Cypriot Bailout Sends Shivers Throughout the Euro Zone | Hacker News Reader

Cypriot Bailout Sends Shivers Throughout the Euro Zone

nytimes.com

73 pointsuvdiv86 comments

"After five years of bailouts financed largely by austerity-weary European taxpayers, wealthy nations like Germany and the Netherlands have decreed that from now on when a bank or country fails, it will be bond investors and perhaps even bank depositors who will be forced to pick up a big share of the bill."

This is so incredibly stupid that it would be funny if it wasn't so tragic. They're basically telling everyone in the Eurozone that their money isn't safe in the bank, and that if you want to make sure it keeps being yours you should wthdraw it and move it to a safer place. Either under your mattress or outside of the Eurozone.

They're basically asking for a bankrun across the southern European countries. Didn't any of these geniuses take econ 101?

It's just another example of what's fundamentally wrong with the Euro. If you compare to the US, which is a continent sized country with a lot of diversity, you'll see some big differences. For one, the economic differences between regions in the US aren't nearly as large as in the eurozone. For another, the authority which regulates currency is also in control of taxation and government spending at a federal level, unlike the EU. Also, everyone in the US is subject to the same federal banking regulations and enjoys FDIC insured deposits. In the eurozone you have a hodgepodge with a currency system overlaid, and then when some financial crisis happens the whole system breaks down.

Well, Europe has different dynamics, rooted in ancient times... and a lot of inertia.

It's hard to steer all people in a certain direction, especially from quite different cultures.

We're not Europeans; we're Romanians, Greeks, French, Cypriots and so on. We have a sense of belonging, not to each other, but to our individual nations.

It is a "hodgepodge", but we must keep it together somehow. What happened last century must never happen again.

I'm really keeping my fingers crossed for the EU; not necessarily for my generation, but for my kids and grankids.

USA on the other hand is an "engineered" country, people got there relatively recently and said "Ok, that's it, let's do things this way". Of course you will see more homogeneity and agreement. And nationalism actually helps keep stuff together instead of dividing people.

Remember, most of our countries formed in the 19th and early 20th century. Before that Germans for instance were Prussians, Bohemians, Moravians, Bavarians and so on. (39 states)

The French for instance only commonly adopted the same language in 1914. (When literacy rates were high enough for everyone to know French instead of regional languages).

Most countries in Europe were the same less than 200 years ago. I can easily see us being Europeans 100 years from now.

I know Slovenians (where I'm from) still considered it a novelty to think of themselves as Slovenians as late as the 1840's.

Well, if this goes on for long enough, with open borders and such there's going to be a lot of mixing..

I'm not sure what we're going to call ourselves, but if nothing "explosive" happens in the next 2-3 centuries, I predict we'll be mostly brown-skinned and speak some sort of English.

>USA on the other hand is an "engineered" country, people got there relatively recently and said "Ok, that's it, let's do things this way". Of course you will see more homogeneity and agreement. And nationalism actually helps keep stuff together instead of dividing people.

Go study up on the American civil war. It was an extremely brutal conflict, and you see lingering resentment today, in the 'red states' and the 'blue states' - hell, I still make (offensive) jokes about how "we should have let them leave when we had the chance" - I mean, I don't know how it compares to the Germany vs. France thing, but even today, there is a pretty significant north/south divide in US politics (and urban/rural divide.) From my understanding of things, we (the northern, industrial states) conquered the southern, agricultural states through force of arms, (well, through force of superior production) - and we've kept them in the union since through a generous application of money. (It's seen as funny, that the "red states" generally speaking, consume more federal tax dollars than they give back, and yet those are the people who make a lot of noise about cutting the size of the federal government. The "blue states" are the opposite. The way I see it, we just figure it's cheaper to buy them bread and circuses than to fight 'em again, while they are frustrated by their powerless position. From what I read, (and culturally, I think) we think of the south as producing brave, but poorly equipped soldiers. (and often we think of the southern leadership as having more guts than brains, that, or just having generally less concern for the lives of their soldiers. The south, at least by Northerners, is perceived as having a lot more respect for it's aristocrats, and less respect for it's peasants, vs "the only color that matters is green" north, which tends to style itself as a meritocracy.) The turning point of the war is often considered to be 'Pickett's charge' - A very brave, but arguably, considering the weapons the union had in the area, the space they needed to cross, and the range and effectiveness of the Minié ball, very stupid military action.)

My point here is that being more homogeneous (and we are... there are big cultural differences, but we all mostly speak the same language) does not save you from war. Civil war can be just as bloody and brutal as wars of conquest between different countries. When you get down to it, brothers will slaughter oneanother just as readily as strangers who don't speak the same language.

Perhaps the more powerful EU countries should get used to giving handouts to the poor EU countries in order to keep things quiet; that is how I think things work here

The EU is one thing, the eurozone another. Overall I don't think either has advanced the cause of European brotherhood very much and I think now the eurozone may actually be setting that goal back quite a bit (ask the Greeks or the Cypriots how they feel about their French and German European brothers).

" the economic differences between regions in the US aren't nearly as large as in the eurozone"

I think the origin of this and other problems is the lack of a significant EU-wide tax system. The US federal tax system serves as a wealth distribution mechanism (some states like NY and CA pay much more than they receive, and other states like OK receive much more than they pay). A similar system in europe would help the net import nations like Cyprus and greece.

This works in the US because there isn't actually that great a disparity between the wealthiest and poorest states in the US, whereas the disparity is much, much greater in the eurozone. More so, the "poor" states in the US are still pretty wealthy even compared to some of the wealthiest European countries, whereas the poor countries in the eurozone are quite poor on an absolute scale (Estonia and Slovakia have a per capita GDP of around 15k USD, much less than half the poorest US states). Also, the poorest eurozone countries are quite populous, there are tens of millions of people who are living at less than 3/4 of the mean per capita GDP of the eurozone, whereas in the US the same figure is around 2 million. It's a much, much harder situation to deal with and the eurozone has fewer options and tools to do so.

Take a look at this table http://www.economist.com/blogs/dailychart/2011/08/americas-f... to see how income is distributed in the US between the states. New Mexico has received over two-and-a-half times its 2009 GDP more in federal spending than it has sent in taxes over a twenty year period. The equivalent for Europe would be akin to Greece getting over $760 billion. Yeah, Europe has to work on its "union" aspect a bit.

That's not comparable: one is subsidy, one is spending. US spends money in New Mexico by maintaining military bases and hiring New Mexico residents to work for them [1]. They serve the entire country, not just New Mexico. In contrast, the EU sending checks to Greece or forgiving its debt is pure subsidy. Only Greece directly benefits from it.

It's one thing to spend money in exchange for goods and services, and another thing to give it away in exchange for nothing.

[1] https://en.wikipedia.org/wiki/New_Mexico#Federal_government

Indeed. Excepted that this is not a financial crisis. The financial crisis is just a catalyzer. The fundamental issue is state who continuously spend more than what they made because states are run by politicians who can't count (because 99% of them are lawyers and lawyers can't count and they'll only accept advices from economists going their way: that is "more state").

We're now witnessing what happens when states spending more than what they make are running out of money.

Of course socialists are trying to pretend it's a financial crisis and that without the financial crisis in the U.S. nothing would ever have gone wrong with all these highly socialists states in Europe spending more than they're making and creating an ever bigger state debt.

Seriously who's buying that? When you're borrowing more money than what you make at one point payback time comes.

And payback time is coming for socialists. And they don't like it.

For all the ranting about socialism, deeply social democratic countries--namely, countries like Germany, Denmark, Norway, Sweden--are doing mostly fine. If not for the Eurozone crisis, I'd say they'd be much better places economically than the USA, let alone a country like Cyprus or Greece. This is despite having more generous public sectors than the Mediterranean.

Nor is it simply corruption, though there's PLENTY of that to go around. Lots of corrupt countries aren't about to spontaneously collapse. But it's not totally crazy to imagine Italy, Spain, and Greece collapsing into chaos by the end of April. Or, if you're a pessimist, by the end of March...

It's sectoral imbalances and a deeply broken EU.

Norway is kind of a special case since they have oil. Denmark, Sweden... they have another decade or so before it hits there. Germany is such an industrial giant that again they are not your typical Eurozone country.

Well, once you've explicitly excluded the quarter of Europe that counts as "rich" and "social democracy" as special cases, of course you won't have examples available that suggest that being an economically successful social democracy is possible.

That doesn't even touch on the UK or France. Which, although certainly having their problems, also aren't the same kind of basket cases PIGS are. I excluded them initially because although they seem to have more severe problems than, say, Germany, they're still pretty economically successful and stable. By the time any of them get to a hypothetical debt crisis, the PIGS will have long-since imploded, and it'll be a totally different ballgame anyway that resists prediction.

You know what's even better? In the Cyprus example, bond investors in the banks (who don't have government insurance) are being completely protected from losses). Small depositors (who do have government insurance) are having 6.75% of their savings calculated. That's entirely contrary to the policy you quoted.

It's hard to really get your head around how wrong headed this decision is.

Cypriot banks finance themselves through deposits, not bonds. Less than 0.3% of Laiki's and 2.5% of Cypriot banks' €70 billion in assets are funded by bonds. Further, those bonds were issued under English law. The depositors are governed by local law.

Government insurance means nothing when the government is broke (relative to the size of its banks). Nicosia does not have the €30 billion to reimburse accounts covered by the country’s deposit guarantee scheme. No bail-out means depositors being wiped out.

"Cypriot banks finance themselves through deposits, not bonds."

The Cypriot banks are going to find all of their deposits withdrawn as soon as they reopen, so they better figure out a new way to finance themselves.

The real problem here is not that depositors are getting a "haircut", which they should if they invest in non-profitable bank, but that the insurance on deposits under Euro 100,000 is no longer good.

In a theoretical free market, depositors would lose all their money if a bank goes bust, just as stock holders lose their money if a company goes bust.

Banks, however, hold a particular role in a modern economy that regular companies don't. As such, deposit insurance is a necessity for overall financial stability. In the case at hand, the decision by the Cypriot gov't to effectively cancel deposit insurance for smaller depositors is their biggest mistake, since it decreases confidence in both the banks and the gov't.

Not trying to be a pedant here, but it's not generally true that stock holders lose money if a company goes bust. Lots of publicly listed companies file for Chapter 11 or some form of bankruptcy protection to tide over cash flow problems. The comparison is not quite right although your point is clear.

Smug US/UK commentators have now been shouting for 3+ years about how incredibly stupid the EU is, how the Euro will break up in two weeks... But why is the Euro up 16% against the USD and 23.3% against the UK pound over the last 10 years? Why are German bond yields lower than the US bond yields, and why do some stable eurozone countries still possess a triple AAA rating by all credit agencies, in opposition to the US?

Considering the population, Cyprus is more like a middle-size city than a country. It joined the EU in 2004 and the Eurozone in 2008 - their problems are much older than that. Other than for humanitary reasons, the EU shouldn't and doesn't really care if they go under. If panicked investos withdraw their money they shall - smarter investors will pick up their holdings and realize gains; the doomsayers will end up as losers, like the US hedge funds ala Paulson betting against the EU the last years.

It's very simple, inside the eurozone you can transfer your euro's from dangerous Spanish/Greek/Portuguese bonds and put them into safe German bonds. Even if the euro were to collapse, the German bonds would be redenominated in the new German currency, chances are it would immediately begin to rise vs other currencies.

So you don't have to exit the eurozone area, you just transfer your money from the debtor states to the creditor states. That doesn't make the situation any better particularly it just drives up bond yields in the debtor countries and makes their situation even worse.

Essentially a decision has been made to save the currency and sacrifice the debtor countries which use it. This is just another example.

>But why is the Euro up 16% against the USD and 23.3% against the UK pound over the last 10 years?

Because the Euro is stupid. You don't want your money to be as valuable as possible! Deflation, when not accompanied by fast growth in real GDP, is bad! There's no excuse for the European Central Bank to be running such a tight policy when aggregate demand in the European periphery is so depressed.

But of course nobody trusts the banking system in the periphery, so all the money from there is rushing into the center causing deflation in the periphery and inflation in Germany. And then the ECB sets policy to accommodate Germany, and threatens to screw the peripheral countries even harder if they don't make the supply side changes it wants.

> But why is the Euro up 16% against the USD and 23.3% against the UK pound over the last 10 years?

You think it is something other than supply and demand? The Fed and BoE can print; The ECB cannot. The result (which is related to printing) you failed to quote: Greek deflation.

It's not complicated.

What exactly is your point? If we see market prices as reasonably efficient, the current Euro price shows that the typical "Stupid Eurocrats idiotic mismanagement of the flawed Euro project will lead to European collapse in 2 weeks" simply doesn't have a base in reality.

Individual (small) countries may fail, the system will be fine, and misinformed doomsayers will - as always - end up making fools of themselves.

> What exactly is your point?

The euro is up 16% because there are more dollars in circulation chasing the same number of euros. Same for the pound.

A deflationary environment in Europe (what are prices doing in Greece? What is the Spanish unemployment rate?) is exactly what you would expect, and the Euro up 16% against the USD and 23.3% against the UK pound is evidence of that.

Or to put it another way: You quote evidence that supports the point you are trying to refute.

(Perhaps you are being confused by the term "up" in currency exchanges? It makes exports more expensive, which makes the deflation worse since fewer employees will be needed.)

You do realize that I quoted numbers for the last 10 years? Since the Eurocrisis started, the Euro has losses of around 6-10% against the other major currencies, so your deflationary argument isn't really sound.

All I wanted to say is that in the long run, foreign exchange rates express some form of judgment about the soundness of a currency. The markets still consider the Euro a very sound and safe currency - at least more so than the USD and the UK pound. A weaker exchange rate might be preferable, but that is not a way Europe wants to go. Instead of printing money, the idea is to restructure the economy. In the short run this will of course be super painful and allow commentators to shout "Look, austerity has failed". Let's talk again in 2025, bond yields for Greece,Italy,Spain are already down...

"You do realize that I quoted numbers for the last 10 years?"

No, you didn't. You compared two isolated data points.

If you look at the actual graph of the last ten years, the Euro has been both considerably higher and considerably lower against the dollar over that period.

The ECB does effectively print money by buying commercial banks' bonds with newly created money.

Draghi said last year that the ECB is prepared to purchase "unlimited amounts", so if there is a bank run, the central bank will fill up the banks' balance sheets as necessary (in theory).

> with newly created money.

No. This is exactly the problem: The echoes of the German hyperinflation of the 1930s are still being heard, so Merkel and crowd have repeatedly stood against printing.

As for the ECB purchases, those were "sterilized" as opposed to "quantitative easing", which is what the Fed does. http://blogs.wsj.com/eurocrisis/2012/09/06/the-ecb-steriliza...

The linked article is about ECB buying government bonds. But the ECB also buys bonds from Eurozone commercial banks, and this is where new money is being created.

It does end up on the central bank's balance sheet, but there's no event that would force the bank to ever write it down. Those hundreds of billions in loans can stay unpaid for hundreds of years if necessary.

All the lending to commercial banks is secured lending, they have to provide collateral to the ECB. The less good quality stuff is lent by individual central banks, so governments underwrite it. There is no unsecured buying of bank debt (banks can use covered bonds as collateral but again that is secured). And the LTRO is only three years. So it is not like you suggest at all.

Thanks and sorry, I was clearly misinformed. I must have taken some "stuff they say on the Internet" at face value.

"...the EU shouldn't and doesn't really care if they go under."

The EU should care. Do European officials and politicians think they are immune from the opinion of people in their own countries?

I expect this measure will generate a lot more hostility towards the EU among the European populace.

Because the UK and the US are doing what the smaller states in the EU cannot, i.e. devaluing their currency.

If the UK pound falls by X% against most other currencies, this is equivalent (in the long term) to all inhabitants of the UK losing X% of their income.

Unfortunately, our lovely world financial system is so precariously poised that a small pebble falling can quickly become an avalanche.

Though as they relate to market psychology, first in the other troubled nations of Europe, but secondarily for the entire world, the actions taken in Cyprus don't exactly resemble the dropping of a pebble. They're more like exploding a few sticks of dynamite on the already teetering mountaintop.

This will go down in history as a huge and pivotal economic policy blunder if it goes through.

I believe the decision was based on German unwillingliness to bail out Russian "hot money" , which they believe is the majority of Cypriot bank cash deposits. They grossly miscalculated the public reaction however.

Given the inevitable public backlash, looks like they're already back-peddling, or worse, just making things up as they go along.

"The Cypriot government on Sunday discussed with lenders the possibility of changing the levy to 3.0 percent for deposits below 100,000 euros, and to 12.5 percent for above that sum, a source close to the consultations told Reuters on condition of anonymity."

"According to a draft copy of legislation, failing to pay up would be a criminal offence liable to three years in jail or a 50,000 euro fine."

http://www.reuters.com/article/2013/03/17/us-cyprus-parliame...

Is anyone of any importance seriously clueless enough that they can't predict the consequences of taking money out of everyones' bank accounts? And if so, what is wrong with the system that allows morons of that magnitude to gain power?

I don't understand this question. What was the alternative? As people keep pointing out, Cypriot banks are overwhelmingly funded by their depositors. You can't just go after the bondholders in this case. And "do nothing" would have been worse, possibly by an order of magnitude, for depositors.

There are alternatives that amount to basically the same thing and are also disruptive, but perhaps differently. For example, they could leave the Euro, print money to bailout, let inflation rise, let their new currency devaluate, etc.

It's also very risky and results in savers losing money. It's also less progressive than what they are proposing as it's strictly just a flat percentage of assets.

It sounds unbelievable enough that I really can't help but wonder if they're doing it on purpose. But assuming that were true, what have they to gain from doing so?

Agreed. Cyprus is often used as a tax haven for money of dubious origin.

Agreed, but I wouldn't necessarily restrict it to the southern countries.

Everyone across the entire Eurozone now knows that their bank deposits can be confiscated without warning.

If I were a bank teller, I think I'd call in sick tomorrow. It's not going to be pretty.

They're basically asking for a bankrun

you've nailed the key outcome. I mentioned this on another thread, but this has to raise the risk of a European bankrun.

People across Europe will react with horror to this latest development in the Eurozone crisis. This will not strengthen the case for stronger European integration but turn many more against it.

Notice too how the supporters of these measures attempt to frame the debate around wealthy foreign tax evaders while minimizing the plight of ordinary Cypriots.

This extract from an opinion piece in The Guardian says it all

"..the debt burden has been transferred from the banks, where it properly belongs, to households, who had no part in their lending decisions.

As part of that propaganda campaign, the focus has been on Russian oligarchs and tax evaders who have been laundering funds through Cypriot banks. In fact, among those caught in the upper savings bracket are bound to be pensioners for whom this represents their entire life savings, and others who have recently borrowed enough money to buy a modest home. But even if only oligarchs were affected, this is surely an admission of guilt by the European and international authorities, who are responsible for the global regulation of banks and co-ordinating anti-money laundering activities. Their own failure can hardly be a justification for expropriating the small savers of Cyprus."

http://www.guardian.co.uk/commentisfree/2013/mar/17/savers-h...

Reading British newspapers for Eurozone financial commentary is like reading Soviet Pravda for its poignant analysis of American life. The rhetoric is so thick and the motivation so obvious that it's easy to forget that there's always someone who will take it seriously.

I think what most resembles Soviet-style propaganda is the public denouncement of Russian oligarchs as a pretext for collective punishment of Cypriot depositors.

The problem is that even when people vote nationally against Europe, their corrupted lawyers/politicians still do only what they want: the french voted against entering the eurozone. Yet their leaders decided France would enter the eurozone.

That's totally un-democratic just like what's happening in Cyprus is anti-democratic. Note that this shouldn't come as a surprise: Europe is mostly socialists and socialist only believe in democracy ("social democracy") as a mean to get in power and, once in power, to act in non-democratic ways. This is precisely what's happening: non-democratic confiscation of citizens' money to fund the state (please spare me the propaganda about the banks: it's about saving the european governments).

(I digress but I so wish they weren't in it, because France is f^cked: people unwilling to work more than 32 hours/week, super high sense of entitlement, uncontrollable state debt exploding and they're going to default in a few years, just like Greece).

I do really hope that the U.K. massively vote to get out of the European Union when the referendum shall take place.

Of course they're wagging the dog with "rich russians" and whatnots: later on they'll blame the working people (who have economies) has being responsible of all the evil in Europe.

Not a single time are you going to see socialists do some introspection.

Greece, Spain, Portugal, Italy and France are all going to state default (Greece will indeed default again).

Oh, and Cyprus shall never have a state debt of 100% of their GDP in 2020 as stated for this measure.

There are way too many public servants, way too many state benefits, in all these countries for them to ever be able to repay their state debt.

Socialism inevitably leads to state default and that's what we'll witness soon (we already witnessed it with Greece).

It's an entire crony bankster program. Those who lent money to Cyprus’s banks by buying their debt rather than by depositing money at the banks, will suffer no losses at all. Those who lent money to the insolvent Cypriot government, will be paid off at 100 cents on the euro. In other words, the banksters are protected. Only depositors with banks will suffer losses in this International Monetary Fund engineered plan. It's as blatant example of who the IMF really works for.

http://www.economicpolicyjournal.com/2013/03/what-to-keep-in...

The banks are supposed to open on Tuesday. Extending the bank holiday and blocking international transfers is most likely a violation of the EU treaty which guarantees free movement of capital.

http://ec.europa.eu/internal_market/capital/framework/treaty...

The government also extended a bank holiday that was put in place to try to stop a run on the banks. The holiday was supposed to end Monday night. Now, banks will not be opening their doors Tuesday, as planned. There was talk that they might not open Wednesday, either.

[...] “As soon as banks in Cyprus reopen, people will rush to take all their money out, because they don’t believe this is a one-off deal,” he said. “When a bank run happens, the E.C.B. will have to pump in liquidity,” he added, “and what you will have is a shell of a banking system supported by E.C.B.-eligible Cyprus bonds, which will rocket the debt of Cyprus out of control.”

There was a comment that a lot of russian mob money is held in Cyprus banks. I wonder if this is actually an attack on them in an effort to take the money from the russian mob.

I also predict acts of vandalism on the banks. Where the goal is to cost the banks money to repair their facilities given the situation.

Definitely not.

The confiscation is 6.75% on small accounts (mostly EU savers and pensioners) who are covered by deposit insurance, and 9.9% on large accounts (yes, a lot of which is Russian money). Overall it will collect a total of around €6B.

If you wanted to get €6B from just the accounts that aren't covered by deposit insurance you'd need to confiscate around 30%. So, basically, the EU had a choice of either taking 30% from the (mostly Russian) wealthy and 0% from the poor and middle class (a lot of whom are pensioners), or taking 9.9% and 6.75%, and they went with the latter.

If anything, this entire debacle is an effort to protect Russian (and Cypriot) oligarchs at the expense of ordinary people. As a bonus, it also makes bank runs, the collapse of the EU financial system, and the destruction of the eurozone much more likely.

Very odd.

Thanks for that info.

What was the potential impact of doing nothing? As this action "makes the collapse of the EU financial system... much more likely" -- what would the impact have been to the EU financial system had nothing been done at all.

10% is in the neighbourhood of cost-of-doing-business for a CIS corporate shell. The fact that there was so much pain inflicted on small accounts means someone has an eye out for the island's future as an offshore financial centre (read: Russian tax haven).

Regarding talks about russian mobs: there is indeed a lot of russian money in cyprus, but not all of it are from criminal activity. The way business works in post-USSR countries forces businessmen to never keep money in the country. And Cyprus banks happened to be most friendly with russian business.

Forget the lawyer-talk and economist-talk. To 90% of all depositors, they have a simple contract with the bank: I give you my money and you can use it to make more money (loaning it out at interest, etc) on one condition: you keep it absolutely safe and give it back when I ask.

That's it, that's the deal as far as almost all depositors care. And if they think for one microsecond that the bank might welch on the deal, they want out, now. Not tomorrow, n.o.w.

This is an brazen raid on personal deposits: a new, unexpected tax on funds people thought had already been through taxation and were safe. People will hate it. And they'll see the banks as both having breached their understood contract and being the cause of an unfair tax.

If the government puts in rules restricting withdrawals, they'll just take it out at whatever rate is allowed and send it elsewhere, or invest it in tangibles like gold or gems and put those in private lockboxes.

The net result over the next year will be a steady flight of small-investor capital out of every country that is even slightly suspected of this scam. A lot of it will just disappear from the economy. This will depress those economies for years if not decades.

It would be pretty ironic if the Cyprus bailout of 2013 will noted in history books as the event that lead to the collapse of 21st century banking (next up bank runs). Is it probable? No. Is it possible? Maybe.

Perhaps not the collapse of all banking, but it could well be remembered as the first direct cause of the EU breaking up into separate countries/areas again.

> No. Is it possible? Maybe.

This eerily reminds me of the bank run on Northern Rock, in August 2007. I was working for a mortgage broker at the other side of Europe at that time, and I was saying to myself: "hey, that's bad for those poor fellows, but it cannot have that big of an impact on the rest of us, it's just a bank in some god-forsaken corner of the UK". One year later Lehman went bust.

Here are your options: lose all of your money or lose 10% of your money. What do you choose?

- lose 10% of your money

Allowing the haircut will lead to bank runs which will cause the banks to go bust anyway. There's a high change that it will also cause bank runs in other countries like Spain, Italy and Portugal. Spanish people are already in the streets protesting. "Trust" will be gone. Cyprus is systemic, whether they want to accept that or not.

I also think that there are two clear options: Cyprus gets a bailout under ECB terms or Cyprus doesn't get a bailout and faces insolvency. It seems that the government decided that the first option is preferable to the second one.

The second option would almost certainly lead to civil unrest, because it would probably mean that teachers, doctors and other public employees (also pensioners) wouldn't get payed next month. Of course, the first option might also lead to civil unrest ...

There's a large difference between "would" and "might."

Option 1: Make rational decisions and rely on everybody else being rational

Option 2: Panic and make rash decisions

Relying on everybody else being rational is irrational.

I guess that boils it down to one option :)

Option 3: Make rational decisions and rely on everybody else panicking? :)

Actually there's a third option: wire all your savings immediately to London.

The banks are closed and electronic transactions disabled.

Let me ask you this: would you deposit your rent and bill money into a bank you trust to not give it away 90% of the time?

They can't reopen the banks without limiting the amount of money people can withdraw. Thus the death spiral of the entire worldwide financial system begins.

No. We'll see some bank runs mostly in southern countries, but the deposits are power law distributed and thus the financial majority (in sum, not in numbers of accounts) will probably act more rational than members of the frightened, over-emotional masses that withdraw their 5-10K or so. The rational will transfer their accounts to more stable banks, e.g., in Germany and won't put their money under the mattress.

Of course, it's a bit dirty to grab the money from those <100K too, it destroys trust, no question. But the essential players and movers were protected, that's why we created this small injustice (yes small, compared to what's possible).

>>>The rational will transfer their accounts to more stable banks, e.g., in Germany

Ah, so Cyprus will just collapse on its own then without any repercussions elsewhere? I don't think so.

Cyprus won't collapse (and even if, that's not the end, they'll stand up again and as an EU member state they'll receive help as they did before). Their banking sector is overblown and the intention is to reduce it to EU average by 2018. They tried to copy Luxembourg, but screwed it up. Now they have to come up with something different.

Anyway, that's far away from your "death spiral of the entire worldwide financial system." :)

>>>Anyway, that's far away from your "death spiral of the entire worldwide financial system." :)

We'll see. Bank accounts are private property. This is an unprecedented confiscation. And if this happens without open rebellion, nothing is safe for anyone anywhere.

History will record that the grand collapse started with Cyprus.

From fbme.com (large bank in Cyprus):

16 Mar 13 2.00pm 17 March 2013

The authorities in Cyprus have announced the delay of a Parliamentary debate on the provisional agreement signed by European Union finance ministers for a bailout package for the Government of Cyprus. Though there is considerable media speculation on the detail, some of it no doubt unfounded, the Cyprus authorities have yet to confirm arrangements within the agreed package and the implications for the banking industry and its customers. These are under discussion at the present time.  

FBME Bank is in close contact with the authorities in Cyprus and is monitoring the situation with regard to Parliamentary and Regulatory Authority discussions. We will keep our customers informed as to developments and expect to update this statement each day in the coming period as soon as information becomes available. Please refer to our website www.fbme.com for the latest statement, which we expect to update during the course of Monday, 18 March 2013 and thereafter.

At this moment, we wish to assure all our customers that the financial condition of FBME Bank is sound and depositors’ monies benefit from the strength of the Bank’s dynamic and well diversified Balance Sheet, which at all times meets European Capital Adequacy and Liquidity Standards. It continues to be the Bank’s intention to keep a very high liquidity and strong solvency position. If there is further information required please email pr@fbme.com

"The more he spoke of his honor, the faster we counted our spoons." -- Ralph Waldo Emerson

Taxing those who are saving rather than the ones who are earning more. Call it a case of misaligned incentives. And what about the long term implication on the banking system? How far it will limit the effect of central bank to control inflation now since people will think twice before putting money in bank account?

Would love to see some macroeconomics views on this.

Couldn't the large account holders just split the large accounts into smaller ones and just save themselves the 3.15% margin? Even taking transaction fees into account, it would still be a lot.

How safe are bank deposits in northern coutries? Germany, uk?

The UK isn't on the Euro, so they won't be impacted directly. Panics have a way of spreading, though.

This is only happening because the government of Cyprus doesn't have the money to do it.

As for other countries they're as safe as their "full faith and credit" and any depository insurance that it covers.

There's something worse that lawyers who can't count. Lawyers who think they can.

The problem is that politician dream up of an european union to make sure no more french / german war would happen. But politicians can't count: they're for the most part lawyers.

So they build this monstrosity: the European Union. A mad bureaucracy / technocracy where every document is translated in 27 languages (including obscure ones): small countries love it because they can send people to get jobs in Brussels at crazy high salaries. For what? Paperwork. Nothing but paperwork.

Then they dreamed up the most stupid thing ever: a common currency (the euro) without a common fiscality. Only stupid lawyers can come up with nonsense like this. Economists did warn them, before the first euro even circulated, that it would end up in precisely the current situation (even the default of Greece and Spain had been forecast).

Nobody listened.

Wanna know what's coming next? It's easy: go read what economists who predicted the current situation are saying. They're from the Milton Friedman school of economics thought. Keynesians lost is and lost it a long time ago. Nothing to learn there: they never predicted anything more than a few years (two or three) before it happened. If you want to predict 15 years+ ahead you have to read Friedman and its disciples.

What coming next is simple: these stupid politicians and lawyers who created all this crazy paperwork and non-sense laws are going to try anything they can, including more and more non-democratic measures, to try to save the euro.

But they can't save it: it's fundamentally flawed. Countries have to get out or the entire eurozone is going to split and go back to national currencies.

The cost is going to be about 15% of the GDP for all the countries exiting.

If the euro ain't split in the few years coming we'll be going to have the BCE defaulting (the BCE basically already became a bad bank, drowning under state debt from states who are going to default) and massive civil unrest: people losing everything.

Here we're talking about a worldwide GDP drop of about 30%.

So either we bit the bullet now and take about a 15% GDP loss by going to national currencies or we try desperately to save the euro and we'll end up creating a much bigger problem.

We're witnessing history. We're seeing a bunch of clueless politicians (who are mostly lawyers) totally f^cking up the entire economy of a continent (and probably of the entire world).

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