“A large part of the clients of the Luxembourgian banks have undeclared money,” Steichen pointed out. They wouldn’t have a lot of options other than closing their accounts in Luxembourg, he said. They might repatriate their funds – and pay fees, taxes, and penalties – or transfer their funds to Singapore, Monaco, or other murky banking centers. Either way, these assets would leave Luxembourg. Their power to generate income, jobs, and tax revenues would evaporate.

This “undeclared money” has been called “black money” in the battle over Cyprus, much of it from Russians. Northern Europe revolted against bailing out mailbox companies and their black-money bank accounts. While they were at it, Northern Europe, including France in this case, shut down the whole offshore machine, crippled the Cypriot economy, smashed its largest source of income and wealth, and demolished its business model. Encouraged by success, Northern Europe, now including the UK, swiveled its guns in direction of Luxembourg.

Luxembourg was horrified. There were too many parallels between it and Cyprus – the mailbox companies, foreign black money, a bloated financial sector, high household wealth…. It was the era of austerity when pensions, wages, and social services were on the chopping block in other countries. Taxes were being jacked up, as in France, to an absurd degree. Belts were being tightened around the poor. So, tax evasion by the rich and not so rich has become an obvious target. Governments would crack down, but not on their own tax dodgers, but more conveniently on countries whose business it was to help them.

With 38% of GDP depending on the financial sector, Luxembourg could not risk a sudden “transition” to a new business model, à la Cyprus. Some of the banks could collapse in the process. It would cause a depression and shred the country’s wealth. Instead, Luxembourg would cooperate, in return for a gradual transition, some loopholes, and a little wiggle room, knowing that the good times were over, and that on other end of the spectrum, there’d be the Cypriot scenario.

Austerity in Spain succeeded in trimming the bloated government sector. But instead of picking up the slack, the private sector destroyed jobs almost four times faster! The hope is that this fiasco will finally reverse course, that something will click and start a virtuous cycle before the unspeakable happens. But so far, it has relentlessly gotten worse. Read…. The Spanish Unemployment Powder Keg

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51 comments

  1. lindsay

    i think this will be seen as good by Great Britain and it’s tax havens such as the Isle if Man.

  2. EenAnderGeluid

    In Cyprus the biggest banks were Cypriot. In Luxembourg most banks seem to be branches of foreign banks – like in most tax havens. So the prospect seems to be retreat rather then collaps.

    And the UK is pointing its guns too ?
    They see new opportunities for their own City of London controled spiderweb of tax havens ? Maybe they want the business from Luxembourg in Jersey, Isle of Man, Cayman etc ?

    1. Synopticist

      It’s a bit of both.
      They want the extra revenues from tax dodgers, but getting extra cash flow into the City would be a handy by-product.

      1. nonclassical

        Shaxson’s book, “Treasure Islands”, notes everyone wants everyone ELSE to close THEIR tax havens…while retaining their own…

  3. from Mexico

    Wolf Richter said:

    Austerity in Spain succeeded in trimming the bloated government sector.

    Why does this falsehood keep getting repeated that Spain had or has a “bloated government sector”?

    The propagandists are busily toiling away, but the statement has no basis in fact, as these figures illustrate:

    http://data.worldbank.org/indicator/NE.CON.GOVT.ZS?page=1

    The size of Spain’s government, if anything, is on the low side in comparison to other European governments.

    How do people ever expect to understand what is going on or craft reasonable solutions is they are so misinformed?

    1. skippy

      Governments (of the people) gets in the way… of trickle down… coin throwing… carriages… on a mission.

      skippy… although I would invoke IOTBP… we need to seriously take smaller bites of each other… of this world especially~

    2. Paul W

      Perhaps because it is true? Governments have been ceaselessly growing my entire lifetime. How could they not be too big? Yes multi national corporations are a menace to society in general. Yes the rich are hoarding too much of the pie at everyone else’s expense. But to pretend governments are innocent victims and not the main part of the problem is ridiculous. They are inefficient and corrupt because they have grown so large that they now exist to serve their own agenda, rather than serve the public.

      1. skippy

        Absolute BS….

        The institution we call government is completely beholden to others than the poorly educated – informed citizens aka labor.

        skippy… who creates the playing field… FFS… dolt[!]… who pays for it… moron.

        1. skippy

          BTW with the increase in population and the consequences of that little exponential fact… all magnified by technological activity’s… one person can kill multitudes by act for profit or emotional vagrancy…

          skippy… were not playing with stone tools… anymore… get a grip.

          1. J Sterling

            Let’s not spread the “exponential” meme about population growth. It’s been linear not exponential since the 1960s. Not that this is necessarily a good thing. There’s two ways population growth can stop being exponential. One is for us all to forgo having four or more hungry children. This is not happening, as interviews with hungry people sadly show.

            The other is for the children themselves to just die childless, as children or excluded adults, as they have done through most of history. I think this is what’s been happening since the exponential explosion of the Industrial Revolution petered out after WWII, and is a sign that the incremental increase we’ve made since then (a constant 75 million or so a year) has been from eating away at what’s left of the forests and seas.

            Arithmetic is not mocked, population growth will cease eventually, when as many people die in misery as are born in ignorance. The only difference will be whether we live in a world stripped of common wealth, forced into zero net population growth, or in a world surrounded by common wealth, having voluntarily embraced contraception.

          2. skippy

            Actually the exponential part was about everything humans – as a – multiplier… need and do. You can have falling pop figures and still through actions… have a larger multiplier.

            Deflation of activity = deflation of assets

            skippy… Hence… consequences

          3. J Sterling

            You wrote “that little exponential fact” of “the increase in population”, but I’m glad you don’t think population increases exponentially.

            As for people getting more and doing more per person, I love that, and would hate the alternative, which is getting and doing less per person. The real nightmare scenario is if we squeeze ourselves in, choose to do less and need less, and the population increase just eats that ascetic effort all up, as I think it’s eating it up now. We make ourselves poorer, without even a benefit to the environment.

            The positive scenario is fewer people leads to sweeter resources per person (a consequence, in Ricardo’s Theory of Rent terms, of pulling the extensive margin of cultivation in), which leads to lower rents/higher wages (the difference between “wage given” and “work done” is just a kind of rent, and goes up with more surplus labor), and more common wealth.

          4. skippy

            Ricardo eh, I would hope almost every jabbering econned priest from antiquity would find the dustbin.

            skippy… physical evidence vs thunkit. I’ll stick with the physical over the armchair gang any day.

      2. Moneta

        If we kill government and go down the pyramid of needs back to the basics, employment will drop to what… 10%?

        1. Paul W

          Who said anything about killing government? I’ve no doubt there are many hard working and talented government employees. Thus they just don’t become unemployed if government size is reduced, instead they enter the private sector and contribute to the economy that way.

          You cannot have an economy based mainly on government spending. It is unsustainable. You don’t have to believe me, just wait and see what is to come.

          1. Massinissa

            Gee, you seem to forget something: A decrease in public sector employment will not result in increased private sector job openings.

            There simply arnt very many job openings in the private sector right now, if you havnt noticed.

          2. Moneta

            Not necessarily. In many South American countries, the middle class got kicked out of the economy and now live in slums.

            If the 1% gets its way and keeps on slashing government for the sake of slashing it, the US is the next banana republic.

          3. Moneta

            Here in Canada, I don’t think we necessarily have too many civil servants, I believe the bigger problem is their compensation.

            For example, a teacher here in Ontario will make 90K and with benefits this will go up to 120K… with 2 months off.

            The government tells us that the annual cost to educate a child is about 10K with 50% infrastructure. So 24 kids per class X 5K = 120K. But who pays 10K per child in taxes to pay for school?

            Since taxes have been going down for the last couple of decades while civil servant compensation has been ballooning, we know that a big chunk of deficits and money printing goes to service these liabilities.

            But this is only education. I can think of healthcare and many other government services that are being funded with money printing because there is no way we are paying enough taxes to affrod these governement services.

            Over the last couple of decades, someone with an equal income in the private sector investing in RRSPs would probably have around 500K vs. a 1-1.5M$ for the civil servant.

            We also know that most defined benefit pension plans are underfunded by at least 30%, despite using optimistic numbers. We also know that these plans are about 60% in equities… those of companies that are cutting costs, laying off thousands of people in the private sector who have no pensions of their own so these DB plans can keep on paying civil servants their guaranteed benefits. Therefore, these DB pensions are pitting the civil servants against the private sector workers by transfering labor profits from the private sector to the public sector.

            I don’t want governments to get gutted, I just want the playing field to get leveled. Perhaps these DB plans should disappear and we should start paying everyone a pay-as-you-go pension.

          4. financial matters

            Pension plans are turning into a strange problem. Pension plans in the private sector can be easily raided especially if they are managed essentially by management. They can claim that these funds are overfunded by painting rosy future scenarios or they can threaten to take them completely by bankruptcy.

            Public funds, such as social security, can always be funded by a sovereign government. Taxes aren’t necessary to fund these commitments. But how this money is invested can be problematic such as Wall Street wanting to get its hands on social security. Much investing has been corrupted so that equities have become more of a speculative gamble and many derivatives are being used to try and increase return.

            And now even central banks are getting into the equities game rather than being focused on job creation and price stability.

            Government deficits are actually necessary to get the private sector functioning more smoothly. I agree with leveling the playing field and defined benefit plans should probably be more in line with social security payouts.

            A sovereign govt can afford anything in its own currency including labor. It can put this labor to work productively at a minimum wage and in areas that do not compete with the private sector. But it will create consumers who will help the private sector. If governments also fulfilled their jobs as regulators and law enforcers we would also have more faith in our banking and investment systems.

          5. J Sterling

            Whose spending will this new private sector employment chase after, when money-spending government sector employees are laid off?

            Private sector employers already had employees, and they shed them after the Global Financial Crisis. They didn’t want to employ them any more. They’re not going to suddenly acquire a wish to start posting want ads and interviewing, just because governments are throwing workers into unemployment too.

            This has been known for centuries, it’s all in Bernard Mandeville’s “Fable of the Bees” and Adam Smith’s Paradox of Thrift: when the powers of the world decide to “be austere” without giving up their assets, the assets go to ruin and the workers who would have done productive work on those assets go idle, excluded from the means of production by the barbed wire fences of private property. Nobody wins, but at least the rich lose in comfort, in their empty estates.

      3. Moneta

        I would say the most problematic government is the US one which forces all other government into making bad decisions.

        However, you have to make a clear distinction between the bureaucrats and the politicians. A lot of people working in government are hard workers who contribute a lot to society.

        I would venture to say that a large percentage of the cuts in government are not getting done in the right places so chances are these cuts will make government even more inefficient leading to more inefficient cuts.

        Often I think that the US needs to split up in 4 new countries which can start with clean slates.

    3. Moneta

      Here in Canada, when I look around, I am always amazed that we got so far considering how hard it is to get any kind of decision in meetings or how hard it is to get everyone on board.

      I think that when people have been lucky for so long, they take everything for granted and don’t realize how much work goes into maintaining the system and put no value on the people doing the work because they do not even realize that it is being done.

      That’s why I believe the Western world is due for a stream of bad luck. We need it to open up our eyes.

      Unfortunately, we’ve set up the world in a way where the weakest links get to suffer even more than we will.

    4. from Spain

      The public sector in Spain consists of (1) those civil servants who have gained their position through (difficult) examinations and have a defined salary and guaranteed employment; (2) those named directly by the politicians at discretionary salaries, without guaranteed employment, but with the relative assurance that no political party will turn them out as all the parties take advantage of this system to employ relatives or return favors; (3) public corporations (as with (2)); city/town/village governments, regional deputations, provincial governments, autonomous regional governments (akin to states), and the central government, staffed as in (2). What is not questioned is the need for those in (1). The others are generally regarded as superfluous by the populace, not by the political class. There has been no significant reduction in (2-4) and the current “neoliberal” clueless government has no intention of altering that situation. The widely ridiculed socialist party is not about to alter that either. Sounds like Mexico to me.

    5. nonclassical

      ..exactly, as usual, from Mejico..this propaganda parallels “Chicago Boys”=Milton Friedman era propaganda, South-Central America, 70′s-80′s..
      original 911, 1973, for only one example…

      it’s the “PRIVATIZATION” sell-out; whereby all government infrastructure is turned over to private entities, BUT public tax $ubsidies to private profit$…

      nonclassical says nonsensical..

  4. Clive

    Tax harmonisation is coming to the Eurozone. How could it not ? Otherwise, the current system of flag-of-convenience invoicing will continue to be an irresistible option for many international companies.

    The other day I bought a book on Amazon (.co.uk) — not my top choice but unfortunately I couldn’t get it anywhere else. The invoice was sent from Luxemburg and although the transaction was denominated in GBP, this was, technically — and certainly for Amazon’s tax purposes — a non-dom company sale.

    This is causing a big backlash in the UK (http://www.guardian.co.uk/technology/2012/apr/04/amazon-british-operation-corporation-tax) but that’s just the tip of the iceberg. Compared to the industrialised tax evasion industry (sorry, sorry, my mistake, I meant Wealth Management business) a few hundred million of VAT and corporation tax losses is tiny.

    The TBTF I’m aquatinted with in the UK was spending big on Wealth Management as the only growth sector left in the face of austerity killing anything resembling mass affluence from the top end of the middle class. Even £100k+ families are struggling to stay ahead of housing costs for anything decent, utility bills, food inflation and the loosing battle to have any sense of life’s luxuries. No, the real winner looked to be high and ultra high net worth individuals (£1M ~ £10M+) for whom it made sense to spend £10~20k p.a. on tax, ah-hem, advice, to shave £250k off the tax take. But in a rare cause for optimism, public outcry has made this more-or-less unacceptable for anyone who cares, or might have to care at some point in the future to indulge in (e.g. http://www.guardian.co.uk/media/2012/jun/21/jimmy-carr-tax-twitter-reaction) So it’s being scaled back. Not dropped as part of the strategy mind you, but definitely scaled back. Guess where the centre of action was for the proposed operations ? Yep, Luxembourg. As the feature said, it’s not just the banks but the ancillary services from accountants, law firms, IT, commercial real estate and so on which depends on these ill-gotten gains.

  5. dearieme

    The first question to ask, I fear, is “Where is Mrs Merkel’s money, where M. Hollande’s?”

    1. financial matters

      Yes, exposing Luxembourg would be a pretty big nut to crack. But the game of musical chairs seems to also be involving the big fish eating the big fish. I don’t think the City of London and New York should feel so safe.

      Tax havens are one thing when most people are flush and things are going pretty well. I think they’re another when unemployment is way high and social services are being slashed.

      A lot of this though is the big fish trying to chase down what real collateral is left. Cleaning out these tax havens is a good start.

      I think the electorates are starting to understand the destructive nature of the FIRE sector as they see all this unfold. It’s not hard to imagine spending money to build up a better industrial base with better social safety nets. A strong baseline social safety net is good for the overall economy as it can provide healthy and well-educated workers who can create demand for domestic products. Governments spending their money this way (infrastructure, education, medical care) allow their private enterprise to compete better in world markets. Funding asset appreciation is hollow and mainly benefits the 1% in the end.

    2. AbyNormal

      determining where Merkel Does Not hold her assets would be simpler…their sandbox is getting smaller (leaving them to eat where they sh*t)

  6. Moneta

    The global banking system got too big for its britches.

    This is one of many diets we will be seeing over the next decade.

    1. Claudius

      I disagree.
      Luxembourg, which along with Austria, is one of the Eurozone’s biggest champions of banking secrecy, the wealthiest country in the EU, the second smallest sovereign state and its banking sector exceeds its GDP by a factor of 23. The big difference, of course, is that these are not Luxembourg’s banks, but subsidiaries of the European and US banking giants, with Germany and France to the fore. And there in lies the difference between Cyprus and Luxembourg.

  7. Norman

    Reading this and a couple of the other articles by Mr Richter about the Euro, brings up the question: if the grand experiment there in Europe fails, then isn’t that a sign that the so called “one world what ever you want to call it”, is just as vunerable to failure?

    1. J Sterling

      The Eurozone is failing because it’s carefully designed to be “many” in some convenient ways, but “one” in others.

      So, “one” labor pool, where migrant workers enter countries, regardless of the wishes of the people of those countries, to be blacklegs for the greater profit of employers. But “many” tax regimes, so the profit-makers can shop for the best taxes. “One” currency, so countries can’t conduct monetary policy, but “many” national crises, where the rich countries aren’t obliged to help out the poor ones.

  8. Savage

    It’s not only in financial services that Luxembourg practices tax banditry. For years, it has kept excise taxes on petrol, alcohol and tobacco well below the surrounding countries leading to high sales and high tax revenues for the Grand Duchy.
    The main road from Holland to the France goes through the village of Martelange is bisected by the border. One side of the street is in Belgium and contains housing. The other side is in Luxemboug and contains 14 petrol stations in a row. This short video on Youtub illustrates the absurdity. http://bit.ly/Yc28a0

    Of course, the Dutch and Belgian motorists stock up on cigarettes and alcohol as well as filling up their tanks. Then then nip along to the bank to cash their coupons.

  9. The Dork of Cork.

    I don’t think so.

    The reason for the destruction of the periphery is to transfer real resources to the cold dead heart of the core.

    Luxembourg is the core.

    It will only blow up if the natives of Ireland , Iberia , Italy etc go national.

  10. The Dork of Cork.

    “Austerity in Spain succeeded in trimming the bloated government sector. But instead of picking up the slack, the private sector destroyed jobs almost four times faster…………”

    Post 1980 the private sector is the industry that is bloated…….not so much in wages but in waste nevertheless via profits.

    The private sector no longer services wage demand …….it services the profits from global wage arbitrage.

    Therefore the demand signal is artificial.

    The private sector in Europe is part of a vast European entrepot that is imploding as external primary inputs continue to increase.

    The destruction of European primary production is at the root of this coming black debt.

    It does not matter if you are in government or the private sector….
    Most do not produce primary products (miners) or service basic needs (nurse)

  11. Lune

    I’m cynical about whether this will actually change anything. The fact is that tax evasion could easily be shut down by local governments without even bothering with tax havens except for the fact that the evaders tend to be rich and powerful with plenty of lobbying muscle. Just notice how Russia, the country ostensibly hurt by the tax evasion and regulatory arbritrage hosted by Cypress, was the one that didn’t want Cypress killed off. If Russia was so concerned about the loss of tax revenue, they could have ended their bilateral treaty with Cypress and in one fell swoop kill off the whole island themselves.

    I’m actually curious why the EU is turning its sights on Luxembourg. Cypress was understandable (only dirty Russians, not respectable Europeans [sic], used it). Why Luxembourg over Lichtenstein? Or the biggest offshore banking center of them all, London? Indeed, it’s amusing to see the US Congress rail against mailbox companies when the biggest site for these is the Vice President’s home state!

    Not to don a tinfoil hat, but I think there’s something more here WRT luxembourg specifically than somehow all of Europe and the U.S. getting religion on shutting down tax havens. Heck, in the U.S. there’s been nary a peep about the fact that Apple is announcing with a straight face that they are going to borrow $100bil for their announced share buyback rather than repatriate the $100bil they have sitting in offshore accounts specifically to avoid the tax they’d have to pay!

    1. financial matters

      Definitely all very amazing for sure. The elite kleptocracy seems to be scrambling. A little squeeze now seems to go a long ways as basically no structural changes have been made and the can has just been kicked down the road. MF Global. Money market funds barely able to keep from breaking the buck. Insolvent banks. Cyprus. Political pressure from an unemployed electorate may cause Spain to abandon the Euro. Likely very good for Spain but would definitely lead to a lot of scrambling. It’s a financial house of cards and its beneficiaries are the ones warning of economic disaster if we let it fall. The 99% would only benefit from a more transparent and less financialized economy.

    2. Susan the other

      Luxembourg is indeed our Delaware. Home of the Bidens. All militarists. Sounds a lot like the MERS business model requiring ignorance for its survival.
      I didn’t know Reuters was a banking concern, should have I guess – but learning is so painful. I didn’t know Chase acquired JPM (even in Lux). And I didn’t understand that Germany was also at the mercy of Luxembourg. The date 2015 has re-surfaced here – as the date Lux will comply with international transparency. Right. After they have destroyed all the evidence. Then each EU country will be able to learn their OWN banking data?? Lux is our Fed. Whose on first here? Sometimes I just don’t have enough faith in the future to read Wolf.

  12. allcoppedout

    You don’t get much felling of “small government” in Spain. There are councilors and official cars all over. I have no idea where we can get figures we can trust. Performance management is everywhere as bent as Soviet production figures.
    Years ago I was in the middle of a big organisational reconstruction in which the company’s financial department got the BPR treatment – jobs went from over 400 to about 10 in the cost cutting. It was an IT solution with much of the staff work transferred to line managers. “Hidden” in this was another transfer – to offshore Luxembourg. The cost of this more or less equal to the savings of the internal reorganisation. I’d say the real reorganisation was from honest to the bent accounting of transfer pricing and tax dodging.
    Offshore is clearly the way rich crooks steal from the rest of us. Cyprus repeated in Luxembourg could almost look like an application of a ‘proceeds of crime act’ on the criminal loot. As others above suspect, it may just be more of a falling out amongst thieves or a relocation of the pirate base to the London hub and spokes.
    The game in all this, the game academe rarely grapples with and generally remains silent on, is getting subsidies from illegal sources instead of government. Whilst we talk of competing on technology and various quality and business process analysis schemes, the big private sector has been:
    1. “Borrowing from the Mob”
    2. Looting much as pirates did
    3. “Smuggling” – by tax evasion.

    I’ve been in boardrooms with spreadsheets demonstrating how little could be saved by making the business more profitable through normal lean management (usually my job), followed by a better dressed bloke or woman showing what could be made through “international accounting”. The global wage arbitrage bit would come next, followed by management buyout funding. The amount of such subsidy funding always dwarfed what could be done trying to maintain the old business model of making and selling in a competitive market.

    The money from this criminality is in Luxembourg, Singapore, Switzerland and all ports west and east of London. Strategic business practice ceased by be about buying the right plant and getting strategic (long contracts) and tactical orders to keep people in jobs and retain enough profit to repeat this over years collapsed into a cunning plan to make Luxembourgers wealthy! Now I can even do this by ordering from Amazon.

    In as far as we can do economic analysis of this criminal field I think tracking the smart money into and out of places of high risk high yield – such questions as why Cyprus wasn’t collapsed 18 months before and what left in this time – and who in the end is sequestrated (ordinary folk and taxpayers?) might reveal the conspiracy. That democracy is gone is obvious. e can’t vote for Plan B – which would be to bring in the cops, do a Keensian jubilee and start over with transparent money.

    1. EenAnderGeluid

      I have the impression that we’re in the midst of an other fake attack on tax evasion and tax havens. Governments have to because of public outrage, but they don’t mean it.
      Datasharing ? You’ll get the small fishes, the middle class losers who thought they could play the offshore game too.
      Real big names are hidden behind laddering-constructions, trusts, anstalts etc. Cyprus ? Those with enough inside information and the possibility to visit the offices in Moscow or London escaped.
      The only real breaches are the product of investigating journalism, inside-leaks etc. But even then, the constructions in offshore enable transfers with lightning speed. A few individuals will be blamed but in the end the proof will be gone.
      The whole offshore-business ballooned with the FIRE-section, globalization, with the colossal neoliberal transfer of income en wealth to the happy few (and the debt to the rest of us). It is the mechanism behind it all. Do you think the present day government will stop this ?
      It will take a lot more to stop this.
      Think about nationalizing banks, opening the books, installing heavy controls of capital transfers, dismantling trusts and other constructions.

  13. tom

    I believe Wolf Richter is dead right. There´s a Chinese saying kill the chicken to scare the monkey. The chicken is Cyprus the monkey is Luxemburg. It is exactly what I gather from official German announcements. Except of course they will go at lot easier with Luxembourg than they did with Cyprus. But Luxembourgs time is up

    1. Moneta

      The global banking system is too big. As we shrink it over the next decade, the countries with most exposure will suffer more.

      1. EenAnderGeluid

        During the 1945-1975 the sector was about 1-1.5 x GDP. Now it is 4 times bigger and a dysfunctional parasitic monster.
        So you’re right, it has to shrink.
        But remember what is behind the mushrooming FIRE-sector : ballooning debt and rising inequality, lack of productive investment and speculation as norm.
        How are we going to unload the debt – on which shoulders ?
        What productive model do we envision instead of the speculative one we are in now ?
        How do we achieve the needed paradigm-shift in politics ?

        1. Moneta

          Who is going to pay?

          1. Those who still have wealth such as the top 15-20% as the 1% move up the curve.

          2. The younger generation as the older generation kicks the can down the road as much as it can

          3. Emerging markets as their economies implode and the US devalues the reserves.

  14. Simon

    Yves says: “Depending on how and when you measured it, Cyprus’s bank assets were roughly 800% of GDP. Luxembourg’s are roughly 2500% of GDP.”

    How I measure it – dividing banking assets by GDP – I get to a figure of around 16.5 times GDP. So how does Yves measure it?

    Wolf Richter ignores that about 60% of Luxembourg bank assets do not consist of private banking assets and therefore is unaffected by the clampdown on secrecy. And in turn banking is only part of the country’s financial activity, the largest part of which – investment funds – is transparent for tax purposes.

  15. Ghis

    Tax havens ? What is it ?

    Let us consider things from another point of view:
    All the countries that are asking for bank information exchange are the worstly managed ones: US, Fr, and so on.

    Let us consider that people in these badly managed countries, are pissed of being juiced down by administration voracity, irresponsible taxpayer money expenditures and that they want to simply put their money in a well, responsibly managed country ? Does it not sound good ?

    And if the so called’tax havens’ were in fact a good way of preserving investment ?
    And let us suppose that instead of answering yes to this voracious badly managed countries, the tax havens were saying: ‘ok for bank data exchange, but only when you’ll clean up your financial mess?’ which actually would imply that the ‘escpaing money’ would come back to the countries and that bank data transfer would simply be not anymore required.

    Think to that.

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