Cyprus Bailout: Stupidity, Short-Sightedness, Something Else?

Yves here. This post from addresses some important misperceptions about the background leading up to the bank bailout impasse in Cyprus, including the alternatives that were available that were perversely bypassed. I also have a separate post due to launch shortly, but this article is an important stand-alone piece and debunks quite a lot of conventional wisdom.

Cross posted from with permission

A quick run-down on the impressively stupid handling of the “Cyprus bailout” by the EU.

And, before we go on, we should note that the on-the-ground situation for visitors and tourists is perfectly fine – Cypriots are not prone to rioting and even though the banks are closed, the ATMs still work. We are all at work and things are otherwise proceeding normally.

First, some background that most people know partially but not completely:

1. The Cyprus sovereign has not been particularly profligate. Debt to GDP as late as last year was in the low 70% range, lower than Germany, etc. While the last Communist government ran unnecessary fiscal deficits, the new government was elected with a more or less ‘austerity’ orientation

2. The issues with the Cyprus sovereign have come from the bailout of the banking system.

The banking sector in Cyprus is being portrayed in the mainstream press as a monstrosity of risky banks for Russian mobsters. I think it is important to put it in context:

(a) Banking assets are about 7.1x GDP relative to the EU average of 3.5x GDP and similar to Ireland and Malta.

Luxembourg, by contrast, where Anglo-Saxon firms do their tax arbitrage has banking assets of 21x GDP. So, Cyprus’s exposure is similar to that of an economy that has large financial services sector, but that still has a real economy too. It is not Luxembourg nor the Cayman Islands nor the Bahamas nor the Channel Islands and so on.

(b) Further to this point, 20B of the 70B of deposits are non-EU (aka Russia/CIS) which, while meaningful (28%), hardly dominate the system

(c) The banks are almost 100% deposit funded (something that regulators across the world have been encouraging because deposits tend to be sticky if you take care of them).

3. Q: So, given all that, why do the banks need a bailout?

A: Primarily due to their exposure to Greece, Cyprus’s neighboring economy, both on the commercial side, but most importantly and most critically because of the Greek Government Bond EU restructuring (this accounts for about 40-50% of the capital needs) which Cyprus signed up for in the spirit of EU / Greek solidarity. It was understood at the time that there would be some protection in exchange for this later on otherwise, Cyprus should have taken a harder line at the time such as ensuring the that Greek branches get covered by the Greek bailout.

4. Not all the banks are in the same condition.

(a) Cyprus has two money-center type banks: Laiki (Popular) Bank and Bank of Cyprus.

(b) Laiki was purchased by a Greek vehicle (Marfin Investment Group) backed by Gulf money. Marfin’s purchase of Laiki took Laiki from being a fairly conservative local bank to being highly exposed to Greece. Laiki is definitely insolvent and needs to be restructured.

(c) Bank of Cyprus has been more conservative vis-a-vis Greece, but still has meaningful exposure. It is conceivable that, given time, Bank of Cyprus could survive.

(d) Beyond the main two banks, there is Hellenic Bank (a much smaller bank with much less Greek exposure), Cyprus Development Bank (no Greek exposure), the Co-ops (no Greek exposure) and the Cyprus subsidiaries of foreign banks (aka, Russian, English, etc banks), also with no Greek exposure.

(e) All the local oriented banks (BoC, Laiki, Hellenic, Coops) have exposure to the local real estate market that went through a bubble during the 2000-2009 period. This exposure however is not short-term and could be resolved over the period of years. It is a problem, not a crisis, and is offset by the fact that the two main banks have quasi-monopolistic earnings power locally. Given the time and some financial represssion (a la the United States) and the local issues would be manageable.

Now, let’s go to the current situation:

5. Three weeks ago, Cyprus elected a pro-EU, pro-Merkel, pro-austerity president (Anastassiades) to replace the anti-EU, anti-Merkel, anti-austerity president it previously had (Christofias). The population recognized the need for austerity and sent to Europe the person it believed would be the most acceptable to the troika.

6. Last Friday, on his first visit to the troika, Anastassiades was ambushed when the troika said to him: “Agree to depositor bail-in as part of the financial package or the ECB will cut off funding to Laiki on Tuesday” causing a surprise collapse of your banking sector.

Unsurprisingly he agreed under that 4am-in-the-morning pressure, though Parliament is now doing its democratic duty and pushing back. In the meantime, the banks are on ‘bank holiday’. The Troika is re-spinning the story, but all you need to do is read the newpaper articles from Saturday and the public statements on Saturday to see that this was the case.

7. Now, it is important to note that the Tuesday deadline is completely arbitrary. Cyprus applied for a bailout nine months ago and has a major bond payment this summer, so the only reason for the ‘rush’ was to ambush him on his first week on the job so to speak and force passage of the bill through Parliament before markets open. In the spirit of this ambush, Russia, which has been asked to restructure its sovereign loan to Cyprus, and has been told that they would be a part of any bailout found out about the approach in the newspapers which did not improve their mood.

The Important Stuff:

Now, let’s get to the meat of the situation. Most of the international analysis of the ‘bail-in’ has been, quite frankly, very sloppy, along the lines of ‘depositor bail-ins are not ideal, but Cyprus has naughty Russian money-launderers so serves them right – it is only fair that these fatcats pay for the bill’.

While superficially pleasing, this is misguided along half a dozen lines.

8. You never, ever, ever, hit insured depositors.

That damage is done and it is EU-wide. There is now precedent that in the EU, deposit insurance can be end-runned via a ‘wealth tax on the deposits you had in the bank at 4:59pm on Friday afternoon’. While this may be legally not a violation of deposit insurance (aka the bank did not fail, the government grabbed your money), it is a violation of the spirit and will be challenged both under the Cypriot constitution and the European Court of Human Rights.

It is also completely clear that this was not something that the Cyprus government invented – it was forced on them by the Troika. As late as the prior week, both the President and Minister of Finance said: “No depositor haircuts — this is the stupidest idea in the world for the EU”

Whether or not there is a bank run tomorrow in Spain, the system damage has been done — look for funding cost to rise for any risky EU bank next time there is a hint of a crisis. The funding costs will be orders of multiples higher than any ‘savings’ here.

9. You should basically never hit non-insured depositors either. For all its free market capitalism, the US extended $13T of guarantees to things like money-market funds to avoid outcomes like this. But in the EU, they are willing to risk lack of trust in the banks over 5B euros.

10. There is nothing resembling a proper order of default here. As far as I can tell, people who have not been wiped out yet include: bank shareholders, bank bond holders, sovereign bondholders.

The rationale, broadly speaking, of why they have not been hit is “It is hard and they might sue us” as if restructuring and insolvency was otherwise a dinner party or we might only save 1-2B that way (as if that is not meaningful in the context of a 5B haircut…)

11. What is even more absurd is that this is not a bail-in of Depositors of Bank A to rescue Bank A, but a bail-in of Depositors of Banks A-Z to rescue Depositors of Bank A (Laiki), B (Bank of Cyprus) and C (maybe some small amounts to the others).

This is one of the reasons that the Russians are howling mad. There are 3B dollars of Russian money in a subsidiary of VTB in Cyprus, a perfectly solvent Russian bank. As far as I can tell, they will be haircut in order to bail out Laiki, a bank that they never deposited money in. On the contrary, the depositors in Laiki’s branches in Greece (aka a totally insolvent bank in a much more insolvent sovereign) will not be haircut.

There is no conceivable creditor prioritization in which this makes sense nor does it teach you anything about moral hazard or fairness. In fact, the only thing it might teach you is: “only put deposits in countries that control their Central Bank” because there is no logic or analysis that could have predicted ex ante that a depositor in VTB-Cyprus was more likely to be haircut than a depositor in Laiki-Greece (the latter being 100x more risky than the former).

12. We should also address the “Money Laundering” point. There might be some true money laundering in Cyprus just like there is at dozens of Western banks (HSBC, Standard Chartered, and so on).

There are also legitimate tax reasons for investment in Russia to be routed through Cyprus (BP Russia is also a Cyprus company for example) for well-known and transparent tax treaty reasons, no different than Ireland, Luxembourg, Netherlands, Bahamas, Delaware, Nevada and so on. Someday the whole world financial system might be restructured so there is no tax arbitrage, but that day is not today and why the EU is so “concerned” on Putin’s behalf about whether or not Russian companies are tax-arbing their offshore operations is beyond me.

When the EU figures out how to prevent Google, Apple, Starbucks and friends from operating in their countries and routing all the earnings tax free to the Caymens through a double-Irish Dutch sandwich, then perhaps they can help Putin out with his tax collection work. In any case, Putin certainly does not seem to appreciate the ‘assistance’ here.

Germany is having a completely surreal domestic election discussion about not bailing out wealthy Russians as if this was the key issue at play here or even an issue at all. Put Laiki in resolution and treat it like a normal bank bankruptcy and see who wants to bail it out – you might be very surprised to see that the Russians do, in fact, want to buy it themselves.. In any case, it certainly does not suggest that we should blindly attack depositors in Cyprus banks whose only ‘crime’ using the same banks as people who may or may not have over-optimized their Russian tax bill any more than you should haircut a retail HSBC customer because HSBC facilitated Mexican drug cartel money.

13. “Large” Account holders:

The large account holders (large being defined as above 100K) are not just fat-cat hedge funds (as if 100K makes you a fat-cat) but the operating accounts of basically every business of size in Cyprus.

BoC and Laiki are the whole money center system of Cyprus and basically you cannot transact business in Cyprus if you are of any size and avoid them.

So, the chaos that is going to emerge when checking accounts, payroll accounts, escrow accounts, pensions, trusts, payments-in-transit and so on are arbitrarily haircut is going to be massive – both in disrupted business operations and small business bankruptcies, but also in thousands of legal disputes.

14. Even despite all the arbitrariness above, at least it solves the problem right???

Absolutely not. You will haircut 10% of deposits on day 1 to make up a capital shortfall and promptly watch 30% of the rest of the deposits flee the country, leading to a much bigger capital hole that Europe will have to fill.

In addition, this will severely cramp Cyprus’s main economic driver the last 2 years (selling real estate, tourism and accounting services to Russians) so any concept that it will make the debt “more sustainable” comes from a lunatic place in financial modeling. Cyprus is a 78% services-based economy. So, if you assume that GDP growth is exactly the same before and after you confiscate the assets of your clients, well, I have a solvent Cypriot bank to sell to you…

This is so obviously risky, that the more paranoid commentators believe it is a deliberate plan by Germany to end up as a multi-deca-billion creditor to Cyprus to which the pledging its oil and gas reserves is the only solution. I don’t think this is the case, but boy it is getting hard to believe that they are this short-sighted.

15. We are not suggesting that Cyprus should not feel austerity. If you want to do a wealth tax, then pass a wealth tax, calculate it properly (on wealth, not on liquidity on a given day) and collect it. Or issue subordinate government bonds tied to gas revenue to the local population. And restructure everyone below on the priority chain. And ask Russia to contribute to the bail-out as part of protecting its depositors. Or do a proper workout of Laiki (it is much easier to make the case to the Russians that depositors in Laiki should get haircut given that its financial insolvency has been common market knowledge for a while). And so on.

But don’t arbitrarily, in the dark of night, out of the sight of democratic processes, try to make a grab into the whole banking sector. It makes a mockery of rule of law and the Eurozone.

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  1. Massinissa

    “You never, ever, ever ever hit insured depositors”

    Its almost as if the Troika woke up one morning and thought, “Gee, lets cause a bank run in Cyprus!”. I just dont see how jarring the confidence of, essentially most of Europe, helps anyone at all.

    1. fajensen

      The Germans hunger for the old days: The old rush of being truly superior beings beyond any moral judgements, driving around in unmarked black Mercedes cars, kicking in doors early in the morning.

      1. nonojo

        Have mercy with the occupied Germans, fajensen!

        Poor buggers are just doing “God´s own work”, instructed by Goldman Sucks.

        Who´s that?
        GS, as intelligent people know, is one of the owners of the US FEDERAL PERVERTS BANK which runs the planet since 1913 on a PRIVATE basis. Politicians are just to be meant as decoration.

        1. Maju

          This particularly intelligent comment deserves applause.

          However any kind of power relies on those who obey them, from Germany to Cyprus and also in the USA. So it’s not so unfair to blame the lackeys after all. But what you say is still necessary to underline so we don’t all lose perspective: Germany is a big player but a second tier player in any case.

      2. Dan Kervick

        The Germans would apparently prefer blood in the streets, tanks in the squares and breadlines to 1/100th of a percent additional inflation.

    2. harposox

      You’re right, Massinissa, this makes no sense – unless, of course, the whole point of this exercise is to trigger a systemic breakdown…

  2. Toby

    I’m watching German politics for the first time the way the rest of the world has probably always watched US politics: the debate is so unhinged from reality _ it’s surreal and has dangerous real-world consequences. But there’s no way to get information in to that closed system, to challenge the “punish profligate Southern Europe” mentality.

    1. Lakis Velotris

      Yet another Unbridled Trojan Horse. The Greek Church begat Islam and COmmunism by rejecting Original Sin. Time for Greeks to fly off to another planet.

    2. SR6719

      Are you the same Toby that used to comment here a long time ago? (Back when Russ was still posting.) If so, I always enjoyed your comments and it’s good to hear from you again.

      1. Toby

        No, he’s not. Timbo commented at my blog that he had seen me commenting st NC again, so I checked. Thank you though for your kiind words; it’s very touching to hear one is remembered (to use Prince Charles speak for a moment ;) ).

  3. Jim Haygood

    Three weeks ago, Cyprus elected a pro-EU, pro-Merkel, pro-austerity president (Anastassiades)

    Add ‘pro-NATO,’ as the U.S.-dominated coalition, fresh from its resounding victory in Afghanistan [that’s sarcasm, folks] seeks to worm its way into the British military bases on Cyprus.

    If Cypriots resent hosting 60,000 Brits, just wait till the Americans move in and start throwing their weight around. Ask Okinawa …

  4. timotheus

    Excellent summary.

    Thought experiment: had HSBC depositors been haircut a la Laiki as punishment for their money-laundering, would Holder ever again get away with saying these guys should never be prosecuted?

  5. dearieme

    “why do the banks need a bailout?

    A: Primarily due to their exposure to Greece’

    So the potty Eurozone “solution” is for a Eurozone-caused problem?

    Alice through the EUglass.

  6. Claudius

    ‘There are 3B dollars of Russian money in a subsidiary of VTB in Cyprus, a perfectly solvent Russian bank’…..

    It should be made a little clearer in the article that it’s the ‘Russian Commercial Bank (Cyprus)’ that is a member VTB group – the holding company of the Group is VTB Bank Plc, one of the leading Russian banks, with the Russian government being the majority stakeholder.

    It’s the third largest bank in Cyprus by asset value – with approximately $13.8 billion in assets and $374 million (not 3 billion as implied in the article) in deposits according to Moody’s.

  7. rob

    That seems pretty understandable.RationalThanks for that.AND…
    What it says, in the not saying so….
    Is the Eu banking crowd, has so long distanced itself from “real”, banking.Banking that is a service to the public.Nothing spectacular, nothing mind boggling, just a facilitator of monies and credit.Bean counters, as it were.That they evidently have grown so accustomed to playing “make believe games”, they will do anything.They don’t even bear the edifice of uprightness.They are a wholly corrupt bunch of jackals.They don’t even care enough to “pretend”, they are businessmen.
    I would also bet,
    While they plan to steal cypriots(and who ever else has money in this system) money, who are in large part like everyone else.normal.They banter about “the russian bandits/mobsters/money-launderers,etc..;as a pretext for them to commit this fraud upon the people.I figure not many,if any of those “normal” people has ever been to a cocktail party with one of these bankers, while I bet that these connected russian/whoever moneylaunderers have been rubbing elbows with them “on the yacht”,or “at the club”, or during intermission at some swanky affair…They will “hold a glass” with them anytime….It takes two to tango. The money launderer needs a banker, for the guise of respectability, and the banker needs the moneylaunder, for the cold hard cash.Together a fairy tale… but in this one snow white has herpes.

  8. paranoid commentator

    I just have a really hard time believing this line was crossed without serious forethought…

    “8. You never, ever, ever, hit insured depositors.”

    This is an inflection point. Everyone knows it is an inflection point. Could Brussels be so myopic? I doubt it.

    Or, lets presume this is a stunt for German domestic political consumption. Do they not know the end result of laying this gun on the table is someone leaving the game? Seriously, if I had money in one of these peripheral countries banks, why would I leave it there now? To earn a extra 2-3%? When I might lose 10-15%?

    I hear plane tickets from Moscow to Cyprus are sold out.

    1. Dan Kervick

      It really seems they are that myopic. The problem here was that there are hardly any stockholders to haircut. They decided that if they disguised a depositor haircut as a tax, the masses would be too stupid to figure it out.

      Europeans need to start thinking about some old-fashioned defenestration.

  9. Martin

    This might be all right. But what exactly is the reason why taxpayer in the rest of Europe should shoulder the losses of banks in Cyprus?

    No one forced these banks to lend to Greece companies and/or banks. Always mind your couterparty risk.

    1. nonojo

      The whole thing called “Greek rescue” was meant to become a trap for Cyprus. Masterminded by Goldman Sucks and executed with “informal political” promises which lateron nobody can recall nor present evidence. Dirty tricks by joint forces of corrupt and/or blackmailed politicians and criminal banksters.

      Business as usual……
      Criminal by nature.

    2. Dogberry

      But what exactly is the reason why savers in Cyprus should shoulder the losses of banks in Greece?

  10. Arno Nym

    Thank you for the enlightening article.

    I think you explained in a really understandable and clear way why the whole situation is bogus.

    Now let´s think a step further. What could be the plans and thoughts behind this?

    I mean they are basically destroying Cyprus banks by causing a bank run. And by this they destroy a big part of the cypriotic economy. But what is the idea behind this? As you wrote yourself they cant be that short-sighted.

    Is it the Reich calling? Germany pushing the southerners into submission, not with tanks but banks?

    Or are they preparing instruments they plan to use on their own population? Just a testrun on foreign ground before they try to seize German accounts to pay for their own dept of roughly 2120 billion euro (Making the 10 billion of Cyprus look like a spare change)?

    Or maybe the Germans try to leave the euro zone by making it implode? The Brits can get away with Anti-EU slogans, but the Germans would be beaten up with the history club if they would utter a thought in that direction. So maybe this is their exit-strategy?

    Or is it the “too-big-to-fail” Bullshit? If they let one bank go bankrupt they had no reasonable arguments to save the next … and the next … until a purge swipes away all unhealthy banks and thus the big lenders to their own debt?

    I mean what the hell could be so important in saving a bankrupt Cypriotic bank that they risk so much for it?

    Good question … I dont have an answere

  11. nix

    As a german citizen i can clarify something for you.
    We are not short sighted, we are outright blind.
    Especially when it comes to economics.
    You would`nt believe the level of sheer stupidity and ideologic bullshit you have to put up with in this country.
    These people have issues. As in retarded.
    When dealing with german economists you always have to keep in mind that you are dealing with retards.

    1. Nathanael

      Be fair. It may not be congenital idiocy; given a different education, they might have been smart. Instead, it may be highly trained idiocy, where they spent years at elite institutions learning to be idiots.

      Given what I know about the DIRE state of the economics “profession”, I would expect this. It seems like most economics curricula exist for the purpose of making the students stupid.

    2. b2020

      Having lived in both Germany and the US, it looks to me like Germans would like to be the “NYPD & Boston Irish” to the Eurozone’s “African-Americans” – that is, being shafted by their own oligarchs and elites 40 years and counting, they are in desparate need of somebody else to look down on and disparage.

      That is certainly of a piece with the incredible authoritarianism one finds in both nations.

    3. lambert strether

      Nix, I live in the United States, mkay? I’ll put our economists up against your economists any day of the week….

  12. Maju

    This is a pretty decent analysis, leaving aside the last note of “well, austerity is fine but don’t touch the banks” (rephrased). Much better than I have been reading all along.

    I agree with some of the commenters above in the sense that Germany/Eurogroup seem to have wanted to cause a bank run. Otherwise they are total idiots but I doubt it is the case: this move clearly meant to favor other banking interests (in Luxemburg, Switzerland, the many British dependencies or whatever).

    1. Arno Nym

      Ooooh that is a good idea Maju.

      By causing a bank run in cyprus they are simply funneling deposits to their own banks.

      Hah and there I thought the Germans would try to conquere europe again. It´s just the plain old capitalsim. By causing a bank run in Cyprus the money moves to other places. I expect the Bahamas are seeing lot of action next week. And I think a part of the money will find it´s way to the “healthy” banks as well.

      Something you could see in the verge of the Greece-Crysis were big ammounts moving to Germany/England/Switzerland.


      Could it be that the elite operators of this City of London global scam have purposely chosen to begin the final destabilization of the system in order to impose their financial order on the resulting chaos? Like you, I find it hard to believe that the Germans are really so stupid as to violate one of the sacred rules of banking.

      1. Synopticist

        Where have you been for the last few years?

        The Euro zone response to the crisis has been one act of shocking stupidity after another, much of it depependent on domestic German politics.

        Germans think economics is a branch of moral philiosophy. If you’ve overspent, then you must be made to pay. We Germans have been virtous, therefore we must not pay.

        1. casino implosion

          Economics IS a branch of moral philosophy. We only go wrong by accepting it’s scientistic assertions as valid statements about real reality.

        2. casino implosion

          Economics IS a branch of moral philosophy. We only go wrong by accepting its scientistic assertions as valid statements about real reality.

          1. H. Alexander Ivey

            ‘Whenever I overspend, I must pay” – Your glib remark is incorrect because it ignores the rest of the players in your morality play, the bankers, the owners of your debt, and the rest of society that is affected by your debt.

            When your debt is too big to repay, then the payer (bank) must take responsibility for lending your the money in the first place.

            Now, let’s get back to Cyprus…

          2. Maju

            If the bank “overspends”, then the bank must pay, not Cyprus, Ireland, Iceland or Spain.

            Anyhow often it’s not even that: just that the legal demands of capital have grown too fast (in a context of generalized recession) for companies to keep up. So they want the public to put up for that.

            But I’m not stockholder of any bank (of anything actually), I owe them nothing other than commissions.

    3. different clue

      Big money holders may have to put their money into “another” bank if they take their money out of “one” bank.

      But little money holders don’t have to do that. If they feel they have to take their money out of “their” bank, they can spend the maximum feasible percent of that money on future survival and future-survival enhancement. And if they have money left over, they can hold it in non-paper forms (gold? silver? ) till the banking-money situation gets sorted out and they can decide if there is a bank safe to put money into again.

      1. David Petraitis

        @differentclue, Maju, nix

        I agree that if the effect is to transfer hot money to other money center banks off island, then one needs to looks at qui bono and infer that the intent to make the money move and to discomfit the Russians was, if not conscious, at least subconsciously self-interested. Form our debased vantage point we may not be able to discern exactly who benefits and how, but certain contours of their interests are discerned in this article.

        This means that the sticky deposits of small Cypriots will be taken out of the banking system and the hot money deposits will be all that is left. The consequence thus making the banking system of Cyprus more unstable.

        The debate on the German economic intelligence (e.g. @nix) is also part of the landscape of disinformation by the elites. I believe that the German press and people are neither more or less intelligent than US or others. To make arguments that one party is playing out their game with stupidity is to mistake the false rhetoric of the journalists and politicians as real reasons for the moves of the elites. It is a classical propaganda trick to make a decision to rob or defraud someone a fault of the victim’s defective moral character. This trick has been played in European, and specifically German, history before. That it is playing again now with much the same moralistic tones is one more leitmotif of the march of the elite classes.

        The Euro is declining. The decline of the Euro and the European unification project as a whole means that there are changes in power occuring in the elites. The fights of Cyprus, Greece, Ireland, Spain and Italy are fights which will pit elites one against the other. The challenge is to look at the actions and consequences of actions and not the speeches and rhetoric, which will be mostly empty.

        1. Maju

          David: there’s nothing bad about a relatively weak euro: we can only compete overseas that way.

          The destiny of the euro and that of the European project, for as much as it is a belover popular desire are almost totally unrelated. This EU of the banksters who play around with petty nationalisms at whim however has to end, we need a totally different more democratic and socialist EU. For that we need to destroy the lobbies and collectivize the banks (after due bankruptcy), to begin with (also all other large companies).

          We need more Europe, not less: but a Red Europe.

  13. Mark

    Thank you for this article. Very informative and helpful. In a very large context, it seems to me this is another chapter in the bursting of the govt. debt supercycle, where the troika are doing everything they can think of to postpone a depression in the hopes the economy will cycle back into growth, before the next election. This would in theory allow the govts to grow their way out of their debt problems. Desperate people do desperate things, and if there’s one thing obvious here, it’s that the troika must be getting desperate. And anything the troika can influence or control is in harm’s way.

  14. Hubert

    Thanks for the details.
    It would be great if you would add who is entitled to decide x.
    To hit the small depositors is a shame but it is not EU shame.
    Deposit insurance is coordinated but not shouldered by EU/Eurozone.
    Why should EU taxpayers shoulder that burden ? Please consider while comparing tax rates of Eurozone/Cyprus.
    If one country lets practically equity-free banks get up to 800% of GDP what is to be expected? Whose fault?
    If you borrow at 5-10% and invest in Greek Gov debt at 20% – who should pay for that once it is over ?
    There are so many losses in the Eurozone mostly due to corrupt banking. That leaves only bad alternatives for everyone involved.
    Full Disclosure to some commenters: Neither my great-grandfather, nor my grandfather, nor my father was, nor am I a Nazi. I just do not like to pay other (countries) debt while carrying more than enough myself …..

    1. gunther

      No German ever was a Nazi at least after May 8th 1945. But about one third elected them. And as today the government politics then did not do any good to the normal German.

      Today the normal German has to pay twice. With a fixed currency (Euro) and an increasing cost advantage Germany does very well. The German consumers income and the sales to consumers have not increased the last 20 years. Normal income stagnated, social security was reduced in order to reduce labor cost and increase competitiveness.

      With consumer incomes declining the gains of this policy were invested into the financial markets. So the normal German- not the exporter or banker- has to pay twice 1st for achieving the competitiveness 2nd for the bail outs.

      Under this circumstances Germany will not leave the Euro as for its elites the Euro is the perfect money maker and it seems the elites had no bigger investments in Cyprus. Furthermore in October there are elections in Germany …

    2. fajensen

      I just do not like to pay other (countries) debt while carrying more than enough myself …..

      For Germany, Sweden, Denmark e.t.c. to run their economies “responsible” with a large surplus, someone else must run a deficit. That someone else was southern europe.

      Our governments pushed down living standards and wages so that capital owners would earn higer returns, however, this policy destroys local demand so they also had to outsource consumption to deficit countries.

      So we got screwed by our own governments over the last 40 years, others enjoyed the fruits of our labour, and now our governments try to complete the con by grassing up their former accomplices in this vendor-financing fraud!

      You are carrying debt because assets got pushed up while your earnings grew much slower. Your own people did this!

  15. Flowsnake

    “The Troika is re-spinning the story, but all you need to do is read the newspaper articles from Saturday and the public statements on Saturday to see that this was the case.”

    Hey, I got a better idea: instead of having all your readers do the leg work individually, how about you just quote from the articles and statements yourself? Too much work? Then close your blog.

    “It was understood at the time that there would be some protection in exchange for this later on otherwise, Cyprus should have taken a harder line at the time such as ensuring the that Greek branches get covered by the Greek bailout.”

    What kind of protection are we talking of!? What pisses me off most about the Cypriot crisis is the abundance of blog posts and forum comments which make the wildest claims without backing anything up with primary sources that contain the important details. Everybody has to know that nobody’s word is worth taking, so substantiate all claims you make, otherwise keep your mouth shut. What would have been the exact modalities for the Cypriot depositor bail-in? Whose idea was it really to tap into the deposits? Don’t claim that someone did something unless you can back it up. People assume Germany to be behind everything: don’t they see that IMF and Eurogroup have a much bigger say in these matters?

    1. Yves Smith Post author

      Get over yourself. A blog post is not a PhD dissertation.

      As for Germany’s hand in this, it was widely reported (WSJ and confirmed elsewhere) that Schaeuble originally demanded a 40% depositor haircut.

      1. Aladin

        Sometimes it is wise to do some close reading:

        But Ms. Lagarde had something else in mind. The IMF chief presented a much more radical plan, in which deposits above €100,000 in Laiki and Bank of Cyprus would have been cut by between 30% and 40%. The owners of senior bonds in the two banks would also have faced losses—a step that was ultimately rejected. That plan would have limited the international bailout to €10 billion and raise some €7.5 billion from depositors.

        It quickly garnered the support of German Finance Minister Wolfgang Schäuble, as well as the delegates of Finland, the Netherlands and Slovakia—all countries with strong, bailout-wary parliaments.

        According to all reports I know it was the Cypriot Prime minister who insisted on including all accounts in all banks in the haircut.

        It is astonishing to see the international media falling for Cypriot spin!

        1. Yves Smith Post author

          Go read FT Alphaville. Lagarde and anyone who studied this for more than 5 minutes would know that you couldn’t cram down the senior bondholders. They are English law bonds and this is not easily done. So the plan was dead on arrival.

          And that very same WSJ article said it was the EU commissioner, Olli Rehn, who in the first proposal made demanded a haircut to all deposits:

          Mr. Rehn was the first to make a specific proposal. To raise funds, Cyprus should impose a special levy on deposits, taxing accounts of less than €100,000 at 3%, those up to €500,000 at 5% and those above at 7%. Such a “solidarity levy “—the brainchild of Thomas Wieser, an Austrian who chairs technical discussion among euro-zone finance officials, and Mr. Asmussen— could avoid a straight “haircut” on deposits, which they feared could be too destabilizing for Cyprus and the rest of Europe. The tax would be applied to all Cypriot banks, not just the two in deep trouble.

          Schaeuble preferred the deeper haircut plan and was the one who argued with the Cypriot finance minister.

          And sorry, it was Bloomberg that reported that Schaeuble asked for 40%.

          The unnamed source is presumably Sarris or got it from Sarris.

          1. Nathanael

            As a german citizen I can tell you, that this demand is part of a strategy Schäuble uses all the time. Every time he demands something very unpopular in our parliament, he demands much more than he really wants. That’s always followed by some bargaining and in the end there’s an agreement about much less, and Schäuble is depicted as very generous, because he went down so much (nevermind that nobody liked his demand at all in the first place). Works all the time.

          2. direction

            haha, great minds think alike.

            please disregard my redundant post below. I pull up these articles and read them later, forgetting sometimes to refresh the comments before I put my 2 cents in. Glad you caught this already and posted a reply. you beat me to it Yves.

          3. Aladin

            Oh yes, it is all very complicated ………

            Not falling for the spin of one side, however, does not imply going for the spin of the other side.
            Just saying ………

        2. direction

          Who’s spin? Your quote from the wsj article is sandwiched by the rest of this:

          “Just after 5 p.m., finance ministers, IMF Managing Director Christine Lagarde, ECB executive board member Jörg Asmussen and the EU’s economic-affairs commissioner, Olli Rehn, filed into a meeting room on the fifth floor of Brussels’s Justus Lipsius, which houses the EU’s ministerial meetings and summits. Cyprus’s newly elected President Nicos Anastasiades stayed behind in the country’s delegation room on the seventh floor, ready to approve or reject any deals.

          Mr. Rehn was the first to make a specific proposal. To raise funds, Cyprus should tax accounts of less than €100,000 at 3%, those up to €500,000 at 5% and those above at 7%. Such a levy could avoid a straight “haircut” on deposits. The tax would be applied to all Cypriot banks, not just the two in deep trouble.

          But Ms. Lagarde had something else in mind. The IMF chief presented a much more radical plan, in which deposits above €100,000 in Laiki and Bank of Cyprus would have been cut by between 30% and 40%. The owners of senior bonds in the two banks would also have faced losses—a step that was ultimately rejected. That plan would have limited the international bailout to €10 billion and raise some €7.5 billion from depositors.

          It quickly garnered the support of German Finance Minister Wolfgang Schäuble, as well as the delegates of Finland, the Netherlands and Slovakia.

          Cyprus Finance Minister Michalis Sarris said losses on savings weren’t acceptable. But Mr. Schäuble rejected his alternative proposals.

          At around 10 p.m. Mr. Sarris went to brief Mr. Anastasiades, who approved a more limited levy: 3.5% on deposits below €100,000 and 7% on bigger accounts.”

          Your OWN source says Anastasiades stayed out of the room, and the very first proposal was to levy all banks.

          Reading comprehension fail.

  16. Mike Sax

    Great post Yves. Some very good info. The one question I have is your claim that the haircut for insured depositors is the idea of the EU. Based on what the news reports have the EU is saying that they never demanded that it hit insured depositors.

    “The rates could be different and could protect deposits under 100,000 euros, we are waiting for that and we are ready for that,” French Finance Minister Pierre Moscovici told CNBC on Tuesday.”

    The reason that Cyprus hit the insured deposits is held up as being so as not to upset the Russians.

  17. Martin

    Again. Why should a German taxpayer pay for the mess in Cyprus? Why? What is the moral, legal or economic imperative to do so?
    Bailing out someone might have advantages, but why are the benefits for Germany larger than the costs for Germany? In econ speech, why is it individually rational?

    1. Hugh

      Geez, and here I thought you were all Europeans, first, now, and always. It is precisely the unwillingness to stand together, especially when times are hard, that shows that the construction has failed. And this being the case, the death of the euro can not come too soon.

      1. Maju

        The reality is that common Europeans of all states and nationalities think pretty much alike: just that they have very limited power over their governments, let alone EU institutions. When I watch common working class Germans on TV, they say exactly the same as Greeks or Spaniards or whatever: this is all completely wrong: an armed robbery by the banksters on common people. They also suffer it: many many German pensioners have to work just to survive, go figure! Working till you fall dead on the spot or something like that.

        Europe as community of people has not “failed”. What fails is European democracy, kidnapped by the banksters.

    2. ohmyheck

      Here is put forth this possibility, from the comments:

      “Chauncey Gardiner says:

      Considering the magnitude of the increase in the Federal Reserve’s balance sheet since November 1, 2012, and the slightly greater decrease in the ECB’s balance sheet, I am left wondering if a portion of QE Cash isn’t going into Southern European CBs?”

      If true, this means that is the “individual” US taxpayer, not any individual German or EU taxpayer, doing the bailing out.

      If true, then quit your bitching. You have nothing to whine about. Now, if you care to enlargen your scope, you could consider this a 1% verses 99% GLOBAL injustice. I’d like to think you might have it in you to get past your self-centered myopia.

    3. Maju

      The banks must fall: all of them! No public money, not a single cent should go to pay the mess of private banks. Only, after bankruptcy, the state may want to nationalize the remains and refloat them from scratch (if at all): a zillion times cheaper and more effective.

      But the whole banking system would collapse. Who cares? Certainly not me. Let them fall as they deserve.

    4. different clue

      If the “Euriphery” countries become too poor to buy German stuff, or discover they were always too poor to buy German stuff; to whom does German sell stuff?

      To the same surviving buyers that China/Korea/America/Japan are desperate to sell stuff to? To a China/Korea/America/Japan who are themselves desperate to sell stuff and may not feel they can afford to buy stuff?

  18. Nathanael

    On behalf of all the Germans, who try to get through the bullshit-jungle of our EU financial-politics (and our media): Thank you very much for this excellent post! Sometimes it’s really hard to stand the mass-media generated stupidity here, which often leads people from all backgrounds here to racist opinions about pretty much everyone south of Austria. It’s rather scary, given our history… Our schools should teach much, much more about economics.

  19. flow

    You should add to the analysis that there are upcoming national elections (September) in Germany. Merkel simply cannot afford to agree to yet another bail-out, at least not without having other involved parties (customers, in this case) to take a share as well. Already the Grescue was highly contested domestically; bailing out a tax haven, where wealthy Russionas launder their dirty money (in the general public’s opinion), could seriously harm her chance for a third term in office.

  20. Rufus T. Firefly, Jr.


    Thank you for a wonderful job reporting on this story, and thank you for helping uncover the treachery, debauchery, and evil that now has nested in the heart of the European Union. The European continent is now in shambles, it is disgraced, and it is shameful.

    The European Union is dead, a carcass that should be disposed of immediately. And criminals such as Barosso and his ilk should be rounded up like the criminal vermin that they are, together with the banksters and oligarchs they serve, and be thrown in prison for the rest of their miserable lives. The same goes for all the disgusting hoards of queens, kings, and princes that Europeans still have to put up with. Enough is enough!

    Personally, I will take all my money out of European banks, and I will never again trust this den of thieves called Europe. I am done with them.

    Thank you again for standing up for justice and truth. Keep up the good work!

  21. Ignacio

    Arbitrariness, contrary to the rule of law, is what imperates in the EU these days. Sad but true.

  22. Hugh

    Miscalculation is the most likely precipitating event for the next meltdown. Cyprus certainly qualifies as a major miscalculation, but we have yet to see if it will be the precipitating event.

    This was an excellent and informative post. The math still doesn’t add up for me though. This looks like resolving one moderately sized bank. It should not have been such a big deal.

    I agree with those who note in various ways the irony of Germany which has done nothing but bailout its own oligarchs cavilling at the largely illusory notion that any aid they might extend might go to Russian oligarchs.

  23. Carl Weetabix

    Well, someone (or rather “someones”) in the EU made this decision. Now since there doesn’t seem to be anyone who thinks this plan was a good idea anywhere, why aren’t we seeing interviews on TV with the bastards who did it?

    I mean, you’d think they’d be clammoring to talk to the retards who actually made the decision.

    Where is that? Where are they? Why aren’t we seeing interviews with them?

    1. Maju

      Exactly, why aren’t Schauble and Merkel answering to the European public opinion. Why aren’t they resigning?

  24. Fíréan

    Excellent article.
    Thank You Yves for cross posting and thank You to the editor at for writing the informative piece.

  25. Miken

    I have gone from Pro-EU to UKIP in under a week. What has been done to EU citizens by the EU is unforgiveable; Let’s be honest the amount involved is the Kinnock family expenses for a month. Part of me hopes the Russians step in at the last minute and screw the EU for gas in the future, but the only problem with this is I am sure Cyprus would suffer further in the long run.

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