Tag: Cyprus

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.

Cyprus Hell

As you may have heard, Cyprus is being bailed out by the EU and the terms are rather striking:

The euro zone agreed on Saturday to hand Cyprus a bailout worth 10 billion euros ($13 billion), but demanded depositors in its banks forfeit some money to stave off bankruptcy despite the risk of a wider run on savings.

The eastern Mediterranean island becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the euro zone for financial help during the region’s debt crisis.

In a radical departure from previous aid packages – and one that gave rise to incredulity and anger across the country – euro zone finance ministers forced Cyprus’ savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.

Parliament was due to meet on Sunday to vote on the measure, and approval was far from assured.

This may sound familiar. This scenario — a seizure of savings and investments accounts — has been flogged for about two decades by various pundits who are convinced it will happen in this country. Does the Cyprus bailout indicate this is a possibility? I think it’s proof that it won’t happen, actually.

First, Cyprus is in a unique situation:

The depositor haircuts seem to have been necessary to get political support for the deal in the EU–and political support in the EU was necessary because Cypriot banks had assets somewhere in the neighborhood of 8 times the Gross Domestic Product of Cyprus. And just to bring it full circle, the banking system had grown to such grotesque, hypertrophied proportions because Cypriot bank accounts seem to be a favorite of tax-dodging Russian oligarchs . . . which is why it was politically necessary to give depositors such a large haircut.

This is not a situation even remotely comparable to the United States. For one thing, there would be no one to bail us out if the banking sector grew to $120 trillion. For another thing, there is no agency that can compel us to terms of a bailout. For a third, vast amount of the of assets in our banks are not held by shady foreign concerns (right now, the Cypriot government seems to be trying to allow natives to pull out cash while extending the bank holiday so that Russians can’t).

Second, even this relatively small taking (on the scale of the European economy) is triggering a potential disaster. There is a run on Cypriot banks as people try to get their money out. The Euro and European stocks plunged in morning trading. And it’s still touch and go as to whether the legislature will assent to the terms.

So, no, I don’t think this is a “it could happen here” scenario. In fact, at this point, I’m not 100% convinced it’s an “it could happen there” scenario. The reaction of the Cypriots and the markets is a perfect illustration of why this is such a bad idea. And hopefully this will be thrown at the next obscure Lefty twit who suggests the idea in a Congressional hearing and sparks the next round of claims that a savings tax is imminent.