Cyprus deposit grab sets bad precedent

By Hugo Dixon
March 18, 2013

Cyprus’ deposit grab sets a bad precedent. Money had to be found to prevent its financial system collapsing. But imposing a 6.75 percent tax on insured deposits – or even the 3 percent being discussed on Monday morning – is a type of legalised bank robbery. Cyprus should instead impose a bigger tax on uninsured deposits and not touch small savers.

Confiscating savers’ money will knock confidence in the banks. Trust in the government will also take a hit, since Nicosia had theoretically guaranteed all deposits up to 100,000 euros. Small savers should be encouraged not penalised. They are the quiet heroes of the financial system, who squirrel away their savings, not those who drag it down by engaging in borrowing binges.

Nicosia has not technically broken its promise to guarantee small deposits. That’s because it is not the banks which are failing to repay savers – something which would have triggered the insurance scheme. Instead, it is the government itself which is grabbing a slice of deposits. The pill is also being sugared by giving savers shares in the banks and some of the hoped-for revenues from a possible natural gas bonanza as compensation. That said, the mechanism is still an effective breach of promise.

There’s no denying that Cyprus needed a solution. The small Mediterranean island was on the brink. Its banking system – which had grown to eight times GDP on the back of inflows of Russian money and aggressive expansion in Greece – was technically bust. Its exposure to the Greek economy, Greek government debt and Cyprus’ own burst property bubble had seen to that.

Nicosia’s euro zone partners made clear there was no time to waste. They had chosen the date of their finance ministers’ meeting on Friday night, knowing that Cyprus already had a scheduled bank holiday this Monday. The country’s president says the European Central Bank was threatening to cut off liquidity on Tuesday if there was no deal. The banking system would have collapsed.

In total, Cyprus requires 17 billion euros – almost 100 percent of GDP – to rescue its banks and deal with the government’s own bills. If Nicosia had borrowed all that cash on top of its existing debt, it would have been carrying an unsustainable burden. It would have only been a matter of time before the debt needed restructuring.

Cyprus’ euro zone partners and the International Monetary Fund rightly decided not to lend it so much money, limiting the bailout to 10 billion euros. This means Nicosia should end up with debt equal to a manageable 100 percent of GDP in 2020.

The problem was where to find the extra 7 billion euros. Given that Germany and other northern European countries weren’t prepared to give a handout, there were two options: haircut the government’s own bondholders or hit bank creditors. The option of haircutting government debt – as Greece did last year – was rejected. Many bonds are held by Cypriot banks, so a haircut would just have increased the size of the hole in their balance sheets, meaning they would have needed an even bigger bailout. The Cypriot government’s credit would have been destroyed for little benefit.

So, by default, the banks’ creditors had to be tapped. Ideally, bank bondholders would have taken the strain. But Cypriot banks have hardly any bonds. So there wasn’t much money that could be grabbed there.

This, incidentally, rams home the importance of requiring all banks to have fat capital cushions – consisting either of equity or bonds that can be bailed in during a crisis. The sooner international regulators come up with a minimum standard for so-called “bail-in” debt, the better.Given that Cypriot banks didn’t have such a cushion, the remaining option was to hit depositors – for 5.8 billion euros.

There was even some rough justice in the policy. After all, up to half of the country’s 68 billion euros of deposits is held by Russians and Ukrainians – and some of this money is thought to be black money laundered through Cyprus.What’s more, the country’s banks have been paying high interest rates in recent months – in some cases up to 7 percent on euro deposits. That is clearly danger money. Depositors should have known there were risks attached to such high rewards.

If the deposit tax was confined to uninsured deposits, which are facing a 9.9 percent levy, such arguments would have merit. But the original plan was also to hit insured savers with a 6.75 percent tax. It would be better to get the money entirely from the 38 billion euros of uninsured depositors.

Following an uproar over the weekend, the Cypriot government was rethinking its plans which risked being voted down in parliament. The latest idea doing the rounds is that insured savers will be hit with a 3 percent levy and those with more than 100,000 euros being charged somewhere between 10-15 percent. This is clearly an improvement on the original proposal. But why not exempt insured depositors entirely? The tax on the uninsured would then have to be 15 percent.

The Cypriot government didn’t want to do this, because the uninsured deposits are disproportionately foreign and it is worried that such a high tax would undermine its status as an offshore financial centre. Even if there is domestic political logic in cushioning Russian mafia at the expense of Cypriot widows, such a policy is bad for the rest of the euro zone.

Provided the Cypriot parliament approves some plan and the banks open tomorrow, there probably won’t be any immediate contagion from Cyprus to other crisis countries. After all, banking systems in Greece, Spain, Portugal and Ireland have recently been recapitalised. Meanwhile, the combination of Cyprus’ relatively huge banking sector and the fact that it is perhaps small enough to experiment with make it a special case. But unless Cyprus’ insured deposits are totally exempted from this raid, citizens in the rest of the euro zone now know that, if push comes to shove, their savings could be grabbed too.

Calculator: How to spare Cyprus’s small savers

17 comments

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Wow the smokescreen of ‘Russian’ money laundering/gangsters is pretty weak, the Euro’s (Germany) are going for world dominance through the finacial route.
Keep all money in cash/gold and DO NOT trust politicians of any shade.
They wonder why we hate paying taxes!

Posted by harrynormal | Report as abusive

It’s interesting the theory that deposits above 100k are not saver’s money, and can be grabbed at will

Posted by dsimonc | Report as abusive

Is there any legally valid confirmation the money deposited by Russians and Ukrainians belongs to mafia? It remains me 1920s when then Soviet Union has refused to pay tsar’s debt.
Simply because money was belonging of Western bourjois and earned as a result of exploitation of workers. You choose the right way how to combine free market ideology with that of bolshevics…

Posted by nik2006 | Report as abusive

The criminal wealthy class thinks this may set a dangerous precedent.

Yet when the criminal wealthy class was bailed out by massive government payments to save the wealthy from their giant gambling losses, we heard no complaint from them about any setting of precedents.

Today in America, the Fed continues the massive transfer of cash into the hands of the criminal wealthy class, with its stealthily named QE (quantitative easing).

The Fed’s QE is the biggest boon to the wealthy ever witnessed by modern markets.

The Fed has been buying up, from the wealthy, every worthless note the wealthy had been stuck with. The Fed has been buying everything, you name it. Worthless junk that nobody else would buy, the Fed has been buying it for top dollar, taking it off the hands of the wealthy.

The wealthy can barely contain themselves at their good fortune. Who would have thought they could get rid of those worthless pieces of paper? Yet, the Fed has now paid them roughly $1.5 trillion in cold, hard cash.

The wealthy, who had expected to lose everything, are now made richer than ever.

The Fed are very happy to accomodate them using the government’s money, and get invited to the country-club parties of the elite. And even President Obama, too, yearns for the invitations to the country-club parties of the elite, so he’s all in with the QE scheme too. No problem.

Once again in life, the wealthy criminal class wins, effortlessly. And the common man is ground into the floor under their heal.

QE is a far greater crime than TARP, and far more subtle for the average citizen to grasp.

The Cyprus bank levy is a tiny refreshing breath of fresh air in the opposite direction.

Now, of course, we hear loud protests from the criminal oligarchs about setting bad precedents.

Posted by AdamSmith | Report as abusive

Finally, an answer to what is taking place with the Cypriot Banks and why it is happening. So much for the silly explanation of Laundered Money in these banks, which would have given money launderers shares in the banks- silly. I guess the news articles were just reiterating the press releases or “reporting” the party line that their sources were told to say. Thanks you again for honest reporting.

Posted by Bernard711 | Report as abusive

re; AdamSmith, Well Stated!

Even with the ’21st Century Great Bailout of the Rich Criminals’ nothing compares to the re-classification of the US Social Security Contributions as a ‘ Tax’ in the 1970′s.

The money that we have been putting aside for our old age has ever since been used, or rather stolen, by the same Rich Criminals.

The ‘Dark Ages’ of the Western societies have never left us, indeed they have now spread worldwide.

Posted by EthicsIntl | Report as abusive

Hi AdamSmith

I agree with everything you wrote except “The Cyprus bank levy is a tiny refreshing breath of fresh air in the opposite direction.”

No, this isn’t “a breath of fresh air in the opposite direction”. This is direct theft from the ordinary people’s savings account. Did you read the report at all? The authorities are imposing a 6.75% on savings deposits below $100,000 and 9% for above. That is, if you have $1 in a Cyprus bank, they will take away $0.067 from you. They are going after anybody who has savings in the banks. And this includes poor widows and retirees.

Of course, you can say at least in this case they have to guts to be upfront about stealing money from the ordinary people, unlike the stealth methods used by the Fed here – as you mentioned: QE, inflation, negative interest rates. But that doesn’t make it right.

Posted by wizard_of_oz | Report as abusive

On some other articles regarding this supposed bailout, many wrote extreme right wing arguments saying the socialist robbery was outrageous. Well, what I am seeing is the EU governments taking their marching orders from financials, regardless of the consequences to impoverished main street, and the stupidity of austerity in a time of depression/recession.

That financials continue to get such favored treatment only proves the EU group is in the pay of the banker/elite fund managers, who rarely take a hair cut such as is being imposed on folks who had no part in the financials gambles.

Posted by Betowess | Report as abusive

Sir,

I fear you have missed a vital point.

If the Cypriot government violates the small depositor ceiling of eur 100,000.

They are telling ALL GLOBAL small depositors, that their deposit insurance is not worth the paper it is written on.

The Global Financial system can not withstand the possible backlash from that statement.

For this reason if no other, the eur 100,000. floor must not be violated in Cyprus.

The IMF and Eurocrats were on drugs, completely out of touch with reality, or on drugs and playing a game with the global financial system when they made the Cyprus “bail in” terms.

Posted by nzl-kz7 | Report as abusive

Why and how on earth can you suggest that the future of Zyprus is still to be an offshore financial centre?? Is it not proven already that it was this industry which drove Zyprus into bankrupcy? Of course it is common sense to tax non-insured and unguaranteed deposits above €100th and leav the rest untouched. What makes this so difficult to see? Get rid of the offshore business, get poorer maybe but at least make an hoest living.

I normally greatly appreciate your bolg entries but here you loose me.

Posted by lisandro | Report as abusive

I for one am pleased. Just as in Greece, but this time even more efficiently and effectively, the people are being punished for the profligacy. If they are not punished, how will they learn? Without pain, there is no gain. The people of Southern Europe can only learn through Pavlovian conditioning. They must accept that their old lifestyle of siestas, financed by German and Dutch taxpayers, is over.

Posted by SheriffofNott | Report as abusive

In case you don’t already know this… America is becoming Greece, Cyprus or whatever………

This president, whom I didn’t vote for of course, is sending our country down. And it won’t be back.

Once you give Obama all the power, its gone forever.

Posted by Rushbabe2 | Report as abusive

In case you don’t already know this… America is becoming Greece, Cyprus or whatever………

This president, whom I didn’t vote for of course, is sending our country down. And it won’t be back.

Once you give Obama all the power, its gone forever.

Posted by Rushbabe2 | Report as abusive

“Confiscating savers’ money will knock confidence in the banks. Trust in the government will also take a hit, since Nicosia had theoretically guaranteed all deposits up to 100,000 euros. Small savers should be encouraged not penalised. They are the quiet heroes of the financial system, who squirrel away their savings, not those who drag it down by engaging in borrowing binges.”

The holding down of the fair cost of money by the fed is in fact a tax on savers in the U.S. and via currency war throughout the world. Why should these guys be allowed to pick the winners and losers in the economy?

They created the conditions for moral hazard to exist in the financial system (an early example would be their dealing with the geniuses at LTCM). They also are a major regulator to the banks and demonstrated their ineptitude in that area.

When will it dawn on those who can impose some discipline that the guys at the Fed are not all that smart? Bernanke and company behave like a bunch of spoiled bullies intent on having their way.

Posted by keebo | Report as abusive

What they are doing in Europe is nothing less than Stealing money from anyone stupid enough to put their money in a bank. And if the E.U. will force them to do it in Cyprus, then the socialists in Europe can do it anywhere anytime. And Americans who have their money sitting in checking and savings accounts, or CDs, or any other type of instrument shouldn’t think that they are safe. If the Socialist in Europe can deal with their DEBT crisis by just stealing money from people’s bank accounts, then Obama who has us on the same path will do the same thing here. I read the news this morning with absolute amazement? Why would anybody in Cyprus keep a penny in a bank when its its now been proven beyond a shadow of any doubt that the people we all thought were crazy all these years for digging holes to bury their money in a back yard were absolutely right? Americans who think Obama and the Democrats won’t steal their money from their accounts in another financial crisis are deluding themselves. Obama has the U.S. on the exact same path as Europe folks. What you see there today you will likely see from Obama just down the road here in the U.S.

Posted by valwayne | Report as abusive

Whats the difference between confiscation of your bank account and confiscation of your pay check? The one you are accustomed to and the other you aren’t, thats all.

Posted by gliderpilot | Report as abusive

So every one will become their own investment manager and end banking and cheap loans. Finance and economics now will be best sellers now that it open that you cannot trust.

Posted by SamuelReich | Report as abusive