Revamped Cyprus deal to close bank, force losses
reuters.com
reuters.com
Up until recently, it has been considered sacrosanct that deposit holders be protected, no matter the cost. The convention and social contract has been that you deposit money for safe-keeping in a bank. We have seen this over the past few years across both Europe and the US, as insolvent banks have been bailed-out, nationalised, given secret loans, so that deposit holders are wholly protected.
With Cyprus, this widely held belief is now in tatters. You as a deposit holder are now a creditor of the bank. As soon as you lend your money to the bank, it is no longer yours. The bank will provide you with interest for the duration of the loan. If the bank is no longer a going concern, you will no longer receive special treatment, but instead you must get in line with other creditors.
Some may argue that this has always been the case[1], however it will be a genuine shock to many people, and any faith in deposit guarantee schemes has been dealt a severe blow when a week ago, the EU urged Cyprus to collectively punish all deposit holders regardless of balance.
[1] For those in the UK, the House of Lords said in Foley v Hill 1848 http://www.uniset.ca/other/css/9ER1002.html
"Money, when paid into a bank, ceases altogether to be the money of the principal... The money placed in custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases... he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands... the banker is not an agent or factor, but he is a debtor."
In 2011 and 2012, in the US, protecting the deposit holders was deemed sufficiently important that FDIC deposit insurance was extended to unlimited protection (now it is up to 250K)
"Back in December 2012 the FDIC and the BoE published a joint paper outlining their new approach for how to resolve any future collapse of one of the Too-Big-To-Fail banks...
'deposit guarantee schemes may be required to contribute to the recapitalization of the firm'[1][2]
...the new system raids the Deposit Protection scheme, gives it to the bank instead of you and when that fails to save the bank…then what? The bank fails again and there is no money left in the Deposit Guarantee scheme."
[1] http://www.golemxiv.co.uk/2013/03/plunderball-the-new-euro-b...
[2] http://www.bankofengland.co.uk/publications/Documents/news/2...
http://openjurist.org/866/f2d/1242/united-states-v-cache-val...
"The district court determined that under Utah law the relationship between a bank and a depositor is generally that of a debtor to a creditor, citing Walker Bank & Trust Co. v. First Security Corp., 9 Utah 2d 215, 341 P.2d 944, 946 (1959). United States v. Intermountain Region Concrete Co., 636 F.Supp. at 284. Under this widely accepted principle, the depositor retains a right to withdraw those funds, which is usually described as a chose in action..."
This is simply not true. Usually bank deposits are insured by the central bank or another such agency, but there's a limit (e.g. $100k per account).
> The convention and social contract has been that you deposit money for safe-keeping in a bank.
There's indeed a social contract of sorts, but since the most of the world converted to fractional-reserve banking, banks are not pure deposit banks anymore.
In fact there have been many bank runs around the world, even in the US.
http://en.wikipedia.org/wiki/List_of_bank_runs
It's well-known that individuals who own more cash than the insured limit should spread it over several bank accounts. Of course, that is moot when the government simply confiscates your money.
The mentality of "It won't happen to me" has been reinforced since 2008 because we've seen how governments will go to extraordinary lengths to bail out banks. For example, no UK deposit holder has ever lost a penny despite Northern Rock, RBS, HBOS and IceSave all going bust.
Yes, it's prudent for deposit holders to spread funds over several bank accounts. Read the small print though! If you're in the UK, the guarantee is per saver, per authorisation[1] e.g. two accounts in two different banks which are part of the same authorised banking group will only provide single coverage.
However, even this might be an exercise in futility if the deposit insurance fund is empty. 'deposit guarantee schemes may be required to contribute to the recapitalization of the firm'[2]
I've never had any such expectation and I don't know anyone who does - banks can (and do) go out of business and generally there is an expectation that in such cases deposits might not be safe (although they are generally insured up to a set amount).
If everyone assumed that there money was always safe in a bank then there would never be runs on banks - which seem to have been around as long as banks have.
No it didn't - the EU always wanted Cyprus to leave deposits under 100,000 EUR alone but impose a higher tax on large deposits. The leadership of Cyprus was the one who came up with the tax on lower deposits because they wanted to decrease the burden on high deposits.
http://www.bbc.co.uk/news/world-europe-21825981 (last paragraphs)
The EU were happy to sign off on a proposal which would see deposits under 100,000 EUR being hit. Maybe it was their idea, maybe it wasn't, but they were okay with it. Ultimately it was the Cypriot parliament who rejected the proposal.
"Cyprus President Nicos Anastasiades says he is battling against eurozone demands that all bank customers pay a one-off levy in return for a bailout.
Mr Anastasiades said he shared people's unhappiness with the terms, whereby all bank customers would pay a levy of 6.75% or 10% on their bank deposits.
The EU and IMF have demanded the levy in return for a 10bn-euro ($13bn; £8.6bn) bank bailout."[1]
So yes, the EU demanded that SOME customers have to pay SOME levy and I am sure he "shared people's unhappiness" with those terms. But the one who decided to put the burden on the small deposit holders was the Cypriot government.
Is this true? I feel like citation is needed for that statement. I thought the EU actually wanted to protect the minor deposit holders, as it has been the case all over Europe up until now.
"Cyprus President Nicos Anastasiades says he is battling against eurozone demands that all bank customers pay a one-off levy in return for a bailout.
Mr Anastasiades said he shared people's unhappiness with the terms, whereby all bank customers would pay a levy of 6.75% or 10% on their bank deposits.
The EU and IMF have demanded the levy in return for a 10bn-euro ($13bn; £8.6bn) bank bailout."
The key thing here is that the EU accepted the original proposal, they were okay with seeing deposits of less than €100k being hit, regardless of any deposit guarantee. Public fury resulted in the Cypriot Parliament rejecting the proposal and the EU back-peddling from the original terms.
This way Cyprus piggybacked on other European countries for year. Now Cyprus is being rescued by the very countries that let the little island get away with these shenanigans for years. It was the Cyprus government itself that wanted normal depositors to pay the 10 percent tax on deposits because the Cyprus government was afraid of destoying the lucrative tax evasion business. The EU only wanted to levy it on the larger depositors.
In the EU there has never been a general convention or social contract that larger deposits are safe. Only deposits up to 100,000 EUR. It is true that during the recent financial crisis larger depositors, bondholders, other creditors and even equity stakes have been saved again and again, but this is the exception, not the normal rule.
The banks should be liable and be allowed to fail without bailout and the system should be changed so depositors elect whether their funds are eligible for speculation (and share in any profits and accept any losses therein). The non-speculative accounts should be protected in law and the admin costs of running them maintained by monthly service fees.
Not only is that incorrect, it's the exact opposite of reality: Cyprus wanted a 10% levy across the board on all accounts, bigger EU countries refused to breach insurance on accounts under €100k, preferring that only uninsured accounts (>100k) be levied against/.
"Cyprus President Nicos Anastasiades says he is battling against eurozone demands that all bank customers pay a one-off levy in return for a bailout.
Mr Anastasiades said he shared people's unhappiness with the terms, whereby all bank customers would pay a levy of 6.75% or 10% on their bank deposits.
The EU and IMF have demanded the levy in return for a 10bn-euro ($13bn; £8.6bn) bank bailout."[1]
When Lehmann Brothers went down, the Reserve Primary Fund suddenly didn't have enough money to pay out everyone, which had the same effect of "getting in line with the other creditors". They actually had almost all the money, but distributing it took nearly a year IIRC.
http://en.wikipedia.org/wiki/Money_market_fund#September_200...
The reason why Cyprus are getting a deal like this is because of the accusations of Money Laundering - an accusation which has led to Cyprus opening an investigation into[2] which is mainly due to the fact that, a Russian accountant (Sergei Magnitsky) was killed in jail in 2009 after revealing “that $31 million of the tax money was moved out of Russia using five Cypriot banks: Alpha Bank, Cyprus Popular Bank, FBME Bank, Privatbank International and Komercbanka”[2] and because, Cyprus are still heavily exposed to Greece. In fact, “the exposure of domestic [Cypriot] banks to Greece amounted to €28 billion, or one-third of total assets and 170% of GDP. Of the €28 billion, government bonds amounted to €4.7 billion; the rest were loans to Greek residents”[3]
The initial plans were to apply a levy on all accounts in Cyprus (up to 10% although, this was then rumoured to be 25% on everyone’s savings above 100k Euros) which was rejected. Then there was a suggestion to nationalize semi-state pension funds although, Germany amongst others were against this idea suggesting that this could be even more painful for ordinary Cypriots than a deposit levy.
The plan now appears to be involving nationalizing state pensions and split failing lenders into good and bad banks which is highlighted by the article, with Laiki (Cyprus’s number 2 bank becoming a ‘bad’ bank).
It’s an interesting scenario from an economical standpoint although, Cyprus should have received a bailout as part of the Greek bailout due to their significant exposure to the Greek economy, regardless if they are an offshore-haven or not.
[1] http://www.ibtimes.co.uk/articles/449633/20130324/cyprus-see...
So 62k Euro per captia? That doesn't sound like an insane amount.
an amount of money which couldn’t be sustained or created on its own ... "Cypriot banks have for years been taking the kinds of risks that are not allowed in France"
Since when has taking cash deposits been risky? This reasoning sounds completely backwards to me.
Why would a country with 68B Euros on deposit be begging for a 10B Euro bailout?
All I can figure is the US, Germany, and France don't like Cyprus taking less taxes and asking fewer questions and they don't want it to be a reliable place to shift your revenue or deposit your money.
Likewise, Cyprus has a large banking system in relation to the size of the economy - as I mentioned in the previous comment - which means that if the government needs to bail out its banks (as it does now) then the economic hardship of doing so is going to be immense.
Cyprus established itself as an offshore-haven through double tax treaties although this has been under-threat due to the EU wanting to harmonize this AND due to the potential levy because of their economic crisis, Russia have threatened to rip up its double-taxation treaty with Cyprus (which attracted Russian Billions in the first place). Russia is extremely important to the Cypriot economy as almost 30 Billion of the 68 Billion is from Russia which is larger than Cyprus's entire GDP.
Moreover, the risks aren't really to do with the deposits but rather to do with what is being done with the money as I mentioned earlier, Cyprus are "highly exposed to the Greek risk (40% of the loan portfolio), is a systemic risk because of its size, with a balance sheet equal to seven times GDP and a high inter mediation raising the level of credit up to 280% of GDP. At the beginning of 2012, the portfolio of loans to Greek households and companies amounted to 120% of GDP."[2]
[1] http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weor...
Since the GDP per capita is around 28k€, 62k per capita seems insane to me.
> Why would a country with 68B Euros on deposit be begging for a 10B Euro bailout?
Because most part of these 68B is not owned by citizens but by foreigners, and is suspected to be dirty money from russian criminals.
Anyway since the european laws protects any deposits up to 100k€, if these 68B€ are really all legitimates personal deposits, this extraordinary tax will just have no effect.
The Cypriot banks have been paying much higher interest on deposits than other Eurozone banks. (You'd get something like 5-6% in Cyprus versus 1-2% in stable Euro countries like Finland.)
When you're paying much higher interest than market rate, obviously taking a lot of deposits becomes a huge risk. The same thing happened with the Icelandic banks before the 2008 crisis -- they attracted lots of European deposits with high interest rates and lost most of that money on ill-advised investments around the world.
Cyprus banks have debts to account holders of €68 billion (people have deposited €68 billion into bank accounts in Cyprus). They didn't do that because they felt their money would be happier on the sunny island, they did it because Cypriot banks were offering higher interest rates than banks in other countries. Also they didn't ask many questions about where the money came from.
In order to offer interest on deposits, banks have to lend money out. In order to offer high interest rates, banks have to lend money to more risky sources, which is what Cypriot banks did (they bought a lot of Greek bonds, whoops!) In this way, Cypriot banks were more exposed to the crisis than other banks.
Turns out, Greece wasn't a great investment. This is why the banks went bankrupt. They can't pay the interest on the deposits they've taken, and they could not pay back the money that depositors have 'loaned' them. This is why they need a bailout.
Other countries (Germany) aren't comfortable guaranteeing the crazy promises (high interest rates) Cypriot banks promised their (mostly Russian) depositors. They claim that depositors knew the risks: high interest, offshore, no-questions-asked, island bank accounts of more than €100k (e.g. not government-guaranteed) are risky. So they're forcing these depositors to take a loss during the bankruptcy restructuring.
Perhaps because the banks took that money that was deposited with them and used it to make rather dubious investments such as Greek government bonds?
e.g. Here is an article from 2011 that talks about what a risky position those banks were in:
http://www.navigator-consulting.com/articles/cypriot-bank-ex...
Their model might have been sustainable if not for the money taken from bond holders of Greece debt.
And that will work against you when you need help from "normal" countries. Cyprus got absolutely no mercy from them, take it or leave the EU. They cannot leave EU so they must do anything else asked.
Turkey occupies roughly half of the country and has more soldiers than Cyprus has inhabitants. If they left EU, in addition to the huge mess created, they would lose whatever protection EU membership offers them. A tiny country, in a strategic location and surrounded by enemies needs a big brother.
Just this week: "“The idea of the Greek Cypriot Administration of Southern Cyprus (GCASC) to offer the natural resources of the island as collateral for a solidarity investment fund or any other borrowing scheme to be established due to its current economic crisis, ignoring the inherent rights of the Turkish Cypriots who are co-owners of the Island, is a dangerous manifestation of the illusion of being the sole owner of the Island, which may lead to a new crisis in the region,” the Foreign Ministry said in a statement on Saturday." http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_24/03...
Number 2 reason: Integration with EU, such as travel, bank deposits, pensions etc etc. decoupling would mean a huge mess.
Number 3: If the left, their banks and econ would collapse anyway, so they still lose with no possible upshot.
And letting the banks fail would do the island more of a favour in the long run since continued propping up just facilitates more wealth redistribution through huge, unmanageable debts to the IMF.
Not the first (or last) time the tiny nation of Cyprus has been given the shakedown by the big boys :(
Good lord, do you ever read the news? In case you missed it, the last 2 weeks have involved non-stop negotiations with various parties as the people Cyprus pressured the Parliament of Cyprus into rejecting the original deal, with had largely been designed by the Germans. And the deal now being considered does not resemble any deal that was suggested by the Germans or the Russians, so clearly Cyprus can say "No", at least enough to gain some flexibility. And Cyprus can certainly leave the euro, thus endangering the long run health of the European project -- and considering how much Germany has benefited by having no restrictions on its exports to the rest of Europe, this would be bad news for Germany.
But even more crucially, there is the question, has Cyprus already, de-facto, left the euro?
http://economistsview.typepad.com/economistsview/2013/03/fed...
The new deal, AFAIK, confiscates all money over 100K euros in the second largest bank, the other one was a 10% tax on all.
Either way, Greece had some leverage and used it to its advantage. Despite the huge cuts they were forced to make, they never met the goals set and they were lowered or extended. Cyprus it seems, has very little to no leverage.
They can surely leave the Euro, like I can leave my wife, drop the lease and quit the job at the same time with nothing else waiting.
It's not a confiscation of all the money. Accounts are frozen, but the final levy (solely on accounts >€100k rather than across the board) are expected to be around 30%:
> Asked about the level of losses on uninsured depositors in Bank of Cyprus, he told state radio: "The assessment is that it will be under or around 30 percent."
> "Reports have suggested that eurozone leaders, particularly in Germany, insisted on the levy because of the large amount of Russian capital kept in Cypriot banks, amid fears of money-laundering. However, German Finance Minister Wolfgang Schaeuble said he and the International Monetary Fund had been in favour of "respecting the deposit guarantee for accounts up to 100,000" euros."
So to me it sounds more like the Cypriot government initially tried to put more of a burden on small deposits but now agreed to do it the way the EU always wanted.
When one invests over 100% of one’s capital in a single
financial instrument – even if that instrument is considered
low risk – it is indicative of poor risk management.
[..]When bankers do the same with investors’ money –
because their bonuses are linked to short-term income
while the losses are underwritten by the taxpayer – the
same behaviour is more than just poor risk management – it
is ‘casino banking’. [1]
[1] http://www.centralbank.gov.cy/nqcontent.cfm?a_id=12472&l...
We don't need bailouts. We need better education of the population about how private banking is in control of our economy so that it becomes clear in everyone's minds that the whole monetary system needs reform.
The system as it stands is mathematically guaranteed to transfer value from the bottom to the top. This is as true for individuals as it is for countries as a whole. Cyprus will never pay off this national debt with the system as it currently stands and so will sit in the pocket of the IMF, and ultimately the US Federal Reserve. "Bailout" is one way of putting it. So is "legalised plunder".
Once successfully pushed in Cyprus, US will be the next one. Why you think they buying millions of rounds of ammunition? Street tanks bought by DHS (not a military part of government). And if you think about it, it makes perfect sense! Only by taking 25% of peoples assets can safe America, safe Social Security, safe Medicare, Medicaid, etc. Pres Obama already prepared it for you -- "you haven't built your business" yourself; the money you have is not really yours; it should be obvious!
Yesterday in Palo Alto, California, John Schultz was mugged for 10 Bitcoins,
a volatile new digital currency based on complicated calculations.
“It was terrifying”, John exclaimed, “he handed me a pen and waited patiently
for 45 minutes while I wrote down the encrypted text required to retrieve the
money”.
The stolen Bitcoins were valued at $415 at the time of the mugging, but
fluctuated between $600 and $3 during the time John was walking home.
Why not? They will be busy going through houses from the "citizen armed lives here" list. Don't keep cash; I said keep most in silver coins. Don't keep in bank ready to be raid; keep at home in safe.
For those of you upvoting thinking it's satire, see his profile:
recently finished coding: http://drudgenewsletter.comI'm a firm believer that genuinely and seriously entertaining stupid questions, unpopular opinions, and fringe theories, is the most effective (and engaging) way to learn something new with some immediate depth. Which is what I'm here for.
I upvoted joering2 because the developing conversation it set off between rdl and mynameishere is the most interesting and novel content in this thread so far.
It is debatably off-topic though.
It's worth keeping physical currency immediate needs in the case of a storm, earthquake, banking glitch, etc. (For most people, maybe $500-1000; the crazy thing is I know plenty of people who do nothing but use credit cards and just have $0-20, which sucks even if their bank just freezes their ATM account or credit card for 3 days!)
Otherwise, physical currency is exposed to the most serious risks (devaluation, inflation), plus physical loss, plus is relatively inconvenient to use. If you want a hedge against USD shenanigans, the things to do are:
1) Reduce ongoing liabilities (debt or expenses), particularly those which might adjust
2) Invest in income-producing assets which have pricing power
3) Potentially, hedge by investing in assets in foreign currencies or non-currencies, or assets in foreign countries, etc.
#1 and #2 are generally reasonable no matter what (buying energy efficient appliances, buying foods/etc. in bulk, education, being in good health, improving your skills, building products or companies...)
FYI, during the Weimer inflation, it was those who went into debt (ie, shorted the Mark) and bought real assets who profited the most. There's no real good advice during a currency collapse for unsophisticated investors. Filling your basement with Jack Daniel's whiskey is as good as anything.
That said, a FRN crisis, if any, is many years off.
It's better to own a subsistence farm than to have something which requires purchasing market-priced inputs and to sell at long fixed-term prices.
Similarly having long term fixed-rate debt (mortgage) is better in a market where rates go up than having to refinance every few years with short-term debt (or, say, rent, in a place where there's no rent control). But a disadvantage of owning vs. renting is that you can't move as easily to take advantage of opportunities.
Reducing mandatory ongoing/recurring market-rate purchases seems like a win; usually that requires either spending capital now or some form of (ideally, fixed-rate) debt. Like borrowing at 3% to buy a fuel-efficient car or live close to work/transit is probably worthwhile, if you get 10-15mpg now and need to commute to work.
Stockpiling unproductive assets is just not a viable long term strategy, nor does it work for society if everyone does it. It makes sense to keep a certain amount in reserve, and to slightly increase that during times of uncertainty, but working and buying gold coins and putting them in a safe isn't a useful financial strategy in isolation.
So, ahem, snicker, not to worry! ..rright?
They don't because in the long run you have to actually produce wealth that would sustain your money-printing instinct. This is the best opportunity for Europe to actual implement structural reforms that would give them a chance to compete long-term, as an European I do hope they don't fuck it up.
Here are some better reasons http://mainlymacro.blogspot.ie/2013/03/the-power-of-austerit...