Quantcast

«

»

Mar 25 2013

Cyprus update

As was to be expected, a deal has emerged over the weekend to deal with the demand by the European Central Bank that Cyprus needs to come up with 5.8 billion euros or risk going bankrupt.

Under the new plan, the bulk of the funds will be raised by forcing losses on wealthy savers in two of the country’s banks, with the remainder coming from tax increases and privatizations.

Laiki, the country’s second-largest bank, will be restructured, with all bond-holders and people with more than 100,000 euros in their accounts facing significant losses. The bank will be dissolved immediately into a bad bank containing its uninsured deposits and toxic assets, with the guaranteed deposits being transferred to the nation’s biggest lender, Bank of Cyprus.

Deposits at Bank of Cyprus above 100,000 euros will be frozen until it becomes clear whether or to what extent they will also be forced to take losses. Those funds will eventually be converted into bank shares. German Finance Minister Wolfgang Schaeuble said he expected a bit more than 50 percent of savings at Bank of Cyprus will be involved in the swap.

The good news is that the deal seems to have preserved, for now, the guarantees of those deposits under 100,000 euros, thus sparing small savers. But they will undoubtedly be hit in other ways as the austerity measures kick in.

Felix Salmon analyzes the new deal and says that the issue is not settled yet, but that there is one development in particular worth watching.

Meanwhile, the resolution of Laiki is going to give the world a very real example of what happens when a too-big-to-fail bank is allowed to fail. Laiki is small by global standards, but very large by comparison with Cyprus’s GDP. If Cyprus can survive Laiki’s collapse, then maybe — just maybe — the world could cope with the “resolution” of a big bank like Citigroup. But that’s a very big “if”.

It will be interesting to see what happens when the banks open tomorrow. It is expected that some restrictions will be imposed on capital flows.

11 comments

Skip to comment form

  1. 1
    starskeptic

    Banks open Thursday…

  2. 2
    raven

    I was rather appalled by this.

    1. Seizing bank deposits? The claim is that the large ones are all tax evasion deposits by Russian oligarches. But so what? They should be allowed due process under the rule of law.

    2. This changes everything. If it happened in Cyprus, it could happen in Greece or anywhere in the E.U. We will probably start seeing bank runs whenever a weak country looks like it is in trouble.

    That being said, I don’t know what else Cyprus could do. Iceland just said forget it, we don’t have the money and we aren’t paying to clean up after our banks. That seems to have been the right decision.

  3. 3
    MNb

    “The good news is …”
    that the trojka extorted this deal – so far your oligarchy theory.
    The bad news is that Cyprus has nothing but tourism and the financial sector; its economy still will collapse. The country being small best would be to introduce a two-valuta system (Suriname even uses three valuta: USD, Euro and SRD) so that when necessary it can take benefit of devaluation.
    Then not in anyway accounts of 90 000 Euro – which are spared as well – belong to small savers. I don’t know how it is in the USA, but in Europe you must be pretty rich to save so much money, as I wrote before.
    Finally Raven is simply wrong. In Iceland literally all the banks collapsed a few years ago; it hasn’t led to many bankruns since then.

  4. 4
    raven

    Finally Raven is simply wrong. In Iceland literally all the banks collapsed a few years ago; it hasn’t led to many bankruns since then.

    1. Wait and see. Cyprus just made the deal today. Their banking system has been closed for a week now except for small ATM withdrawals.

    This is to try and halt a run on their banks. Whenever they open, which hasn’t happened yet.

    2. Iceland isn’t part of the the Euro currency block. They were out there on their own.

    3. Would you put large sums of money into a bank in a floundering Euro country like Greece or Spain? I sure wouldn’t. Chances are a lot of that money is going to safer havens.

  5. 5
    raven

    The KIngworldnews:

    Nigel Farage – Major European Bank Runs Now Taking Place

    Mar. 25, 2013

    Today Nigel Farage told King World News that what they have done in Cyprus has now sparked major banks runs in Europe. Farage, who is Britain’s popular MEP, also stated, “Even people like me who have spent many long years warning that things are out of control are really, really scared by the events of the past few days.” Below is what Farage had to say in this extraordinary and exclusive interview

    I just saw this on the internet.

    I can’t say how reliable this source is though.

  6. 6
    raven

    Saving Cyprus Means Nobody Safe as Europe Breaks More Taboos …
    www. businessweek. com/news/2013…25/saving-cyprus-means-nobod…

    News From Bloomberg … By Simon Kennedy on March 25, 2013 … The risk is that bank runs and bond market selloffs become more likely the moment a … to populist leaders across southern Europe, who say the political elites running crisis …

    A slightly more reliable source, Businessweek.

    Although, at this moment, I dobut if any financial news sources are all that reliable.

  7. 7
    Dunc

    1. Seizing bank deposits? The claim is that the large ones are all tax evasion deposits by Russian oligarches. But so what? They should be allowed due process under the rule of law.

    We generally prefer to ignore it, but the truth is that bank deposits are investments like any other – and like all other investments, they do carry some risks. One of those risks is that the bank in question will collapse. This is why most states have deposit guarantee schemes – any deposit over the statutory guarantee level is, by definition, not guaranteed, and therefore subject to loss should the bank collapse.

  8. 8
    Dunc

    Nigel Farange is a swivel-eyed lunatic, not a reliable source. I can find no evidence that bank runs are actually occurring, only people talking about the potential risk of bank runs occurring.

  9. 9
    Corvus illustris

    … the bulk of the funds will be raised by forcing losses on wealthy savers in two of the country’s banks, with the remainder coming from tax increases and privatizations.

    Because privatizations have worked out so well in other countries.

  10. 10
    raven

    I did survey the net last night and found a lot of frothing and foaming but nothing in the way of facts.

    Since we are talking about future events, no one knows anything for sure.

    But it seems likely that capital and savings will flow from weak countries in south Europe to financially stronger countries in north Europe and even, oddly enough, the USA.

    It’s just common sense. A bank is a bank but not all banks are equally likely to collapse and take your money with it. It isn’t just individuals either. Corporations have many billions in accrued profits and they aren’t in business to be stupid and take unnecesary risks.

  11. 11
    baal

    Risk of bank collapse =\= risk the government will come in and loot your account.

    Banking (finance generally) needs to be returned to a commodity business for most transactions and a separate system for gambling (high risk derivates). At a minimum, the later activity needs to be set up in such a way as to not carry over losses to the capital reserves used for day to day loans, mortgages, and other citizen or small business (by capitalization not staff count) activity.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite="" class=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>