On The Ground in Cyprus, Day 3: The Sword of Damocles Still Hangs Over the IslandPatrick Henningsen Cyprus managed to avoid the initial danger of an all-out bank run and the potential for mass rioting this week, which is probably due to the fact that no Cypriot wants to see their country become a lawless banana republic in the Mediterranean. But that calm will not last for long if banking oligarchs continue to pressurize this economy. Capital controls and frozen bank deposits mean that thousands of businesses are now being strangled of operating funds. Its a very bad scene. One successful Pathos bar owner, named Nicolas, is being hit particularly hard, and told us that his story is the same as every local trader he knows. He explained, In other words, things are likely to get much worse, as the Sword of Damocles is now hanging over the head of every Cypriot. Dionysius (II) was a fourth century B.C. tyrant of Syracuse, a city in Magna Graecia, the Greek area of southern Italy. To all appearances Dionysius was very rich and comfortable, with all the luxuries money could buy, tasteful clothing and jewelry, and delectable food. He even had court flatterers (adsentatores) to inflate his ego. One of these ingratiators was the court sycophant, Damocles. Damocles used to make comments to the king about his wealth and luxurious life. One day when Damocles complimented the tyrant on his abundance and power, Dionysius turned to Damocles and said, If you think Im so lucky, how would you like to try out my life? Damocles readily agreed, and so Dionysius ordered everything to be prepared for Damocles to experience what life as Dionysius was like. Damocles was enjoying himself immensely until he noticed a sharp sword hovering over his head, that was suspended from the ceiling by a horse hair. This, the tyrant explained to Damocles, was what life as ruler was really like. Damocles, alarmed, quickly revised his idea of what made up a good life, and asked to be excused. He then eagerly returned to his poorer, but safer life. The story of Damocles can be applied two angles here. Everyone we spoke to here on Cyprus is aware that this sword is hanging over them, suspended by threads. That is obvious to the thousands of small- to medium-size businesses who are all hanging in there, and barely holding on in the face of capital controls and an acute liquidity shortage. If they didnt have sufficient cash reserves before this crisis hit, then its doubtful that they will be able to weather the storm indefinitely. The deeper aspect of Damocles here, is that before joining the EU and opting into the euro single currency, Cyprus was a closed economy and could more easily manage its domestic and incoming cash. Its currency, the Cypriot Pound, was one of the strongest in the world. It filled a gap in the international market by offering a secure and profitable offshore destination for capital investment. Why worry when everyone seemed to be doing well? Then came the Russian money, and then the housing bubble, and the euro which turned this small island of 800,000 into a speculative free-for-all, where incoming cheap money corrupted nearly every level of Cypriot society. This period of speculative gambling based in Nicosia was transposed on top of an already existing, pre-euro layer of backhanders and fat brown envelopes. It was a perfect storm for our Damocles. All the while, shrewd shylocks in New York, London, Berlin and their court administrators in Brussels, where watching closely, and simply waiting for someone to spring the trap. Arguably, that someone was a Dubai-backed, high-flying Greek tycoon, Andreas Vgenopoulos, who took control of Cypruss Laiki Bank and proceeded to attach the Cyprus banks to a sinking Greek financial system. You can blame Vgenopoulos, or Laikimanagement, or you can blame the money laundering, or the Troika. You can even blame the corrupt politicians, but all anyone could do in the end is stand and watch its balance sheet go up in flames. and watch it sink to the bottom. Corruption in Nicosia left the Troika mafia in control of the entire country of Cyprus. Like Damocles, some older Cypriots are now longing for their old farming lives, where living off the land was part-and-parcel of living here. A local restaurant owner in Larnaca, Nico Petreu, told us a story which made my heart sink, and one which illustrates the Greek tragedy unfolding before our eyes here. His business is already being ravaged by an EU-funded motorway project which is running along the beach front and will cut off most of his trade as a result. Eurocrats have offered no compensation. Now the banking crisis has hit like a left-hook knockout punch. He explained, For 29 years, I have always paid my rent on time, but this week I had to call my landlord to tell her to reduce my rent or I cannot afford to pay it. So I gave her that choice reduce the rent or take me to court because either way, I can no longer afford it. The next call could be to his daughter at university, saying he cannot afford to help finance her higher education any longer. These are the stories which people like Christine Lagarde and Angela Merkel will never hear, even though they have the power to rectify the situation. If you still think they really care, then you are probably still in denial. 