Cyprus Banking Crisis for Dummies


Bank Customer Trying to Get His Money Out of His Bank During Cyprus Bank Holiday

Ground Zero of Financial Repression

You’ve heard that the tiny European country Cyprus is threatening to grab between 3 and 13% of bank depositors’ funds in return for a bailout of the country by the European Union.

Zero Hedge reports that Germany’s Finance Minister and the IMF originally demanded that 40% of bank deposits be looted.

Sajiyat Das notes:

Irrespective of the fate of Cyprus, the solution adopted will exacerbate the European debt crisis.

Many commentators note that the deposit grab may cause panic among bank depositors in Spain and other vulnerable countries as well. Indeed, many are asking whether this could be a modern Creditanstalt situation. Another common analogy is that this could be “worse than Lehman” failing.

On the other hand – given that the entire economy of Cyprus is smaller than that of Shreveport, Louisiana, and that Cyprus is mainly a parking spot for hot money from Russian oligarchs and mafia – some say that the whole crisis will quickly blow over.

What’s the bigger picture? Bank deposit grabs may spread to other vulnerable European countries. The New York Times reports:

Jeroen Dijsselbloem, the president of the group of euro area ministers, declined early Saturday to rule out taxes on depositors in countries beyond Cyprus.

And the chief economist of the German Commerzbank has called for private savings accounts in Italy to be similarly plundered:

A tax rate of 15 percent on financial assets would probably be enough to push the Italian government debt to below the critical level of 100 percent of gross domestic product.

Indeed, Zero Hedge has been warning about this kind of scenario for years.

Why are they doing it?

The Financial Times notes:

Cyprus’s new president Nicos Anastasiades did not like the idea of forcing any losses on ordinary account holders….But after receiving what Cypriot officials said were reassurances from Angela Merkel…Mr Anastasiades agreed to a deal that he thought would include relatively modest “haircuts” – a 7 per cent levy on deposits above €100,000 and a 3.5 per cent hit on those below.

With the principle of haircuts agreed, Mr Anastasiades decided to stay for the finance ministers meeting, which was just getting under way. All he asked was that the rates be tweaked: raise the levy on the bigger deposits in order to lower the hit taken by the less well off. Both sides believed a deal was at hand….

However, Mr Anastasiades was left reeling by the response to his request for modest adjustments, according to Cypriot officials. Wolfgang Schäuble, the German finance minister, said Nicosia would immediately have to raise as much as €7bn from depositor haircuts. A stunned Mr Anastasiades decided to walk out…

But Mr Anastasiades soon learnt storming out was not an option. The European Central Bank had another shock for him: the island’s second-largest bank, Laiki, was in such bad shape that it no longer qualified for the eurosystem’s emergency liquidity assistance – the cheap central bank loans that teetering eurozone banks need to run their day-to-day operations.

The message, delivered by the ECB’s chief negotiator, Jörg Asmussen, meant that if no deal was reached, Laiki would collapse, probably bringing the island’s largest bank down with it, and saddling Nicosia with a €30bn bill to reimburse accounts covered by the country’s deposit guarantee scheme. It was money Nicosia did not have. All of the island’s account holders would be wiped out.

Mr Schäuble was not alone. Several officials involved in the talks said he not only had backing from the Finns, Slovaks and to a lesser extent the Dutch. The International Monetary Fund, which had been urging depositor haircuts for months, had won the argument over the skittish European Commission, which had long worried that seizing depositor assets could spark a bank run in Cyprus and, potentially, elsewhere in the eurozone.

Yves Smith explains that the real reason for the EU’s grab for deposits from Cyprus bank accounts is that it is easier to screw the little guy than to screw sophisticated investors:

Why are depositors, the folks most senior in the creditor hierarchy, being whacked? Shareholders and bondholders should be wiped out before they lose a penny. Yes, but this is a case where expediency, unwisely, has been allowed to carry the day.

In an excellent and important post, “A stupid idea whose time had come,” Joseph Cotterill of FT Alphaville explains why the axe fell on the depositors.

***

There is pretty much squat in the way of equity and senior debt. The “other liabilities” may be secured. So then we get to liabilities to central and other banks. The liabilities to central banks are not going to be haircut; that is part of the “private sector participation” premise. Remember, banks in periphery countries have been pledging any asset the ECB will take to it, and any stuff the ECB won’t take to their own central bank. In the case of the Cypriot banks, the exposure is almost entirely that of the local central bank. Again from Cotterill:

As of January, the Cypriot central bank was extending around €9bn of secret liquidity in return for collateral no longer accepted at normal ECB liquidity ops. Much of it (it’s naturally difficult to determine how much) was probably going to Laiki.

… That’s €9 billion of Cyprus loans to the banks, mainly Laiki, which is junior to deposits, versus the €5.8 billion to be seized from depositors. So why aren’t the loans from the Cyprus central bank being written down and the Cyprus sovereign debt investors taking losses? Well, it turns out it is easier to screw retail customers than it is professional investors:

As it is, there were lots of good reasons why a sovereign debt restructuring did not happen. I don’t want to downplay them. Notably, the fact that the bonds that were best to restructure were governed under English law, and were likely held by the kind of investor who’s willing to litigate. I listed the problems here. Around it all was the inability to get write-downs out of Cypriot domestic-law sovereign debt, because that was held by the banks which already bore big black holes in their balance sheets. Again we come up to something that could be raised in the defence of the deposit levy — local exposure was so great everywhere, that any distribution of losses would have been painful. For the widow depositor, substitute the pension fund holding local-law bonds….

No wonder this cartoon – showing the EU forcing the Cypriot bankers to rob their depositors – is going viral in Cyprus (the caption just says “bank robbery of the Cypriot people):

#cyprus
Indeed, it’s not the “great recession” … it’s the great bank robbery. (Too bad Cyprus didn’t choose the right fork in the road.)

As Tyler Durden notes, the Cypriot deposit grab is just one of a wide variety of forms of financial repression that central banks, big private banks and governments are using to grab money from the people. For example, negative interest rates are an ongoing theft.

Sajiyat Das writes:

A debt crisis, especially on the current scale, cannot be dealt without other than by financial repression. To date, it has taken the form of higher taxes, interest rates below the rate of inflation, directed investment and increased government intervention in the economy. Cyprus marks a new phase of financial repression, shifting the burden increasingly onto savers directly by confiscating savings.

As we’ve previously noted, we’ll have a never-ending depression unless bondholders are forced to take a haircut. The world economic and political “leaders” have demonstrated once again that forcing the big boys to take a haircut is inconceivable. Instead, they will escalate their campaign of repression against savers and taxpayers.

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  • Essential Intel

    The following article surveys the underlying phenomena of the recent financial pandemic,which this week centers around the Pandora-box of Greek-Cypriot finance, where a new aspect of direct-democracy is attempted: that of member-accountability: http://essential-intelligence-network.blogspot.com/2013/03/from-democratic-services-to-dhimmi.html

  • Al Kyda

    What’s the big deal? Via taxation, governments routinely steal far more money from their citizens, yet no one is running around and screaming. I don’t see why another few percent would matter.

    • Meteorlady

      What’s the big deal? People spent their lives working for that money. It’s theirs…..

  • just_say_no

    The caption really says – “bank robbery” in Cypriot.

  • Frenky

    NCIe grest so nice psot!

    http://urgentessays.co.uk

  • Frenky

    NCIe grest so nice psot!

    http://urgentessays.co.uk

  • http://www.facebook.com/bruce.hood.750 Bruce Hood

    The idea is being floated like a big fart to see if other countrys can smell it.

  • Roy

    “…the critical level of 100 percent of gross domestic product.”

    Hmmm. That would be the “critical” level the US is now exceeding.

  • Honest Harry’s Used Cars

    The dark truth is found in the statistical reality thatthe vast majority of people are so indebted, they have NO savings that can get wiped out.

    In the U.S. the Cyprus solution would sail through Congress. Democratic Congressman, “We are going to take the money from those rich people WHO HAVE SAVINGS, so the NANNY-STATE government can continue to send you your welfare check, pay your rent and replenish your EBT card.” Obama constituency, “Hooray!”

    The demographics are there to get it done too. Don’t doubt it. The rabble in this country votes now.

    The really dark truth about Cyprus is that it is a wholly confabulated trial balloon.

    Not one financial reporter is talking about the massive insider trading that occurred -worldwide- on this sudden Cyprus news. But trust me, that’s exactly what happened. The reason stocks rebounded yesterday and this morning, is because there were so many greedy traders who had inside information concerning this trial balloon, there was something of a -short squeeze- as the put-balance-sheet played itself out against the lack of stampeded sellers in the market.

    Face it! Everyone is so numb from all the endless news-hype about this-and-that EURO development affecting the economy, most people simply sat back and watched as the Cyprus news was marched out and paraded in the Main Stream Media. Even the gargantuan media orchestra playing the Cypress Symphony didn’t stampede as many as the script-writers -hoped it would.

    Don’t shoot till you see the whites of their eyes!

    All the news, -the whole script, -the complete musical score to be played out in the media every day -is coming from Ben Bernanke’s friends on Wall Street. It’s as predictable as Vaudeville.

    The Alternative media is just not savvy enough to recognize how familiar is the tune being played -every day-.

    Trust me. This is not the end of the world. This is just more of the same-old-thing these shills have been playing at for years. Don’t you see it?

  • trigon400

    I will shed no tears for those in the US who will be affected most by the inevitable reductions in “gubmint freebies” & federal employee pensioners.
    It is this group, along with millions receiving way more in social security than they paid into it (along with millions of illegals as well) that have help put us in this predicament.

  • TruthHawk

    It’s MUCH bigger and broader than being reported…

    Sinclair: “If people believe that $13 billion is the total of this bailout, they are out of their minds. $130 billion is not the true total of even the Russian deposits in Cyprus banks. One important Russian businessman, in his various business enterprises, would have $100 billion on deposit himself. 10% of all deposits in Cypress could be $500 billion or more because Cyprus is the banking entity for Russia, not Switzerland or Grand Cayman.

    “People need to grasp that this is not about $130 billion. The real dollar figure is orders of magnitudes larger than that number. How much higher we’ll never know, but it is massive. This is the Bank of Russia we are talking about here. The Central Bank of Russia is for the people in Russia. What the IMF went after here is the central bank of the Russian elite and former KGB, and the Russians simply will not stand still for that.”

    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/3/19_Sinclair_-_Cyprus_Disaster_Is_Much_Bigger_Than_Being_Reported.html

    *********
    Farage: “I think the implications of this are much bigger than Iceland … This is much more serious than that because what you are facing here is a country being forced out of the euro. And once one country goes, it will expose, through the Target 2 system, that Germany is owed vast sums of money by the central banks of the Mediterranean countries.

    That is why, up until now, Merkel has been so desperate not to let Greece leave the euro. Because she knew that if Greece left that it would bring the whole house of cards crashing down.

    Now I know that Cyprus is small, and it’s only a country with about 800,000 people, but the Cypriot Parliament effectively said, ‘We are leaving the euro.’ There is a very real risk that this knocks-on, and brings about a crash, not just in the euro, but in several banks across the European Union. So we are at a very, very critical juncture.”

    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/3/19_Nigel_Farage_-_Cyprus_Rejection_Sets_Up_A_Crash_In_Markets.html

 

 

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