Lessons from Cyprus

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Duke of Marmalade

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We all knew that it wasn't impossible that depositors might be hit some day. We had various theories as to how it might happen and how to mitigate it. We don't know all the details yet but there are some interesting pointers from what is happening in Cyprus.

1) Will we really get sufficient notice? I suppose this was fairly well flagged, so why are there people still left?

2) We see that it appears to be possible to freeze the system immediately, so this is a lesson to get out on time if we see the same thing threatening here.

3) The deposit guarantee is absolutely useless. This is a tax which avoids the guarantee.

4) Being picky about your banks doesn't seem to matter as I think this tax applies to all bank deposits and not just stricken banks.

5) Spreading your deposits around doesn't seem to help. I am not sure yet but I think the tax is 6.6% on 100K per person and 9.9% of over 100k per person.

We will have to wait and see but if (4) and (5) are true it shows that the popular approach of spreading your deposits around or going for foreign banks based in Ireland doesn't help.

On the slightly positive side, we sort of get a sense of how bad the confiscation might be. 10% is bad but not the end of the world. I think 30% would have completely cleaned the Cyprus government's debt slate.

PS Of course, different considerations are at play for a "conventional" failure of a bank in which case the deposit guarantee will come into play, however a systemic bail out Cyprus style seems a more likely threat than letting a major bank go bust.
 
So the moral of the story is take the best interest rate going, because if the government wants your money there's nothing you can do to stop them.
 
I am a little at sea here. What's happening in Cyprus is blatant daylight robbery. Because it is happening on another island hundreds of miles away does not make this any better. The European Union is behind all this (we are the European Union, believe it or not) and no doubt is chasing the Cypriot government for its pound of flesh.

People work hard to save money for that rainy day (like we were all advised by our governments). Suddenly, 10% of our savings will be stolen from us and legally. The only difference between the Cypriot government and the Provisional IRA is that the IRA took chances that they would be shot or imprisoned. The Cypriot government is taking no chances.

I remember a radio interview a couple of years ago when Gerry Adams was asked:- "When are you going to stop robbing the banks?" To which he replied:- "More importantly, you should be asking when are the banks going to stop robbing us?"

. . . and could this blatant daylight robbery take place in Ireland? - You can bet your rootin' tootin' bottom dollar, it can.
 
I think i heard on radio that Irish Government felt the Cyprus deal was a good one. How could this be apart from the loss to the depositors it has the prospect of creating uncertaintly in the Euro countries and in a worse scenario a flight once again of deposits from Irish banks.
 
The problems in Cyprus are quite a bit different from anywhere else.

The banking sector which is huge in comparison to its GDP collapsed due to the Greek Government defaulting on Cypriot bank bonds. Otherwise the fiscal budget is quite well balanced and once the banking sector is sorted out,Cyprus should bounce back very quickly

The banking sector in Cyprus is bloated due to the large amounts of foreign deposits in its banks. This is due to, what used to be known as the "offshore sector" as well as the very controversial Russian controlled money, of dubious origin which is holed up there. Some of the European partners are unwilling to proceed with a bailout unless the Russians also take their medicine. The bank tax is a way at getting at the Russian money. The typical Cypriot citizen is not that well off and locals money accounts for well under 50% of the total.

Once the heat dies down, I think this will be a very good outcome for Cyprus. The banks will be restored to health with a new capital injection of c.5 billion and the economy should recover very quickly. Its appropriate that the Russian money should take a hit. The Russian money was deposited in Cypriot banks. The Cypriot banks loaned it to the Greek Government who then defaulted. So essentially the Russian money is the root of the Cypriot bank crisis in the 1st place and for this reason the feeling is that the owners of this money should play their part in the solution.

As part of this deal the Cypriot Government is required to downsize the size of the Cypriot banking sector to European norms by 2018. The banking sector is currently 8 X GDP and European average is currently 3.5 X GDP. It seems that nobody will be too concerned if the foreign money takes flight after the tax has been levied. The downsizing has to happen in any event. This is quite different to Ireland and other bail out countries.
 
with all countries being in debt where do you think the money will come from to pay for them? and it doesn't really matter anymore where you live since globalization.
 
Dr.Debt said:
The typical Cypriot citizen is not that well off and locals money accounts for well under 50% of the total....Its appropriate that the Russian money should take a hit.
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That being the case, isn't Legarde's suggestion that those in the 100K+ category should take the hit @30% - and nobody below 100K should have their life savings stolen!


On another forum, someone working in fx has suggested that there was noticeable activity (buying) in the swiss franc on Friday - that couldn't otherwise be explained. Sounds like Cyprus suffers from the same cronyism & corruption that is pervasive here in IE...
 
Cyprus

I cant see too much difference theoretically between this and our pension levy to be honest. It isn't a new departure but it sets a very worrying precedent for the larger economies. The ECB must ring-fence this deal and say never again.

The Russian angle is interesting as Putin is saying different things to his finance ministry today. The Russian finance ministry think it is a fair deal but Putin is unhappy with the lack of consultation and is considering revoking some of the Russian part of the financial rescue. Maybe this is because he is the real No. 1 on the World Rich List, and he is going to be one of the biggest losers (tongue only slightly in cheek here).

The other interesting angle is geopolitics. With Syria in turmoil and France/UK considering arming the opposition in Syria, Russia might lose out on direct port access to the Med. Cyprus is being offered another deal by Gazprom in exchange for exploration rights. Gazprom is in many ways a proxy for the Russian state so the EU and Russia are vying for control. Cyprus needs to decide whether to leave the EU and become a Russian satellite or move towards a more transparent and honest banking system.
 
I cant believe that some on here are saying that ultimately the blatant robbery of peoples' life savings is a good outcome. Furthermore, our government saying that this is a fair and equitable deal for the people of Cyprus.

There is something wrong somewhere when people who squandered their money or kept in under mattresses are in effect being rewarded for their efforts. Meanwhile, the good living people who saved, scrimped and put their trust in banks (where did we hear this before?) are being screwed.

"Fair and Equitable" were words used by members of the Labour partyregarding talks in Croke Park 2. Can anybody trust any government now? My advice is to get your savings to Switzerland and do it fast.
 
Leper said:
I cant believe that some on here are saying that ultimately the blatant robbery of peoples' life savings is a good outcome.
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As I understand it we're talking about an amount equivalent to 2 years interest on deposits and the alternative would be to see most of their savings wiped out if the bail out does not happen. That is the reality of their situation.

Leper said:
Can anybody trust any government now? My advice is to get your savings to Switzerland and do it fast.
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Before you go advising people on where to put their money, it might be an idea to make sure you understand the risks involved!!! Just for starters our guarantee system is capped at CHF 9B, in reality that means that if things go pear shaped the payout would be a couple of cents in the Franc for the first 50K and nothing there after, so maybe you'd get 2K or 3K back! Then there is the fact that the Swiss government has a long history of letting banks go to the wall - since I came here 20 years ago, three major banks have gone to the wall without any support for the depositors....
 
When I first heard this news I was in shock, outraged that savers money had been stolen by government. But then after some thought I don't think it's such a bad idea - especially if the deal is modified to mitigate the loss on those under 100k. Given the increase in taxes / USC / cuts that we are endureing, I think I would have gladly handed over 10% of my savings
 
theoneill said:
When I first heard this news I was in shock, outraged that savers money had been stolen by government. But then after some thought I don't think it's such a bad idea - especially if the deal is modified to mitigate the loss on those under 100k. Given the increase in taxes / USC / cuts that we are endureing, I think I would have gladly handed over 10% of my savings
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I think you're confusing two things. The cuts we are experiencing are primarily because we have been, and continue to be, living beyond our means.

The depositor haircut occurring in Cyprus is purely political because of the amount of Russian money there. Frau Merkel can't tell German taxpayers that they will be bailing out Russian depositors in Cypriot banks. Bondholders are being protected once again -- which presumably mean other European institutions. Little old Cypriot ladies are just collateral damage.
 
theoneill said:
I thought the whole problem in Cyprus was the lack of bond holders to take the hit?
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Sorry, I think you're right. It's still all about haircutting Russians though. I don't think they'd have hung the little old Cypriot ladies out to dry otherwise.
 
dub_nerd said:
I think you're confusing two things. The cuts we are experiencing are primarily because we have been, and continue to be, living beyond our means.

The depositor haircut occurring in Cyprus is purely political because of the amount of Russian money there. Frau Merkel can't tell German taxpayers that they will be bailing out Russian depositors in Cypriot banks. Bondholders are being protected once again -- which presumably mean other European institutions. Little old Cypriot ladies are just collateral damage.
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From everything I have read the decision was that of the Cypriot government as to how they were going to finance their part of the bail out and they choose this method because there are very few bond holders to burn!!!!
 
Jim2007 said:
From everything I have read the decision was that of the Cypriot government as to how they were going to finance their part of the bail out and they choose this method because there are very few bond holders to burn!!!!
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Yes, but presumably their options were limited by the size of the bailout offered. I gather they had two options -- the one they chose, and a much more radical restructuring and downsizing of the country's banks which would have seen smaller savers protected by guarantee, but deposits above 100k cut by 30-40%.
 
Is it clear that it was the Cypriot government came up with the idea of taxing deposits rather than the Troika etc. If this is correct then it is the Cypriot government is to blame for all the unease and if a future bail out is needed in the Eurozone it seems unlikely to me that the EU would suggest such a course in view of the current reaction
 
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