Here’s the nut of the Cyprus bank deal:
Laiki, or Cyprus Popular Bank, is to be closed. Its €4.2bn in deposits over €100,000 will be placed in a “bad bank” and could be wiped out entirely. Those with smaller deposits will see their accounts transferred to Bank of Cyprus.
The Cypriot government reportedly fought hard for Bank of Cyprus to be spared, but the island’s biggest bank will face huge restructuring. No bailout money will be used to the recapitalise it. Instead shareholders and bondholders will be hit. It is thought depositors with more than €100,000 at the bank will also be involved in the recapitalisation, and are expected to face losses of around 30%.
Getting the bank up to healthy EU-mandated capital levels will be made harder by the fact that Bank of Cyprus will inherit a €9bn debt Laiki had with the European Central Bank (ECB).
The bailout deal does not need approval from the Cypriot parliament because it has been achieved by restructuring the country’s two largest banks, rather than levying a new tax on citizens.
The €100,000 floor on deposit confiscation should keep people from beheading the current government.
I was trying to understand the difference between Cyprus and Iceland. Both countries had a bank bubble based on foreign debt/investment, but Iceland has its own currency, so during its crisis, it let three banks fail, gave money back to domestic depositors, engaged in a program of domestic debt relief, and let its currency plunge. It also tied up between $3-8 billion of foreign investment. Cyprus is in the Eurozone, so I guess the 30% haircut for (mainly foreign) depositors is the financial equivalent, for them, of Iceland’s currency devaluation, though “the market” didn’t do it. Domestic individual depositors are more-or-less being made whole, but as Atrios points out, some of the “big depositors” are operating accounts for domestic businesses. So the key difference is that domestic depositors don’t get as good a deal as Icelanders, and there’s no domestic debt relief involved? Maybe someone who knows more about this can tell us in the comments, because Iceland seemed to survive what appeared to be, at the time, a complete collapse of their financial system.
schrodinger's cat
This experiment with Euro shows us that a monetary union without a political union, does not work.
c u n d gulag
Please, please, Oh Great FSM, let the Koch Brothers, Mitt Romney, and Pete Peterson, have large accounts there that will get a hefty trim.
Why should only Russia’s Oligarchs have to suffer?
Alex S.
The threads….I am… slain.
MikeJ
I rather enjoy the idea of banking havens going tits up. I’m glad the average Cypriots are going to be ok, but the idea of tax dodgers losing 30% makes me smile.
Zandar
Too bad the resulting depression from Cypriots losing their only real industry (money laundering) won’t. In the end, the only people who will really lose here are the Cypriots themselves.
We’ll be at “up against the wall” stage by end of the year, I figure.
Scott P.
Iceland also had to slap down severe capital controls which will continue until at least 2017. If you have a bunch of krona, you can’t convert them to anything else.
Oh, and Cyprus has stricter money-laundering regulations than Germany. Lots of Russian money parked in Cyprus, but it isn’t money-laundering.
MattF
As has been noted by various financial analysts, one difference between Cyprus and Iceland is that Iceland has fish (although, still, no trees). So, Iceland has an actual economy that doesn’t depend on fugitive foreign capital. Of course, the main, ‘difference that makes a difference’ difference is that Iceland has its own currency.
Ash Can
@schrodinger’s cat: This. Am I the only one who thinks it would be infinitely better in the long run for the European economy to go through the temporary paroxysms of ditching the euro and returning to individual currencies than to continue to prop the damned thing up on a structure whose individual pillars are markedly uneven and persist in crumbling on top of it?
Roger Moore
FTFY. We have no idea what the Russian mobsters will do.
schrodinger's cat
@Ash Can: The longer the Euro experiment is prolonged the worse the outcomes are going to be.
Gin & Tonic
Hey, mistermix, you think it would be a good idea if I complained about too many threads in too short a time? Maybe I should e-mail Cole too?
MattF
@schrodinger’s cat: It’s pretty clear that the euro is really just a renamed Deutchmark. So, with the euro, you’re getting political union in the sense of ‘doing what the Germans tell you to’. And you’re getting it, as they say, good and hard.
Zifnab
@Zandar: I’d say the fools taking a 30% haircut are going to suffer pretty hard, too.
And I’m not sure what you are hoping to defend when you claim the citizens of Cyprus are going to suffer because they’ll lose money laundering as a major facial bulwark. Am i supposed to feel bad about that?
schrodinger's cat
@MattF: Its obviously good for someone in the embattled countries, right. For example, why doesn’t Greece get out of the EU?
Zandar
@Zifnab: Not “defending” anything. Just pointing out that regular Cypriots who don’t have 100,000 euros plus in the bank are going to get hurt a lot as well.
Feudalism Now!
I like the work around the elected government angle. Share holders and bond holders left holding the bag? Perish the thought. There will be blood before too long. Should we consider this Weimar Europe Part Deux?
TS
@MattF:
A love of money seems to make strange bedfellows.
On Iceland – at least one government bailed out its own people who had invested in Iceland. I don’t know if any other countries did the same. The UK failed in its attempted to get compensation from Iceland – [ edit I should have read my link better – The Netherlands also bailed out its investors.]
“Thousands of Brits had placed money with Icesave, which offered interest rates far above those offered by British banks. When Landsbanki collapsed the British government bailed out the 230,000 UK savers, compensating them fully at a cost of around £3.5 billion.”
http://citywire.co.uk/money/uk-loses-out-as-iceland-escapes-icesave-repayment/a654467
It seems in some areas of finance – gambling is win/win – those of us who accept the 2-5% max on bank savings have not recognized this fact.
Omnes Omnibus
@Zandar:
That is going to happen in any case.
MattF
@schrodinger’s cat: Well, why did Greece want to get in? Why did the EU want Greece to be in–despite obvious problems with Greece’s application? Who actually made the decision? All murky questions.
Xenos
I just happen to be going through the records of the Icelandic banks insolvency proceedings in the Luxembourgish courts this afternoon. Déja vu all over again, it seems.
The cypriots got buggered but good by the IMF in this deal – Wolfowitz’ old organization worked both ends on this one, talking the new right-wing government in Cyprus into agreeing to the bank tax while pushing the Germans and the Finns into taking the hardest position possible (this was reported in the FT).
The first version of this deal, which screwed the little guys, was Lagarde’s baby. I am not sure if plan B a/k/a ‘screw the Russians’ was foreseen or was just a high-energy clusterfuck finding its own level, but this is not going to wonders for international relations.
We are a long way from seeing how the aftershocks rearrange things. Now that the IMF has done one of its patented screw jobs on Europe and the elites in Moscow we could see all manner of interesting diplomatic action soon.
bcinaz
If you look closely, you will probably find Goldman Sachs fingerprints all over this failure, they seem to have perfected the art of ‘hiding debt’ and ‘transferring sovereign wealth. They were a big player in the failure of the Greek economy for which they have not been held to account.
Xenos
@MattF:
Plenty of blame to go around on that point. Both right and left knew the Greeks would fuck up. Both sides thought they could manage the oncoming crisis to their advantage. As it turned out, the right managed to hold power, but does not know how to fix things. Or rather, they knew what their theories would say as to fixing things, but not having any clue what to do once those theories did not fix things like magic.
Omnes Omnibus
@Xenos:
It makes one wonder if how things would have turned out if DSK hadn’t been d-bag he turned out to be.
MikeJ
@MattF:
Cheap labor.
scav
@Omnes Omnibus: That’s what I was going to say. Average Chypriots weren’t /aren’t going to have it easy either way. But I think the raiding small depositors idea would have rattled people across Europe (esp Southern), make that has rattled already (not good). Personally have no problem with the bank to get stomped on, but I’m not familiar with the details of that/fallout of that. Still, big bank, fail and consequences has a nice mouthfeel. Whole mess has certainly not imroved the North/South Europe divide, nor the feelings for Germany/Brussels.
Roger Moore
@MattF:
The members got a bunch of advantages. Their economies were more tightly integrated, which reduced transaction costs for dealing with other parts of the Eurozone. Equally important for Greece is that they got a public perception of responsibility. To join the Euro, they were supposedly required to get their fiscal house in order, and that reassured investors and let them finance their debt much cheaper than they would have been able to back when they were on the Drachma. There was also a belief that the rest of the Euro zone wouldn’t let a member default, which had the same effect. If it weren’t for those low interest rates, Greece would have faced exactly the same kind of debt crisis years ago.
lol
Not sure on the source of a stat I’ve seen swirling around the Twitters, but it claimed that, even if the small depositor cut had gone through, depositors in Cyprus would still be ahead of anyone banking in the UK since the recession.
MattF
@lol: That particular claim was made, I think, last week by a NYT columnist, and has been dismantled pretty thoroughly. The problem is that it doesn’t include differences in exchange rates.
BArry
@MikeJ:
” I rather enjoy the idea of banking havens going tits up. I’m glad the average Cypriots are going to be ok, but the idea of tax dodgers losing 30% makes me smile. ”
Atrios pointed out (as was pointed out in the original post – perhaps reading it would be a good idea) that ‘over 100K Euros’ would hit a lot of businesses.
scav
@lol: So people are playing the competative we’ve got it worse than you game, you stupid lazy emotional southerners varient? twitters.
ETA huh, assumed it was mostly uk-ish, mercan play is weirder, maybe more bank favorable? odd.
Ben Franklin
We’re talking about Cyprus as though it were an anomaly. There is a daisy-chain of clusterfucks coming over currency, in toto. The IMF and Fed have been printing with sweaty hands. The World economy is Shadow. They are keeping the lid on to capture the remaining crumbs. After that…..its not going to be pretty.
What remains are games of musical chairs, Ponzi schemes, frauds, swindles, stonewalls, ruses, ploys, scams, dodges, bluffs, subterfuges, QE martingales, interventions, rehypothecations, pretenses and other modes of evading or disguising reality. The reality is that there is not enough real wealth to go around, certainly not enough to cover the giant web of obligations that masquerades as “money.” So, now whenever somebody or some company or government or entity is called upon to put up or shut up, the danger arises that the whole web will disintegrate, since all the participants are broke. You want “your” money? Wait three days. Make that four days. Check that, let’s say next week. How about two months from now? Oh, forget about it…. No wonder folks are spooked.
http://kunstler.com/blog/2013/03/money-worries.html
Villago Delenda Est
Bottom line is still that the big boys in Frankfurt get their money back. Their speculation has no downside.
BArry
@MattF: “As has been noted by various financial analysts, one difference between Cyprus and Iceland is that Iceland has fish (although, still, no trees). So, Iceland has an actual economy that doesn’t depend on fugitive foreign capital. Of course, the main, ‘difference that makes a difference’ difference is that Iceland has its own currency. ”
And the fishing economy of Iceland is just what, compared to (say) the 1990-level economy (i.e., well before any bubble or banking boom)?
Omnes Omnibus
@scav:
It’s the same the whole world over
It’s the poor what gets the blame
It’s the rich what gets the pleasure
Ain’t it all a bloomin’ shame?
grass
The difference as far as I can tell (besides being unable to use currency devaluation to hit the salaries of citizens) is that Iceland gave up on having a massive banking industry, while Cyprus desperately wants (and needs) to keep it.
I think Cyprus also has a less diverse economy and was exposed to the Greek bailout/semi-default.
But then IANAeconomist
elftx
I found this to be an interesting read the other day
http://www.philip-atticus.com/2013/03/destroying-cyprus-to-save-it.html?m=1
grass
@BArry: According to wikipedia fish was 40% of their exports in 2006 and their fisheries are bigger than the UK.
MattF
@BArry: I have no idea, but I have a suspicion that Iceland was neither particularly wealthy nor particularly not-wealthy until their financial misadventures.
Mike E
Listened to BBC NewSour where this was characterized as a devastating event, like when the Turks invaded Cyprus back in ’72. The 1,000’s of jobs lost, the shrinking of their GDP, and that whole blackmail thing imposed by larger elements within the Euro structure (coughGermany*cough) makes this an austerity bomb for the ages–Greece, Spain, Italy et al are taking note of this
deploymentdevelopment.Punchy
Expect the Russians to retaliate in a brutal manner.
Ben Franklin
@Punchy:
Yeah. Never steal from the Sopranos.
Bob In Portland
In the Nineties Warren Hinckle published a Ramparts-like magazine, The Argonaut, and had an issue called The Fourth Reich, which centered its articles about how Germany was essentially reconquering Europe through its banking.
When you think about it, it seems the countries in Europe are fracturing along ethnic lines (for ex, Czechoslovakia, Russia, Yugoslavia) except for Germany, which got bigger. And they are running the show now. Totally.
MikeJ
@Bob In Portland: Oh yeah, aside from the murder of six million jews (and millions of gypsies, gays, etc) and the military invasion of country after country, bombing civilians, gunning down prisoners, starving, and raping the populace of more than one country, it’s just like the Nazis.
Please tell me you were joking and nobody is really that fucking stupid.
burnspbesq
Shareholders taking it in the shorts? “We’ll, that’s the way I always heard it should be.”
Cyprus is so last week. All the hep cats are now worrying about Slovenia.
All of these fucking countries that gave up a huge chunk of their sovereignty by going on the Euro in effect said “we trust Germany.” I think we. Call that “the triumph of hope over experience.” The Euro turns out to have done what the Wehrmacht couldn’t.
I am not a kook
@Scott P.:
Really? Were/Are they also enforced? Back in the day in the old country, communists argued that the Soviet constitution was much better and enumerated more liberties etc than the US one. Which was probably actually true. Of course that was totally meaningless, since it might as well been printed on used toilet paper (and probably was).
Fair Economist
@MattF:
Greece being in the Euro has allowed the bankers to blame government deficits for problems caused by bankers and the free market. Of the countries that have had trouble so far, only Greece was running excessive budget deficits prior to 2008. Spain, Italy, Iceland, and Cyprus were all running deficits *lower* than the supposedly virtuous Germans. The problems were caused by bankers operating in free-market driven asset bubbles. This includes Greece; even there governmental issues were just a contributing factor.
If Greece hadn’t been in the Euro, then they wouldn’t be able to say “countries can’t run budget deficits or they’ll end up like Greece”. They’d have to say “countries can’t run budget surpluses like Spain or Ireland” and they really, really, don’t want to say that.
Now, were they bankers really thinking that far ahead? I don’t think they anticipated *this* crisis, but the historically minded probably were aware there would be *some* kind of crisis and it would be helpful to have a bad-government scapegoat around.
Mike E
@MikeJ: For whom the Godwin tolls…
You know who else suspected bankers?
The Moar You Know
Having your own currency helps you write your own destiny. And the EU system is just fucked up; here in the US, we have “defaults” and “bailouts” all the time, but we simply call them transfer payments and don’t put a lien on savings accounts in Alabama just because they got more tax money from the Feds than they paid in.
The EU is what “states rights” looks like when you take that concept very seriously. I think that point needs to be made more.
But keep in mind that Iceland is the absolute best-case scenario for a default. Russia and Argentina are more representative of the usual outcomes, and I think citizens of both nations would tell you that it wasn’t all T-bone steaks and Cadillacs.
Suffern ACE
I guess if I were, say, 62 and approaching retirement and had saved more than 100K over my lifetime, I’d still be pissed. I have no idea what Cypriot social insurance looks like.
What I found fair about this plan is that if people needed have their funds confiscated, that it would be limited to the depositors at the failing banks. So if you were fortunate enough to decide not to bank at institutions that were trying to be major players in that lucrative Ukranian banking market, you were o.k.
If I were a Cypriot, I still might not mind if my bankers and their regulators were taken on trips to the Urals. And I still wouldn’t trust that my deposits had any insurance on them at any level.
Fair Economist
@MikeJ:
The First and Second Reichs weren’t moral monstrosities like the Third was. Morally, they were fairly ordinary for their day. Saying the Euro is defacto creating a Fourth Reich isn’t accusing the German of another run at Nazism (which is not happening). The Euro “Reich” certainly has seen a tremendous increase in German power, with Germany effectively having vetos on budgets in Ireland, Portugal, Spain, Greece, and Cyprus, and likely more to come. Merkel is pretty explicit that her goal is for all Euro countries will have to agree to budget and banking regulations Germany wrote up.
ErinSiobhan
Iceland citizens voted and declined to cover about $5 billion euros worth of foreign deposits held mainly by Dutch and British depositors in Icesave accounts. The Dutch and British governments covered the deposits and sued Iceland to recover the funds. So far, their lawsuits have failed.
It will be interesting to see if the Russian government steps in to cover the losses of its citizens.
mainmati
@Zandar: Actually, its only real financial industry was money laundering. In fact, Cyprus does very well in tourism and agriculture.
Thor Heyerdahl
How much is this result due to the fact that there’s a German Election coming at the end of September? Right now it looks like there’s public discontent and no clear winner based on polls. Might have to be another “grand coalition” government.
PeakVT
@Zandar: @mainmati: The Cypriot financial industry wasn’t based on money-laundering – converting illegal money to legal money (though undoubtedly that happened there, just as it has in the US). It was focused on being a tax and legal haven for rich Russians and Russian companies. Cyprus is the third largest foreign investor in Russia because money was funneled through the country by Russian companies because it appeared to be a safer place to keep money and do business than Russian itself.
I am not a kook
@The Moar You Know: Comparing US states and EU countries with American concepts like “states’ rights” makes no sense.
EU countries have separate histories going back hundreds, even thousands of years, or at least to the end of the imperial era in WWI. They have different languages, ethnicities, political systems, and so forth. They were also killing each other wholesale only 70 years ago, and in the Balkans 20 years ago.
Compared to that US states are all the same. Their political systems are almost identical, they have a common language etc.
EU integration started in economies, there was no way there could have been political integration at the time. EU has serious problems with democracy deficit and the euro. Compared to the almost constant state of war on the continent until the end of WWII, things aren’t that bad.
Since so many people here a rooting for the fall of euro and EU, have you considered what the effect would be for example on US consumer protection? Lot of industrial production is done to EU standards, because it’s the largest marketplace and those pesky Germans are nitpicky about environmental etc regulations. This benefits everybody, and I don’t see the US with its regulatory systems captured by the industry stepping up any time soon.
catclub
I would say that slumping markets are: the realization that this sounded good but will not be ‘contained’.
Contained is what Bernanke said he thought the housing bubble was in 2007.
catclub
@I am not a kook: I have always seen the euro as benefitting US tourists in Europe
(and it also turns out, US manufacturers).
The transfer payments between states of the US dwarf any done in the Eurozone. Heck, the transfers in the Eurozone seem to go in the wrong direction.
I think the consumer protection regulations of the Eurozone have much more influence in the US than their environmental protection regulations. Just my guess.
I am not a kook
One more thing: I bet 99% of Americans who follow European issues get their information from English language media, which means British press (or British press filtered through American press) with a heavy dose of what my acquintances call Little Englander (anti-EU) sentiment.
Omnes Omnibus
@I am not a kook: There has always been a strong vein of Euro-skeptic running through the Brits. What is the lovely phrase: The wogs begin at Calais.
PeakVT
@I am not a kook: I don’t think anyone here is rooting for the fall of the EU. OTOH, people are rooting for the breakup of the common currency because it is very bad economic policy. Eliminating the Euro does not necessarily mean breakup of the EU, but countries exiting the Eurozone unilaterally may have to revoke all of their EU membership treaties if the remaining countries force the issue. We don’t really know because nobody has exited unilaterally yet.
marshall
First, it is amounts over 100,000 Euros that will be subject to confiscation. (So, if you have 100,001 Euros on deposit, you will lose maybe 30 – 40 cents.) That is not clear in many of the news reports.
Second, if Cyprus had not bought Greek sovereign bonds at the encouragement of the ECB, they would not be in this mess. This crisis is completely artificial in that sense. The Cypriot banks are not failing because of mismanagement or embezzlement, but because the troika made Greece invalidate its “safe” country bonds.
Third, this is not done by any means. Banking was 70% of the Cypriot economy. Now, that is gone. I doubt if it will be one tenth its former level in 6 months. Money will flow out of the country like water from a sponge, and I don’t see how the Bank of Cyprus can survive without serious additional support from the ECB.
I am going to paraphrase Winston Churchill :
All is over… Cyprus recedes into the darkness. She has suffered in every respect by her association with the European Union and with the euro.
marshall
@I am not a kook:
No serious effort is being made to go after any laundered money in Cyprus. All will be whittled down uniformly.
And, yes, from what I have seen the Cypriots were more serious than, say, the Luxembourgers, in preventing money laundering there. The game was tax avoidance, which is played in many other countries (see “Dutch sandwich,” for example).
scav
Jeroen Dijsselbloem, have you considered not opening your mouth and thus confirming everyone’s suspicions about those playing with the big European levers? Yes, it’s a bit of a public service but not something no one was expecting, although the cluelessness exhibited is not reassuring.
PeakVT
@marshall: The breakdown is 100% loss of deposits over €100K at one bank, 30-40% at another bank, and nothing at the other, smaller banks. This was different from the first proposal which would have hit all accounts at all banks.
Barry
@I am not a kook: “. Compared to the almost constant state of war on the continent until the end of WWII, things aren’t that bad.”
The first sighting of ‘The EU is not as bad as WWII’ meme.
Not Sure
@Zifnab: It’s like those people who used to work in the payday loan industry before regulators clamped down on them. Some jobs aren’t worth saving.
Djur
Fuck the Euro and fuck Germany, and also fuck anyone who acts like talking shit about European bankers is automatically antisemitic. Deutsche Bundesbank is run by a bunch of gimlet-eyed Teutons.