Small countries, big banks: is Andorra the new Cyprus?

Andorra has just over twice the population of Liechtenstein, and looks (and behaves) a little like it too.

Our quote of the day comes from the introductory paragraph of a Reuters story:

“With Andorra now added to the list, how many more examples do we need to see the folly of combining a small country with a large banking system?”

That’s our quote of the day. The lead angle of the story is one of financial stability: it asks if this is Cyprus, all over again. Banking assets in Andorra are over six times GDP, with assets under management worth the equivalent of 17 times GDP. The rating agency Standard & Poor’s has just cut Andorra’s credit rating to two levels above junk. Following in the small-country theme, Reuters also cites:

“those financial crisis examples of Ireland and Iceland, both of whom enjoyed the fruits of wild-west banking for a time only to see it end extremely badly.”

(See also Paul Krugman on the small islands, big banks theme: mentioning today’s TJN blogger.) As we have repeatedly noted, offshore centres – and here we don’t necessarily mean small islands, but centres that have built up their financial sectors through attempting to ‘compete’ in laxity of financial regulation or some other mechanism for social ills – played crucial but little-noticed roles in the build-up to the Global Financial Crises, and to various mini-crises of financial stability that have ensued. See this laundry list of offshore horrors, especially the pre-2014 archive at the bottom, to get an idea. (See also our Finance Curse analysis.)

Andorra shows all the classic symptoms of small tax haven crisis management: the culture of denial, the theatre of probity, the pretence that nothing is wrong, that it’s all in the past, that it was just a few rotten apples, that they are clean and transparent and co-operative and lovely.

“Andorra has initiated a transformation process and is committed with transparency, international standards of exchange of information and the fight against money laundering … to preserve our position as a world-class financial center,” finance minister Jordi Cinca told Andorran television.

He has to say that. The world’s hot money hates a taint, so this “theatre of probity” (and, like most theatre, it’s pure make-believe) is essential for the financiers to thrive.

And don’t get us started on how the culture of small islands (or small jurisdictions) mixes up with offshore finance. The combination of the two has proven, time and again, utterly toxic. For more on that, read the “Life Offshore” chapter, here.

Endnote: look at this fascinating micro-history of this European micro-state – and the similarities with Liechtenstein’s.