I’m sure my headline is over-optimistic. But its certainly looking good, compared to the doom-laden view mid week. And (insofar as I can tell, not having any specialised insight) the correct solution has been found – so much so, that you might wonder why it wasn’t found immeadiately. And that solution, in brief, is to honour the guarantees for deposits of less than 100k euro, close the most broken bank, and impose losses on those with more than 100k euro.

The bit I find interesting is the Russian perspective. The original bad deal – losses on accounts above 100k limited to 10% – was clearly a result of “pressure” from Russia, though in what form its hard to say: it could have been anything from direct corruption of pols, to as little as those same pols not wanting to piss off the Russians to avoid losing future business. Was the pressure coming from teh Russian gummint, or from the dodgy folk who had parked their tax-avoiding money in a quiet offshore corner? And mid-week, when their finance minister was off in Russia trying to do some murky deal, it all looked very dodgy: Russia poised to snaffle up Cyprus because the EU were too skinflint to help it. But then: all that fell apart. The Russians weren’t interested. From which I draw the conclusion that they have no spare cash to push their imperial ambitions.

There’s a fun quote from some lawyer: “Since last Saturday, we are just answering calls from angry clients,” said the lawyer, whose firm has helped Russians and Ukrainians setup 6,000 companies in Cyprus so that they can avoid taxes, benefit from a sound legal system and, they hoped, keep their money safe. Cyprus still offers those draws, he insisted, but his clients “thought we had betrayed them.” Notice the bizarre juxtaposition of “avoid taxes” and “sound legal system” but in the end, they did indeed get a sound legal system, and are wishing they hadn’t.

[Update: as some of my commenters have pointed out, the "haircuts" imposed on the depositors seems rather high. Timmy has what looks like a plausible explanation for this - that only two banks are now affected. It has some interesting consequences.]

Refs

* Timmy, as usual, is on hand to point out economic illiteracy in the meeja.
* Economist: interview with Athanasios Orphanides has harsh words for the former prez, and for the Krauts

Comments

  1. #1 Lawrence jenkins
    London
    2013/03/25

    Surerly you AGW lot long for the economic collapse of Western Capitalism to enure not only are our C02 targets met but actually surpassed, What a wonderful world, eh? Only then will the climate balance be restored and we can once again get cold miserable winters like I ‘ad when I were a kid,.

    [Impressive spelling, but your utter ignorance of what anyone thinks is even better; when your head is filled with such straw(men) its clear you have no room for thought -W]

  2. #2 Hank Roberts
    2013/03/25

    > thought we had betrayed them

    I hope some epidemiologist keeps an eye on the health of all those involved in these transgyrations for the next year or two. It’d be interesting to see if the have any longterm health effects.

  3. #3 carrot eater
    2013/03/25

    I don’t know. This seems to set the precedent that we don’t mind giving you a haircut if you’re probably from outside the EU. It looks like Cyprus is getting a different treatment from the others.

    [I don't think that's right. I think the right answer has been achieved here: honour the guarantee, haircut those who deposited in bad banks. Note that this is much better than the original deal in another way I haven't mentioned: not all banks are being "taxed", only the worst: in the first deal, even good banks were hit, and people who'd taken care to select their bank were penalised.

    As to hitting outsiders: it was pretty clear that there was heavy pressure in the initial deal not to hit the dodgy Russian money (either because they were desperately clinging to their offshore-baking-centre notions, or for worse reasons). That was bad, and the dodgy Russian money deserved to be hit -W]

    [Update: the Beeb sort-of agree with you: http://www.bbc.co.uk/news/business-21922123 that this deal isn't "fair". But that article includes grotesque stupidity ("a country has been forced - at financial gunpoint - to destroy the part of its economy that has accounted for most of its growth for more than a generation" is ridiculous. The "industry" in question is the shady-dealing offshore banking; that deserved to be destroyed) so I wouldn't care to call it in support of anything -W]

  4. #4 Bryan
    2013/03/25

    A good move except if your pension fund in Cyprus for tax reason .
    But then why would your tax fund be in Cyprus?

    [Very few people keep their pension fund in cash. Most are in stocks, bonds, etc. None of which are touched (unless your pension fund invested in Cyprus banks, of course) -W]

  5. #5 crandles
    2013/03/26

    So does it send out the signal that financial markets are recovering some strength and can now withstand some shocks?

    Or does it tell people to start a run on Spanish banks?

    [Don't think so. The message is, the 100 ke guarantee holds. If you have more than 100 ke in the banks, you've badly mismanaged your finances <cough>. I've seen reports today (Torygraph) that do indeed support your first para; people are spinning (though quite possibly only in arrears) the idea that this is intended as a signal -W]

    Had the first plan not been considered, the message might be spread large deposits among many banks (never mind their health just use a large number). The fact that the first plan was considered means the message is reduce large deposits and buy something; maybe gold? Little need to guess which would be better for the troubled banks!

    So reasonably sensible last proposal but incompetent handling of crisis?

    [Oh, very definitely -W]

    Reasonably sensible? Grab the EU help first then ditch the euro in order to devalue to have a competitive economy?

    [I'm not convinced by that in the case of Cyprus. It sounds very much like they barely have an economy outside the banking sector. But, what do I know -W]

  6. #6 carrot eater
    2013/03/26

    You mention a guarantee. I’m missing a basic fact here – do Cypriot savers have deposit guarantees up to 100k euro? If so, imposing losses above that is appropriate. the previous ideas however were just begging for bank runs to start occurring.

    [AFAIK its a common guarantee across the eurozone. Oh yes: http://ec.europa.eu/unitedkingdom/press/press_releases/2010/pr1074_en.htm -W]

    Yes, I suppose my take is similar to the beeb there. Given all the precedents were to avoid imposing losses, I would tend to reject your assumption that the Russians were looking for special treatment in avoiding losses. Rather, it is special treatment the other way now – now, that we have a tiny country beyond the periphery, with Russian investors (and apparently a moral stand that we can take about dodgy outsiders), only now is there courage to impose such losses. the BBC seems to say that now that people have some confidence that the world isn’t coming to an end, this is the new precedent. We shall see.

  7. #7 Aidan
    2013/03/26
  8. #8 Kevin O'Neill
    2013/03/26

    If I read Krugman correctly, then the Eurozone as an optimal currency area has – in Cyprus – become a pessimal currency area.

    Along the same lines Tim Duy asks: Do Capital Controls Mean Cyprus Has Already Left the Eurozone?

  9. #9 David B. Benson
    2013/03/26

    As Krugman points out, having rate controls on financials entering and leaving countries produces stability. Cyprus would (probably) not have this mess if Cyprus had such controls.

    [As I understand it, the credit controls are technically illegal under std.eu law. But I doubt the EU will prosecute; it will look the other way -W]

  10. #10 Dunc
    2013/03/26

    I’ve been continually amazed at the number of people who don’t seem to realise that bank deposits above the guaranteed level do actually bear some risk. Sorry, no, the bank does not have “your money” in a shoebox somewhere.

  11. #11 American Idiot
    2013/03/26

    You ask whether pressure came from the “Russian gummint” or “the dodgy folk who had parked their tax-avoiding money in a quiet offshore corner.” Is this predicated on the assumption that those are not strongly intersecting sets?

  12. #12 Neil Craig
    2013/03/26

    I think you are indeed being over optimistic.

    The proper, ultimately the only, solution to banks going bankrupt is to let them, probably with the ste guaranteeing la flat minimum. This, in the end, is close to what has been done.

    However the othher proper solution to a failing economy is devaluation which is not being done because the Euro currency has been politically determined as proof of EU machismo.

    Further than that the earlier attempt to take money from the first E100,000 made the state guarantee worthless. This is particularly so for the EU since it was the EU who pushed for rescinding that guatantee not the Vypriots.

    Which in turn means that when any other EU nation comes under pressure there is going to be a run omn their banks..

    We are, I’m afraid, a very long way from the end. The end is probably that the EU breaks up – those countries within it willing to embrace economic freedom will then rejoin the rest of the world, with its average 6% growth rate and those that don’t will enter the dustbin of history.

  13. #13 Jeffrey Davis
    United States
    2013/03/26

    “If you have more than 100 ke in the banks, you’ve badly mismanaged your finances . ”

    Except for the part about having 100 ke anywhere, of course.

  14. #14 Hank Roberts
    2013/03/26

    So, is anyone betting on whether — when they actually open up the banks — the “money” thought to “be there” will mysteriously have shrunk or evaporated away?

    I do love a locked-room mystery.

  15. #15 Hank Roberts
    2013/03/26

    PS, quoting the guy at your “Timmy” link:
    “… make your expat dream cheaper you fool.”

    Yeah, for values of “dream”including being surrounded by an impoverished and angry crowd rather than by happy natives selling local handicrafts and fruity umbrella drinks. Do you factor in the height of the walls? Being able to leave the confines of your villa?

  16. #16 Idolino
    2013/03/26

    I am not sure why the Russian government should be so interested to help all their oligarchs in the first place. In the end Cyprus was a way to get the money out of the reach of the Russian state (and therefore investing in a “saver” way ?).
    So, not sure how Russia plays the cards in the end…

    [Because the oligarchs *are* the gummint, as AI suggests above? -W]

  17. #17 carrot eater
    2013/03/27

    Putin is not going to treat all the oligarchs as tax dodgers. only the ones who have crossed him or challenged his authority.

  18. #18 carrot eater
    2013/03/27

    the economist suggests that it’s a distortion to say all the russian money is coming from a handful of oligarchs

    http://www.economist.com/news/finance-and-economics/21574040-european-leaders-tear-up-rules-unpredictable-consequences-bungled-bank

    and also furthers my point that imposing losses on depositors is unusual compared to previous practice in the last couple years in the EU.

    [That was written no the 23rd, and the "bungled" refers to the initial deal, not the one finally arrived at. However, I agree that this deal is different to previous. I disagree that its bad that it is so, or that it represents special treatment for Cyprus - instead, it represents something closer to what should be done, and which they are finally trying to do, now the situation is un-dire enough to support it -W]

    as for putting strong pressure – Iceland will never forgot what the UK government did to try to recover something for their depositors.

    [We didn't behave well. As it happens, I was talking about this down the pub last night. As I said "I recall, then, seeing full-page ads in the papers from Icelandic banks saying 'invest with us! High interest rates!' and I recall thinking, at the time, 'I'm not putting my money in there, they are clearly desperate, and probably in trouble'. Anyone else competent, or who could be presumed to be competent (and that certainly includes the County councils and so on) should have thought the same. So, I have no sympathy for the greedy UK folk who chased after high interest rates. The govt should not have leant on Iceland to rescue them" -W]

  19. #19 David B. Benson
    2013/03/28

    Cyprus banks to reopen on Thursday after bailout closure
    http://www.bbc.co.uk/news/business-21961854

    There will be many quite unhappy depositers.

    [Why will there be "many" unhappy depositors? 95% (wild guess) will get their money back -W]

  20. #20 crandles
    2013/03/28

    >”Why will there be “many” unhappy depositors? 95% (wild guess) will get their money back”

    It isn’t just about whether they can expect to get their money back:

    “One customer in a queue in Nicosia told the BBC’s Tim Willcox he was withdrawing the allowed daily amount of 300 euros ($383; £253) but would take out all of his money if he could.

    As well as the daily withdrawal limit, Cypriots may not cash cheques.

    Payments and/or transfers outside Cyprus via debit and or credit cards are allowed up to 5,000 euros per person per month.

    Transactions of 5,000-200,000 euros will be reviewed by a specially established committee, with applications for those over 200,000 euros needing individual approval.”

    Not impossible conditions for ordinary folk, unless they want to buy a car or house abroad (hardly ordinary) or settle a £10,000 bet or transfer their savings to a foreign country or ….

    Even so I doubt ordinary folk would be happy to have such restrictions put in place on them. I wouldn’t volunteer to accept such a situation, but assuming it is rational to compare against alternatives perhaps there won’t be many rational unhappy depositors, just lots of irrational ones fuming about the situation?

    http://www.bbc.co.uk/news/business-21963462
    sounds relatively quiet.

    [Oh, yes, I'd be unhappy about that :-). I misintepreted the point; I thought it was "would be unhappy about losing their deposits", which they won't.

    Someone made a good point to me last night in the pub: that since interest rates are currently effectively zero, you may as well just take all your cash out and put it under the bed. Of course if *everyone* does that the burglary rate is going to go through the roof -W]

  21. #21 Hank Roberts
    2013/03/28

    I vaguely recall during one of the USA’s earlier financial slumps I read the suggestion that bank savings deposits ought to be taxed, because people were hoarding their money instead of spending it. The idea didn’t even raise a ripple at the time.

    I suspect the real worry is that the musical chair/shell game is getting transparent and people are realizing that money’s stored up “buying power” is an illusion subject to inflation, dilution, and otherwise shrinkage. It ain’t just moths and cockroaches that can eat up your money nowadays.

    Old people definitely remember that savings can be shrunk faster by a year of sudden high inflation than by this tax levy, and there’s really nothing one can do about it.

  22. #22 Eli Rabett
    http://rabett.blogspot.com
    2013/03/28

    Think Northern Rock on steroids. The point is that no bank in Europe is safe for large deposits. The same thing happened in the US during the savings and loan crisis of the late 1980s. On any rumor, the large deposits fled and the bank went under.

  23. #23 dhogaza
    2013/03/28

    “Of course if *everyone* does that the burglary rate is going to go through the roof”

    Is there a futures market for that? :)

  24. #24 Idolino
    2013/03/28

    “I vaguely recall during one of the USA’s earlier financial slumps I read the suggestion that bank savings deposits ought to be taxed, because people were hoarding their money instead of spending it. The idea didn’t even raise a ripple at the time.”
    The idea makes no sense, since the bank does not “store” the money in the first place but invests with it. Also: YOU are lending the money to the bank (not bunkering it), thats one of the reasons why you get an interest rate in the first place…

  25. #25 carrot eater
    2013/03/29

    Ok sir, in substance I agree with what you say in response to #18.

    One could, in principle, fault Iceland for treating domestic and foreign savers differently, but I’m not at all surprised that they did.

  26. #26 David B. Benson
    2013/03/30

    Cyprus eases some bank restrictions after bailout
    http://www.bbc.co.uk/news/world-europe-21978286

    Calmer than I had thought it would be.

  27. #27 crandles
    2013/03/30

    Get large majority to calm down first then announce
    “Some 37.5% of holdings above 100,000 euros will become bank shares.

    A further 22.5% will go into a fund attracting no interest and may be subject to further write-offs.

    The other 40% will attract interest but this will not be paid unless the bank performs well.”
    http://www.bbc.co.uk/news/business-21982652

    so the rich will now have difficulty stirring the majority into protests?

    Some losses yes sensible. Circa 40% losses was my impression. Presumably this means they will not be able to withdraw much if any of their money over 100ke.

    110ke – painful but bearable. 200+ ke – devastating.

    [Yup, its hard to see the masses coming onto the streets to support those with 100ke+. If I had big deposits, I'd try to feed the media stories about "large depositors such as schools and universities" in order to try to hold onto some sympathy, but I doubt it will work.

    This is a big mess. Some people are going to lose a lot -W]

  28. #28 Phil.
    2013/03/30

    carrot eater
    2013/03/25
    I don’t know. This seems to set the precedent that we don’t mind giving you a haircut if you’re probably from outside the EU. It looks like Cyprus is getting a different treatment from the others.
    [Update: the Beeb sort-of agree with you: http://www.bbc.co.uk/news/business-21922123 that this deal isn't "fair". But that article includes grotesque stupidity ("a country has been forced - at financial gunpoint - to destroy the part of its economy that has accounted for most of its growth for more than a generation" is ridiculous. The "industry" in question is the shady-dealing offshore banking; that deserved to be destroyed) so I wouldn't care to call it in support of anything -W]

    Didn’t this ‘industry’ destroy itself as a result of dodgy dealings and bad investments? The US system of insuring bank deposits up to $100,000 seems to be similar to the EU. Not sure why those who came to the rescue should be blamed, it’s hard to imagine that Cyprus would be in better shape if this had happened and they weren’t EU members.
    It’s also interesting to read about the Turkish invasion of Cyprus without any mention of the Greek army-led coup, that overthrew the government of Cyprus and conducted massacres of Turkish citizens, which preceded it!

  29. #29 William M. Connolley
    2013/03/31

    Follow up from CR’s comment, this from Timmy’s blog, but his hosting is f*ck*d so I’ll just copy the whole thing in here:

    Ouch!
    by Tim Worstall

    (quote)

    Under the arrangement, depositors in Bank of Cyprus will receive shares in the lender worth 37.5pc of any savings over ?100,000, while the rest may never be paid back, according to a statement from the Cypriot central bank.

    Of the 62.5pc of uninsured deposits not converted to bank shares, about 40pc will continue to accrue interest but will not be repaid unless the bank does well, while the final 22.5pc will cease to attract interest.

    Government figures, including finance minister Michalis Sarris and central bank governor Panicos Demetriades, had previously indicated that depositors in the island’s largest lender would lose around 40pc of their uninsured savings as part of an 11th hour agreement reached in Brussels in the early hours of Monday.

    Meanwhile, account holders in Laiki Bank, the country’s second largest, stand to lose up to 80pc of their money as the lender is wound down and insured deposits transferred to Bank of Cyprus.

    (from http://www.telegraph.co.uk/finance/financialcrisis/9962244/Cypriot-authorities-confirm-raid-on-big-depositors.html)

    I’m not really sure how these numbers stack up.

    From the original numbers they needed to find ?6 billion or so to prop up the banks. There’s ?30 odd billion in accounts over ?100,000. Thus the haircut shouldn’t need to be that large. 20% or so would see it right.

    However, those are the numbers for the entire banking system. And now they’re only resolving the two main banks, the two which are actually bust. And I suppose it’s possible that the two bust banks were the two retail banks. It’s the other banks that have been catering to the offshore big hitters with the large deposits. They’re not bust, they don’t need resolving, but that’s also where most of the large deposits are.

    That’s all supposition of course but it does explain the observable facts. And that leads to a very interesting outcome as well.

    That means that it wasn’t Cyprus’ home for hot Russian money that was the problem. They’re not the banks that went bust. What did go bust was the plain vanilla domestic banking system. Largely by putting all the depositors cash into Greek Government bonds. And that would be very interesting indeed, wouldn’t it?

    So, does anyone know where one can find the actual figures for deposits? By bank? Can we see how much Laiki and B of Cyprus had in those large offshore deposits? As I say, if the haircuts have to be this large to raise the ?6 billion then those large deposits can’t have been all that large. But is it possible to find out?

  30. #30 Eli Rabett
    http://rabett.blogspot.com
    2013/03/31

    FWIW us deposit insurance went up to $250K in 2008 as a backstop to prevent bank runs in the lesser depression. See #22. 100K E is probably too low to protect median savers in many countries (e.g. you sold your house, etc.)

  31. #31 Eli Rabett
    http://rabett.blogspot.com
    2013/03/31

    Ms Rabett (who know such things) also points out to Eli that in the depths of the continuing late unpleasantness the FDIC policy was that they would cover all commercial checking account balances so that businesses could function. This is NOT happening in Cyprus. Whatever businesses were there are now officially screwed.

  32. #32 David B. Benson
    2013/04/06

    Key data missing at troubled Bank of Cyprus – inquiry
    http://www.bbc.co.uk/news/world-europe-22041122

    Will heads roll?

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