The Latest on Cyprus

A new deal has been reached and looks likely to pass:

Cyprus clinched a last-ditch deal with international lenders to shut down its second-largest bank and inflict heavy losses on uninsured depositors, including wealthy Russians, in return for a 10 billion euro ($13 billion) bailout.

The agreement came hours before a deadline to avert a collapse of the banking system in fraught negotiations between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund.

Without a deal, Cyprus’s banking system would have collapsed and the country could have become the first to crash out of the European single currency.

Swiftly backed by euro zone finance ministers, the plan will spare the Mediterranean island a financial meltdown by winding down the largely state-owned Popular Bank of Cyprus, also known as Laiki, and shifting deposits below 100,000 euros to the Bank of Cyprus to create a “good bank”.

Deposits above 100,000 euros in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki’s debts and recapitalize Bank of Cyprus through a deposit/equity conversion.

I’m not convinced there are any good options on Cyprus. As I said, the idea of taking money out of deposits gives me the screaming willies, even it is “just” uninsured accounts with over 100,000 euros. Long term, the economic effects on Cyprus could be terrible. Their banking system may never recover. The good side, however, is that countries are no longer just getting handouts from the EU. They’re expected to bring something to the table.

Europe is a big mess. Unemployment is still at 9-10% but that’s an average. In Spain, it’s in the 20’s. Among young Spanish people, over half are unemployed. I have no hope they will emerge from the wilderness any time soon without either breaking the union up or centralizing monetary and fiscal policy. But it’s clear that the current system can not be sustained much longer.

Comments are closed.

  1. Hal_10000 *

    Nobody will ever deposit past the insured amount again.

    I think you overestimate the intelligence of investors and the temptation of the words “this time it’s different”

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  2. InsipiD

    I think you overestimate the intelligence of investors and the temptation of the words “this time it’s different”

    Probably. That said, banking has gotten quite crazy overall, and a bank can’t do what a bank is supposed to do (use depositors’ funds to loan money within its community) when central banks are controlling things so thoroughly. The money will get used elsewhere.

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  3. Mississippi Yankee

    Long term, the economic effects on Cyprus could be terrible.

    As I said last week, short and long term confidence in any EU bank (with the exception of German banks) has been all but destroyed.

    Your off-handed remark:

    I think you overestimate the intelligence of investors and the temptation of the words “this time it’s different”

    Supposes that investors are as dim as the hoi-paloi you look down on from that Ivory Tower on just about all of your recent posts.
    Hint; Europe is as nervous as a ‘Cat on a Hot Tin Roof’.

    People with money to invest, at this particular economic juncture, are very leery and overcautious. Unlike you (plural) they see “It can happen here”

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  4. Mississippi Yankee

    Hmm the Germans slowly gaining Hegemony over the rest of europe………………

    I’ll bet the fwench are all…”It can’t happen here, again”.
    Third times a charm snail eaters.

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  5. Hal_10000 *

    People with money to invest, at this particular economic juncture, are very leery and overcautious. Unlike you (plural) they see “It can happen here”

    MY, I would like to believe that. But we had people pouring trillions into the real estate market long after it became obvious it was a bubble. The LTCM collapse did not dissuade anyone from investing in fly-by-night hedge funds. Most of Bernie Madoff’s investors kept pouring in money long after it became clear that something fishy was going on.

    There is a subset of billionaires and millionaires who constantly want to believe that they have found the secret to printing money. They are constantly chasing the next big thing, the next housing bubble, the next banking bubble, the next .com bubble. Even when they know it’s a bubble, they figure they will get out before it pops.

    The people who were putting money into Cyprus were doing so after 2008, well after Greece became a problem, well after the derivatives market imploded, well after the European banking sector became a problem.

    The fact is that there are *always* suckers.

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  6. Thrill

    But we’re not talking about high-flying investors here. There’s a difference between saving and investing. Saving money, putting it away for retirement, should not have any risk. The message is now clear that it does if you bank in the EU.

    That’s the point here. The bondholders and stockholders should have been the ones taking the risk, not the retirees with more than $100,000 in the bank.

    Isn’t it also fair to say that the EU effectively forced the Cyprus banks to help bail out Greece and then punished the Cypriot depositors for that decision?

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  7. Hal_10000 *

    Saving money, putting it away for retirement, should not have any risk. The message is now clear that it does if you bank in the EU.

    There’s no such thing as a risk-free investment. All investments have risk. You can diminish that risk by taking something with a lower rate of return but the risk never goes to zero.

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  8. pfluffy

    You can diminish that risk by taking something with a lower rate of return but the risk never goes to zero.

    “Risk” also includes opportunity costs, or money you are not making. It also includes inflation, so stashing money under a mattress carries risk. Is this what you mean, Hal?

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  9. pfluffy

    But we’re not talking about high-flying investors here. There’s a difference between saving and investing. Saving money, putting it away for retirement, should not have any risk. The message is now clear that it does if you bank in the EU.

    That’s the point here. The bondholders and stockholders should have been the ones taking the risk, not the retirees with more than $100,000 in the bank.

    Isn’t it also fair to say that the EU effectively forced the Cyprus banks to help bail out Greece and then punished the Cypriot depositors for that decision?

    This blog needs more Thrill.

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  10. Hal_10000 *

    “Risk” also includes opportunity costs, or money you are not making. It also includes inflation, so stashing money under a mattress carries risk. Is this what you mean, Hal?

    Yes, partially. Inflation, default, currency collapses. Even gold has collapsed this year.

    This blog needs more Thrill.

    I agree!! :)

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  11. Thrill

    There’s no such thing as a risk-free investment. All investments have risk. You can diminish that risk by taking something with a lower rate of return but the risk never goes to zero.

    Yes, as Kramer would say: “Banks get robbed!” Sure, risk is implied in any transaction. I still feel like you’re lumping savers and investors into the same group. In the case of Cyprus, the savers paid the penalty, not the investors. This undermines the trust in the entire banking system.

    Depositers should never face such risk while investors walk away clean.

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  12. Thrill

    And I’ll amend my above statement:

    There’s a difference between saving and investing. Saving money, putting it away for retirement, should not have any risk of a 40% loss while the bondholders and stockholders who were participating in operational decisions, receiving higher dividends, and rightfully should have been assuming the risk lost nothing.

    Absolutely no lessons have been learned since 2008, obviously. You say this:

    I think you overestimate the intelligence of investors and the temptation of the words “this time it’s different”

    We’re not talking about investors though. It IS different for them. They no longer have to worry about risk. The savers do. Everything is backasswards.

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  13. Mook

    There’s no such thing as a risk-free investment. All investments have risk. You can diminish that risk by taking something with a lower rate of return but the risk never goes to zero.

    THAT^^^. Unfortunately, too many people don’t understand that fact. Even FDIC insurance uses govt. power to skew the market, creating an illusion of safety. In a big bank run, FDIC couldn’t stopgap the losses.

    And since FDIC holds sway over banks, that gave/gives politicians influence over the banking industry. Hence the threats against them if they didn’t make mortgage loans to people who were otherwise not creditworthy to buy homes. I remember well all the politicians and leftist media lapdogs decrying the practice of “redlining” in order to intimidate banks through political means. Without FDIC, the banks could have simply told them to fuck off and make the loans with their own money if they wanted.

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  14. Thrill

    In a big bank run, FDIC couldn’t stopgap the losses.

    That’s true, but it’s hardly an intelligent policy for the EU to cause imminent bank runs by seizing savings.

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  15. Mook

    but it’s hardly an intelligent policy for the EU to cause imminent bank runs by seizing savings.

    No argument from me on that. What’s particularly unfair about it, is that they targeted cash assets while not touching those in Cypress who have millions or billions in property assets or stock assets. It was a selective confiscation of one asset class.. I’m guessing that it disproportionately hurt 60+ year old Cypriot retirees who believed that their assets were safe in the bank as well as the Russian high rollers.

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  16. Mississippi Yankee

    Ye

    s, partially. Inflation, default, currency collapses. Even gold has collapsed this year.

    EVEN GOLD HAS COLLAPSED THIS YEAR

    Do you even live on the same planet as the rest of us? How much has gold collapsed this year in comparison to how much it rose last year…or the year before…or the year before that……

    Fer Christ sakes even CM doesn’t start rumors as ridiculous as:
    EVEN GOLD HAS COLLAPSED THIS YEAR.

    Lies, damn lies and statistics. The new blog trick.

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  17. Hal_10000 *

    MY, Gold peaked at $1800 last year. It is now at $1600 and on its way down; probably way down. Gold is way overpriced right now. As Buffett pointed out, the sum total of the world’s gold, at current prices is worth $7 trillion. For $7 trillion you could buy all the farmland in the US, all the oil companies and still have a trillion left over. Which do you think is more valuable?

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  18. CM

    Fer Christ sakes even CM doesn’t start rumors as ridiculous as:
    EVEN GOLD HAS COLLAPSED THIS YEAR.

    Stop now, I’m blushing.

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  19. Mississippi Yankee

    MY, Gold peaked at $1800 last year. It is now at $1600 and on its way down; probably way down.

    What’s that, less than 11%
    EVEN GOLD HAS COLLAPSED THIS YEAR.

    Evidently gold is falling at the same rate your credibility is sinking. Crisis’ drive the price of gold, always has and always will. And even to the casual onlooker the horizon looks a bit crisis-full.

    As for Mr. Buffet, how much gold do you suppose he’s got stashed away? And also how often has his advice been pure political bullshit?

    For $7 trillion you could buy all the farmland in the US,

    And turn it into solar and wind farms.

    all the oil companies

    Could then be shut down

    and still have a trillion left over. Which do you think is more valuable?

    Gold, for when all you “My plan will work THIS TIME” types fail…miserably I might add.

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  20. Xetrov

    Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked: ‘Account Overdrawn.’

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  21. CM

    The Earth just wasn’t getting any healthier. How could it ?

    The one single and abiding criterion by which the success of countries is judged is in terms of their ‘growth’. Each year the great nations agonise over how much they have ‘grown’. How much more they have made, how much more they have consumed.

    Consumer confidence is actually considered a measure of a country’s relative economic strength. When a load of poor deluded sad-acts are down at the shops running up debts on their credit cards, finance ministers claim that the ecomomy is ‘growing’ and start celebrating. Recessions are deemed to be over the moment people start spending money which they don’t have on things that they don’t need. Consumption is synonymous with ‘growth’ and growth is good. It is always good, whenever and wherever. Hence, clearly consumption is good, all consumption, anywhere, anytime.

    Judged by the logic of world economics, the death of the planet will be the zenith of human achievement, because if consumption is always good, then to consume a whole planet must be the best thing of all.

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  22. Mississippi Yankee

    Judged by the logic of world economics, the death of the planet will be the zenith of human achievement, because if consumption is always good, then to consume a whole planet must be the best thing of all.

    Just a bit melodramatic

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