Cypriot bail out

An interesting point raised by Larry Elliott in the Guardian…

But while there was never a doubt that Cyprus would need help from the so-called troika of the International Monetary Fund, the European Union and the European Central Bank, the deal announced at the weekend differed in one significant way from the ones that have gone before it: bank deposit holders in Cyprus will have to foot part of the bill themselves.

The reason for this is simple. There is a lot of Russian money in Cyprus, much of it from somewhat dubious sources. With the richer countries of the eurozone suffering from bail-out fatigue, there was resistance – particularly in Germany – to the idea that ordinary European taxpayers should be writing blank cheques to Russian oligarchs who might have been using Cyprus as a money laundering destination.

we are still talking about folk with £88K savings
Why help these?

88K is not so much – as a lump sum to fund a pension for your whole life it doesn’t go very far at today’s interest rates.

Cyprus, with a GDP of €17.9bn (end 2012):

– requires assistance estimated to be €17bn – point 1
– has a bank deposit base of €68bn – point 2 (Iceland, Ireland?)
– of which €20bn are held by foreigners – the bulk being Russian – point 3
– has its second largest bank (Laiki) dependent on € aid – point 4
– a potential €30bn bill to cover deposit insurance (if that still existed/exists?) -point 5

In this context, there is only one likely result, and it is not a pretty one. Faced with that and as bad as this proposal seems – the choice of paying 10% to protect the remaining 90% of your deposits starts to look worthy of some consideration? What would you do?

It looks like the domino effect will start again with this tiny tax-less nation.

Euro is ridiculous and EU is free riding … 😆

In this context, there is only one likely result, and it is not a pretty one. Faced with that and as bad as this proposal seems – the choice of paying 10% to protect the remaining 90% of your deposits starts to look worthy of some consideration? What would you do?

Burn down the houses of some bankers and politicians.

What would you do?

Start over with a new system. The present one doesn’t work. It fails. And again. And again. And again. And again.

That may keep you warm but it wont get your money back!

THMS iirc that is one of the risks of lending other peoples money and only keeping about 10% of it in your bank at any one time- the systems has a serious flaw that will occur from time to time

88K is not so much – as a lump sum to fund a pension for your whole life it doesn’t go very far at today’s interest rates.

First world problem and it is a lot – i rather suspect it puts you in the top 1% of the EU saving league and about 0.01 % globally.
I also doubt that anyone chooses to put their money in the tax haven of a cyprus bank as a safe way to fund their pensions/life savings.

Don’t get distracted by the high earners, many ordinary Cypriots with some money in the bank are going to suffer.

Today it is Cyprus. How long before the practice spreads to other eurozone countries, or maybe one day, the UK?

Indeed. I’m sure a lot of Southern European governments are presently watching with interest,thinking “well… if they can pull this off without people rioting in the streets, then…..”

First world problem and it is a lot – i rather suspect it puts you in the top 1% of the EU saving league and about 0.01 % globally.
I also doubt that anyone chooses to put their money in the tax haven of a cyprus bank as a safe way to fund their pensions/life savings.

What if you have just sold a house and the money is in your account just as they announce that they are going to do this? they then just take 10% of it……..

It’s ok though as the Cypriot bank holiday has apparently been extended to Thursday so they can postpone people taking any money out until they’ve had a rethink.

yes some ordinary folk are going to suffer but in the main it will be tax avoiders and money launderers who suffer.

Why would we help them out and in particular why would we help out the 50% who are not even EU and wont be paying any of this back?

What if you have just sold a house and the money is in your account just as they announce that they are going to do this? they then just take 10% of it……..

well fist of they give you shares so you exchange the money iots not quite lost aor stolen [ better than the bank/country going bust i would assume],secondly you have been very unlucky and thirdly we cannot define policy for an entire island and think there wont be examples where it is clearly unfair on some individuals. It will be. Are you happy to bale out the 50 % who are laundeirng money and the others whatever % who are tax avoiders? Should we not have a poilcy that deals with them in the main though it will affect the odd person unfairly.

88k is a lot of money, however that’s not the minimum amount they’ll <ahem> tax is it? If you’ve toiled for years and saved €5,000 you stand to lose €500 overnight.

Too much focus on the very rich here IMO and not much thought for those that will really feel it (low earning net savers).

well first off they give you shares so you exchange the money its not quite lost or stolen

Fantastic!!! Is there much demand for shares in these organisations that are having to rob their own customers so as not to go bankrupt? Are they worth much? 😆

Junkyard – you seem to consider yourself a man of the people. If this were happening to a bank in the UK and you stood to lose %10 of your savings would you be happy about it?

Junkyard – Member
THMS iirc that is one of the risks of lending other peoples money and only keeping about 10% of it in your bank at any one time- the systems has a serious flaw that will occur from time to time

Yes and no. Banking is fundamentally about taking risk be it liquidity (what you are referring to I think), interest rate, credit, FX etc. IMO, its not really about keeping 10%, its the fact that funding tends to be short-dated (even on demand) whereas assets are longer-dated. The basic “fund short-lend long” concept at the heart of liquidity transformation (which if and when managed and priced correctly can be beneficial). The key is to manage and price risk correctly – which is were things fall down (especially when markets are distorted by Gov/Central Banks keep interest rates artificially low). Hence the recent liquidity regulations that are being introduced.

Cyprus has both equity risk – the banks need recapitalising having been “forced” (see the parallels here) to buy Greek sovereign debt on which they took a bath – and liquidity issues – Laiki etc are being kept solvent largely by European funding. On top of this, the basic numbers simply do not add up at either the macro or the micro level (see earlier).

But I am surprised at how relaxed you are about this *. This is neither a First World Problem nor a hit-the-rich one. This is affecting all Cypriot depositors, many of whom will have little understanding at how risky their banks had become. Even if they did, they will have been told that their deposits were insured up to a level but not warned about Euroland smokes-and-mirrors. But the bizarre thing is that the basic numbers should have told people that their deposits were not as safe as they thought – for that many people are to blame.

* edit: plus nobody should forget the “transparency (sic) issues” here. Over the weekend, peoples’ livelihoods were used in a game of political poker. The Germans and the Finns called the Cypriot bluff and the latter blinked first. Is this really the way we want to be governed?

I got a letter from alpha bank in cyprus last week offering me an free Ipad if I opened a savings account!

Numbers with the greedy ha mers and the russian Russian mafia and the steady hand of capitalism at the helm what could possibly go wrong.
Ot.course I would not be happy and said so first post – it is not hard to see why they are annoyed by this. I bet drug dealers don’t like having their assets seized but that does not make it wrong.

I’m not sure there’s anything very capitalist about effectively confiscating 10% of peoples savings.

I agree it’s not wrong to confiscate a drug dealers assets, but if that’s the real aim here then why is it being dressed up as a tax and being imposed on the general population? If someone is found guilty of dealing drugs and has their assets confiscated does the court then go after his customers/victims and take their assets also? Or the bloke who owns the shop near the corner where he was selling his drugs?

tonyd – Member
I’m not sure there’s anything very capitalist about effectively confiscating 10% of peoples savings.

A certain Russian would agree with you tonyd..

2:35 PMledbetreuters @James Ledbetter
Dmitry Medvedev on Cyprus bank levy: “This practice, unfortunately, was well known and familiar in the Soviet period.”

I’m stunned at the insouence of some of the contributers. They wouldn’t be so sanguine if it was their account.

I’m not sure there’s anything very capitalist about effectively confiscating 10% of peoples savings.

True, a proper capitalist system would see you lose 100% when the bank goes bust.

Cannot get my head round all this.
Surely the Euro is f*ck*d or is it just down to bad running of the countries involved by their governments?
Could they ditch the single currency and go back to the way it was?

proper capitalist system would see you lose 100% when the bank goes bust.

You’d be bloody careful about where you invested the money then, wouldn’t you… so when you had a choice between Icelandic Landsbanki at 6% and a building society at 3% you might think ‘hmmm!’

The point is you are taking a risk sometimes the risk wont pay off and you loose.

Banking is fundamentally about taking risk be it liquidity (what you are referring to I think), interest rate, credit, FX etc. IMO, its not really about keeping 10%

well yes they do indeed take risks with their savers money and leave only 10% in the bank and lend the rest out. How else can they generate money but by lending more than they physically have of someone elses money? If they had the money that folk have given them you could not get a run on a bank now could you .

But I am surprised at how relaxed you are about this *. This is neither a First World Problem nor a hit-the-rich one

No it is a hot the tax avoiders and money launderers who has 88 K in the bank and 6 % if under that [ in shares]
You [and others]keep going on about the Normal person when the figures suggest more than half are Russian and i would assume half the others are tax avoiders. I would have no issue with it being more targetted at the mercenaries tbh than the population as a whole but the broad brush hits these more than the man in the street etc
Perhaps they could have protected it all to 100k as that is the rule then really hit those with money above this?
Not really sure how worried you want me to be about rich folk whilst you portray those with 100k of savings and everyday folk tbh. It is not as if they have just become destitute now they only have 90k of Euros.

TBH i dont understand why so many of you wish to stick your hand in your own picket and help out tax avoiders and money launderers who clearly have some wealth and way more than the EU average

JY, why do you keep banging on about tax avoiders when it is all savers?

I did it partly to counter this concern that the right wing seem to have developed for the poor everyday person in Cyprus who is being harmed etc. I dont doubt they are but they are atypical in the sense they are not the majority.

Why do you think there are so many foreign investors in Cyprus banks – 10 % corporation tax at all or is it simple coincidence?
Do ebay and Amazon do this?

http://www.shelteroffshore.com/index.php/offshore/more/cyprus-attractive-offshore-tax-haven
According to a recent survey conducted by KPMG, Cyprus is one of the most attractive offshore tax havens in Europe.

for example

Tax planning is a legitimate method of minimizing your tax liability and should not be confused with tax avoidance. For any individual or company that trades or wants to make business in Europe, Russia, Middle East or Asia, Cyprus offers incredible advantages as an international business center.

http://www.hg.org/article.asp?id=21206
i cannot be bothered doing much googling as i need to make tea.

It is not alone as we also have jersey ,Isle of Mann etc

But none of that takes away that this is an indiscriminate raid on everyone. The fact that there are tax dodgers in the equation and they’ll be punished too doesn’t take that away.

If you want to punish tax avoiders, money launderers etc, do so.

JY, perhaps your desire to personalise the issue, sorry counter the concerns of the right wingers on here, has stopped you thinking clearly about what is happening here. Cyprus has a deposit base of around €68bn of which €43 is from resident Cypriots. These people are all being hit irrespective of their background, size of deposits (below the threshold) or the type of bank that they have their money in. You comments may have held some validity if the hit was being targetted 100% above the threshold but it isn’t. Instead you seem to have been misled by easy headlines and showing a rather surprising lack of sensitivity for your fellow man. Perhaps Mr Medvedev is correct in his tweet, This really is a policy of the ancient left wing. How very odd?

On the banks liquidity issue, the point is that deposits are relatively short term instruments. Most depositors want to have quick access to their money. But they want to finance things over a period of time, not an immediate short term loan. So banks provide the function of facilitating it and they make their money because the yield curve is (normally) positively sloping so the longer term assets earn more than the short term liabilities. Managed well this is an important and valuable economic function. The challenge as you point out is that if everyone wants their money back at the same time, the banks cannot realise the assets quickly enough to pay them back. Hence banks typically go out of business more due to liquidity crises than capital crises. And guess what, that is exactly what could happen at Laiki. What then for the average Cypriot?

JY – if what you’re saying is true then Surely you have to question the regulatory framework – or complete lack of it – of the EU? How on earth has it allowed a culture in a member state, and participant in the single currency ‘project’ where the banking system seems to be mainly concerned not with useful economic activity, but as a front for tax avoidance, and money laundering for Russian gangsters.

Especially as the European taxpayer is to all intents and purposes acting as the ultimate guarantor to the currency and banking system? It’s absolute madness! A complete and utter shambles!!!

More than that Binners, this proposal goes directly against the principles of deposit insurance and the bailing-in of other creditors (bond holders). Ok, in Cyprus there are few bond holders, but this is a very important part of EU regulation that has been ridden-over.

Hopefully this is the first strike against these “tax exile” nations that damage all the others who at least have a semblance of fairness. Lets hope the IOM, Jersey and Monaco are next.

is an indiscriminate raid on everyone

Yes it is a blunt instrument but the reason for why it has been done is that the savers are mainly russian and tax avoiders etc hence why they did it. yes it hits many innocent [ but wealthy] folk. Its not hard to think of a fairer method

JY, perhaps your desire to personalise the issue, sorry counter the concerns of the right wingers on here

Chuckles at the lack of self awareness and the ad hom whilst protesting an ad hom [ never accidental is it] – thought that thread went well for you and put up a strong defence when challenged. Not really interested in this good luck finding another TJ – awaits goad 🙄

How on earth has it allowed a culture in a member state, and participant in the single currency ‘project’ where the banking system seems to be mainly concerned not with useful economic activity, but as a front

Aye if only they could be a s robust and open and honest as the City of London – the reason they cannot get more robust banking laws is because the UK vetos them but still its the fault of the Euro folk for all this and not us/CMD.
Binners the euro zone is not all brilliant but your attempt to blame everything on them is motivated by your view of it [ like farage] rather than what they do or the actuality of the causes/scenario.

I shant bother with these threads again as it is not really a debate – hard to believe i could be the neutral one on a politics thread 😯
Peace and love etc

A page and a half of interesting points and debate before a pop at Binners and me, followed by several more comments (closet racists and loons??) Sorry JY but your second para simply doesn’t hold up. So good to have then behind us and to focus back on the ball not the men. There is and has been plenty of debate on here and hopefully that will continue.

So back on topic, an interesting analysis in the FT Alphaville by Willem Buiter from Citibank. Must be the only high profile economist to have backed the idea today. In his opinion, The Cyprus Bail-in (shouldn’t that be partial bail in?) Is qualified good news. Quite a different take on this weekend’s news.

Can’t paste the link here, but worth googling or access via FT web site.

People losing faith in the euro and its banks means taking their money elsewhere.. where? The USA? So presumably the euro goes down, the dollar goes up? With a favourable exchange rate it might benefit euro manufacturing….

It’s all a ploy isn’t it?

Following on from your ploy idea mol, a few more days of hits in Italian banks like Unicredit will bring equity prices right back into distressed buying opportunities again. If the € does survive with Italy part of it, buying such a bank at 70% of book value might be quite a trade! Not a bad hedge?

It’s all a ploy isn’t it?

Hmm, not too sure – I would suspect BMW, Merc and Audi sales in Russia might dip somewhat in the near future 😆 (they shifted about 35k units each into russia last year, and sales were growing at about 30%)

(edit – ok, just looked it up and it turns out they shifted about ten times that in the USA last year , so maybe a good move after all) 😀

Junky, THM, give it a rest.

Apart from that, interesting thread. The cat is well and truly out of the bag now, and any government that is looking shaky, with shaky banks, should now be very worried about a run on the banks and potential collapse. The way the UK tried to restore confidence in the UK banking sector after Iceland was to protect deposits, not raid them.

As a result, the cleverer people (probably with the most money) will be looking very closely at IoM / Channel Is / Switzerland right now. That can’t be good.

Please tell me this is sarcasm?

It’s not sarcasm, but it is a bit more complex that junkyard’s racist ramblings about how it’s all just Russian mafia billionaires who are losing money so who cares. Feel free to choose whichever makes most sense to you.