EU Crosses the Rubicon in Cyprus
The Euro is hitting three-month lows today, and for good reason. For those of you who may not have been paying attention this weekend, banks in Cyrus were near default and a bailout plan was agreed to on Saturday. As bailouts go, this one is historic - and not in a good way.
For the first time in nearly a century, individual depositors are going to take a haircut on their deposits under €100,000 - despite having FDIC-like depositors insurance. Depositors with less than €100,000 on deposit will forfeit 6.75% of their balance, and those with more than €100,000 on deposit will forfeit 9%. The haircut is being billed as a tax or a levy, but the net result is that it completely undermines all trust in depositors insurance and, by extension, the entire global banking system.
This is a line that should have never been crossed. The rumor of it led to widespread bank runs on Friday, and now that it's reality, the banks aren't even open in Cyprus.
To almost add insult to injury, depositors are becoming unwitting (and for the most part unwilling) shareholders in the very banks that were on the verge of default. To supposedly cushion the blow of the haircut, investors are receiving illiquid shares in the amount of cash they were forced to forfeit.
There is a chance this will all be overturned by the Cypriot government later this week, but the bottom line is that you can't unring this bell. Once bank depositors know that the powers-that-be even considered taking their insured deposits, it's all over for faith in the banking system. Depositors insurance has been sacrosanct in the developed world for a century now.
It'll be interesting to see how this all plays out, but I think we can all agree that this was a line which should have never been crossed. I mean, if depositors had to take a haircut, it at least should have been those whose balance was over €100,000 because that's the limit of depositors insurance in Cyprus. Of course it's great for them that they're only giving up 9% when it could have been everything over €100,000, but sticking it to the little guy just screws us all.
Love how pissed off the Russians are...
This move was bad on so many levels. I started a thread on it a few days ago. Really bad precedent.
Also, I wouldn't be surprised if Putin himself took a haircut on his personal accounts. Unhappy bad Russians means some bureaucrats are definitely getting iced.
I've never tracked the FX market ever since Draghi made this historical statement in London last year. Anyway, I don't think this is a big deal. The ECB never gave a fXXX about this little country, and they were all tied up with dealing with the bigger ones. Cyprus is just too small, so it will unlikely have a meaningful effect on the overall sentiment in the market.
And besides, I think everybody knew that nobody would step in because it could create MORAL HAZARD. This will establish a precedence that small countries will not recieve a lifeline no matter how dire the situation is, and only the big countries will get bailed out.
So FAIR!
This is huge. If depositors in Italy and Span start to worry that they will experience the same thing, ciao banks.
You notice that the bondholder cut was never contemplated (openly) for Cyprus in the same way as it was for Greece? Would have been a lot fairer.
The big thing is that this could cause a EU wide bank run, especially in the smaller countries and those already teetering on the brink (spain/Italy). Very bad move. Especially because the point of deposit insurance is that your deposits are insured. Cyprus' economy is basically just banking so if people don't want to put money in Cypriot banks then they have a problem..
The reason a bond haircut was never considered was that the Banks own 80% of domestic conventional bonds ! Gains from restructuring would be wiped out by losses at the banks....
The foreign bonds require 75% for CAC. Though it is still unclear how Cyprus could restructure, with precedents for holdouts going both for and against Cyprus's favor
Again, I disagree with the views above. I view this as a political move from the ECB. They poured in a lot of resources to save Spain and Italy. In light of all these, would bailing out a tiny country like Cyprus add on a lot of burden on the central bank's balance sheet? I don't think so. They are trying to exploit these kind of market fears, and are attempting bring Italy and Spain more under their control.
But whether or not Spain or Italy will listen is a different issue..
This move is, for lack of a better word, breathtaking. What bugs me more than anything is that they keep referring to this move as a "tax". This is not a tax, this is the outright confiscation of personal property, pure and simple.
I never thought I'd say this, but I hope Putin comes to the rescue...
Madness..... I truly can't understand it. Why would anyone create this type of economic shock for the sake of €6bn euros?
All we need now is the Italians and Spanish to decide it could happen to them and we are really off to the races....
The €6bn euros is not the issue here, Merkel believes that a lot of the €91bn in deposits are illegal gains from criminal activity, especially Russia. Thus a pure bailout would be considered a huge mistake in Germany, that is why they are trying to force through a "tax".
Mattress time over in the PIGS states...
Well. At least you don't have to raise taxes just to see the people avoid it on the back end. Easier just to steal the money straight out of the accounts. Am I missing something here though? Why not just nail the un-insured deposits and leave the insured ones alone. Or does this go back to everything I'm reading about Russian oligarchs and money laundering. haha.
can assure you that a lot of dodgy business goes through that island, although a lot of it is in BB banks with branches there, dont think they were affected.
Great volatility today though ;)
p.s. it was 9.9% on 100k+
I think it's great news. We're one step closer to destroy this immoral, unfair, fraudulent and inflationary world wide fractional reserve banking system.
thought you died decades ago, Comrade.
Yea, having an entity that can counterfeit money to give it to your business so you can never go bankrupt is something normal. Great way to show us how well you understand capitalism.
central banks are not for profits, they're for supply of cash into regional economies to value or devalue a currency. Back to War and Peace! Not sure which banks you think owe money to central banks either... most of the infamous ones have repaid it with creditcard levels of interest.
I can clearly see that you do not understand the nature of banking, money and economics.
this is like arguing with a feminist, you're just standing in the corner saying im wrong, go on then, explain it to me, for the motherland.
The EU? It's not like someone is going to hold the Cayman's feet to the fire because they are dependent on an international currency.
Why aren't I better at stealing damnit!
The threat of such taxes on Italian and Spanish bank accounts is supposed to prompt the Spanish and Italian gov'ts to act in what manner? To be more austere in their spending and raises taxes so they won't be forced to ask for a bailout from the ECB?
Talk about a cold slap to wake people from their apathy. Don't know yet if this enough to send ripples of panic from the periphery to core, making clear the imperiled state of the Euro.
For those wondering, nailing the uninsured deposits only would require a tax of 13.5% (realistically slightly higher to a few exemptions).
Not sure why everyone is cheering for the Fed and fiat currency. All is does is allow man to manipulate interest rates and the value of currency. The whole premise of the Fed and a fiat currency is that it should take the tops off the mountains and fill in the valleys of the market, so to speak. Since we have had a Fed can anyone really say the market has been less volatile?
@companion your writing style comes across really forced. Doesn't make you sound smart, makes you sound like you are TRYING to sound smart. Also, good troll.
Frankly, I have no idea why anyone would think that having a non-fractional system would insulate them from this. Aside from kooky pseudo intellectual bullshit foisted on the next generation of supposed bankers by the morons in Texas, the gold standard is fucking dead, get over it. There's something fundamentally more basic at issue, and I think that it needs to be literally translated: MONEY IS TO BE TAKEN OUT OF THEIR BANK ACCOUNTS TO SETTLE SOMEONE ELSE'S DEBT. Let's put this in the same camp of egregious as Corzine's comingling of company+client accounts: this is a dealbreaker and system killer. Unlike other defined benefit plans, gov't insurance of funds is the easiest deal to actually uphold considering they can actually just PRINT MONEY. Inflation obviously isn't the solution here, and that's not even the topic: the faith in banking itself, regardless of gov't or currency, is under threat here.
There is almost no limit how bad this can get. Here, people were up at arms over the false rumors that FOX news spread about Obamiden taking money out of their IRA accounts. In Europe...they actually decided to raid individual accounts.
Commence downward spiral
I don't think there is really much different than if they were to go ahead and raise taxes on everyone and use the proceeds to go pay down debt. Same if they levied a 5% and 10% tax on us in this country, one time, to lower the defecit or fund a bailout. The difference is the illusion of the choice of paying that tax rate is taken away and it's just coming straight out. Sure it's arbitrary, unfair and not exactly smart but I guess you could also argue that if Cyprus is a big paring spot for overseas money or a tax haven, so to speak, the EU could just be pissed that they aren't getting the tax revenue from that money in their home countries. If i'm a foreigner with money parked there sure I'm pissed, but do they really think that money magically appears in Europe? If the ECB prints to fund the bailout, or they levy this, or do whatever they want the money still has to be paid at some point.
Is this just a back door way of illustrating the point that it is beyond stupid to have an economic union with no real 'union' but rather giving other countries the ability to borrow at lower rates then individually and spend freely? Break it up and let them print their way to prosperity. This wouldn't be an issue if they had their own currrency.
True. But this is only part of the equation. There are many other reasons why it made sense to implement a currency union. And these reasons still hold true today. The problem is that many flaws weren't adressed (monetary union without political union, monetary union with no automatic fiscal transfer system, a central bank responsible for every country that adopted the euro but ruled only by Germany until last year).
Thanks for this great post. I couldn't fully understand in the financial times.
I'm just waiting for the riots to start.
I don't know about you guys, but I think this is pretty damn exciting. I would sure as hell be removing every penny from those banks once they open. Banking is built on trust...once that trust is gone, bye bye! Heads will roll.
I'm completely appalled. I cannot believe that they're doing this. Completely threatens the banking system. Other reports I've read state that the Dutch Finance Minister has already stated he has not ruled out similar bail ins in the future.
There's many factors here.
The German elections and the growing opposition to foreign bank bail outs.
The size of the Cypriot economy and their banking system. Their banking sector, relative to their GDP, is twice the size of other European nations. Moreover, the Russian deposits comprise an estimated 25-50% of total deposits. With numbers like those, I don't think anyone could say that this wasn't knowingly aimed at the Russians.
UK and French support of the Syrian rebels versus Russia's support of the Syrian regime.
The fight over the coming gas royalties.
At the end of the day, many of these European countries that don't have strong industries outside of banking are going to suffer as their economies are forced to drift away from debt driven consumption.
That and the fact that they could not make a haircut to bondholders as the banks themselves where the major owners of these bonds.
I think the EU had three bad options, the bailout option (politics and reputation), haircut (kill the banks), and this "tax" (piss off people in a tiny island nobody gives a shit and give the finger to Russia). The decision to tap right at the source was definitely the best option given the other two crappy ones.
Nice vid on War and Banking
Gotta love the 2nd Amendment. Never going to happen in America. If it does, out bank deposits will be the last of our concerns.
This is insane. Lehman moment raised to the power of infinity. If this goes through (I believe a vote is still needed for it to take effect), I anticipate ripple effects not only in the PIIGS, but throughout Europe in general, which will then impact other parts of the globe. This sets a dangerous precedent and potential panic in which many people will instantaneously lose faith in the global banking system, setting off yet another liquidity crisis, or a crisis of confidence at its core. Enjoy the Dow records while you can- the storm clouds are brewing.
And how many days will they continue to keep the banks closed? Keeping banks closed to prevent capital flight is a lousy way to restore confidence.
Cyprus banks are closed until Thursday.
Now it's Tuesday...LOL...they may just stay closed forever by this point.
@16rl. I agree. Also, Cyprus has heavy connections with Greece, the red headed stepchild of Europe. They figured "Hey, fukk it. Charge the depositors. Most of em Russian anyway". Plus, they're in the no mans land like Turkey. Are they European? Are they Middle Eastern? And if the Russians continue their "investments, I.e. deposits" in the country and the banking sector, they"ll be able to expand their Mediterranean influence/access in the Middle East.
Nevertheless, the country is still in economic trouble and something has to be done. It looks they'll veto this bill though.
Don't wait on the government. Put yourself on a gold standard today, and get rid of paper money that is being counterfeited and devalued by people who don't have a clue on how an economy works. They just hide behind their college name, whose reputation btw, was built by people in other fields of study and who came mostly from overseas.
Here's a chart from the Cato Institute showing who will be on the receiving end of this dicking (Hint: It's not the mainland Europeans).
http://www.cato.org/blog/cyprus-follow-money
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