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Comment by jpdoctor | Hacker News Reader

> this is not a terrible deal.

Nonsense. The EU just made the depositors junior to the bondholders of the bank! On what planet does that not have permanent implications for trust in the banking system?

Every EU depositor (esp in Greece, Spain and Italy) should start thinking about where to store their money besides the "insured" banks. Hell, with 0% interest in US banks, the FDIC should at least make some high-profile statement saying this would never happen in the US.

Edit: As near as I can tell, Nemo gets the real rationale correct - https://self-evident.org/?p=962

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Depositor insurance replaces the bank's credit with the state's. That happened here. It's just that the state's credit is trash. If you are in a country with trashy credit it would be highly advisable to move your funds to the closest Switzerland, Germany, or United States.

Why is the EU promoting such fragmentation? Again, remember there are a lot of political and financial flows constraints here that are unique. Pragmatism must trump principle. The choices to the bailout team were let the Cypriot economy crater by refusing funds, grant funds and watch foreign depositors leave the islanders with 145 percent debt to current GDP, or take rapid measures.

My hope is that this prompts the EMU to finally implement a pooled depositor insurance scheme. The present scheme is akin to each state in the U.S. providing its own depositor insurance.

There are almost no bondholders. The junior bondholders have probably been wiped out, it is unclear. The senior bondholders there are (very few) are secured (covered bonds) which are senior to depositors.

> which are senior to depositors.

Not for any definition of "depositor insurance" that I'm familiar with. The whole point was that the investors of the bank would lose their money first, then a gov't agency would make good on the deposits.

Anything less is a return to the days of unstable swings banking and deflationary depressions. Or perhaps the wizards at the EU thought/didn't care that Cyprus would join Greece in their deflationary depression: But the signal to Spain and Italy is abundantly clear: Anyone who leaves their money in a bank in those countries is not paying attention.

Depositor insurance is not about legal seniority in debt, it is about an insurance scheme that is made available (usually funded by a levy on banks). Covered bonds own a specific pool of assets. But the issue now is that there is legal restructuring, or taxes like this, without any bankruptcy, so it is a bit random what happens...

> Depositor insurance is not about legal seniority in debt

It absolutely is. When a bank fails, the regulating institution steps in and performs the capital restructuring. The statement of depositor insurance is that they are to be made whole, even if the regulatory institution must dip into the depositor insurance fund.

The EU restructured the Cyprus banks, but they did not haircut the bondholders for the difference, as has been done in every other bank failure since the Great Depression.

I wholeheartedly agree. And this in my mind is what the whole story comes down to. I've written about it here: http://bit.ly/1103Gkq.

But to summarize, when both the banking system and the government is insolvent it's relatively obvious to me that loses should be imposed in this order:

1. First bank shareholders should be wiped out(!),

2. then junior bondholders,

3. then senior bondholders and uninsured depositors,

4. then government bond holders,

5. and finally, only if the above doesn't cover it, insured deposit holders will have to take a haircut.

What we're seeing now is more or less a jump straight to 5.

There is a full resolution (ie non bankruptcy) proposal in place, due for 2015. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:20...

It should be less arbitrary that the current scheme, where senior bondholders and the ECB are not being touched.

If you look at the balance sheet of Cyprus Laiki half way down http://ftalphaville.ft.com/2013/03/16/1425732/a-stupid-idea-... then you see that debt is almost nothing. There is a lot of central bank (ECB indirectly) money which has not been haircut. The decision to haircut the "insured" depositors was a political one, allegedly made by Cyprus itself.

I can well imagine that Cyprus made the controversial decision (to haircut the "insured" depositors) themselves, for political reasons. It's exactly the decision I'd make in Mr Anastasiades' place if I was being strong-armed by a German delegation. The simple reasoning (for me) would be to increase the risk of contagion above and beyond what Germany can accept, so as to maximize the likelihood of Berlin folding and offering better terms.

This (registration required) appears to be what happened http://www.ft.com/cms/s/0/f890566a-8f24-11e2-a39b-00144feabd...

No. eg in Cyprus http://www.centralbank.gov.cy/nqcontent.cfm?a_id=8158&la...

"On the activation of the DPS, an announcement is made in the Official Gazette of the Republic of Cyprus and in the local press stating that the member bank is unable to repay its deposits and specifying the manner in which claims could be submitted and the necessary documentary evidence that accompany each claim."

This is not related to the restructuring and payment of creditors (which usually takes years, while deposit insurance pays out quickly). The deposit fund it is true then becomes a creditor and might get some money back later. This happened with eg insured UK depositors in Iceland.

The ECB has not restructured the Cyprus Banks. Cyprus is going to inject equity into them as a going concern, the equity paid for from this tax (and then the equity will be distributed to the taxpayers). This not really restructuring and other models where banks are left as going concerns with arbitrary appropriation of various bonds (somewhat at random it is true) is becoming normal in Europe (eg see SNS Reaal).

I'm sure people across the EU are paying close attention, especially with many financial pundits holding a view that Cyprus is just a guinea pig.

If the people there roll over without too much fuss, stealing directly from deposit holders will become the template for future banking bail-outs.

Bondholders and shareholders of Spanish and Italian banks could then avoid losses on their bad investments by pointing to Cyprus as a shining example of things done right.

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