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The Cyprus solution

Written By: - Date published: 9:48 am, March 26th, 2013 - 48 comments
Categories: capitalism, economy, Europe - Tags: , , , ,

One of the consequences of the big banks being allowed to socialise their losses (have taxpayers pay for their bailouts) is the sovereign debt crisis that is messily unfolding in Europe. The latest hotspot is Cyprus.

One of the EU proposals for dealing the debt in Cyprus was to “levy” (simply take) a percentage of all bank deposits in the country. That led to mass protests, panic, a run on banks, and a government backdown. (It also sent a shock wave through other countries, and at home in NZ speculation that National was preparing for a similar process, followed by a lot of learned reassurance that such a thing could never happen here.)

Now we have the next stage of the unfolding situation in Cyprus:

Cyprus strikes last-minute EU bailout deal

Agreement set to involve heavy losses for wealthy investors, while those with savings under €100,000 will be spared

European leaders reached an agreement with Cyprus early on Monday morning that closes down the island’s second-biggest bank and inflicts huge losses on wealthy savers. …

A meeting of eurozone finance ministers that started six hours late reached an agreement in the early hours of Monday morning to finalise the fine print of the deal. Savers with deposits of less than €100,000 (£85,000) would be spared but it was thought there would be heavy losses inflicted on the deposits of the wealthy.

Laiki, or Cyprus Popular Bank, is to be closed, with its good assets transferred to Bank of Cyprus, the country’s biggest bank, where savers would suffer big losses in return for equity shares. Those with more than €100,000 in Laiki would also be hit hard.

There is some justification for this move as a form of (albeit fairly extreme!) progressive taxation (and also in the suggestion that many of those big accounts are held by foreigners as a tax dodge). None the less a solution that hits the wealthy instead of the poor, for a change, is certainly notable. I can’t help but think that it is going to send a shiver up the spines of the ultra-wealthy international money set. How will they respond? What next for Cyprus and the EU? Interesting times.

48 comments on “The Cyprus solution ”

  1. A,

    I really wish you would stop using the word taxation for what really is theft. Added to that it isn’t the really wealthy who get screwed unless you consider everyone with savings over €100,000 wealthy.

    The brutal theft of peoples savings over which they have it may be assumed to have paid their taxes to pay for the derivatives gambles of their bank is outrageous and while I am happy to hear that the church is losing some €100 million indicating that they must have some €350 million in their bank accounts (so much for them helping the poor) the reality is that the money will go to the really rich i.e. the private interests that rule the global banking system at the cost of the middle class and the sort of better off than most.

    • ghostwhowalksnz 1.1

      A bank is a business, if it fails you lose your money. No difference from a finance company

      • MrSmith 1.1.1

        The difference is the Government bails you out if your a bank Ghost, and even sometimes if your a finance company especially when enough of your farmer mate stand to lose their shirts.

  2. infused 2

    It can happen anywhere. Regardless of the insurance. Who funds the insurance?

    • grumpy 2.1

      The old BNZ had their losses insured by a company registered in the Cook Islands……

  3. prism 3

    Added to that it isn’t the really wealthy who get screwed unless you consider everyone with savings over €100,000 wealthy”

    I think all ordinary people would consider that having this sum of savings indicated being wealthy – it is $200,000 odd in spare money.

    The sacked bank teller in Cyprus who was interviewed on radio this morning was beside herself – how will she live, get more paid work, there is no social security.

    • Tiresias 3.1

      No, EU100,000 = NZ$154,000

      You are defining ‘ordinary people’ purely in cash terms? If you have $155,000 in the bank you can’t be an ‘ordinary person’?

      So you can’t be an ordinary person if you own a $250,000 home mortgage free? Suppose you’re a single child and your parents have just died leaving you with $500,000 house they worked all their lives to leave to you, which you sell to pay off your own mortgage and put the rest in the bank for your kid’s university fees, or your retirement, or a new car and that big holiday you’ve always dreamed of next year.

      Have you considered that whatever your income, there are a great many people in Africa, Asia and South America would have a hard time not regarding YOU as wealthy?

      • prism 3.1.1

        tiresias you have hit it on the nail. anyone who has the sort of financial situation you refer to is in an extraordinary position – they are in a different strata than their ordinary friends and family. the opportunities that mortgage free or thousands that are spare cash in the bank allows change one’s outlook on life. and don’t waste my time with your relativism. we are talking about the experience of the economy in a developed country.

  4. Tiresias 4

    Do you honestly think this is a solution that ‘hits the wealthy’?

    Do you honestly think ‘the wealthy’ have their wealth sitting in bank deposit accounts?

    No. ‘The wealthy’ own property, own shares and businesses, own precious metals and art-works none of which are being sequestered in this grab – which is almost entirely designed to prevent debt-default losses falling on the wealthy who own banks or who have shares and bonds in German, French, Dutch, Italian and Greek Banks who stood to lose if the Cypriot banks went under.

    This hits depositors at a single moment in time. Your business just received a payment for work done under a contract? You have your firm’s payroll handled by Laiki and transfer funds in to meet it? You just sold your business and were looking invest in another? Your surviving parent just died and their estate was being wound up for distribution? You were a small, conscientious saver looking to your retirement who didn’t trust the share-market but wanted to help Cyprus by saving? Tough. You lose.

    Because of its historical links with Britain Cyprus is unique in the EU by using English commercial law – which is globally respected and understood – and has respected courts. For this reason many Russian companies doing international business and many international companies doing business with Russians were registered in Cyprus to take advantage of this with their commerce passing through Cyriot banks – eg BP-Russia. No-doubt some of this was dodgy, but no more than passes through the City of London or New York on any one day. It is these perfectly legitimate companies doing perfectly legitimate business that are being stung by this, and the damage to Cyprus, the damage to the necessary fidelity of transaction that underlies international trade and the damage done to the whole EU ideal have yet to be realised.

    • Rogue Trooper 4.1

      Very Wise appraisal T.

    • Draco T Bastard 4.2

      No. ‘The wealthy’ own property, own shares and businesses, own precious metals and art-works none of which are being sequestered in this grab – which is almost entirely designed to prevent debt-default losses falling on the wealthy who own banks or who have shares and bonds in German, French, Dutch, Italian and Greek Banks who stood to lose if the Cypriot banks went under.

      That’s one of the few things that I agree with you on.

  5. vto 5

    Bank meltdowns.

    Coming to a town near you. (You’re a good keen man if you take the bright sunny outlook and bet on it not happening in a town near you).

    The system is systemically stuffed. This is the continued playing out of the end-game.

    • Tiresias 5.1

      One bank’s loss is another bank’s gain – there’s only so much you can stuff in a mattress and the rest has to go somewhere.

      What is interesting now in the Cyprus fiasco is the losses are falling on two banks, Bank of Cyprus and Laiki. Laiki was in a very bad way and probably deserved to fail while Bank of Cyprus was probably salvageable except that it’s now to be saddled with a lot of Laiki’s problem accounts which will probably kill it. However Cyprus has a lot of smaller banks that didn’t have exposure to Greece and so were still solvent.

      The original scheme required the holders of accounts even in the solvent smaller banks to bail-in to help save Laiki and BoC. Now if you had the good fortune to be with one of the smaller banks you’re OK, but if you had the misfortune to bank with Laiki you lose much more – up to 40% rather than the original 10%.

      So the lesson is, if you’re going to put money in a bank take a good look at its balance sheet first and, of course, don’t forget to take into account everything that’s going to happen in the financial world for the next couple of years or so.

      Oh, and both BoC and Laiki passed the banking ‘stress tests’ run on all European banks by the ECB only 18-months ago, so it’s clear you can safely rely on official pronouncements.

    • Draco T Bastard 5.2

      +1

      The system is structurally unsound and we’re just starting to see the cracks appear.

  6. Pascal's bookie 6

    So what are the alternatives?

    Way I see it there are only so many broad options available.

    -either some sort of jubilee in which the debt is simply ruled to no longer exist

    -the debt gets paid out of created money

    -debt gets paid by someone else (ie the govt) borrowing to pay it

    -the debt gets paid by looking about and seeing who has a big stack of cash and saying, sorry mate, you’re paying everyone else is broke.

    Every one of the methods hurts someone. There are bad ways and worse ways of doing all of them too, but which way you choose is going to come down to a political choice that will be called ‘theft’ by the people who end up paying.

    • vto 6.1

      Lending money comes with risk that it wont be repaid.

      The risk has materialised. It wont be repaid.

      These were the rules.

      Now, onwards to ensure the drug dealer money-lenders dont get to do it again. No more interest. What gets me about all this shit is that the money-lenders are EXACTLY like drug dealers – load everyone up and when they finally overreach then waltz in and take the commodore. The parallels are exact.

      • Tiresias 6.1.1

        “Lending money comes with risk that it wont be repaid.”

        That’s true in the playground. In the world of grown-ups things are a little more sophisticated.

        1. The rule was that you could lend up to EU100,000 to a bank with a guarantee that it would be repaid. The attempt to say that wasn’t really a rule was the most inane part of this episode.

        2. There were also rules that said what banks could and couldn’t do with your lent money which were designed to encourage you into lending by reducing the risk, and the interest you were paid was mean to ‘compensate’ for what little risk remained. There’s no suggestion that Laiki lent money outside those rules and it’s arguable that ‘agreeing’ to the haircut on Greek lending forced on it by the EU was the only breach. Laiki may have unwise (in retrospect was unwise) in having such a large exposure to Greece, but that’s not strange given the relationship between Cyrus and Greece.

        3. Taking that haircut weakened Laiki and the financially literate, mistrusting Cypriot (and, very likely the astute and canny Russian drug-dealers) saw the writing on the wall so began pulling their money out, weakening Laiki still further. So the axe has fallen on the financially illiterate Cypriot mums-and-dads, businesses and institutions, or on those who believed the Government’s promise that deposit accounts would not be sequestered.

        4. Banks have spent generations and millions of dollars building up a reputation that lending money to banks by way of deposit is fundamentally different to lending it directly to businesses, home-buyers, used-car salesmen, and fundamentally safer. Their whole business depends on that reputation, and modern commerce depends on it too. The EU’s bull-in-a-china-shop approach to the Cyrus problem has blown a hole as big as a barn door in that reputation.

        • vto 6.1.1.1

          Sure T the details may be in the way you describe, however I see no case put forward that that has removed the risk that the money wont be repaid. There is always that risk – unless one is playing in the playground and you are the big kid (which is in fact exactl;y what is going on here – squaring up for a ding dong)

          • Tiresias 6.1.1.1.1

            vto – you’re right. There’s always a risk of losing the money . But you’re also wrong and missing the point.

            Because of the ultimate ‘rule’ – you risk losing ‘ your’ money – there are supposed to be rules that allow you to assess that risk, decide how much you want to risk and what reward you want for making that risk. In the regard of Cyprus’ bank those rules related to ‘guaranteed’ deposits, what banks can and can’t do with your money and the order of priority in which monies will be applied in order to meet debts.

            And in regard to Cyprus the hamfisted EU actions tore up those rules, as so made the risks of lending money to any EU institution unquantifiable. And the EU will suffer a loss of investment as a result.

            ie: Before Cyprus you ‘knew’ you could lend up to EU100,000 by way of deposit to any bank in the EU without risking losing it, because it was supposed to be guaranteed. Now you know that’s not true – the EU was perfectly prepared to stand-by while Cyprus sequestered money as a ‘tax’ from accounts <EU100,000.

            Before Cyprus you were supposed to be able to rely on banks not putting your money at risk by 'forgiving' massive loans to other people. Laiki was arm-twisted by the European Central Bank to write down its loans – loans made with your money – to Greece in order to save the Greek banks from having to make interest payments they weren't able to meet. But when as a result Laiki was faced with having to make interest payments it wasn't able to meet, including interest to you on your loan, the ECB didn't offer to come to the party to help out your bank. They just pulled the rug out from under it.

            So you're right – lending in Europe is right back to the playground where the big, strong boys like Germany can bully the little guys into coughing up without compensation, but that certainly isn't the way it's supposed to be done, nor the way it needs to be done if you want a thriving financial industry underpinning your growth and development.

    • Tiresias 6.2

      There was certainly no immediate need for Cyprus to be crucified. I have little doubt there was an element of ‘pour encourager les autres’ in it, and that the suffering Cyprus will now experience is being imposed to gratify the German domestic voter, both of which make a complete and utter mockery of any idea of ‘European solidarity’ supposedly underlying the whole EU project.

      Any of Pascal’s Bookie’s options, tho’, are ruled out by the fact of the Euro. A European-wide debt jubilee would involve so much money and so many intermeshed obligations it would crash the global financial system overnight, but there’s no way in a ‘single currency’ that debts can be wiped for a single player within it without raising howls of ‘unfair’ from the others.

      The depositors getting hurt in Cyprus – and Cyprus itself in the economic consequences to come – are actually suffering because of the haircut its banks agreed to in order to preserve the Greek banks last year, so in a real sense this isn’t even ‘theft’ from Cypriots to save Cyprus, but to save Greece.

      And it wasn’t even a political choice as, having once been thwarted by Cyprus’ Parliament presumably speaking for the Cypriot people, this deal was stitched up by the bureaucrats in Brussels in such as way as to by-pass Parliament.

      IMHO Cyprus’ best bet now would be to use the breathing space gained to secretly print a bucket-load of Cypriot pounds and leave the EU overnight, renaging on the debt it has just been blackmailed into taking on.

  7. erentz 7

    Oh please stop this crap that people who save are rich. I am beginning to feel like I’ve made a huge mistake saving all my life. Instead you seem to think I should have got into huge debt buying houses I couldn’t afford. How about instead of indiscriminantly taking the savings of people we take 25% of everyone’s house?

    • vto 7.2

      +1000

      That would highlight the reality of what is being taken at the barrel of a gun

    • TheContrarian 7.3

      Totally agree Erentz. My wife and I have spent the last 8 years living on one salary and saving the rest and avoiding debt at all cost. To me that seems like a smart move and I wouldn’t consider myself ‘rich’ . Just debt free.

    • Edmund Horner 7.4

      I agree. The proposed savings threshold of 100k is at best a proxy for wealth, and arguably a poor one. Having 100k in savings is not necessarily “wealthy” by any means. It could be what a person has managed to scrape together over their *entire working life* and is not remotely comparable to, say, earning 100k per year (which I would agree is relatively wealthy, but hardly 1% level).

      I don’t know the details; will the one-time tax affect only the remaining balance above a tax-free threshold of 100k? I’m not sure it qualifies as progressive taxation if not.

      Systematically taxing bank accounts is administratively easy. But it doesn’t target those who can really afford to pay, nor those who caused the crisis in the first place.

      • rosy 7.4.1

        I don’t really get why are they going after customers instead of shareholders. Surely it’s shareholders and management who made the decisions that took the bank down, not the customers who accept lower interest than they could get elsewhere because banks were lower risk, apparently?

        Why also, is the not targeting offshore investors who are avoiding tax in their own countries?

        Do executives still keep their jobs?

        • Colonial Viper 7.4.1.1

          – The shareholders can’t provide the immediate loan repayments that the ECB wants as the shareholders have no money stored at the bank. The depositors do.

          – You target the depositors because the depositors have billions in funds that you can take immediately.

          – Most of the big deposits under threat are Russian. So they ARE targetting foreign investors. (But I read on ZeroHedge that the Russians have already got their money out of the UK and Russian branches of the Cyprian banks, which did not have controls applied to them).

          • rosy 7.4.1.1.1

            The shareholders can’t provide the immediate loan repayments that the ECB wants as the shareholders have no money stored at the bank
            They can if you seize the banks – a la Iceland

            So they ARE targetting foreign investors
            At 100 grand, they’re targeting locals more, I reckon – small business, professionals and people who have put away a bit for a rainy day.

            Really, it needs to be a million to target the overseas investors and leaving the people who make the Cyprus economy tick over largely alone.

            Imagine if they had’ve done this to Spanish/Greek banks… there would be a few German and other Northern European depositors that would be pretty upset, seems they don’t have much of a stake in Cypriot banks?

            • Colonial Viper 7.4.1.1.1.1

              The shareholders can’t provide the immediate loan repayments that the ECB wants as the shareholders have no money stored at the bank
              They can if you seize the banks – a la Iceland

              I think you have your concepts slightly mixed up here. IIRC in Iceland, the government refused to bail out the banks from their massive bad debts, and nationalised them instead.

              Yes, the shareholders were all destroyed as the banks were allowed to fail and those share values went to zero. But there was no real money available in those shares anyway (they are shares not dollar notes).

              The Icelandic govt then negotiated with depositors when, and what portion of their deposits they would get back.

              The real losers of the episode were the banks bondholders. Where the icelandic banks refused to make good on the options transactions etc that they had entered into.

              At 100 grand, they’re targeting locals more, I reckon – small business, professionals and people who have put away a bit for a rainy day.

              Yeah, there’s a fair bit of that.

              • rosy

                Ta, yeah, I’m not up on these banking things, hence the questions… still, it seems there are other options that would have protected the economy somewhat more than this one does (while understanding there are no ‘good’ options). I see this as protecting foreign institutions rather than the country, and it’s those institutions and tax dodgers, chasing unreasonable profit that should take the haircut. I guess there is nothing new there, but.

  8. Colonial Viper 8

    It could be called progressive taxation (and it is right that they are not hitting small depositors the hardest), unfortunately the funds are not going to be used for the social good of the country.

    They will be used to deliver principal repayments and prop up yields to foreign creditors.

  9. r0b 9

    Please note that in the post I am not endorsing the action that has been taken here (though I wrote it in a hurry and it isn’t as clear as it should be). I said there was “some justification” for the move, not that I thought it was justified!

    Three factors for me:

    If it is indeed true (as stated in the article linked) that a sizable number of the accounts hit are held in Cyprus by foreigners (the international super-rich) avoiding taxes in their own country, then I have no problem with those folk being hit.

    This solution leaves the small savers alone which is absolutely a good thing.

    But this solution does hit a large number of Cypriot citizens who are good savers, and no 100K in the bank doesn’t make you rich in the context of saving for retirement. Those people got screwed and I’m very sorry for them. (Cypriot super-rich with more than 100K lying round in spare change I am highly ambivalent about).

    • And that is what they are counting on. You love to see the rich get a haircut so you will be silent about the fact that it is outright theft and if they can do it to them they can do it to everyone. By the way the whole exercise was not so much about the Cypriot banks as a move in the financial wars being wages in the run up to a global hot war. The Russian Oligarchs this was intended to hurt upsetting Russia where able to take their ill gotten gains out in the confusion running up to the bank “holiday” in Cyprus it appears.

    • grumpy 9.2

      Apparently the proposal is to hit only “unsecured” deposits. A different kettle of fish entirely.

    • Tiresias 9.3

      “If it is indeed true (as stated in the article linked) that a sizable number of the accounts hit are held in Cyprus by foreigners (the international super-rich) avoiding taxes in their own country,”

      It isn’t.

      “And the idea that Cyprus is a hotbed of Russian Mafia money also appears to be exaggerated. This looks to be a combination of a need to scapegoat the latest supplicant to the Trokia plus Anglo-German prejudice against Central and Southern Europe.

      Not to put too fine a point on it, Wachovia laundered over $800 million of Mexican drug money, and Standard Chartered admitted to “at least” $250 billion of Iran related money laundering. And HSBC, which paid the biggest fine ever in the US for drug-related money laundering for Central American groups, is now being charged by Argentina for similar activities. Let’s not kid ourselves. Citigroup has had a huge wealth management business, concentrated on Latin America, since the 1980s. What do you think that is about? To a significant degree, like Swiss private banks, Citigroup is the recipient of funds expropriated from national governments. For people like Martin Wolf of the Financial Times to get sanctimonious about what Cypriot banks are up to is more than a tad disingenuous, particularly when his own paper, the same day, describes how five Russian M&A transactions are having to be reworked due to the bank freeze in Cyprus. Yes, there is clearly dirty banking going on there. But it appears only 28% of the deposits are Russia related. A significant, if not overwhelming amount of that activity appears to be no worse than GE’s tax avoidance. And remember, depositors of every bank are being haircut to bail out the miscreant Laiki. That includes the roughly €3 billion of largely Russian deposits in the perfectly solvent Cyprus subsidiary of the Russian bank VTB. ”

      From: http://www.nakedcapitalism.com/2013/03/cyprus-will-the-mouse-that-roared-be-gored.html

  10. vto 10

    http://www.stuff.co.nz/business/money/8471186/SCF-failure-costs-taxpayers-805m

    So each and every person in NZ has paid out $200 for the greedy investors in SCF.

    What a load of absolute fucking bullshit.

    What with the crap going on with EQC in Chch and people’s savings getting constantly raped and pillaged to support the moneyed elite, it is enough to make one ………………. fuck the system

  11. grumpy 11

    Many years ago, I was on the Board of a european company wishing to move to Cyprus for tax purposes. They had leased a whole floor to turn into offices and I visited twice.

    The whole island was run by Russian Mafia, the locals usually had bugger all money and the economy revolved around being a tax have and the Russians.

    Clearly, the locals will carry the cost of this bailout as the Russians will have very little in Cypriot banks.

    One group of Russians wanted to go fishing so they bought a boat for good money off a local fisherman. When they left they just abandoned it at the wharf and he got it back free.

    A strange place…….

  12. arcadia13 12

    Wow…I bet David Shearers rapt he hasn’t got a Bank Account in Cyprus…or has he? *chortles evilly*

  13. karol 13

    Mana supports the petition to stop banks taking your money.

    they explain their support with reference to the dodgy practices of banks and the way profits from Kiwis are siphoned off overseas to Aussie and the US.

  14. AmaKiwi 14

    Trust is the essential service banks sell their customers. Trust has been broken. The EU forced the Cypriot government to seize personal bank accounts.

    My personal advice to everyone:

    1. Take your money out of the bank in cash and hide it well.
    2. Move your money to Singapore, Norway, or Switzerland. (These are among the few countries that have huge cash surpluses and are therefore unlikely to seize it from depositors. They are not part of the EU.)

    Is this socially responsible? No. But enough other people will be doing it so it is only a matter of time before we have widespread runs on the banks.

    The banking system is stuffed. If you don’t get your money out now, be prepared to lose it.

    I write this with a heavy heart. There will be no joy in what is inevitably unfolding.

    • karol 14.1

      Not that easy to open accounts in countries you don’t live in, or at least have physically visited, as far as I’m aware. Certainly not in Aussie, NZ or the UK.

      • Colonial Viper 14.1.1

        It’s fine if you have at least US$1M to deposit and your own private wealth banker to help organise it. 👿

        • karol 14.1.1.1

          Ah, yes. That’s why I had difficulty opening a bank account in Aussie from the UK, when I was planning to move to Aus. I’m a little short of a $mil.

      • AmaKiwi 14.1.2

        I do not know about the need to visit. Wikipedia shows 7 locally owned Singapore banks. Contact them directly and ask. They may have local representatives.

        If you must make the trip, weigh the risks.

        It is easy to exit a movie theater until someone yells, “Fire.” Then you are trapped.

        I don’t have a million either, which is why I cannot afford to lose what I have.

        • AmaKiwi 14.1.2.1

          @ Colonial Viper

          Wikipedia shows the 7 locally owned banks are full service banks. That means you should be able to open a simple savings account with less than $1,000. The locals do it.

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