So much for €100,000 protection - Cyprus bailout

innovate

Excellent interview by Jeremy Paxman on Newsnight tonight. He spoke to a cypriot MP, after the cypriot parliament had voted against the deal tonight.

I am paraphrasing, not quoting verbatim, but may be there's a recording on BBC iplayer.

Paxman: why did your PM accept the deal on Saturday, when he did not have the backing of the Parliament?
MP: PM thought the Parliament would back it

Paxman: now that you have rejected the deal, what will you do?
MP: We will try to find xxx billion Euros

Paxman: how will you find them?
MP: nationalising public sector pensions, may be, not sure

Paxman: why did you not look into finding the money yourself before agreeing to a deal?
MP: we thought the EU and the IMF would be sympathetic

Paxman: if you cannot find enough money, what will you do then?
MP: we will leave the Euro and print Cyprus Pounds

Hey, why didn't they do that in the first instance then, instead of trying to get a few billion of handouts, paid for by tax payers from other countries? I sincerely hope the EU and IMF will just let them get on with their self-rescue plan. Which, to come back to the subject of the thread, could cost the cypriot savers a lot more than just the few percent that were at stake before.

ChiefGrasscutter

JohnRo wrote: »

Don't people find it strange in all these bailouts that the banks private equity and their senior bondholders aren't being held to account for these losses?

What I can't understand, and want to, is why the EU guarantees depositors euro balance with these institutions against any losses up to €100,000 on the one hand, while the equity, bonus culture and senior bondholders of these banks are also having their liabilities protected on the other, by raiding the depositors accounts anyway!

You need to keep up!
The Bondholders will be probably German and French institutions predominately and we can't have them being ask to pay can we.
They will be insured anyway against default via the CDO market in the Euro core area which means mega payouts in the middle of europe would have to be made from somewhere...........cue bust/bankrupt institutions etc in the insurance market.
Additionally and if not more importantly haircutting the bondholders would adversely affect the credit worthyiness of bank bonds in Spain and Italy as a knock on effect meaning more support from the ECB would be needed - all bad news.

As the haircut also involves those being haircutted being given a share equity in the bank as a swap (that bit seems not to be discussed by anyone - and equity value pretty well zero at present) the EU won;t want too much being haircutted from the >E100K accounts on the asumption most of these deposits are Russian.
Why?
'cos then they have to give too much equity to Russians in the swap which if the holders act in a combined way would give a significant/controlling interest in the bank to Russia ----no - bad idea.

The real catalyst for all this is that the Cypriot banks were heavily invested in Greek bank bonds - and when they went down with the Greek bank bond re-structuring program Cyprus's banks' position became untenable.

Yes, the EU has as you imply, just ripped up the rule book on debt seniority by haircutting more secured creditors (depositors) before less secure creditors (bond holders) - welcome to the EU.

ozzage

I don't agree with the people saying that the scheme was the same as QE reducing the value of our savings.

Economic policy and its effects are a long game playing out over years. If you don't like it, you can change your affairs, move country, invest/save differently, spend it all instead(!)... ie take all kinds of actions.

Taking money from a bank account overnight without warning is a completely different beast and I can't really believe that people see them as equivalent.

Thankfully it hasn't happened but would you put money into Cyprus banks now? Part of the damage to the country has already been done.

jamesd

It'll be interesting to see what Russia comes up with. They have had a desire to have a naval base on the far side of the straits that are a bottleneck to their Black Sea fleet getting out into the Med so they may seek a base in Cyprus.

socrates

jamesd wrote: »

It'll be interesting to see what Russia comes up with. They have had a desire to have a naval base on the far side of the straits that are a bottleneck to their Black Sea fleet getting out into the Med so they may seek a base in Cyprus.

The same way the Americans wanted military bases in Cyprus and were refused so they sent the Turks in on a false premise.....

CLAPTON

ozzage wrote: »

I don't agree with the people saying that the scheme was the same as QE reducing the value of our savings.

Economic policy and its effects are a long game playing out over years. If you don't like it, you can change your affairs, move country, invest/save differently, spend it all instead(!)... ie take all kinds of actions.

Taking money from a bank account overnight without warning is a completely different beast and I can't really believe that people see them as equivalent.

Thankfully it hasn't happened but would you put money into Cyprus banks now? Part of the damage to the country has already been done.

in the long run the effects of inflation have far more effect that a one off 6.75% tax on savings.

for the vast majority of people in the UK your suggestions for avoid the same are rediculous.

ChiefGrasscutter

jamesd wrote: »

It'll be interesting to see what Russia comes up with. They have had a desire to have a naval base on the far side of the straits that are a bottleneck to their Black Sea fleet getting out into the Med so they may seek a base in Cyprus.

I have postulated much the same on the MSE Economy board
Russia bails them out and backstops the currency
Possibly even to the extent of a new currency converted 1:1 from their Euro holdings and linked in value to the rouble.
Bondholders can go swivel.
Banks are nationalised and immediately re-opened a la Iceland.
Russia gets access to/profits from the offshore oil/gas field.
Additionally to your observations now that the USA/UK are starting to play silly b**gers in Syria and the small soviet base at Tarteris in Syria looks untenable and its too small anyway: secure access to a strategic base on Cyprus surrounded by land you control in the Med' seems like a good idea.
Quite where Turkey figures in all this I've no ideas on...much less what Merkel and the EU would make of it.

JohnRo

So more or less the same as is happening in every other place then, including the US and UK. Massive bailouts to protect the institutions propping up these insolvent banks so they can continue living the high life on the back of a loss making venture paid for by the public. A colossal wealth transfer in other words.

From what I can glean the problem in Cypus is that there just aren't that many senior bondholders in their banks and burning them would achieve little in terms of a bailout but do much to spread fear elsewhere in other eurozone areas as you suggest.

The global financial sector as a whole seems to me like it is just a monumental charade, the people running it have racked up vast losses while taking obscene profits and the only people with any real, accessible wealth left, within the system, are depositors. Presumably that's why we are all being forced, overtly in Cyprus and covertly elsewhere to carry the can.

These bailouts seem to do nothing but allow the charade to continue until it finally breaks down completely and everyone trapped in the system is left completely broke and those running it have amassed staggering personal fortunes.

CLAPTON

basically banks only have assets that comprise

- share holders

- bond holders; largely other banks and central banks

- deposits of ordinary people and businesses

shareholders typical get wiped out as happened to B&B, Northern Rock or suffer very large losses i.e. RBS and HBOS and Lloyds suffered 90% losses
In any event this provides no money to the banks.

So that leaves
-central banks
-other banks
-businesses
-ordinary people

As Cyprus is asking central banks for more money to stop them become insolvent then cancelling their debts doesn't seem a winning strategy

Haircutting other banks seems unpopular with Mr Putin (I assume most other banks don't hold too much money in Cyprus


That doesn't seem to leave a lot of options.


What exactly do people sugggest ?

socrates

This sums it up nicely

http://www.bloomberg.com/news/2013-03-19/in-cyprus-europe-sets-a-new-standard-for-stupidity.html