CYPRUS - Breaks Public Trust, Signals Enormnity of EU Banking Problems and Incites the Politics of Germany Distating Terms
"I object to the entire scheme. First the bondholders should have been wiped out. If that was not enough then the deposits above the €100,000 deposit guarantee should have been hit. Then and only then should the average citizen been hit.
... And guess what. The average Cyprus citizen would likely not have been hit. Instead, the EU mandated a "screw every citizen" policy to protect the senior bondholders. This is not going to sit well in Cyprus or anywhere else, and all for a mere EU 5.8 billion Euros.
The stupidity and arrogance of these nannycrats is staggering.The nannycrats think this will stop "contagion". They are nuts." Mish 03-17-13
It breaks a cardinal rule, namely public trust on which money relies.
Had th public thought their savings were at risk from a restructuring, savers would have run on local banks, hence it is different from a tax
SIGNALS & POLITICS
Frederik Ducrozet, an economist with Credit Agricole, tells Business Insider:
I think the Cyprus deal as it stands a big deal indeed, mostly in terms of bad signaling (as the ongoing normalisation in Eurozone capital flows remains fragile and vulnerable to sudden stops) and politics (Germany still imposing its rules despite growing discontent in the South).
There were multiple reports which indicated that Germany told Cyprus: Confiscate your depositors' money or leave the Eurozone. That's a terrible political dynamic, and on top of Italy it exacerbates a bad overall political situation.
#Cyprus Depositors Vent Fury Through Social Media 03-17-13 Zero Hedge
- Small Depositors Are Getting Hit Because Cyprus Didn't Want To 'Price Themselves Out Of The Laundry Business'
- ANALYST: Cyprus Could Cause The Already Overvalued S&P 500 To Fall By 10%
- This is a nuclear war on savings and wealth - something that will likely crush animal spirits. This is a policy move you expect from a dictatorial regime in sub-Saharan Africa, not in an EMU member state. If the European governments can clandestinely expropriate 7 to 10 percent of their hard working citizen's precautionary savings after the close of business on a Friday night, what else are they capable of doing? Why even hold money in a bank account? Are they trying to start a bank run?
- The Rape Of Cyprus By The European Union & The IMF The nations of Europe, Germany, France, the Netherlands and the rest, demanded that this take place, a "fait accompli," the President of Cyprus said and Europe annexes Cyprus. Let's be quite clear; the European Union has confiscated the private property of the citizens in Cyprus without debate, legislation or Parliamentary agreement. Pay attention please. The European Union and the European Central Bank and the IMF have just advocated the confiscation of private property for their own indulgence.
- Cyprus: The World’s Biggest "Poker Game" The nations of Europe, Germany, France, the Netherlands and the rest, demanded that this take place, a "fait accompli," the President of Cyprus said and Europe annexes Cyprus. Let's be quite clear; the European Union has confiscated the private property of the citizens in Cyprus without debate, legislation or Parliamentary agreement. Pay attention please. The European Union and the European Central Bank and the IMF have just advocated the confiscation of private property for their own indulgence.
CYPRIOT PRESIDENT ADDRESSES NATION: We Were Given Two Options Like Blackmail 03-17-13 BI
Cyprus President Nicos Anastasiades just addressed the nation in a dramatic Sunday night speech regarding the bailout of Cyprus, which will see a one-time tax on everyone with cash in Cypriot banks.
The basic gist:
- Cyprus is in a huge crisis, and the country was given two choices, blackmail style.
- Either the government could get no help, and see a complete collapse of the economy and the financial system.
- Or take the "bailout" deal, which involves the painful deposit tax.
- This is the country's worst crisis since 1974, and the choice was to take the lesser of two evil
Depositors Pay Price in Cyprus Bailout Deal 03-16-13 WSJ
- NEW CHANGES PROPOSED (SUNDAY NIGHT)
- The new proposal will see smaller depositors, those with up to €100,000, taxed at 3%;
- savers with €100,000 to €500,000 taxed at 10%; and those with
- over €500,000 taxed at 15%, one official said.
- ORIGINAL (SATURDAY NIGHT): Depositors in Cypriot banks will be hit with a one-off tax on their savings. Accounts
- With more than €100,000 will be taxed at 9.9%,
- With less at 6.75%,
- Raising an expected €5.8 billion for the near-bankrupt nation.
- Cypriot Parliament would adopt the taxes over the weekend and the money would be extracted from accounts before banks take up business Tuesday.
- Part of a €10 billion ($12.96 billion) bailout from the euro zone and the International Monetary Fund.
The deal, announced early Saturday, marks the first time in the euro zone's five-year-old financial crisis that depositors in bloc's banks will lose money. "We have taken immediate measures so that electronic transfers cannot take effect before banks reopen on Tuesday," said the minister, who took office just two weeks ago.
Jörg Asmussen, a member of the executive board of the European Central Bank, stressed that amounts in excess of the levy will remain fully available. Accounts held in Greek offshoots of Cypriot banks will also be spared.
Cyprus, which first applied for help last summer, has proved a major headache for the euro zone, mostly because
- of an outsized banking sector, which has swelled to eight times the size of the island's economy and was hit hard by a restructuring of Greek government debt last year.
- Allegations of money laundering and
- a general election in February also hampered bailout talks.
- An initial assessment of Cyprus's finances in January concluded it needed more than €17 billion, including €10 billion just to stabilize its banks.
- That would have been an unmanageable burden for the island, whose annual economic output is less than €18 billion and shrinking.
As they struggled to bring down the rescue costs, euro-zone finance ministers and the troika of the European Commission, the ECB and the IMF chose to go ahead with the deposit tax despite warnings it could unsettle savers and investors in other weak European countries.
"This is a special situation, with a very specific banking sector, with a very specific structure and size, which calls for this specific package," said Jeroen Dijsselbloem, the Dutch finance minister who chaired the discussions. He said similar measures weren't being considered for other countries that have received bailouts.
Officials hoped that the contribution of depositors will make it easier to pass the rescue package through parliaments in rich countries like Germany, the Netherlands and Finland. Lawmakers there have balked at bailing out foreign depositors, many of them Russians, whom they suspected of taking advantage of Cyprus's lax banking laws.
- Nicosia will also raise its corporate-tax rate to 12.5% from 10%, among the euro zone's lowest,
- impose a levy on interest income and
- undergo a review of its anti-money-laundering legislation.
The IMF, which had been the strongest advocate for having the bailout burden fall partly on depositors, will contribute to the rescue, said the fund's Managing Director Christine Lagarde. Two officials said the IMF is expected to chip in €1 billion of the overall €10 billion needed.
Olli Rehn, the European Union's economic affairs commissioner, said Russia had indicated it was willing to give Cyprus more time to repay a €2.5 billion rescue loan from 2011, and may also lower the interest it charges. Mr. Sarris is expected to travel to Moscow on Wednesday to nail down the final terms.
The struggle to agree on a bailout for tiny Cyprus, which accounts for just 0.2% of the euro zone's economy, once again underlines how vulnerable the currency union remains to economic shocks in any member nation.
"Cyprus is of systemic relevance to the euro area," said Mr. Rehn. "Not to provide assistance to Cyprus would have posed a risk of undoing the progress that has been painstakingly made over the past year."
Ministers also agreed to give Portugal and Ireland more time to repay their bailout loans, but didn't provide any details.
The Cyprus Bailout Is Unfair, Short-Sighted, And Self-Defeating 03-17-13 The Economist
IT IS not a fudge, but it is still a failure. The euro zone’s bail-out of Cyprus, which was sealed in the early hours of Saturday, did get the bill for creditor countries down from €17 billion to €10 billion, as had been rumoured. But the way it did so was somewhat unexpected.
Almost €6 billion of the savings for taxpayers in euro-zone countries came from losses imposed on depositors in Cyprus’s outsize banks. A one-off 9.9% levy will be imposed on all deposits over the insurance threshold of €100,000 before banks reopen after a bank holiday on Monday. That idea had been in the air for a while, not least because a lot of those uninsured deposits came from outside Cyprus, and from Russia in particular. The politics of saving wealthy Russians with money loaned by thrifty Germans were always going to be tricky.
What had not been anticipated was a 6.75% loss for savers with deposits in Cypriot banks below the insurance ceiling. Cypriots woke up this morning to find bank branches closed to them. By the time they will be able to get at their money, it will be too late. The offer of equity in banks to replace the value of their savings is meant to be a balm but it’s not a choice they would have made. Why this decision was taken is not yet clear. The most plausible explanation is that
the Cypriot government itself preferred to spread the pain rather than wipe out non-resident depositors and jeopardise its long-term prospects as an offshore financial centre for Russian and other money.
Whatever the rationale, it is a mistake for three reasons.
- REWAKEN CONTAGION RISK: The first error is to reawaken contagion risk elsewhere in the euro zone. Depositors have come through the financial crisis largely unscathed. Now they have been bailed in, some of them in breach of an explicit promise that they can be sure of getting their money back even if a bank goes belly-up. Euro-zone leaders will spin the deal as reflecting the unique circumstances surrounding Cyprus, just as they did the Greek debt restructuring last year. But if you were a depositor in a peripheral country that looked like it needed more money from the euro zone, what would your calculation be? That you would never be treated like the people in Cyprus, or that a precedent had been set which reflected the consistent demands of creditor countries for burden-sharing? The chances of big, destabilising movements of money (into cash, if not into other banks) have just shot up.
- EQUITY: The second error is one of equity. There is an argument to be made over the principles of bailing in uninsured depositors. And there is a case for hitting everyone in Cypriot banks before any taxpayer in another country. But there is no moral imperative for whacking Cypriot widows and leaving senior bank bondholders untouched, as appears to be the case here; or not imposing any losses on sovereign-debt investors in Cyprus; or protecting depositors in the Greek operations of Cypriot banks, as has also happened. The euro zone may cloak this bail-out in the language of fairness but it is a highly selective treatment. Indeed, the euro zone’s insistence that this is a one-off makes that perfectly plain: with enough foreigners at risk and a small enough country to push around, you get an outcome like Cyprus. (That is one reason why people are now wondering about the implications of this deal for little Latvia, also home to lots of Russian money and itself due to join the euro zone in 2014.)
- STRATEGIC: The final error is strategic. The Cypriot deal has no coherence in the larger context. The euro crisis has been in abeyance for a few months, thanks largely to the readiness of the European Central Bank to intervene to help struggling countries. The ECB’s price for helping countries is to insist they go into a bail-out programme. The political price of going into a programme has just gone up, so the ECB’s safety net looks a little thinner.
The bail-out appears to move Europe further away from the institutional reforms that are needed to resolve the crisis once and for all. Rather than using the European Stability Mechanism to recapitalise banks, and thereby weaken the link between banks and their governments, the euro zone continues to equate bank bail-outs with sovereign bail-outs. As for debt mutualisation, after imposing losses on local depositors, the price of support from the rest of Europe is arguably costlier now than it ever has been.
It is also hard to square this outcome with the ongoing overhaul of finance. The direction of efforts to improve banks’ liquidity position is to encourage them to hold more deposits; the aim of bail-in legislation planned to come into force by 2018 is to make senior debt absorb losses in the event of a bank failure. The logic behind both of these reform initiatives is that bank deposits have two, contradictory properties. They are both sticky, because they are insured; and they are flighty, because they can be pulled instantly. So deposits are a good source of funding provided they never run. The Cyprus bail-out makes this confidence trick harder to pull off.
Other than that, it is a really good deal.
MOHAMED EL-ERIAN: The EU Had Four Valid Reasons To Force Cypriot Depositors To Pay Up 03-17-13 BI
According to El-Erian, the EU actually had four valid reasons to make such an unprecedented move.
- First, El-Erian says, given the problem – which stems partly from the enormous size of the Cypriot banking system relative to GDP – depositors are partly to blame. "In entrusting funds to Cypriot institutions, depositors (and especially foreign depositors) inadvertently funded the over-extension of the banking system, both domestically and abroad," writes El-Erian.
- Second, much has been made about the "Russia angle" in the Cyprus deal. Because Cyprus is viewed as an off-shore tax haven for Russian oligarchs mafia types, many worry that the move could anger those depositors. El-Erian thinks that is a good thing, though: "By killing once and for all the notion that Cyprus is a safe and lax offshore haven, the levy serves to limit such intermediation [of funds from dubious origins] in future."
- The third valid reason for a deposit haircut, according to El-Erian, is that the alternatives seemed worse. Someone was going to lose out in this deal. For the two reasons outlined above, it might as well be the depositors.
- Finally, this will serve as a "wake-up call" for investors who thought the ECB had fixed everything with its "whatever it takes to save the euro" speech back in July. This, too, is a good thing, says El-Eria
What You Need to Know About Cyprus El-Erian
Cyprus: The next blunder VOX
Cyprus Can't Put 'Genie Back in the Bottle': O'Neill CNBC
Chaos as banks empty cashpoints and ban online transfers DMail
After Cyprus, Depositors Race to Withdraw Their Cash. Is the Rest of Europe Next? DBeast
Cyprus works on tax levy deal to get bailout approved Reuters
Cyprus Bailout 'Disaster' Risks New Euro Crisis CNBC
Barclays Says Cyprus Bank Crisis Won't Spread To Southern Europe Forbes
TIME: The $13 billion bailout package may seem like chump change, but in fact it represents about 50% of Cyprus’s total economy
Russian Oligarchs Lose Friend In Cyprus Banks Forbes
Moody’s Sees Defaults as PBOC Warns on Local Risks BL
|4- EU Banking Crisis