Cyprus’ Bank Deposit Bail-in

Ed Harrison here. I haven’t been on NC in a while now but Yves asked me to cross-post this one because the issue is important. Let me note here that Tyler Cowen asks some troubling questions on this. And Ed Conway raises some good issues as well. I recommend reading those posts too. Below is my cross-post. If I have any updates, go to the CW version for those.

This morning we learned that after hours of tense negotiation, Europe has hammered out a 10bn euro “bailout” of Cyprus. I put the term bailout in quotes because the key feature of this deal is the bail-in of Cypriot depositors to the tune of 5.8bn euros, about a third of Cyprus’ GDP. This means that depositors went to sleep on Friday night and woke up Saturday to find that their money, deposited safely in Cypriot banks, had been seized and used to “bail out” the country. While the bail-in became official EU bank rescue policy during the Spanish crisis last summer, bank depositors were never mentioned at that time. I see this as an extreme measure which, if the European banking crisis continues elsewhere, will have very negative implications for bank depositor confidence in other European periphery countries.

The mitigating factor in terms of preventing a loss of confidence in the European banking system is that the bail-in will happen principally via a one-time 9.9% levy on deposits over 100,000 euros. This is a bank holiday measure that means that Cypriot bank account holders with funds over 100,000 euros will have 9.9% of their account holdings deducted from their accounts when banks open on Tuesday. However, importantly, an additional 6.75% levy is going to hit deposits below that 100,000 euro level. As a bank depositor, given a one-day national holiday to decide what to do with your now shrunken savings, what would you do?

Cyprus’ finance minister Michalis Sarris said large deposit withdrawals would be banned. Jörg Asmussen, a German member of the ECB board and a key ally of Angela Merkel, added that the part of the deposit base equivalent to the actual bail-in levies would be frozen immediately so the funds could be used to pay for the “bailout”. The Financial Times has the best immediate write-up on this. The finance minister is quoted this way in that article:

“I am not happy with this outcome in the sense that I wish I was not the minister that had to do this,” Mr Sarris said. “But I feel that the responsible course of action of a minister that takes an oath to protect the general welfare of the people and the stability of the system did not leave us with any [other] options.”

Some of the bailout lenders like the IMF had actually been calling for Cyprus to seize all deposits larger than 100,000 euros. So this falls well short of those demands. Nonetheless, a rubicon has been crossed. Not only are senior bank debt lenders now on the hook before a single penny of European Union loans or guarantees flow to busted eurozone countries, but so are subordinated debt holders and so are even depositors. As an EU citizen, you must now believe that any lending exposure you have to a bank whether as a bond lender or deposit lender can be seized and confiscated by government, no matter how small the exposure. The FT notes that “[e]ven Ireland, whose banking sector was about as large relative to its economy as Cyprus’ when it was forced into a bailout in 2010, never considered such a measure.”

Bailout fatigue is the driving force behind the Cyprus bank deposit bail-in. The logic here is the same logic that was at work in the confiscation of subordinated debt holders’ money in the Dutch bank SNS Reaal’s bankruptcy. The principle is that the direct lenders of banks will now become the main parties to lose money in any future EU bailout deal. Significantly, sovereign balance sheets will not take a hit unless nationalized banks’ direct lenders do first.  No loans and no guarantees will flow before appropriate haircuts are given to the direct bank lenders. And we can see now that this includes depositors. This approach was first adopted as principle during the Spanish crisis last year. European policy makers see bail-ins as critical in breaking the sovereign-bank nexus which has been so destructive during the European crisis.

At that time, I wrote:

My suggestion is that preferreds be converted first, wiped out if the capital is insufficient before moving to the debt holders. The debt holders should have an option of writedowns or equity conversion especially because some debt holders from funds are specifically limited in the types of investments they can hold. And senior debt is the stickiest wicket because haircuts here could create contagion. Nevertheless, the outline here is clear: set specific guidelines on how much bailing in one can anticipate will need to occur and this will go a long way toward relieving market funding worries for euro banks.

To the degree that Europe devises a bank resolution scheme along these lines, they will need to use it because bank recapitalisation will be an issue outside of Spain as well.

I hadn’t even considered bank depositor bail-ins. But apparently that’s what was meant as there are few senior and sub bank debt funds to get in Cyprus. To keep the bail-in principle, the EU was forced to bail in depositors then. This is problematic because no clear standardized EU-wide framework was worked out regarding how and when debt holders would be bailed-in as I suggested last July. Moreover, bailing in depositors brings up the spectre of bank runs again. In Spain, angry depositors were aghast when the money they were coaxed into switching out of deposits into preferreds was bailed in when Spanish banks were nationalized. Can you imagine the reaction if depositors actually lost money?

Details are still sketchy. However, if there is a debt for equity conversion instead of just a clear-cut confiscation of funds, that would certainly mitigate the downside. I will have more to say at a later date but this doesn’t look good to me. It’s another ad-hoc solution that will lead to panic and talk of contagion, bank runs and a eurozone breakup. The EU can get away with this in Cyprus because the country is tiny. Would the same approach work in Spain?

What is clear now, however, is that this draconian solution – with even depositors bailed in – was driven by core European countries’ need to tell their own taxpayers that they would not be paying for the mistakes of others, that no German money would flow to bail out the so-called profligate periphery in a German election year. And that’s what matters most as far as EU policy goes.

If you are an investor, clearly relative value-wise, sovereign debt versus bank debt or sovereign CDS versus bank CDS is going to be a good play.  

Editor’s note: Reuters mentions that half of Cypriot savers are thought to be non-resident Russians. So this policy will definitely get a response from Russia (though it is alleged that many of these deposits are tax dodges and that the Russia state would be pleased with the policy response as it would shift deposits back to Russia.

Update: Apparently, a condition of the bailout is that Cyprus raise its tax rate from 10% to 12.5%, the same (low) level as in Ireland. This pre-condition changes the tenor of the bailout somewhat as it makes clear that Cyprus is being forced into a corner and forced to alter macro policies in order to prevent its banking system from collapsing. Every European peripheral nation needs to understand that is what loss of currency sovereignty and inclusion in the euro zone means.

Update 2: The IMF now supports capital controls. This shift in policy occurred in December. I believe the shift will matter if the Cyprus bank bail-in scheme destabilizes deposit bases in periphery countries. See here for the wording of the Cyprus bank deposit guarantee. It is not clear what protection this provides and what the implications are for other deposit guarantees in the EU.

P.S. – I forgot to add this: follow me on twitter! I have been tweeting about this a lot and will be for some time to come. My handle is @edwardnh.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


    1. Thor's Hammer

      Bad mistake. Most of that seized money was KGB money stolen in the period after the collapse of the Soviet Union and deposited in Cypriot banks in an era before the Panamanian money laundering system was fully developed.

      Now there is a difference between the bankster capitalism that we have in the US and the gangster capitalism in Russia. Neither gives a damn if they walk over the dead bodies of millions as they climb to the top, but unlike banksters, gangsters have ethics. They hold grudges and are willing to sacrifice ultimate profits to extract revenge. That money seized from Cypriot banks was Vladimir Putin and his friends money. Are the Eurocrats really so dumb that they can’t understand where the gas that heats their homes and offices comes from?

      The price of heating homes in Europe next winter just went up drastically, and the poor will pay the price or freeze to death.

      1. bmeisen

        LIke your point, and I heat with Russian gas. Still I wonder if it will be as charmless as you suggest. They could do it with the Ukraine but can they do it with EU heavyweights? It’s not like their Cyprian CDs were all that important.

      2. Ptup

        “Now there is a difference between the bankster capitalism that we have in the US and the gangster capitalism in Russia. Neither gives a damn if they walk over the dead bodies of millions as they climb to the top, but unlike banksters, gangsters have ethics. They hold grudges and are willing to sacrifice ultimate profits to extract revenge. That money seized from Cypriot banks was Vladimir Putin and his friends money. Are the Eurocrats really so dumb that they can’t understand where the gas that heats their homes and offices comes from?”

        Um, I assume you meant to say “Not there is a difference”.

        You know, I kinda see where you’re coming from, but, something tells me that there is no equivalent in America to the whole Sergei Magnitsky trial and incarceration. Just sayin’. I know, I know, our hedge funds and bankers rule, but, the Russian oligarchs must be fascinated with the whole SAC event. We may be bad, but, no way are we as bad as Putin’s Russia yet, and, say what you will about the Rand Paul Tea Party types, but, no way would they allow that to happen without a serious fight.

      3. Nathanael

        It’s important to note that the Russian mafia can and will kill people using poison and guns. Our deranged elite 0.1% is too hands-off to do such things. And, as noted, they hold grudges.

        Accordingly, attempting to expropriate the Russian mobsters money is actually pretty crazy.

    1. JohnnyGL

      Wow, what a whopper to herald your return to Nakedcap, too!

      Flat out asset seizures of depositers??!?!! Unreal!!!

      Ed, do you think the reactions in Spain and Italy will be key in determining how this plays out? I’d be interested in how Italians, in particular, view this as the EU bomb-throwers now have a big voice in the new parliament (as opposed to Spain where political parties have closed ranks and opposition is limited to the streets).

      If I’m Berlusconi or Grillo, I’ve suddenly been given a big piece of ammo to put a scare into Italian voters. They can credibly run campaigns telling voters that the EU is going to empty their bank accounts if they don’t jump ship from the EU and the Euro!

      Plus, in light of a recent post on Naked Cap in the last couple of weeks, we now know that Italians have quite a bit socked away in wealth.

      The capital controls thing is just going to further convince people that the mattress is the safest investment of all, these days!!!

      1. Edward Harrison Post author

        I am not going to say a whole lot about bank runs or the like because I reckon this will be a sensitive topic and it is better for me to just keep away from that in public. I will say this though, something I wrote on Twitter: The Cyprus bank deposit bail-in scheme is going to be extremely problematic for the EU. That’s my prediction.

        1. Bill Smith

          That’s ok. We can pick up the ball and run with it from here. Everyone knows we are full of crap and no harm done.

          What I see happening is silverware will become the preferred way for the middle class to hold savings. On payday, after paying bills and going to the grocery store, any excess cash will be used to buy a silver spoon, fork or knife.

          It’s possible even that a black supermarket will develop and silverware will become the new “unit of account”. One may worry about the age old problem of how many chickens for a pig and vice versa, and associated problems of making change in a checkout line, until one realizes that at a supermarket you can make a basket of goods match the value of a silver spoon quite closely.

          For large transactions, I think you want to use a brokerage account full of stock and then convert whatever you need to cash and then immediately do a wire transfer, obviously in the middle of the day so your cash is not at risk for any longer than 15 minutes.

          1. Bill Smith

            After some more thought, I think a safe deposit box may be even better than a coffee can buried in the backyard. I worry about the rising cost of home defense too.

          2. chicagogal

            Safe deposit boxes might be an iffy way to go since it’s a safe assumption they contain cash and other valuables that could also be seized. I’m honestly surprised that any EU citizen would keep money in a bank with all of the uncertainty and intentionally inflicted harm being forced by the governments there.

          3. Bill Smith

            True. I think they did seize safe deposit boxes in London once when they were short on money and decided to go after tax dodgers.

            And when you think about it, that would be one way to be surer to get the people that deserved it, rather than dinging everyone that has a checking and savings account. Even ones who pay off their credit cards and work at whatever local jobs TPTB and econ forces made available to them.

          4. chicagogal

            Taking from those who can afford it is worthwhile, but there are those who can least afford it who would be caught up in this type of plan as well. I know someone here who keeps their money in a safe deposit box because of the insane policy regarding assets for those who are eligible for and receive certain benefits, i.e. Medicaid, SNAP, etc. The outdated asset cap of $2000 forces people further into poverty where they cannot save for old age and emergencies, much less do what other consumers do like buying a new car. This person’s car is about 20 years old and they are in desperate need of a new one, but would these programs force them to sell the car to satisfy that requirement in order to continue receiving the help they also need?

            In its own way, the U.S. has forced us into austerity that is just as damaging as what is happening overseas.

          5. Bill Smith

            Yup. Seizing safe deposit boxes is probably not the most equitable policy we can come up with. You may find one with the Hope diamond in it. But then there will be 100 with grandma’s wedding ring in them.

            There are some people that keep copies of tax returns there for safe keeping (“fire file” in case the house burns down) in case the IRS can’t find the original and you have to prove you paid taxes. Raiding those boxes would be a waste of the taxpayers’ money, obviously.

            Good idea about getting down to the $2000 account max to qualify for food stamps [calculator clicking away finding platinum volume of checking, savings, and brokerage accounts]

          1. Jagger

            I was thinking the same thing. “Bail in” is too close to “bail out” which can produce a positive emotional response. In fact, I have never heard of the “bail in” term before. “Bail in” just doesn’t produce the negative emotional response of the “confiscation” reality.

        2. Nathanael

          FWIW, Wolfgang Muenchau and Paul Krugman both believe that this is, in Krugman’s words,

          “It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying “time to stage a run on your banks!””

          Commenters at the FT report that Portuguese people are already withdrawing their money.

          We’ll see how far this goes, but it looks like it will trigger a coordinated, unstoppable, EU-wide bank run. The bank run phase could go on for YEARS as we found out in the US from 1929-1932.

          The next phase after that is for some country’s government to figure out that the only way to restore confidence is to get out of the euro, and to do so despite all the dire warnings being issued against it. As soon as one country does it and turns out OK, the euro will be gone within about a month, just like the fall of the Soviet Union happened instantly.

      2. Lidia

        Re; “ammo”… Thing is, Italy went through this already in fairly recent memory. Back in the days of the lira, Amato, PM in 1992-93, went in and took a percentage out of all Italians’ bank accounts overnight.

          1. Nathanael

            That was one of the things which caused the lira to inflate substantially as Italians stashed their money in other currencies.

            What’s the “other currency” alternative to the euro?

    1. Claudius

      “Blood”. Agree, and somewhat rhetorically, why is there an implicit assumption that deposits in Greek banks is Russian Mafia money – and, therefore, it’s just the bad guys getting their just desserts?

      Cyprus is a Mediterranean financial center (in as much as it emulates the equally tiny islands of HK and Singapore). It has some twenty domestic and international banks with operations in Greece, Russia, United Kingdom, Australia, Romania, Ukraine and the Channel Islands. Bank of Cyprus (the biggest) operates a total of 567 branches, of which 216 operate in Russia, 166 in Greece, 143 in Cyprus, 18 in Ukraine, 10 in Australia, 11 in Romania, 2 in the United Kingdom and 1 in the Channel Islands. Financial intermediation is 7% of Cyprus’s GDP Tourism 64%. So, banking in Cyprus is no Swiss or Cayman Islands type brass plated, PO Box shop front. Cyprus’s legal and banking system is based on its British (former colonial) counterpart and UK court decisions are often used as precedent for contract and tort law (as with Singapore).

      But, the impression that might be given by reading some of the American news reports and even some of the European news is that: “don’t worry. It’s just a bunch of nonentity banks with shady Russian customers (probably all mafia, anyway) getting a 10% hit for off-shoring their ill-gotten gains”.

      While I’m sure Cyprus-based banks have their own fair share or AML issues and dodgy customers. Why would the offshoring anyone’s money to in order to Cyprus banks avoid domestic tax be seen as any more of an issue than Romney, GE, Citi Bank et al off-shoring (or not on-shoring) their money to avoid domestic US taxes (not that I think it necessarily justified)? It is pure deflection, and the majority of commentators have fallen for it.

      The single most important issue recognizing that it’s the financial élite starting the process of grabbing someone else’s money to make themselves whole, and asking the question: “So, what are you going to do about it?”. And, when it’s nothing, they continue onwards with Greece, Spain, and Italy……..

  1. IF

    Interesting that this has essentially been implemented via steep negative interest rates. I am confused why accounts below 100k are affected (I thought a guarantee was given – probably why it is called a tax/levy in the media). And why large accounts again keep 90 percent and not 0. There was no guarantee for those! Presumably to save companies from bankruptcy, but would love to learn more about the real motivation.

    1. Carla

      “..why large accounts again keep 90 percent and not 0. There was no guarantee for those! Presumably to save companies from bankruptcy, but would love to learn more about the real motivation.”

      Use your imagination.

  2. ambrit

    Hitting depositors is the example indeed. The ratio of funds raised from the “Over 100,000 Euro” crowd to “Under 100,000 Euro” group would be interesting to see. It’s plainly a regressive tax measure, else why the two different percentage levys? If this goes through, there is going to be a world wide reaction, even if slow and faltering. Todays’ average person with a bank deposit has Internet exposure. Watch this go viral if the Cypriots go nutters.

  3. lambert strether

    Bailing out banks with depositor money?! Sure, Russian oligarchs, but what about the rest of the Cypriot schlubs and granny?

    Fortunately, this clearly a one-time thing, since dirty money is uniquely parked in Cyprus….

    1. readerOfTeaLeaves

      Lambert, some intriguing stats from from Feb 2013, by Wolf Richter at Testosterone Pit to back up your comment:

      Cyprus is broke. Its banks carry on their books €152 billion in decomposing assets, about 8.5 times the country’s GDP of €17.8 billion. Of these “assets,” €23 billion are nonperforming—130% of GDP! The banks also sit on €26 billion in Russian “black money,” according to a “secret” report by the German version of the CIA, the Bundesnachrichtendienst (BND), leaked last November [here is my story on the leaked report… The Bailout Of Russian “Black Money” In Cyprus].

      Now Cyprus needs a bailout of €17.5 billion—100% of GDP—of which €12 billion would go to the putrid banks. It’s the first Eurozone bailout that is so unpalatable that the German parliament might actually refuse to nod it through, which would scuttle it.

      Traditional, Glenn Hubbard-type acolytes of ‘capitalism’ and ‘free markets’ don’t seem to think very long-term about the implications of expecting citizens in Germany, France, and Holland to underwrite the financial gamesmanship represented by turning the banking systems of small nations into tax havens.

      Looks like the wheels are coming more rapidly off the bus of neoliberalism, which is the intellectual foundation of tax havenry and bogus accounting.

      The prospect of being expected to underwrite bogus banking, due to tax havens (including oil corporations and Russian black money) is probably not going to sit well with the citizens of Europe. And it will probably only feed the anger (understandably) of the Tea Partiers stateside.

      The Tax Justice Network has been following Cyprus for quite some time.
      Here is one of their more intriguing links:

      1. Ptup

        Right. So, really, how many citizens of Cyprus are affected, or, how much of their money, is being “confiscated” here? I suspect not much. Seems to me to be a pissing match between Germany and Russia, and the Russians only had to pay ten percent. Not a bad deal.

        1. Bill Smith

          There is the confidence issue from confiscation. That can cause bank runs and currency flight out of the country. So in this case we have good currency, the euro, leaving a country that does not mfg it’s own. And worse yet, it’s a tax haven banking center – which is a hard concept to sell to the big money guys at this point. (domestic or foreign) Fractional banking collapses and then there is no euros or credit, except for the horded ones, but biz just got stopped in that case and will be filling for bankruptcy next day.

          But of course this is a “bail” of sorts so some new euros come into the country in this deal and somehow get assigned to their “rightful” owners. But then the question is if they stay put in the country or not and we rinse & repeat.

          Next there will be speculation about whether this will be standard practice in the rest of the periphery. I think last year there was a sizeable move of funds from the periphery to French and German banks, and that was what motivated Mario to do his stepped up buying of periphery bonds. So none of the consequences can be a surprise to the Troika, I don’t think. They may try slapping controls on international movement of money. Or it may just turn into a money grab wherever they can catch it.

          Or maybe everyone stays mellow about it. We’ll have to see.

        2. Jill

          Many of them. There are things that used to be called “laws” which allow for a judical process to prove gains are ill-gotten and thus may be forfeit. If this was about lawful action to redress ill-gotten gains it would be rather easy to go after most members of EU and the US govts. along with their owners in the finacial scam industries and recover everything needed to pay off all debt.

          Also, pay attention to the geographical location of Cyprus. The US would love to bring democracy to Cyprus, because really, can you have too many bases when you’re trying to overthrow so many govts. in the area?

          1. Ptup

            I think that yo are being quite naive when you speak of laws, in this day and age, especially when it concerns this amount of money.

            The U.S. could care less about Cypress. C’mon. They are way way down on the list. I mean, there is probably intelligence all around the money flows, but, otherwise? Doubtful.

            I’d like to see the figures. Maybe there is a lot of money, but, my gut tells me that, the real money confiscated here is (a) foreign and enjoying tax haven status, or (b) local non taxpaying and corrupt money, and also enjoying tax haven status. I really doubt the little people of Cyprus are getting that screwed here. Something tells me the little people of Cyprus don’t have much to speak of. 10% isn’t a bad deal at all, at the moment, sort of a tithe from the Oligarchs. When the dust settles, they’ll do a quick transfer to wherever. London, Paris, Miami RE, Dubai something or other, precious metals, whatever. They’ll do OK. Price of doing business.

        3. Nathanael

          “Right. So, really, how many citizens of Cyprus are affected,”

          All of them. Read Krugman for the short, clear description. Nobody is crying over the tax on accounts over 100,000 euro (except the mobsters)

          The “tax” on ALL accounts, including those below 100,000 euro (the deposit insurance limit), is both savage to small businessmen and incredibly stupid. It really is a “your money is not safe, we could seize it at any time and we just did seize some of it” announcement.

    2. Ms G

      Actually, if you think about it, what is the difference between a bank seizing a 10% tithe from depositors’ captive accounts and MF Global using customer account funds to pay JP Morgan and MFG’s operating expenses (which included Mr. Corzine’s salary, no doubt)?

      And apparently, according to Josh Rosner’s report, JP Morgan has done exactly the same thing – viz. using customer account cash to pay for its personal expenses …

  4. nickj

    I thought EU countries were required to insure bank deposits up 100K euro? gbp 85K in the UK. Looks like that’s gone out of the window, the gold bugs will have a field day!

    1. Ruben

      We are all still reviewing the details but presently the scheme is a one time tax, so deposit insurance does not apply.

      Gov’ts can do whatever they want, or whatever they are told to do by other more powerful gov’ts, in this case.

      1. Perfect Strangler

        A tax is assessed, though; you can find a way to deal with it. You can get a loan to cover your income taxes, you can decide not to make a purchase because of sales tax, etc. Here, the government simply took the depositors’ money, no choice or options allowed.

        6.75% may not seem like much, but I can only imagine the Cypriot who works paycheck-to-paycheck, who scrimps and saves and barely has E1000.00 in their account. I’d be furious that the government had just grabbed E67.50 of my rent money. It’s unconscionable that they didn’t exclude the small depositors, IMO.

  5. Jim Haygood

    Good to see you back, Ed. You wrote:

    Not only are senior bank debt lenders now on the hook before a single penny of European Union loans or guarantees flow to busted eurozone countries, but so are subordinated debt holders and so are even depositors.

    As an EU citizen, you must now believe that any lending exposure you have to a bank whether as a bond lender or deposit lender can be seized and confiscated by government, no matter how small the exposure.

    In the past, I have advocated a small deposit insurance co-pay, in the range of 5% to 10%, to reduce the moral hazard of the existing system. For CDs of $250,000 or less, one can simply shop for the highest rate, from any no-name, jerkwater bank. If it fails, the FDIC will bail you out next Monday.

    However, the appropriate moment for implementing such a policy is when banks are healthy and depositors have the time and choice to move their funds. And after public debate and transparent legislation, of course.

    By contrast, the Cyprus ‘stability levy’ has nothing to do with incentivizing prudent behavior, since it affects all depositors. It also is grossly random.

    A business which just made payroll on Friday might have a negligible balance in its account this weekend. On the other hand, a Cypriot preparing to buy a house next week might have €300,000 in her account, which is going to get docked by nearly 10%.

    Sucks to be you‘ is the only advice Cypriot finance minister Michael Sarris has for her.

    Can the EU get any more squalid? Its answer, one suspects, is an emphatic ‘YES, WE CAN!

    Meanwhile, the EU has poisoned the well for any attempt to remedy the moral hazard of 100% FDIC insurance. Merci pour rien, mes amis!

    1. hugh fowler

      Amen to all of that

      This is the financial equivalent of area bombing in which you level the city in order to ensure hitting a few targets. Lots of financial transactions are going to be wrecked in mid flight by this policy and it won’t just be savers who are impacted. Any Cypriot who took out a €10,000 loan on Friday will find they only have € 9,325 left in their accountwhen the Banks open on Tuesday. You can bet the banks will still be seeking interest on the full amount.

      Ultimately this is going to be a disaster because the banking system is 90% faith (small depositors) and 10% investment (bondholders) – hit the depositors and you break the system and it can take a generation to rebuild confidence. You don’t have to be a genius to see that stuffing cash in a mattress now has a better yield than putting it on deposit. Any sane Cypriot of modest means will be wondering why he would want to leave any of his money with a bank after todays events. I am sure the same thoughts are going through peoples heads in other parts of Southernn Europe.

        1. Nathanael

          There are three scenarios:
          (1) Confidence is re-established before the banks re-open. This can ONLY be done by guaranteeing all accounts under 100,000 euros and NOT taxing them. And that might not even be enough: the mere suggestion of expropriating insured deposits across-the-board was toxic.

          (2) Confidence is NOT re-established before the banks re-open. In this case, everyone will withdraw their money instantly — BANK RUN!

          (3) The banks NEVER re-open. Oh boy. In this case the country will stop using the euro, *regardless of what the government claims the official currency is*. The Turkish lira is a likely alternative currency. Or perhaps Putin will come in, “bail out” the country and provide a ruble-base currency — it would be a nice addition to the Russian Sphere of Influence. Or something else could happen. In this case, if the government keeps asking for taxes in euros, the government will be overthrown.

  6. Bill Smith

    At least we can rest assured that no one will ever do anything like this to the Cayman Islands. The Grand Cayman Navy is just too formidable and intimidating.

    1. Ms G

      I hear that the Cayman and Bermuda armies (and navies and aerial forces) are generously supported by Michael Bloomberg and a few others.

      Just kidding!

      1. Maju

        Cayman, Bermuda and most tax heavens’ Army and Navy are the British ones, normally with backup from the USA. Yes, most tax heavens (aka pirate dens) are British dependencies. Instead Cyprus committed the “error” of becoming independent, so it was first invaded by Turkey (another NATO bully) and now squeezed to death by EU.

    2. Thor's Hammer

      The Gran Cayman money laundering system is fully protected by the US Navy for as long as it is useful to the Mitt Romneys of America. Of course it is a mere pimple on the hemispheric laundromat system located in Panama City— the fourth largest banking center in the world.

      And we all saw what happened to Manuel Noriega when he demanded a larger share of the drug profits flowing through his country into the CIA sponsored wars in Central America—-.

  7. Susan the other

    The EU doesn’t have a Federal Deposit Insurance Corporation paid for by all the private banksters. So they have chosen $100,000.00 for the cut off. Anybody above that gets skinned 10% to bailout the banksters and anybody below that can keep their money. Our FDIC had a 100k cut off before the GFC. Now it’s $200k per depositor. There has been a whisper of reducing this coverage back to 100k. Don’t know what that portends. And somebody please tell me what all is considered to be a “deposit”. Can liquid commodities contracts, like CDS, be deposited in the bank? Because they go back and forth just like cash?

    1. James Cole

      A deposit is a loan to a bank made by the depositor (i.e. you), that is all. A CDS is a contract between two parties that itself may at any given moment constitute the extension of credit from or to a bank but it is not capable of being a deposit in the normal use of the term. However an interesting question here is the extent to which non-depositor unsecured creditors of Cyprus banks are subject to this tax. I’m guessing not at all, but also that there are not that many of them to be significant.

    1. Nathanael

      Nope! Shareholders and bondholders — mostly rich foreigners and — are protected.

      This “deal” REEKS.

  8. TomDor

    Did I miss something, did I mis-interpret something?

    This is just plain outright theft!! WTF

  9. shtove

    Good article. Thanks.

    I’m still unclear on the EU’s regime for dealing with bondholders.

  10. curlydan

    Hitting the depositors with under 100K Euros seems extremely harsh. If they wanted to target hot Russian money, just hit the 100K+ accounts since they were uninsured unless the Russians had tons of accounts with 90K to 100K euros.

    Are the bondholders again getting a great deal since they could have beared the brunt of the losses (presumably after shareholders) on this?

    1. NotTimothyGeithner

      The article addresses this point if not directly. This is about German and other Northern European countries’ politicians sticking it to the lazy Southern Europeans who they will use much in the same way Ronald Reagan blamed welfare queens. Policy outcomes are not as important as short term perception when it comes to politics.

      This isn’t about oligarch’s creating tax havens, or there would be a more sensible program. This is about election appearances.

      1. JTFaraday

        If German voters really think that this is what they want, maybe German voters should think twice.

        1. Nathanael

          Maybe? Definitely. There are only a few ways this can end, and none of them are good for Germany.

          (1) Total economic collapse of Europe.
          (2) End of the Eurozone, Germany is unable to export due to exchange rates
          (3) War

          1. Perfect Strangler

            And, of course, 1 and/or 2 doesn’t necessarily exclude 3.

            Ironic that Cyprus, a haven for pirates in medieval times, is now being pirated.

  11. MG

    Neo-liberal wars in the post-modern world seize assets before the bombs explode and fires rage

  12. bmeisen

    It isn’t theft. Decades of devaluing instead of building the an industrial base the hard way, with bigtime investments in education and infrastructure, drove the Club Med virgins into the brawny arms of the Euro-nauts. The airheads went on a shopping spree, piling on the credit card debt and thinking “Some big, strong man is gonna end up paying this (as long as I can keep on putting the botox on my VISA).”

    Turns out the Euro-nauts are teuto-butch valkyries who are going to put these eternal waitpersons on the road to fiscal responsibility, and the first step is a wake-up aria: You löse 7%! Honest. A bit more than a pinch. Better this than a devaluation followed by another cycle of tourist hoards pitching their empties out the back door.

    1. Aussie F

      Yeah, and now it’s Gotterdammerung time for the Valkyries, the airheads and the uber-Nazi Teuto bankers. They’ll all go together, along with the whole European kulcharal project.

    2. Maju

      Less chants to Germany: the people have been pushed to poverty there as well. The system is rotten at the core: Germany.

      1. bmeisen

        Collective punishment surely from the perspective of people who think taxation is collective punishment.

        For the life of me I don’t get the EU/Germany bashing. Ok, the Euro was a mistake, a communal mistake. Spain, etc signed on, knowing they were losing their devaluation game, and that Germany was going to benefit more, if not a lot more, unless they got their economies into high gear fast. They didn’t. Instead they made like good liberals and watched real estate bubbles rise to the heavens.

        All members knew that van Helsing wasn’t going to save them when the eerily quiet naves of European central banks were befallen by Gsax vampires who promised further fiscal sovereignty without a national currency.

        Germany benefits most not because they planned it that way, diabolically like Hitler plotting in the Wolf’s Lair. Germany benefits because it is at the center of Europe, it has an industrial base to die for, and its European competitors can’t devalue to compensate for failure to compete.

        What Spain et al need is for Daimler/BMW/Audi to screw up the way GM/Ford/Chrysler screwed up. Then they would have a chance to move in like Toyota has taken half of the US auto market. Germany just lose it, go arrogant and decadent like the US, start ripping off it’s workforce, failing to reform education, to innovate in the infrastructure. (By the way, claims that Germany is savaging its labor force are proto-stalinist fantasy.) Germany has a functioning social democracy, and is reeping the benefits of holding the line against the neo-liberal attacks that followed the fall of the Berlin Wall.

        1. Lambert Strether

          “Taxes are the price we pay for civilization.” I don’t think grabbing 6.75% from the account of every small depositor falls into the same category; there’s no informed consent, no social contract. If you think it is, why?

          1. bmeisen

            I don’t think they’re in the same category – and I agree that a social contract motivates us to consent to pay a tax.

            My objection is that while this “grabbing” may look like collective punishment of everyone, it is an event that effects bank depositors only. Bank depositors, while often poor struggling people just like me, voluntarily enter into an agreement to lend money to a bank. I expect there’s an argument from the regulatory side saying that bank customers must be liable.

          2. Carla

            @ Lambert: “Taxes are the price we pay for civilization.” I don’t think grabbing 6.75% from the account of every small depositor falls into the same category; there’s no informed consent, no social contract. If you think it is, why?”

            Well, honestly, Lambert, I must say it appears to me that this goes on every day in the United States, where taxes are levied on the poor and middle class with no informed consent, with no social contract, and taxes on wealthy elites are consistently cut. In a very strange way, this action in Cypress is more honest.

            Depositors are TOLD they’re being fucked while they’re being fucked.

            I agree it is chilling. But it’s a rather obvious strike, as opposed to a stealth drone strike.

          3. Lambert Strether

            If you think becomeing a bank depositor is a wholly voluntary act, as in caveat emptor then try being unbanked, and find out how your life changes.* I think this justification is a little thin, especially since Granny needs some place to cash her pension check.

            Yes, FT Alphaville tries to frame this theft as a tax (“note that it is what it is: a tax”) but I don’t think that’s right:

            1. Citizens can dispute the amount taxed

            2. Tax is known in advance, so citizens can plan

            3. Citizens can become tax resistors. (If the response is that then the IRS levies the account, that proves my point: This is just a taking, not a tax.)

            4. Amazingly, depositors are being given some sort of equity swap. IIRC, Spain did something similar and of course it was a scan. However, what kind of tax involves an equity swap with a private bank?

            * This is why, of course, there should be something like a Post Office bank where all citizens can do their boring banking.

          4. Ruben

            Come’n Lambert, since when the gov’ts of the world need informed consent and social contract in times of emergency? The masses willingly put themselves in the hands of their lords, just recently they voted these masters in Cyprus.

            There was a measure of distinction with the cypriot granny, they foced a lower tax on those holding less that 100K euros.

            I am guessing here, but if they had charges all the tax on those holding more than 100K then due to their much lower number the tax would have been nearly complete confiscation.

            The masters that the Cypriot cattle put on their top to screw them probably calculated, with external help, that this spread of the pain will assure that the herd will take it with just mild protestation.

          5. Yves Smith


            Your assumption is wrong. They didn’t need to go after the smaller depositors. Even though they hit the bigger depositors harder because it was assumed to be dirty Russian money, the authorities didn’t want to charge them more because…they wanted to preserve Cyprus as a financial center. In other words, the Germans railed about Russian thugs and drug runners using Cyprus but are imposing a lower haircut on them than they deserve so that they’ll be willing to come back.

          6. Ruben

            Come to think Yves, your reading sounds right to me, the smaller depositors got hit in order to not scare away the bigger ones.

  13. Maju

    The only tax heaven under Eurogroup control gets culled. Russia promises (?) €2.5 Bn in addition to the €17 Bn of the EU (and a ridiculous €1 Bn by the IMF) – these are the figures I have read, not exactly the ones mentioned in this entry however.

    Cypriot citizens and residents rush to get their money out of the banks. Foreign investors surely will in no time, all just a few days after a Communist President loses elections by a small margin to a Conservative.

    It’s ridiculosuly suicidal: whatever this intends it cannot be to save Cypriot Banking.

    Why not simply nationalize the banks and pay with bonds (or whatever)? The Eurozone, as it is, is so obviously a deadly trap!

    IMO it will soon collapse.

      1. shtove

        Cyprus: an island economy with an over-leveraged finance industry + dodgy tax-haven arrangements + billions of funds stolen from Russia.

        Britain: an island economy with … you know the drill. The difference is the UK can abuse its own currency.

  14. Chris Engel

    There is no longer any reason for any peripheral Euro depositor to believe their funds are safe.

    When people start seeing their balances seized, that’s what leads to serious action and social unrest.

    It has begun.

    1. Lambert Strether

      If that’s true, it looks like the EU pulled out the bottom card from the whole house of cards. Who could not see that as consequence?

      So what were they thinking?!

      1. Chris Engel

        Perhaps there’s something about the depositor base in the periphery that the troika know, that we don’t?

        Can’t imagine any Joe (or Jose?) Plumber seeing this news and thinking “oh, no reason for me to liquidate my deposits or savings.”

        But those aren’t the ones holding the system together…the next few days, most particularly Tuesday, will be quite the spectacle.

      2. NotTimothyGeithner

        Our elite have been inured from consequences of their actions for so long they don’t think about “what ifs” and “how people might react” as long as someone is there with a graph to reassure them that they are correct and special. The answer to what were they thinking is they don’t. Consequences are for little people, and if something goes wrong, the answer is no one could have predicted. Will Merkel lose her house? Or miss a meal? Will the quality of her government effect her future compensation? The answer is no, so why should she work hard?

        1. Nathanael

          Good summary. For more on the abnormal psychology of the 0.1% and the German bank executives and Merkel, see _Theory of the Leisure Class_, by Veblen.

      3. Nathanael

        Lambert: they weren’t thinking. Not really.

        A very wise person pointed out to me that the Troika / German Banker types live in a bubble. A Richistan bubble.

        They only talk to 1%ers, and usually only 0.1%ers. They don’t ever actually talk to middle class people, let alone poor people. They certainly don’t talk to average Italians or Spaniards!

        They are also poorly educated. They have been indoctrinated with self-serving bullshit. They don’t actually understand that you have to give the people bread and circuses. They don’t understand that deflation is bad, that it destroys the industrial economy. They don’t understand any of this — they never learned it, and they are too egotistical to learn it now.

        So they are basically living in a fantasy world. In their fantasy world, this will work and people won’t start bank runs. The fact that this is not the real world never occurs to them, and if they notice it then they yell at the real world telling to act more like their fantasy.

        They are like the court of Versailles under Louis XVI. They will pursue the path which leads them to the guillotine and they will never realize what they’ve done.

        Yes, they have just pulled out the last brick, the one which will destroy the eurozone and possibly the entire world financial system. It remains to be seen how much damage the collapse will cause.

  15. The Dork of Cork.

    Something was about to hit the fan when we heard of “mafia money” in Cyprus.

    Need I say we happy plebs in Ireland have not been told the names of those bond holder guys.

    Those were the good mafia guys
    Then you have the bad mafia guys………

    For fuck sake.

    Europe is a lawless place.

    Whoever is running the gaff is extracting money during massive inflationary & deflationary invests.

    I am afraid those poor mafia guys from Italy & Russia are not a patch on the real power base

  16. Brian

    Well, there is trouble in the Eurozone tonight. 8:5 the banks close in most countries in Europe within 72 hours. For those of you trusting souls, thank you. It will allow us skeptics to withdraw our worthless paper and buy timber. If you haven’t seen enough, you are willfully blind.

      1. Nathanael

        Torches and pitchforks?

        Or maybe they’re planning to board up their windows before the civil wars and rioting start.

  17. craazyman

    Just a shout out to Ed. I’m a happy paid subscriber to your website. Keep up the great work!

  18. Propertius


    Could you please elaborate on how you would expect your “small” copay to work, especially in light of the miniscule yields of bank deposits these days?

  19. JGordon

    I wonder if Yves will use phrases like “rescue” and “buy time” for this mess as she has when she’s described other bailouts or potential bailouts.

    I have always wondered whenever I read that exactly who was being rescued and what time was being bought for by the way. It seems a particularly virulent kind of delusional thinking that adding more debt to already unpayable debts is a viable solution to anything at all. Sort of like a ponzi scheme that can only keep going so long as the ponzi-Keynesians can keep the money supply infinitely expanding without a single hiccup. Oh, meanwhile back in the real world the amount of actual physical collateral that correlates to MMT ponzi-currency units keeps diminishing at an accelerating rate.

    1. borkman

      Are you implying Yves is a fan of what’s been happening in the Eurozone? She’s been consistently critical of austerity the efforts to shield the banks. And yes, shielding them is a “rescue” just as the bailouts in the US were also “rescues.”

      1. Lidia

        borkman, you’re confounding two different issues: one is the fact that the pie is not growing higher because the energy to do so is diminishing in per-capita terms. Pies that do not grow higher break the interest-/debt-based money system absolutely. Now that the shrinking pie is globally shared, the breakage will be global eventually.

        The second issue is who is going to suffer austerity because of this: how we’re going to divide the shrinking pie. The answer is clearly the consituencies with the least amount of political power. Despite their “broke”n state banks still wield more political power than any other constituency, and so banksters say their pay and perks need to keep growing as before, or even faster! Growing the pie for banksters means shrinking the pie even more for everyone else, at a drastically disproportional rate, as described in the post above as well as just about anyplace else you care to look.

    2. Nathanael

      “wonder if Yves will use phrases like “rescue” and “buy time” for this mess as she has when she’s described other bailouts or potential bailouts.

      I have always wondered whenever I read that exactly who was being rescued and what time was being bought for by the way.”

      The elite psychopathic bankers. Time is being bought for… them to steal more money before it all collapses.

      You have a confusion, though. It is very much possible to continuously expand the money supply, with steady low inflation — in fact, this seems to be the correct situation for a healthy economy. Money *should* be continuously dropping in value so that it’s more valuable to spend it on real, useful things than to hoard it. But it shouldn’t be dropping *too fast*.

      The key is that the *money* supply can expand indefinitely but *debt* cannot. With too many debts, at some point you have to forgive the debts, which is essentially equivalent to monetizing them.

      To put it another way, the money supply should be expanding at a slow but steady rate. When something “demonetizes” (such as the fake “AAA” securities which were in money market accounts, but aren’t now) the “missing money” has to be replaced with a supply of new money in order to maintain stability. The new money doesn’t need to go to the same people, in fact it shouldn’t, but it needs to go into the economy.

      The German bankers running the ECB have been refusing to expand the supply of euros, which is needed right now. Therefore countries need to switch to other currency so that they can expand the supply of money.

  20. Squeeky Fromm, Girl Reporter

    I just wrote an Irish Poem about this crap, which I hope everybody enjoys:


    A Cypriot wailed “Woe is Me!”

    “Six percent just gone POOF!” don’t you see?

    Now that wasn’t fair,

    But they didn’t stop there,

    For this “service”, they charged me a fee!!!

    Squeeky Fromm, Girl Reporter

  21. lambert strether

    Atrios: It Must Be Deliberate:

    They’re actually sending the message that people need to pull money out of banks because otherwise they might steal the money to give it to the banks… in order to save the banks.

    But WTF? Creditanstalt, except on purpose?

    A test to see what they can get away with?

    (It’s actually rather like ObamaCare’s mandate, instead of forcing you to pay for not entering the market via your 1040, they enter your bank account and give you a swap in return. I can certainly see a lot of advantages to the market state in being able to do that. It’s not clear to me how such a system would reach its full flower without abolishing cash.)

    NOTE * “Stability levy” is really brilliant. Nice little household you’ve got there, shame if something even worse happened to it.

  22. OMF

    They stole the money from the depositors to pay off the bondholders. That’s all there is to it.

    The ECB could have printed money. It could have issued credit. It could have made other banks lend money. The IMF could have done something too.

    Instead, the ECB chose to make a euro in a cypriot bank a second class euro, subject to confiscation at any time. And now all euros are second class euros. The euro is now a second class currency, with only its own inertia for support.

    This is going to be a very slow train wreck.

    1. Susan Pizzo

      Thank you. That was my thought also. Especially after finding a breakdown of Cypriot debt, which seems to be predominantly Greek debt and non-performing Greek loans. I’m not sure why depositors in one EU state should shoulder debt created by the bad faith, criminal conduct, or bad luck of another – but the reference to Russian monies would appear to be a red herring. That the politicians are choosing to balance bad debt of their own creation on the backs of small depositors is just the next step in the wealth transfer process that has been gearing up for 40 years. Doesn’t have to be this way, but only a global uprising a la Grillo seems likely to stop it…

    1. Nathanael

      Repeat, again, gold is a LEADING indicator of trouble.

      Gold will continue to rise and do great as long as the Eurozone crisis (and the global financial crisis) stagger onward without resolution.

      However, as soon as the eurozone *actually collapses*, as every country abandons the euro and the banks are liquidated… why then, gold will drop like a stone and lose its value.

      Buy goods with real value — own your home outright, insulate it, deck it in solar panels. Better yet, cultivate relationships. The loyalty of a farmer with good land is worth more than gold. (No, I’m not following my own prescription, but that’s because I’m antisocial.)

  23. Bakasone

    The Russian story is all smoke and mirrors. If Merkel’s henchmen were serious about fighting tax evasion, they’d cancel all agreements against “double taxation” with Cyprus. This is how it works: Let’s say you’re an Austrian zillionaire unwilling to pay taxes. Just open up an investment trust in Cyprus, it’s easy. Of course your money actually never leaves Austria. You put it in an account your Cypriot trust holds at the Austrian bank of your choice. As you’d have to pay no taxes in Cyprus all income earned by this money will be tax free in Austria, too – thanks to an agreement to avoid “double taxation”.

    The end game is picking up speed. I’m living in Europe and I’ll take my money out of the bank asap.

    1. sleepy

      Interesting point.

      As I understand it, tax treaties relative to earned income generally give the taxpayer an offset for taxes paid overseas.

      For example, if I were a US citizen working in the UK and paid $5000 in UK income tax and owed $4000 in US income tax, I would be given an offset by the IRS for UK taxes paid, thus owing the US nothing.

      A similarly situated UK citizen working the US would owe the UK taxman $1000.

      It may not be a straight one for one setoff, but again, as I understand it which might be wrong, it is similar.

      Now, to your point involving the hypothetical Austrian. Normally, since he paid no Cyprus taxes, he would just pay his/her Austrian taxes in full–no taxes paid, no offset.

      Is unearned income treated differently with these tax treaties than earned income?

      1. Bakasone

        Well, I know the Austrian. Of course he’d never pay tax at home. Cyprus is just a convenient location in offshore wonderland. We’re not talking about “earned” income. It’s just book money miraculously multiplied by financial engineering of all sorts.

      2. Nathanael

        I don’t know the Austrian laws, but it seems likely he’s breaking them.

        Of course, in the US the first ~$20,000 / year of investment income is actually, legally, tax-free at the federal level. This can create some damn weird tax avoidance schemes and is really completely immoral.

  24. Rufus T. Firefly, Jr.

    There is more to this story. The financial stuff is just the façade.

    Cyprus is now being levereged against Russia and Syria, which is why it is being fast-tracked to join NATO. The 2 UK bases on the island might also be turned over to the US. The maneuvering here points to much larger geostrategic implications.

    Perhaps other readers might like to comment on these aspects?

    1. Bakasone

      Good point. Wood there be a better way to drive Cypriots into the open arms of Mother Russia? What were they thinking? Seems Berlin was too worried about the German elections coming up in September, so we’re entering another depression for similarly stupid reasons as in 1929.

      1. Nathanael

        No. This particular piece of utter stupidity doesn’t help with any of those goals. In fact, it’s calculated to drive Cypriots into the arms of Russia and even Turkey.

  25. Andrey Subbotin

    “Cyprus state broadcaster CyBC reported on Saturday that German Finance Minister actually entered the Eurogroup meeting on Friday proposing a 40 percent haircut on Cypriot bank accounts. Sarris (Cyprus finance minister) stated on Saturday that this had also been the proposal of the International Monetary Fund.”

    Maybe this haircut is not as one-off as advertised.

  26. ddf

    You don’t like the bail in so where is the money going to come from then? Other Euro area tax payers? Alternatively Cyprus and its banks could be left to their own devices to sort out their problems without new money from the EU/IMF (as far as I know no one else has stepped forward to offer new money) which would likely involve sovereign and bank default. Riskier for the euro area but currently the market seems in a mood to buy any dog with yield so Brussels/Berlin might just get away with it. Which of these alternatives would be more equitable? better for market discipline? FYI in terms of sovereign versus bank CDS, since 1 Jan. all euro area newly issued debt includes a CAC.

  27. E.L. Beck

    As if no one could see a run on banks coming. And to think of the incomes drawn by those cats from the EU, ECB and the IMF. I wish I could get paid that kind of coin for being stupid. It’s so much easier than thinking through potential consequences.

    Next: The collapse of the Cypriot banking system, so stay tuned for more from the Troika. It has all the makings of a great comedy, were it not so tragic.

  28. HotFlash

    From the NYT article ref’d above: “What the deal reflects is that being an unsecured or even secured depositor in euro-area banks is not as safe as it used to be,” said Jacob F. Kirkegaard, an economist and European specialist at the Peterson Institute for International Economics in Washington. “We are in a new world.”

    Yes, *that* Peterson Institute. Are there wheels within wheels here or what? Help, anybody?

    Oh, and Public Intelligence says they are `not that charitable`(quelle yada …)

  29. Heretic

    Well this is a perfectly fair outcome. Small Depositors, who effectively have no say in the operating policies of the banks, must be robbed of 7% of savings. Depositors are easy, so they get whacked first. But the bankers and executives who made ALL of the decisions that led to this fiasco, their salaries and bonuses are sancrosanct, AND there must be no detailed investigation of their actions (and especially no disclosure to the public). After all, we do not want to discourage the ‘talent’ from whom we enjoy ALL our prosperity. (After all engineers and scientists are a dime a dozen in India and China, and farming is old world commodity work).

    A perfectly fair outcome.

  30. steve from virginia

    Good summary by EH, as usual.

    It is hard to see what the EU gains b/c costs are very high. Every pfennig extracted in Cyprus from the hapless depositors will be lost by the ECB and the rest of the eurozone banking system. Unlike Vegas, what happens in Cyprus will reverberate across the entire eurozone.

    European banks need more depositors rather than fewer, it is hard to see the reason behind this ‘strategy’.

    Also, Russian ‘oligarchs’ are Putin & friends @ Gazprom. All it takes for Russians to gain that 10% back is for some beefy Russian dude to turn a valve in Siberia and cut the flow of gas. It gets cold in Germany in winter, I understand …

    Harrison may be right about the absence of senior secured creditors but more likely is assets on Cypriot banks’ books are completely worthless … the entire liability stack is underwater and so is Cyprus government.

    The journey from ATM to ATM to withdraw money is just beginning in Europe, as it was years ago in Argentina. After that comes the banging of pots and pans in the streets, then come bomb attacks on police stations. This is not a good journey for the Europeans to be embarked upon.

    1. Nathanael

      Remember, the people in charge DO NOT HAVE A PLAN.

      They just have a bunch of crude “those southerners should suffer” ideas in their heads.

      The people in charge, the 0.1%, “Our Galtian Overlords” as Atrios calls them, are STUPID and they are IGNORANT.

      We are dealing with what we would call, in a D&D campaign, “Stupid Evil”.

  31. Heretic

    Bankers once again doing ‘God’s Work’.

    President Blankfein (Blank-fiend?) would agree.

  32. sd

    Can anyone guess how this might affect ‘savers’ in the US? Let’s say a similar scheme gets going here. Anyone with an IRA is going to get seriously whacked., no?

    If I was living in Europe, I would absolutely be trying to reduce bank balances to the minimum. I just can’t figure out how this will metastasize for use in the US.

    1. Gonville

      It has already; how this is different from the Federal Reserve printing money and devaluing the dollar so that banks can stay solvent. The only the difference between the US and Cyprus (and Europe in general) is that the largest US banks have an excess of deposits over loans – it’s the Fed’s excess reserves, which amounts to just over $2 trillion, that presently sit on the banks deposit ledgers. And, it’s these excess reserves (giving the impression that the banks are solvent) that – along with FDIC insurance – has served lessened the apprehension of a ‘public’ run on the bank.

      The Feds (taxpayers) munificence has been rewarded by banks such as JPM, who not only pay a reasonable rate of interest on these funds, but then use the deposits to finance business, start-ups, construction, technology, etc. – helping to bring life back to the American economy. ….. Oh! That’s wrong. I just remembered, JPM is paying zero interest on these excess deposits and then using the money to fund the ‘whaling’ operations of its very risky prop trading desks (doing a Melville) ….. My mistake.

    2. Ptup

      Highly doubtful that this could happen here in this form for a long time. Of course, the Democrats are beating the tax the rich drum, which can take many forms, but, the only method I have seen to nail the average schlump is to reduce Social Security and Medicare benefits if one is declared “rich” because they have to declare assets in their retirement accounts that are above a level that, of course, exceeds most of what citizens in their age group own. That will not be hard to determine, since most Boomers have no savings to speak of. In affect, a tax on some of the middle class, and a reduction in retirement assets. I can feel this happening soon.

    3. Nathanael

      There’s a severe psychological difference between a slow inflation (and by the way, inflation is at a record low, still running around 2%) and an instant confiscation of money.

      The confiscation is MUCH more dangerous.

      FWIW, the UK has already said “We will never do this sort of confiscation”. I presume the US will also never do it, unless crazy-ass Republicans get in charge (they’re crazy enough to do anything stupid, absolutely anything).

      However, the German bankers who run the Eurozone have just proven that they WILL do this insanely stupid thing. There will be a slow-motion run on euro-denominated bank deposits. It’s going to take down the entire euro banking system. At a *minimum*.

      1. Gonville

        Agree with you entirely; no doubt all governments would rather inflate their way out of this mess. Cyprus, given that it doesn’t issue it’s own currency, simply doesn’t have the means.

        Still, my point is that the US depositors and tax payers are, presently, not immune from having a wealth tax being imposed on them – albeit stealthily – and it’s a tax that, likely, will have an immediate and equally devastating impact when 2 trillion in reserve deposits push up M3.

  33. Rui Azevedo

    The Euro Crisis Explained To Grannies: For a very simple (and funny) explanation for the euro crisis, just write on your search engine: wordpress blog The euro crisis explained to grannies

  34. Conscience of a Conservative

    I’m intersted in the Russian angle on this. There were talks for a while that Russia might bail out Cyprus which is strategically quite important in the area and is thought to have huge potential in Natural Gas. Now Europe is bailing out Cyprus and there’s a ton if Russian money in Cyprus, not all of it legally there which will now lose 1/10 it’s value after the levy.

  35. different clue

    As a total layman, I have to wonder . . . how many of these confiscations would it take to convince small single and/or family citizen-savers to decide a deposit-taking institution in Europe is no longer a safe place for deposits?
    How many Europersons would keep just barely enough money in a bank to be able to do the things that only a bank can allow to be done . . . and then keep all the rest of their meager-to-modest savings in some physical-cash form buried in coffee cans or mason jars (which don’t rust)?

    And how many more such confiscations from lumpen-savers can the EuroLords perpetrate before the EuroSerfs wonder whether the Euro will indeed break up and disappear? If they feel they can no longer trust the Euro itself to remain existing over the long term, what other paper will they seek to turn their Euros into? Would it have to be dollars? What if a hundred million EuroSerf lumpen-savers decided to begin selling some (not yet all) of their Euros for Rubles and RenMinBi instead? Just in case? Just to be ready?
    And how many EuroSerf lumpen-savers begin thinking about how much longer each of them can expect to live personally?
    Might a hundred million EuroSerfs make a hundred million separate personal decisions about how many pairs of socks/shoes/underwear/pants/etc. they might reasonably expect to need for the rest of their personal lives? Might they buy and stockpile personal supplies of these things right now while money still has value in terms of the consumable and/or durable items of daily and yearly living?
    How much space would a lifetime supply of toilet paper take if it were neatly packed and pressed in tight? If you put your bed up on a five foot high loft and filled the entire space under it with rolls of toilet paper, would that be enough for the rest of your lifetime use?

    1. Sufferin' Succotash

      You ask too many questions.
      There are ways of dealing with overly-inquisitive people like yourself.

      1. different clue

        Too late! The question asked cannot be unasked, the bell unrung, the steak uncooked, etc.

    2. Nathanael

      “As a total layman, I have to wonder . . . how many of these confiscations would it take to convince small single and/or family citizen-savers to decide a deposit-taking institution in Europe is no longer a safe place for deposits?”

      It doesn’t even take one.

      The mere threat of one, backed by the German bankers who run the ECB, has already been sufficient for people in Portugal to start pulling their money out.

      This was the crossing of the Rubicon — the move which cannot be taken back.

  36. John Hope

    When the Nazis wanted to introduce their euthanasia policy they didn’t do it all at once ; they started with the most disabled with the justification that they were being ‘ kind ‘ to put them out of their ‘ misery ‘ . And when it worked and nobody protested they moved on to greater and greater crimes . This is how it works. Whatever might be behind this crime it is a testing ground for what the ninety nine per cent will stand . If they pull it off without too much protest then they can ramp it up bit by bit to enslave the ninety nine per cent completely. Austerity has failed so they need something like this. Something that taps straight into the money believing that we can’t do without the banks whose weapon until now has been their ubiquity . But our creativity as humans is boundless and we will find alternatives to the present banking system . In fact many already exist . The banks will become obsolete just at the point when they think they have us beaten .

  37. Bill Jones

    Now, surely, not even the most rabid of the lunatic left can deny that the purpose of government is the looting of the governed.

    1. Sufferin' Succotash

      I hope you enjoyed the CPAC workshop on The Virtues Of The Peculiar Institution.

    2. Nathanael

      That’s just a stupid statement.

      Government is what happens whenever a group of people (perhaps us) gets together, and decides that we’re going to enforce some rules against other people.

      What is its purpose? *Different every time*, depending on who the “we” is who decides to get together and become the government. The dictator of Albania was obsessed with building bunkers, so that was the purpose of his government.

      Right now, the German government’s purpose is clearly to loot the pockets of the average people in the non-German parts of the Eurozone.

      That doesn’t allow you to generalize about “the purpose of government”, which is asinine.

      1. different clue

        How many non-German Europeans may be said to own the homes they live in and the land those homes sit on? How many of those homeowners ( or even non-owning homedwellers) are in a position to start gardens, micro-orchards, etc.?
        What if they turned some of the money in their pockets into
        hi-intensity garden systems/ tool-collections/ etc.? How much money would each of them need to buy a lifetime supply of various ground-up rock and mineral powders, seaweed meal, etc. to keep their gardens producing hi-nutri-dense mineral-rich food for sustaining health and life until natural ancient-age death? How much harder would the EuroLords find it to loot soil from a garden than to loot money from a pocket? And my mind still goes back to that lifetime supply of toilet paper under the bed-on-a-loft.

        1. Maju

          Many homeowners are in debt and may lose their property to the banksters, either because of their own mortgage or that of relatives, which they availed.

          Most European homes are apartments and have no room for gardening or, in the best case, rather well-off people, a tiny garden. Owning a garden is an expensive luxury, at least where I live. Rural land is not cheap either.

          Most people in Europe have no realistic options of becoming economically autonomous from the wider socio-economic context in any way. That’s why it will explode, what else?

  38. Roger B Houghton

    The following paragraph describes the usual economic model before the advent of British global hegemony two centuries ago:

    “The Turkish economy is simple and creates prosperity but more importantly commerce in Turkey is readily intelligible. There are no fluctuations to fear, no fictitious credit is created. Neither consumer nor producer is dependent on powerful capitalists operating in between them. There is no effecting of transfers, running risks, circumventing gratuitous obstacles (all of which increase prices and accumulate wealth in the hands of the intermediaries). Freedom of exchange of goods prevents great gains and great losses. No-one is excluded. Competition diminishes difficulties, expenses and profits. Prices relate to the labour expended, its transport cost and the commercial exchange.”

    The full review is in the Asia Economy chapter at

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