Updated: 17 March 2013, 1:59pm New York time.
Econintersect: The bailout process has reached a new level of absurdity. To protect the sanctity of the landed moneyed aristocracy, banksters will now be bailed out by confiscation of bank deposits. This event is happening over the weekend in Cyprus as the Eurozone finance ministers force the confiscation as part of a €10 billion ($13 billion) Cyprus bailout deal. The finance ministers are coming up with only €10 billion of the total amount needed. They are taking an additional €6 billion out of Cyprus bank accounts.
To tell the whole story, the "tax" on deposits of up to 10% will be replaced with equity in the banks. But equity is far from liquid and, considering that, without the deal the banks would have gone under (see below), is certainly of very questionable value.
The newly elected president of Cyprus, Nicos Anastasiades, said that the country's economy would have collapsed without the deal as the two largest banks would have folded. Had that happened, Reuters has estimated the country would have been obligated to compensate depositors with up to €30 billion ($40 billion). The GDP of Cyprus is approximately $25 billion). The corresponding level of bank deposit guarantee by the U.S. government would be approximately $40 trillion.
A bank holiday has been declared for Monday in Cyprus so the impact on banking there will not be seen until Tuesday. There have been reports Saturday that overuse of ATM machines had caused breakdowns, as Cypriots tried to "rescue" their money.
This epsiode brings into question the integrity of deposit insurance in the Eurozone. Cyprus deposits are insured up to €100,000. Except it seems that guarantee was a hoax; they were actually insured only up to 93.5% of value. This gives an entirely new meaning to the term "negative interest rate." The possiblility of destruction of the primary pillar of modern depository banking may be serious tested this week if depositors throughout the Eurozone decide that they do not want to wait to see if their deposit guarantees will be violated. As our headline states, this may be the formula for starting a multi-nation bank run.
Here is a summary from Reuters:
- Nicosia will impose a 9.9 percent one-off levy on deposits above 100,000 euros in Cypriot banks and a tax of 6.75 percent on smaller deposits from March 19. The levy will generate 5.8 billion euros. Depositors will be compensated by equity in the banks. There will also be a tax on interest that the deposits generate.
- Cyprus has agreed to increase its nominal corporate tax rate by 2.5 percentage points to 12.5 percent, which could bring in up to 200 million euros a year.
- The International Monetary Fund is expected to contribute to the rescue package, but the amount is still to be determined.
- Russia will likely help finance the program by extending a 2.5 billion euro loan already made to Cyprus by five years to 2021 and reducing the interest rate, which is now at 4.5 percent.
- Cyprus may be required to privatize the Cypriot telecoms company, the electricity company and the ports authority.
- Cyprus will have to downsize its banking sector, reducing it to the EU average by 2018. The size of the banking sector in Cyprus is more than eight times the size of the economy, compared to around 3.5 times in the EU.
What are others saying about this?
- Andrew Walker at BBC suggested that the failure of the Eurozone to preserve the integrity of bank deposits in Cyprus might create withdrawal events elsewhere that could undermine the weak Eurozone banking system further.
- The bank run scenario was also mentioned by Edward Harrison at Credit Writedowns. Harrison used a new term for the deposit seizure: "bail-in." He also questions how damaging the destruction of a sovereign deposit guarantee in this case will reflect upon the credibility of deposit guarantees elsewhere.
- Mike Shedlock at Mish's Global Economic Trend Analysis called it "mandated theft to protect senior bond holders." Shedlock suggests no one will want to keep money in Spanish banks and "deposit fear will spread everywhere." Another quote from Mish (quoting a correspondent in Germany):
"These guys did not study their Machiavelli. He said roughly if you hurt people, you must never hurt all of them at once."
- Tyler Cowan at Marginal Revolution suggests two bad outcomes: (1) the implementation of the deposit confiscation goes badly and bank runs occur in Cyprus then he fears contagion to other countries, especially Greece and Spain; and (2) if the process goes smoothly how many more Eurozone countries will see deposit seizure as an easy way to resolve some of their debt problems. Cowen suggests there is no good outcome here.
- Steve Keen (private communication) suggested that we have forgotten the most important lesson from the Great Depression, the guarantee of depositor funds. He foresees the possibility of commerce being severely impacted as transactions in some parts of the world could only be completed with cash as the modern credit and debit system may no longer be trusted. In an interview Friday 16 March 2013 by Tom Hartman, Keen described why the focus on public debt is misguided. Keen maintains that the crisis is with private debt.
- Neil Irwin (Washington Post) says there will be "high alert" for contagion, for runs on other countries' banks:
"...if there is going to be a new wave of crisis in Europe, historians will be able to trace its starting point back to today’s Cyprus bank bailout."
- From Ian R. Campbell, The Economic Straight Talk Newsletter:
The important questions are:
- how high is that wave, and how fast will it move when banks open not only in Cyprus, but in France, Greece, Italy, Portugal, and Spain for starters; and,
- ...what meaningful consequences, if any, will arise from the existence of that wave.
For financial markets participants it will be important to look for answers to those questions in the coming days, beginning tomorrow morning.
- Nick Malkoutzis (ekathimerini.com, Athens) says this may mark a turning point in the eurio crisis and he sees a possibly fatal change:
This is the point at which the links within the eurozone will begin to pop apart, when citizens will turn to Beppe Grillo-style solutions, to nationalists, extremists or to anyone who promises a different path.
This is the point at which the vehicle stops functioning and the road ends.
- Liz Alderman in the New York Times reports that the head of the finance ministers organization would not rule out the deposit confiscation process being used elsewhere in the Eurozone:
The decision — a first in the three-year-old European financial crisis — raised questions about whether bank runs could be set off elsewhere in the euro zone. Jeroen Dijsselbloem, the president of the group of euro area ministers, declined Saturday to rule out taxes on depositors in countries beyond Cyprus, although he said such a measure was not currently being considered.
- From The Economist:
Unfair, short-sighted and self-defeating
- From Joseph Cotterrill at FT Alphaville:
A stupid idea whose time had come
- From Some of It Was True:
Time will tell whether this leap is over or into the chasm.
- From Eamonn Fingleton, Forbes:
The Botching of the Cyprus Bailout: Worse Than Lehman Brothers
Important detail: The deal will not be finalized until approved by the Cyprus parliament. That vote has been rescheduled from today (Sunday) to Monday.
- Cyprus' savers bear brunt of unprecedented bailout (Annika Breidhardt, Robin Emmott and Michele Kambas, Reuters, 16 March 2013)
- Eurozone and IMF agree 10bn-euro Cyprus bailout deal (BBC News, 16 March 2013)
- Factbox: Outlines of Cyprus' bailout by the euro zone (Robin Emmott, Reuters, 16 March 2013)
- Cyprus president says depositors had to pay to avoid bankruptcy (Michelle Kambas, Reuters, 16 March 2013))
- The Cyprus Bank Deposit Bail-in (Edward Harrison, Credit Writedowns, 16 March 2013)
- Contagion-Begging Actions; Expect Bank Runs Following Cyprus Idiocy; Have Money in a Spanish Bank? Take It Out Now! (Michael Shedlock, Mish's Global Economic Trends, 16 March 2013)
- A few Cyprus questions (Tyler Cowen, Marginal Revolution, 16 March 2013)
- Why today's Cyprus bailout could be the start of the next financial crisis (Neil Irwin, Washington Post, 17 March 2013)
- The Economic Straight Talk Newsletter (Ian R. Campbell, 17 March 2013)
- After Cyprus, eurozone risks transmission failure and running out of road (Nick Malkoutzis, ekathimerini.com, 17 March 2013)
- Facing Bailout Tax, Cypriots Rush to Get Their Money Out of Banks (Liz Alderman, The New York Times, 17 March 2013)
- Unfair, short-sighted and self-defeating (The Economist, 16 March 2013)
- A stupid idea whose time had come (Joseph Coterill, FT Alphaville, 16 March 2013)
- The Botching of the Cyprus Bailout: Worse Than Lehman Brothers (Eamonn Fingleton, Forbes, 17 March 2013)