The current deal only impacts depositors with more than 100K in the banks - more than this wasn't insured anyway.
"You should basically never hit non-insured depositors either."
Why? Since when is there a guarantee that banks are 100% safe? If people deposit large (i.e. over deposit guarantee limits) in a bank to benefit from the high interest rates they are taking a risk with a reward - if this goes wrong then why should other more prudent people have to bail them out?
Actually, Schäuble even opposed this idea, but the dear government of Cyprus wanted to avoid disappointing the wealthy investors and hence initially preferred to ignore the insurance commitments it made. Only after the public backslash did they decide to honour at least parts of their previous obligations.
"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]
We don't really know which individual came up with the idea... but the EU were okay with the original plan to take money from those with <100k as part of a bailout, as long as the Cypriots got it passed locally as a "tax" to avoid any potential legal issues with the EU directive on protecting deposits.
No, it is completely fair to only blame Cyprus (the people obviously in extension of the leadership), given that Cyprus got itself into this mess and needs European money to find a way out. Expecting them to contribute[0] at least a little bit to the bailout is perfectly fine, and it is not the EU’s job to police how Cyprus procures said contribution.
[0] This is true even more since contrary to Greece or Ireland, there’s no indication whatsoever that Cyprus will ever pay back 10 bn €.
Its not Cyprus to blame for EU's decision to write off the Greek debt about a year ago. Cyprus economy and banking system went from healthy to sinking boat overnight because of that decision of the eurogroup which it didn't have control over. Now the eurogroup came back to penalize Cyprus for not having that money that eurogroup itself took away.
Many think the bank stress tests are a joke and only exist to raise investor confidence. If true, then those people so quick to criticise Cyprus, might soon find themselves sharing the same fate.
Agreed that no depositor should be hit. The failure here is that of the ECB which has not managed to regulate banks properly to reduce the risks of failure.
It's trying to avoid avoid reality. What you are saying is that no one should ever be hit. banks shouldn't fail. The reality is that banks do fail. They fail because of bad management. They fail because of bad financial environment. They fail because of bad regulation. Whatever. They do fail. That is reality.
We need rules that define what happens when they do fail. We need to be able to survive bank failures the way we can survive failures of other companies.
We can't just keep deciding that banks should never fail again.
If you are management at one of these banks, you essentially have a risk-free business, and can do whatever you want without fear of bankruptcy or prosecution.
In Cyprus, I'd say put these banks into some sort of bankruptcy. Give everyone haircuts in whatever order a court (remember rule of law?), not some dark room full of politicians, beuarocrats and bankers decides is correct. Then have the Cypriot government or the EU (we also need to figure out who is liable here) make good on the promises to insured depositors.
I don't see how dooming the next generation of Cypriot taxpayers to high taxes and low public services in order to save uninsured depositors who benefited from the high interest rates these risky accounts yielded from taking a haircut. Not from a legal perspective, or a moral one. It doesn't sit well with socialism or with capitalism.
I don't buy the argument that it will in any way preserve choruses ability to borrow in international markets.
Bank regulation is not the responsibility of the ECB. Each EU country is responsible for regulating its own banks. This is one of the criticisms of the EU system: the currency is continent-wide, but there's no centralized bank regulator.
Attempts have been made to establish a common regulator or at least a common set of rules for national regulators, but have been strongly opposed by a few more and more marginalised member countries.
Even if you are prudent and spread your savings across different banks, you might still find yourself one day seeking taxpayer help.
In December 2012, the FDIC and Bank of England published a paper saying:
"deposit guarantee schemes may be required to contribute to the recapitalization of the firm... insofar as a bail-in provides for continuity in operations and preserves value, losses to a deposit guarantee scheme in a bail in should be much lower than in liquidation."[1]
In a nutshell:
"...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."[2]
As an indie developer who had established an online business in cyprus and is now being hardly hit by the bail-in, i agree with a lot of the observations made. Cyprus offers high quality financial services for people who do international business transactions. I am not aware how much of this business is from russian mafiosos, but I was certainly not one of them.
Establishing a business in southern europe is risky anyways in the past 5 years with national governments failing left and right. The red tape and the ability of the state to impose arbitrary "urgent taxation" (has happened twice in greece already) hurts all business planning in an already shaky business environment. For me, cyprus was an obvious choice because of its "most lawful" status (the country is in the EU and in the euro for years, which requires a high level of transparency, and it is not in considered a tax heaven by OECD), plus when you don't do business in your home country you have the freedom of choice. Compared to the bailed-out european south, cyprus was actually the safest option. From my experience, i did have to provide adequate documentation for all business transactions and the red tape overhead was much reduced.
The whole handling of the situation until now is a hugely chaotic freak show, a pretense battle between white knights of capitalism and socialism, and a huge display of how ineffective it is to run europe without a central trustable government.
With a proper democratic parliament based on population size, Italian, Spanish and French could easily outvote German delegates. I don’t know about Italy and Spain, but the impression of Germany in France and the other way around is one of the best[0].
You 're assuming that these nations trust their own leaders / nationals only. If you were an italian having to choose between Berlusconi and Merkel based on their track record what would you choose?
Well, Berlusconi just got back into the Italian parliament together with that other clown, so I prefer not to take guesses at the outcome of Italian votes.
My point was that there wouldn’t be such a thing as a ‘German authority’ to accept in a united and democratic Europe and that at least the French don’t appear to be entirely opposed to the idea of working closely with Germany.
(Oh, and Merkel isn’t all that popular in Germany – (un)fortunately, her social democract contender is the guy (not necessarily seriously) suggesting to send the cavalry into Switzerland[0] and pirates to Cyprus.)
Thats not entirely true. Laiki UK is a branch, which means it is regulated and supported by Cyprus, while Bank of Cyprus UK is a subsidiary, regulated in the UK. However some sort of deal seems to have been done with Laiki UK.
Er, this turned in to a rambling rant. Some of it might be worth reading....
I don't agree with this analysis. Its a one sided argument against the current plan. Which is fine, but its certainly not the whole story. Part 15, the solution, is absurd. It has all the problems outlined in the previous 14 points. It is no solution, because there isn't a reasonable no pain solution. People are literally saying anything that pops in to their heads because the cant cope with the idea proposed already. I get that, but there isn't really an alternative. The country, or to put it another way, a big group of people, have gone way too far in to debt. An individual in the same circumstances would go bankrupt, but that is not an option for a country, as far as I know. In the end, they have to settle the debts. Not only that, borrow more money to survive.
What interests me is the reaction of the people. It all seems a bit civilised. There isn't much worse a government can do to its people, yet the people seems incredibly calm about it. I am still surprised that the people haven't stormed their parliament. This i the real test. How far can you push a population? Looks like you can push them pretty far.
Also, I still cant get my head round peoples who vote in governments then trying to separate themselves from the actions of that government. Or take out loans, then blame the banks for handing those loads out. Or scream hysterically about socialism, when its capitalism and its basic law of supply and demand that has caused the whole mess.
The biggest joke of all, in the UK at least, is that with a disaster caused by banks dishing out toxic loans, the banks are now under pressure to loan out more. Half the problem is people now working to pay off loans, reducing the amount of money that can be spent in general. We want them to borrow more, when their jobs are uncertain?
In the end, the problem is greed and impatience, and us the people demanding that we are loaned the money to satisfy that.
Im sorry, but IMHO, the whole system is a wreck, and no one wants to take responsibility for any of it. Governments are too interested in protecting votes, and that is making them avoid any harsh but effective solutions.
Anyway, point being, I'm not seeing any realistic long term solutions anywhere. The Cypriot idea is interesting to me, and rather than knee jerk against it, I am interested in seeing how it pans out. I mean, what if it works? The UK is said to have triple dipped, so what ever is going on here isn't much cop, we are just scraping along the financial gutter. Could a one off injection of all our money save the day? Its our country, our debt.
I'm stopping now. I'm boring and confusing myself....
Why is insolvency not an option for a country? It was in Sweden, which is doing fine now, and in Argentina more recently. Oh look, there's a whole lot more of them[1]. It only isn't an option for a member state of the EU. I sure don't see how Germany's strategy of starving those already struggling economies to death is going to work out.
For a country whose sole gdp generator is the banking sector, with that amount of foreign holdings it would be fatal. I'd only imagine how their relationship with Russia would be if Cyprus null'ed their holdings.
I may be exaggerating, but think of it as Switzerland losing it's bank sector. How would you begin to build up a new economy which, as of yet, biggest sector is banking, for instance. Think of the large population that would be instantly out of work.
At least, that's my guess at why an insolvency wouldn't be the best option for Cyprus.
Not that I don't agree that Switzerland loosing its finance industry would be a big blow for the country, but let's get some perspective: Banking is less than half the size of Switzerland's manufacturing industry in terms of income - in terms of workforce it's more like a third to a quarter. In international comparison, Switzerland's service industry isn't excessively large. I'd argue the country's economy would somehow survive it.
Ok sorry, I was wrong about Sweden - I thought the nation defaulted in the 90ies, but it was in fact 'only' a big chunk of their financial industry[1]. It seems that they came very close though, and the way they resolved it doesn't appear to be by tight economic grip either - the state poured 4% of their GDP into the system. However - and that's an important point that apparently went forgotten in the last US crisis - they also took the chance to regulate the financial industry more tightly, in order to avoid repeating the same mistakes.
Hm, while the economist's article points out how messy the process became, it doesn't makes an evaluation of how the default actually affected the argentinian economy.
I think that Greece and Argentina will make a good examples for comparisons of different approaches, when both recover economically (if they do recover, that is).
I think Iceland is a great example of a better option. Iceland is still a tourist destination with educated people providing other products and services. As long as your country has stuff people are willing to pay for you'll be ok (even if you go bankrupt).
Because Cyprus doesn't have the money to back the insurance on accounts less than 100,000€. If Cyprus did the same thing as Iceland, then a lot more people would be losing a lot more money.
This is the foundation or your argument and it is wrong.
At best, it's an assumption.
The best treatise on this subject, imo, is David Graeber's : Debt: The First 5000 years.[0]
Graeber is an anthropologist -- he's about to take the Chair as Professor of Anthropology at LSE -- so it is far from being a dry financial read.
It's a fascinating text that will, if not change, certainly make you rethink
any assumption you have about debt and money. In fact, in the early chapters he
disconnects debt from money entirely.
From page 2: "Surely one has to pay one's debts". It tackles your comment head on,
but not in the way you might expect.
The country is insolvent too, has been unable to borrow for some time. This makes the options available rather limited. Iceland had little government debt when it had problems.
A great article. I think the EU made a big mess up by even considering not honouring the deposit insurance scheme. Now everyone knows that the insurance is not really an insurance and the government can grab it anytime a crisis happens. All the trust built up over the years is gone with just one action.
Also all the big accounts with a large haircut will now cause almost all businesses to be affected. It will be very hard to see any business surviving this cashflow crunch in Cyprus.
It has been reported that the initial idea to not honour the deposit insurance actually came from Cyprus, not from the EU. But I agree it was stupid move from the EU to go along with this plan.
What if the action actually doesn't seem so stupid in the long run, if they manage to force these countries to give up their resources in exchange for a bailout?
Still doesn't make it a planned action by necessity. When the Spaniards discovered the Americas with all of its Aztec gold, it was an accident that made them very rich for a long amount of time; still it would be stupid to claim Colombus was sent on his journey with the task to deprive indigenous people of their treasures.
> still it would be stupid to claim Colombus was sent on his journey with the task to deprive indigenous people of their treasures.
Wikipedia: "In the "Capitulations of Santa Fe", King Ferdinand and Queen Isabella promised Columbus that if he succeeded he would be given the rank of Admiral of the Ocean Sea and appointed Viceroy and Governor of all the new lands he could claim for Spain. He had the right to nominate three persons, from whom the sovereigns would choose one, for any office in the new lands. He would be entitled to 10% of all the revenues from the new lands in perpetuity. Additionally, he would also have the option of buying one-eighth interest in any commercial venture with the new lands and receive one-eighth of the profits.[31]"
This is really interesting and makes the whole situation seem absurd. It makes you wonder what they (the EU) are thinking. It is really scary that this can happen in this manner. Each individual bank was not treated differently - some Cyprus banks stayed conservative and didn't put their depositors money at risk and are still being wiped out. Amazing - and scary.
Is that really the case? From what I've understood from the news, accounts in banks that haven't lost their customers' money are safe and operating as usual.
Depositors are only taking a loss at bankrupt banks where their money was wiped out by bad investments, and now EU and Cypriot taxpayers are refunding a portion of it.
As we speak, laws are/were passed here in the US that will make it ok for predatory banks to confisticate your savings and give you some worthless stock in exchange.
Why? Services (incl. tourism) are great; it's a tiny country in a region which actually needs financial services (arab countries, russia). Is the EU unwilling to save their banks? fine, let them bail themselves (which is what they are doing). Why the fuck do they have to order a whole nation what to do? What's next? ask luxembourg to start herding cows?
Until they fail, cause a world-wide recession and main street has to bail out wall street.
> Is the EU unwilling to save their banks?
Ideally, it indeed would be unwilling to save bloated up banks unrelated to the local financial needs.
> fine, let them bail themselves (which is what they are doing). Why the fuck do they have to order a whole nation what to do?
They tried to get money elsewhere, but even Russia didn’t feel like helping out. Now they want European money and I would assume it only to be fair to require that in order to get that money, they have to ensure they won’t need it again in the near future, i.e. scale down their bloated banks which apparently threaten the actual economy on the island.
> What's next? ask luxembourg to start herding cows?
Basically, yes[0]. Though nobody minds banking as long as you don’t request other people’s money to continue banking and last time I checked, Luxembourg didn’t need a bailout.
[0] It might be pointing out that you can run a nice economy not relying on banking even when not herding cows.
Saarland (1.013 mil, 7.6% unemployment rate), from Wikipedia:
> automobile industry, steel industry, coal mining, ceramic industry and computer science and information systems industry.
Bremen (547000, 10.2% unemployment rate), from Wikipedia (paraphrased)
> Airbus, EADS Astrium, OHB-Systems, Mercedes-Benz, Beck & Co […] Anheuser–Busch InBev (Beck's Brewery), Kellogg's, Kraft Foods (Kraft, Jacobs Coffee, Milka Chocolate, Milram, Miràcoli), Frosta (frosted food), Nordsee (chain of sea fast food), Melitta Kaffee, Eduscho Kaffee, Azul Kaffee, Vitakraft (pet food for birds and fishes), Atlanta AG (Chiquita banana), chocolatier Hachez (fine chocolate and confiserie), feodora chocolatier
Hamburg (1.8 mil, 13.9% unemployment rate), from Wikipedia (paraphrased)
> Berenberg Bank, M.M.Warburg & CO and HSH Nordbank […] Port of Hamburg […] Blohm + Voss […] civil aerospace industry. Airbus […] E-Commerce […] Media businesses employ over 70,000 people
Come on, those are german cities/areas. These cities have harvested the best talent from the total german population (80 million) to come up so successful. Cyprus is 1/80th of that. And Germany has a huge science and engineering tradition, it didn't exactly form ex nihilo.
I'm not saying it's not desirable to be well diversified, it's just unrealistic to do it overnight (or over-decade for that matter)
Actually, Hamburg and Bremen are likely to be the least successful states in Germany with the larger southern states (Bavaria, e.g.) usually taking the lead when it comes to economic strength and wealth. And while there might be some sort of engineering tradition, that doesn’t mean said tradition is a prerequisite to form a diverse economy.
The real lesson here is probably that, while size is not a sufficient prerequisite for economic stability, it might well be a necessary one.
(c) The banks are almost 100% deposit funded (something that regulators across the world have been encouraging because deposits tend to be sticky if you take care of them).
Uh... if you pay 1% or less a year in interest as they in USA. Many Cyprus banks were paying north of 5% a year so they'd have to make maybe 7%-10% a year to break even after expenses and taxes.
8. You never, ever, ever, hit insured depositors.
Great point, expect that no one is touching them. Deposits over EUR 100K are being hit /frozen, those up to EUR 100K are not touched, which just happened to be the insured amount. The banks could have bought private insurance and threatened to take down the next AIG with them (Now that's leverage), but they apparently didn't.
The real fault lies with the banks and Cyprus gov (or the people, indirectly). They could have cracked down on these shady deals and limited the bank's exposures to Greek debt. They didn't and Germans /N Europeans don't want to ask their taxpayers to bail another country. Someone has to pay, it clearly can't be the taxpayers given the ratio to GDP so it's the depositors and bank owners. To summarize:
There is no money.
No one wants to give them more money.
Banks are broke and as usual you can lose all the money that is not insured. It says so, or it should say so on the tiny print.
You are forgetting where and why the financial crisis started. Although in the US the financial institutions were saved by printing money in the rest of Europe the ECB controls the presses.
"You are forgetting where and why the financial crisis started."
I don't think it is accurate to say that the 2008 financial crisis had a single cause. If you think it was the boom in sub-prime mortgage lending in the US and the resulting popularity of CDOs and CDSs how did that cause the Irish problem (insane property speculation), Iceland (asset speculation in other countries used borrowed cash), Greece (fiscal irresponsility) etc.
Greece had very little to do with the ‘global’ sub-prime bubble, it was merely the following recession that exposed the fiscal irresponsibility, originally resulting from low interest rates due to Euro membership. When people realised that Euro membership does not imply northern European standards, Greek interest rates soared and since Greece couldn’t print money as in the good old days, there was no way to fulfil these interest rates.
Doesn't matter at all where it started, Cyprus and it's people benefited a lot from the financial bubble (and from EU,) until it collapsed. No country has it better now, taxes are going up and spending is being cut down even in richer countries. Everyone was living in a bubble
We forget how bank operate: they ask you to trust them with your cash and in return they promise to safeguard your capital and even give you interest a year. Well, what if their investments lose most of the money and the government cannot bail them out? They go kaput!
To be fair to the Cypriot people - they did the same as everyone else in the UK, Ireland, Iceland etc. did and allowed the finance sector to become far too large relative to the rest of the economy assuming that there were no possible downsides.
Who would ever vote for a politician who tries to constrain the growth of a financial sector that appears to be able to generate money out of thin air?
Great point, expect that no one is touching them. Deposits over EUR 100K are being hit /frozen, those up to EUR 100K are not touched
Yes, that's the current decision. The linked article was written at the time the Parliament was about to ratify haircut of the insured depositors along with the rest.
(There's no timestamp on the page, but I saw this text around 21th of March.)
The current deal only impacts depositors with more than 100K in the banks - more than this wasn't insured anyway.
"You should basically never hit non-insured depositors either."
Why? Since when is there a guarantee that banks are 100% safe? If people deposit large (i.e. over deposit guarantee limits) in a bank to benefit from the high interest rates they are taking a risk with a reward - if this goes wrong then why should other more prudent people have to bail them out?