So it turns out that those who noted that the Cyprus bailout took place ahead of a local bank holiday on Monday were onto something. The terms of the bailout deal represent a huge leap in how the EU is tackling the crisis. Time will tell whether this leap is over or into the chasm.
This is a quick reaction post. I will focus on likely market reaction because that is what I know about – and why you’re likely reading my ramblings – and leave meditations on justice and democracy to people closer to the action.
Details such as we have, via FT and WSJ.
Deposits below EUR100,000 to suffer 6.75% tax; above 100,000, 9.9%.
Immediate action to prevent capital flight (FT):
Cypriot finance minister Michalis Sarris said his government had already moved to ensure deposit holders could not make large withdrawalselectronically before Tuesday’s open; Jörg Asmussen, a member of the European Central Bank executive board, said a portion of deposits equivalent to the levies would likely be frozen immediately.
What does this all mean? In looking on what this means for the rest of Europe, a few points stand out:
- Four choices have been faced ahead of every bailout; screw the local taxpayer; screw the creditors; the Germans pay for everything; or fiddle the numbers in the hope the crisis just goes away. The Irish programme rested heavily on option 1, the Portuguese and Greek (especially) on options 1 & 4. Hopes for option 3 (ESM buys shares in the banks) are dead in the water. This programme indicates option 2 gaining in strength, 3 & 4 sinking.
- Taxing local small depositors. This is really shocking, being both the least fair and the riskiest part of this plan. The fairness aspects are obvious, but the risk that other Peripheral depositors will reconsider is clear, albeit so far more popular with the usual suspects than with locals.
- Cypriot banks have almost nothing in terms of either junior or senior bank claims. Best guess is that the former will take the familiar (Ireland/Spain/Holland) hosing, the latter will be spared. Again, realpolitik – with the exception of Anglo-Irish after it ceased to matter – senior bank bondholders are being protected to save other banks. But this means that Cypriot depositors are being sacrificed that depositors in the rest of Europe can be protected. IThe thinking here is pure economics – once-basket-cases like Bank of Ireland recently raised unsecured senior loans, reflecting an important step in European finance’s return to health but the sacrifice of the poorest depositors in one of Western Europe’s smallest and poorer economies is surely the wrong price.
- The hedge funds win again. A favourite trade for speculators has been Cypriot government debt. And it’s done very nicely. Mayfair sends its thanks. Update: This implies that you’re better off with your money in peripheral government debt than in a bank. That’s a message I personally would be very hesitant to send.
- And the Russians? The reason small depositors have been hit is that the losses inflicted would be much bigger if a) only large deposits b) only non-EU deposits were haircut. The data on Cyprus deposits is here (MUMs = Monetary Union Members). I would guess the thinking is that 10% is seen as a cost of doing business when it comes to money laundering, but 30% would probably finish Cypriot banking for good. If the infliction of losses on small depositors has a purpose, it’s probably to reassure the Russians that they are not being discriminated against. Yes, I may have thrown up a little in my mouth typing that. *
So: senior bondholders and Russians helped at the cost of smaller locals. There’s more logic here than there appears at first glance – the primary aim of this programme is to hold the European banking sector together whilst having a vaguely realistic programme, not placing another huge bill on the core/Germany not ending the viability of Cyprus as an offshore banking sector. My own judgement is that inflicting costs on depositors in principle is an extremely important one, but that not sparing the small depositor is worse than a cruel piece of realpolitik – it is in fact a mistake.
* Irony corner: the destination of choice for Russian money looking to escape into an EU jurisdiction is now apparently Latvia
Update: via @charlesforelle some detail on Cyprus bank balance sheets – really basically no senior bonds.
Also worth noting that in return for their tax payment, depositholders get shares in their bank. Limited consolation I suspect.
Cash in a Cyprus banks has been a classic Ponzi scheme for years.
Come to think of it, so is the whole EU concept…
looks like eurchf and eurjpy saw it coming on friday …
The rape of already poor (in relative terms) Cypriot depositors is the ‘tow in the water’ test for some of the less tasteful EU governments (read – the Irish coalition government, who were elected with a landslide majority on promises to which they then enacted the polar opposite) without question Ireland will need a 2nd, 3rd and 4th round of bailout funding as it is an impossible task to pay what they have agreed to for a population of 4.3 million where 1.2 are employed and 290,000+ are public servants.
They may just be able to hold out on a retail bank depositors theft until after the next election, but (when and not) if the junior partner walks and an early vote is called, you can guarantee if Fine Gael are returned again as senior partner – this will be instant option A …. (Even more certain of happening if they deny they ever would!)
It’s wrong, it’s theft and I fervently hope the people if Cyprus don’t stand for it.
I think the “if” in the last sentence should read “of”. Otherwise, excellent post. Maybe it’s time that small depositors in other Eu countries take their money from the bank and stash it at home.
Ireland is a great country and great people. My thoughts and prayers are with you.
I thought there were 1.8m employed in Ireland. Once they reform the remaining bank debt, sell the remaining NAMA holdings and flog state assets, ireland will probably be ok. Relax.
This is the end of personal banking as we know it. Watch the rush to withdraw funds in all EU countries as soon as the banks open. A very dangerous and possibly disastrous course of action.
Short and sweet and I full agree with your comment. I live in Greece and on Tuesday (Monday is a holiday here) I am heading for the bank….
Italy, Spain, Portugal see you later ……France……
Reblogged this on Senselogi© and commented:
A rather brutal truth indeed…
It’s a very good post. But the real question here is that EU made the decision to tax bank deposits witch is like to open the Pandora’s box. It was a huge (insane?) mistake and the financial system as we know it will probably collapse. This could be the beginning of the end of EU and all of us know what that means. Hostility between European countries was the reason to start the world wars. I am truly afraid with this measures and on what Europe became. Regards from Portugal.
Jorge, I pray for you and others in Portugal. I pray for anyone in the EU who are truly afraid after what has happened. Regards from USA.
What’s ESM your refer to in the first bullet point? ESM buys shares in the banks.
I do have an offshore company with Cyprus company current account. Is my company account affected by this tax?
yes – and you thought you were being clever by avoiding UK taxes? Tough shit.
Just turning the savers into first losers as the banks spiral, NEVER has a one time injection been the end of it.
This is German blitzkrieg in currency wars. Deposits will flow from Spanish and Italian into German banks. And euro will take a hit without using printing press.
Schauble proposed 40 percent haircut on Cyprus. And Commerzbank economist had already mentioned 15 percent haircut for Italy.
EU countries leaders must react against this outrageous decision by IMF to take money from depositors. Taking money from depositors => Bank Run => Banking system collapses for sure.
Moreover other countries were bailed in excess of 50bn while Cyprus in comparison was given just 10bn with such insane and irrational conditions. Cyprus financial problems were caused by the Greek debt exposure and restructuring and not by their governments bad financial decisions or corruption. IMF should have shown understanding on this but instead they are just killing them. Where is the regulations on IMF decisions, can they just totally mess up the economy in EU like this without any reactions and controls?
I agree with you 100%…and don’t forget I am Greek.
The IMF aren’t taking money from depositors! Cyprus is.
Blame the Greeks or the rest of Europe if you want, you might even believe that all of the problems were caused by other countries.
But avoiding looking at reality won’t help make necessary changes.
Cyprus changed to the Euro and retailers slapped an extra charge on to round it up to €2 a CYP.
Swiss Franc mortgages dropped dramatically in cost so the Cyprus Banks slapped an extra 2% on borrowers interest rates!
The blame fell squarely on the Euro and the Swiss Franc for those two, shifting the focus from the retailers and the banks!
For a country that relies heavily on tourism and construction that’s a strange way to behave.
Perhaps the government could introduce a big property tax that could increase house repossessions and cause a further collapse of property prices. That way they Open the door to new investors looking for bargains and getting rid of some of those who are making complaints!
If anyone complains they can then blame it all on the IMF, and the Greeks of course.
It may be that the Cyprus government will not listen to the people on the street or make any effort to change their ways, but that doesn’t mean Europe will just hand over money. It is irresponsible to lend money when there is no means to have it paid back. An open report on a proper outside audit on government spending may make very interesting reading and perhaps go a long way to showing a few areas that could be rectified as an aid to recovery.
relax. much if not all the russian money was probably stolen/looted in the first place.
the hedge funds have been protected again
implies a cause and effect – the hedge funds bought cypriot debt, and then influenced the outcome
The alternative is that hedge funds were smarter or more risk taking then you, and made money as a result
the real question, as always, since hedge funds are un audited, we only hear when they make money; we don’t know on avg hwo they do
Reblogged this on Pink Iguana.
Screwing the local taxpayer appears to have worked for the Irish political elite.
I honestly can’t imagine why. Ireland is weird. Perhaps they’re all drunk, or they are simply servile after centuries of English oppression?
My point is that it is damn well not going to work in most countries, because it’s a recipe for civil unrest *at best*.