
Revamped Cyprus deal to close bank, force losses - niggler
http://www.reuters.com/article/2013/03/25/us-cyprus-parliament-idUSBRE92G03I20130325
======
bitcartel
There is a very important question here: What is the relationship between you
and the bank?

Up until recently, it has been considered sacrosanct that deposit holders be
protected, no matter the cost. The convention and social contract has been
that you deposit money for safe-keeping in a bank. We have seen this over the
past few years across both Europe and the US, as insolvent banks have been
bailed-out, nationalised, given secret loans, so that deposit holders are
wholly protected.

With Cyprus, this widely held belief is now in tatters. You as a deposit
holder are now a creditor of the bank. As soon as you lend your money to the
bank, it is no longer yours. The bank will provide you with interest for the
duration of the loan. If the bank is no longer a going concern, you will no
longer receive special treatment, but instead you must get in line with other
creditors.

Some may argue that this has always been the case[1], however it will be a
genuine shock to many people, and any faith in deposit guarantee schemes has
been dealt a severe blow when a week ago, the EU urged Cyprus to collectively
punish all deposit holders regardless of balance.

[1] For those in the UK, the House of Lords said in Foley v Hill 1848
<http://www.uniset.ca/other/css/9ER1002.html>

_"Money, when paid into a bank, ceases altogether to be the money of the
principal... The money placed in custody of a banker is, to all intents and
purposes, the money of the banker, to do with it as he pleases... he is, of
course, answerable for the amount, because he has contracted, having received
that money, to repay to the principal, when demanded, a sum equivalent to that
paid into his hands... the banker is not an agent or factor, but he is a
debtor."_

~~~
DangerousPie
> the EU urged Cyprus to collectively punish all deposit holders regardless of
> balance.

No it didn't - the EU always wanted Cyprus to leave deposits under 100,000 EUR
alone but impose a higher tax on large deposits. The leadership of Cyprus was
the one who came up with the tax on lower deposits because they wanted to
decrease the burden on high deposits.

<http://www.bbc.co.uk/news/world-europe-21825981> (last paragraphs)

~~~
bitcartel
From your link: _"The 10bn-euro ($13bn; £8.6bn) bailout agreed with the EU and
IMF had demanded that all bank customers pay a one-off levy and led to heavy
cash withdrawals."_

The EU were happy to sign off on a proposal which would see deposits under
100,000 EUR being hit. Maybe it was their idea, maybe it wasn't, but they were
okay with it. Ultimately it was the Cypriot parliament who rejected the
proposal.

 _"Cyprus President Nicos Anastasiades says he is battling against eurozone
demands that all bank customers pay a one-off levy in return for a bailout.

Mr Anastasiades said he shared people's unhappiness with the terms, whereby
all bank customers would pay a levy of 6.75% or 10% on their bank deposits.

The EU and IMF have demanded the levy in return for a 10bn-euro ($13bn;
£8.6bn) bank bailout."_[1]

[1] <http://www.bbc.co.uk/news/world-europe-21824495>

~~~
DangerousPie
My understanding of this article is that the EU told him he would have to come
up with ~5bn, which they wanted him to do by imposing a tax on large deposits
over 100,000. The comment by Schaeuble is pretty clear in this regard.
Instead, the president opted to impose an additional tax on lower deposits in
order to decrease the burden on large ones and keep Cyprus attractive as a tax
haven. The EU wasn't happy with this but let him do it since it still
fulfilled the requirements of raising 5bn.

So yes, the EU demanded that SOME customers have to pay SOME levy and I am
sure he "shared people's unhappiness" with those terms. But the one who
decided to put the burden on the small deposit holders was the Cypriot
government.

------
itsprofitbaron
To add some context to this situation, Cyprus is a country of 1.1 Million
people and it's banks have 68 Billion Euros in its accounts (of which 38
Billion is in accounts over 100k Euros) and as highlighted by their own GDP,
its an amount of money which couldn’t be sustained or created on its own.
Germany and France have argued that, Cyprus's offshore-haven business model
wasn’t sustainable with, Bank of France Governor, Christian Noyer saying that
"Cypriot banks have for years been taking the kinds of risks that are not
allowed in France"[1]

The reason why Cyprus are getting a deal like this is because of the
accusations of Money Laundering - an accusation which has led to Cyprus
opening an investigation into[2] which is mainly due to the fact that, a
Russian accountant (Sergei Magnitsky) was killed in jail in 2009 after
revealing “that $31 million of the tax money was moved out of Russia using
five Cypriot banks: Alpha Bank, Cyprus Popular Bank, FBME Bank, Privatbank
International and Komercbanka”[2] and because, Cyprus are still heavily
exposed to Greece. In fact, “the exposure of domestic [Cypriot] banks to
Greece amounted to €28 billion, or one-third of total assets and 170% of GDP.
Of the €28 billion, government bonds amounted to €4.7 billion; the rest were
loans to Greek residents”[3]

The initial plans were to apply a levy on all accounts in Cyprus (up to 10%
although, this was then rumoured to be 25% on everyone’s savings above 100k
Euros) which was rejected. Then there was a suggestion to nationalize semi-
state pension funds although, Germany amongst others were against this idea
suggesting that this could be even more painful for ordinary Cypriots than a
deposit levy.

The plan now appears to be involving nationalizing state pensions and split
failing lenders into good and bad banks which is highlighted by the article,
with Laiki (Cyprus’s number 2 bank becoming a ‘bad’ bank).

It’s an interesting scenario from an economical standpoint although, Cyprus
should have received a bailout as part of the Greek bailout due to their
significant exposure to the Greek economy, regardless if they are an offshore-
haven or not.

[1] [http://www.ibtimes.co.uk/articles/449633/20130324/cyprus-
see...](http://www.ibtimes.co.uk/articles/449633/20130324/cyprus-seeks-11th-
hour-deal-to-avert-financial-collapse.htm)

[2] <http://euobserver.com/magnitsky/118524>

[3] <http://www.iif.com/emr/resources+2662.php>

~~~
marshray
_1.1 Million people and it's banks have 68 Billion Euros in its accounts_

So 62k Euro per captia? That doesn't sound like an insane amount.

 _an amount of money which couldn’t be sustained or created on its own ...
"Cypriot banks have for years been taking the kinds of risks that are not
allowed in France"_

Since when has taking cash deposits been risky? This reasoning sounds
completely backwards to me.

Why would a country with 68B Euros on deposit be begging for a 10B Euro
bailout?

All I can figure is the US, Germany, and France don't like Cyprus taking less
taxes and asking fewer questions and they don't want it to be a reliable place
to shift your revenue or deposit your money.

~~~
pavlov
_Since when has taking cash deposits been risky?_

The Cypriot banks have been paying much higher interest on deposits than other
Eurozone banks. (You'd get something like 5-6% in Cyprus versus 1-2% in stable
Euro countries like Finland.)

When you're paying much higher interest than market rate, obviously taking a
lot of deposits becomes a huge risk. The same thing happened with the
Icelandic banks before the 2008 crisis -- they attracted lots of European
deposits with high interest rates and lost most of that money on ill-advised
investments around the world.

~~~
camus
when it's to good to be true...

------
OGinparadise
It appears that they are no shortcuts, or getting rich with banking by
becoming a low tax banking center (see Ireland, Iceland and now Cyprus).

And that will work against you when you need help from "normal" countries.
Cyprus got absolutely no mercy from them, take it or leave the EU. They cannot
leave EU so they must do anything else asked.

~~~
lkrubner
"They cannot leave EU so they must do anything else asked."

Good lord, do you ever read the news? In case you missed it, the last 2 weeks
have involved non-stop negotiations with various parties as the people Cyprus
pressured the Parliament of Cyprus into rejecting the original deal, with had
largely been designed by the Germans. And the deal now being considered does
not resemble any deal that was suggested by the Germans or the Russians, so
clearly Cyprus can say "No", at least enough to gain some flexibility. And
Cyprus can certainly leave the euro, thus endangering the long run health of
the European project -- and considering how much Germany has benefited by
having no restrictions on its exports to the rest of Europe, this would be bad
news for Germany.

But even more crucially, there is the question, has Cyprus already, de-facto,
left the euro?

[http://economistsview.typepad.com/economistsview/2013/03/fed...](http://economistsview.typepad.com/economistsview/2013/03/fed-
watch-do-capital-controls-mean-cyprus-has-already-left-the-eurozone.html)

~~~
OGinparadise
They said no and ran to Russia to try to pressure the Northern Europeans. And
they came back crying...

The new deal, AFAIK, confiscates all money over 100K euros in the second
largest bank, the other one was a 10% tax on all.

Either way, Greece had some leverage and used it to its advantage. Despite the
huge cuts they were forced to make, they never met the goals set and they were
lowered or extended. Cyprus it seems, has very little to no leverage.

They can surely leave the Euro, like I can leave my wife, drop the lease and
quit the job at the same time with nothing else waiting.

~~~
masklinn
> The new deal, AFAIK, confiscates all money over 100K euros in the second
> largest bank, the other one was a 10% tax on all.

It's not a confiscation of all the money. Accounts are frozen, but the final
levy (solely on accounts >€100k rather than across the board) are expected to
be around 30%:

> Asked about the level of losses on uninsured depositors in Bank of Cyprus,
> he told state radio: "The assessment is that it will be under or around 30
> percent."

~~~
OGinparadise
The way I read it, all their money in the second largest bank (above EUR 100K)
is on hold, until all the loans, and investments are unwounded.
[http://www.reuters.com/article/2013/03/25/cyprus-
resolution-...](http://www.reuters.com/article/2013/03/25/cyprus-resolution-
idUSB5E8KL01220130325) No one really knows how much they'll get back. That's a
lot of uncertainty, they essentially screwed one bank's customers over and
sent the insured accounts to another.

------
atsaloli
Wealth redistribution in action.

------
seanhandley
The problem is that there is no competition in banking. A bank is a private
company and should be allowed to go out of business as a result of poor
decisions and speculation. In a true free market, there would be no bailout.
What we have now is a cartel of banks with government-approved protection by
central banks, a system that encourages recklessness and a money-system backed
by nothing but debt. Propping it up is just delaying the inevitable and
allowing the very wealthy more chances to take ownership of property and
assets for bargain prices while the general public pay more through inflation
of currency, commodity prices and house prices.

We don't need bailouts. We need better education of the population about how
private banking is in control of our economy so that it becomes clear in
everyone's minds that the whole monetary system needs reform.

The system as it stands is mathematically guaranteed to transfer value from
the bottom to the top. This is as true for individuals as it is for countries
as a whole. Cyprus will never pay off this national debt with the system as it
currently stands and so will sit in the pocket of the IMF, and ultimately the
US Federal Reserve. "Bailout" is one way of putting it. So is "legalised
plunder".

------
joering2
Do yourself a favor; withdraw ALL your money from banks and buy a safe; keep
it at home in safe bolted to the ground, fireproof; the type with remote off-
trigger so with a gun to your head you can't open it for a burglar. Preferably
replace most with silver coins the 25c 90% silver ones. Do not buy gold in
large quantities as when buying food on a daily basis it will be hard to
"break" a bar of gold.

Once successfully pushed in Cyprus, US will be the next one. Why you think
they buying millions of rounds of ammunition? Street tanks bought by DHS (not
a military part of government). And if you think about it, it makes perfect
sense! Only by taking 25% of peoples assets can safe America, safe Social
Security, safe Medicare, Medicaid, etc. Pres Obama already prepared it for you
-- "you haven't built your business" yourself; the money you have is not
really yours; it should be obvious!

~~~
rdl
This is horrible advice.

It's worth keeping physical currency immediate needs in the case of a storm,
earthquake, banking glitch, etc. (For most people, maybe $500-1000; the crazy
thing is I know plenty of people who do nothing but use credit cards and just
have $0-20, which sucks even if their bank just freezes their ATM account or
credit card for 3 days!)

Otherwise, physical currency is exposed to the most serious risks
(devaluation, inflation), plus physical loss, plus is relatively inconvenient
to use. If you want a hedge against USD shenanigans, the things to do are:

1) Reduce ongoing liabilities (debt or expenses), particularly those which
might adjust

2) Invest in income-producing assets which have pricing power

3) Potentially, hedge by investing in assets in foreign currencies or non-
currencies, or assets in foreign countries, etc.

#1 and #2 are generally reasonable no matter what (buying energy efficient
appliances, buying foods/etc. in bulk, education, being in good health,
improving your skills, building products or companies...)

~~~
mynameishere
_Reduce ongoing liabilities (debt_

FYI, during the Weimer inflation, it was those who went into debt (ie, shorted
the Mark) and bought real assets who profited the most. There's no real good
advice during a currency collapse for unsophisticated investors. Filling your
basement with Jack Daniel's whiskey is as good as anything.

That said, a FRN crisis, if any, is many years off.

~~~
rdl
The difference is _fixed-rate_ , vs. things which could adjust. It's all about
being on the right side of optionality :)

It's better to own a subsistence farm than to have something which requires
purchasing market-priced inputs and to sell at long fixed-term prices.

Similarly having long term fixed-rate debt (mortgage) is better in a market
where rates go up than having to refinance every few years with short-term
debt (or, say, rent, in a place where there's no rent control). But a
disadvantage of owning vs. renting is that you can't move as easily to take
advantage of opportunities.

Reducing mandatory ongoing/recurring market-rate purchases seems like a win;
usually that requires either spending capital now or some form of (ideally,
fixed-rate) debt. Like borrowing at 3% to buy a fuel-efficient car or live
close to work/transit is probably worthwhile, if you get 10-15mpg now and need
to commute to work.

