
The Cyprus bail-out: Unfair, short-sighted and self-defeating - aero142
http://www.economist.com/blogs/schumpeter/2013/03/cyprus-bail-out
======
pinaceae
Funny thing is - this is likely just a test run.

BCG wrote the scenario up back in September 2011: Back to Mesopotamia? The
Looming Threat of Debt Restructuring <http://www.scribd.com/doc/130778664/BCG-
Back-to-Mesopotamia>

It describes exactly the case for one-time haircuts across all citizens,
neatly laid out per country. The money needed to turn those deficits around
needs to come from somewhere, just printing it does not work. Certain finance
bloggers are already going apeshit about this.

And for those of you in the US, snickering at the European victims - it lists
the US as well, with the need for a 26% haircut to balance its books.

Sleep well.

~~~
trusche
Fascinating read, thanks for that. For those that like scribd as much as I do,
here's a direct link to the report (PDF):

<http://www.bcg.com/documents/file87307.pdf>

------
riggins
The crisis takes a much longer time coming than you think, and then it happens
much faster than you would have thought.” -Rudiger Dornbusch

If I was Greek, I wouldn't have money on deposit at a Greek bank. It surprises
me that at a minimum the Greece financial system hasn't ice-nined already.
We're witnessing history.

~~~
avn2109
Can you shed any light on the practicalities of moving one's money beyond
local government's reach? This is something I've wondered about for a long
time.

~~~
easyascherrypie
Not too hard. Just go to a country that is known to not depend on your country
(say, if you're from the States, choose China). Go there, open a bank account,
mission accomplished.

~~~
icelancer
I probably would have picked a different country in that regard.

That being said, it's not all that simple to open up shop in a Chinese banking
office. Though I guess if you have the kind of money you would want to do this
with, it becomes easy enough.

~~~
jbooth
Anyone who has that kind of money already has it offshore in the Cayman
Islands. Why pay Chinese taxes on it?

------
alexmic
I'm Cypriot, and today I've seen 6.75% of my family's savings disappear.

~~~
bitcartel
It's theft from your family, plain and simple.

You still have a chance to stop this outrage, as it must pass your parliament,
and then other Eurozone parliaments too.

Good luck.

~~~
danieldk
_It's theft from your family, plain and simple._

I feel very sorry for the parent poster. But, no, it's not that simple. We as
Europeans have been spending too much, we have added countries to the Eurozone
that were not healthy enough financially so that France's finances would seem
relatively ok. For years we the ignored tax evasion and corruption. We as
voters and citizens were all part of the problem, and now everyone is going to
pay.

If the EU didn't bail out Cyprus, his/her savings would be worthless, since
their economy would've collapsed. If Cyprus' population is not going to pay
heavily, the next bail-out may not be possible, because the populations of the
countries lending the money might revolt. I live in The Netherlands, and
there's not much solidarity left (which I think is stupid, but anyway).

Obviously, it is not a very good manner to seize funds, because the citizens
of the next country that needs to be bailed out, will withdraw their savings
beforehand.

~~~
Nightrider
But for some who dearly counted on those savings to pay rent or medicine, to
be taken without their consent or knowledge, it is theft, plain and simple. No
matter what opinionated armchair economists like you have to say.

~~~
danieldk
_But for some who dearly counted on those savings to pay rent or medicine, to
be taken without their consent or knowledge, it is theft, plain and simple._

Again, what's the alternative? Without the bail-out, government employees will
lose their jobs, foreign assets are frozen, they'll be removed from the
Eurozone, the economy will collapse, and they cannot buy medicines either.
Sure they could increase taxes, freeze or decrease wages, etc. But the net
effect will be the same - people will lose money.

 _No matter what opinionated armchair economists like you have to say._

This has little to do with armchair criticism. My pension fund has been
downgrading as well, there is a lot of uncertainty on what will be left when
my generation retires. The thing is, we have to blame ourselves as well: in
electing populist leaders rather than visionaries, for our unbounded
consumerism, and for participating in corruption. E.g. in my country:

\- People are obsessed with this populist right-wing politician (Geert
Wilders) who dominates every discussion, always shifting the attention to
muslims, Eastern Europeans, and how we are wasting money on Greece. In the
meanwhile we have a mortgage bubble that is almost bursting and a healthcare
system that becomes unaffordable. Moderate politicians, that get relatively
little attention, have been warning the electorate for years.

\- People buy expensive gadgets and phone subscriptions, without really having
the money.

\- Although there is relatively little government corruption, lots of people
try to evade taxes at every possible occasion (e.g. through unreported
employment of painters, construction workers, etc.).

\- We dislike the banks and bonuses, but refuse to transfer our money to more
ethical banks.

~~~
moe
_Again, what's the alternative?_

Take it from the >100k bank accounts. _Only_ from the >100k bank accounts.

~~~
1337biz
No, and the reason is very simple. The whole discussion shows, that you can
have zero trust in national governments. It is therefore save to assume, that
you can not count the slightest bit on any retirement plans that have some
form of government involvement. Even if you only get some modest apartment in
a European metro area as you personal retirement plan, you are way beyond the
100k. Do you really want to steal the money from people who saved money all
life just to have some decent retirement? (The "bank account" argument doesn't
really count, as the BCG report outlines how they are gunning for real estate
owners next).

~~~
moe
_Do you really want to steal the money from people who saved money all life_

You seem to be arguing they should not have taken any money at all, which I of
course agree with.

My point was that _if_ they take money (which they did) then they should at
least have spared the <100k accounts. I was trying to give the simple answer
to the rhetorical question "what's the alternative?".

They overstepped _two_ red lines here. Applying a sudden-tax to their citizens
is the first, and taking it from the people who can least spare it is the
second. My response was only concerned with the second line, because that is
the really explosive one (civil unrest, bank run).

~~~
1337biz
I personally find it great that they didn't spare the <100k accounts. It would
have been much easier to do otherwise, as the "let's just take it from the
rich" perspective is easy to sell nowadays in Europe. But taking it from those
with under 100k accounts takes the fight to the streets and let politicians
"feel" the backslash.

------
hristov
CYPRUS. That is the name of the country. What you typed is a completely
different thing. I thought the semiconductor company was getting bailed out.

~~~
pg
In case anyone is confused, the original title was "Schumpeter on the Cypress
Bailout."

Incidentally, to those who complain about mods changing titles: we fix stuff
like this constantly. All day long we quietly fix breakage, and every month or
so we revert a title that someone was attached to, and we get an indignant mob
bitching at us.

~~~
thaumaturgy
I suppose I'm a member of that indignant mob, though I have no problem with
fixing spelling errors or linkbait or inflammatory titles.

But the flip side of the loud indignant mob is the quietly indignant mob; a
few days ago I submitted an item that I thought might be worthwhile, except
that the best-formatted (easiest-to-read) source, nbcnews, also happened to be
the one with the worst title. So, I used the title for the same article from
the AP instead, and within a few minutes a moderator had mindlessly changed it
to match the crappy, inflammatory title from the article.

I didn't bitch to anyone though, because it's clear that nobody's mind is
going to be changed, but I wondered why HN doesn't just automatically pull the
title from the submitted article. There's really no point in my putting any
effort at all into a title.

obtw, a good rule of thumb in customer service is that for every complaint you
get, there were 10 other people that had the same problem but didn't put the
effort into telling you about it.

~~~
petercooper
The other weird thing is that until about a year ago, the guidelines said
writing better titles was ok. Now, it doesn't. So a policy changed there for
some reason.

------
Freestyler_3
Where does this put the trust in banks? What will the reaction be from people
in other countries with money in the bank? They could start fearing that one
day their money will be locked away from them and that the bank is going to
take percentages off of their savings. This is a decision that might push
others over the edge.

~~~
jemaddux
My thoughts exactly. How can they justify simply taking deposits?

~~~
nwzpaperman
Fact 1: Deposits are loans from depositor to bank. Fact 2: Deposits are
accounted for as liabilities on the banks' balance sheets. Fact 3: Banks write
multiple loans against each dollar deposit; it has a fancy name: fractional
reserve banking. Fact 4: Most countries are now on zero reserve banking and
only manage their loan portfolio size by the amount of capital they have on
their balance sheets.

------
kunle
Important part here:

> 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.

Typically, as you impose losses for burden sharing, you start with equity as
the most highly risky capital, move to debt, and after that move to
depositors. The reasoning is that this underlines basic choices about who is
taking risk; equity investors have the most risk capital, bondholders are
right behind them (based on the structure of the bond) and depositors are the
lowest; philosophically this is because as an investor in equity/debt it's
your job to evaluate the bank's chances of failure. As a depositor, you just
want somewhere to park your savings.

Bad deal.

------
dschiptsov
It is, again, a matter of a point of view.) In theory, no one benefits when,
say, Russian criminals or politicians (which is actually just an alias) park
stolen money there. Money should work (flow) which means - getting invested.
If they just stolen, evacuated from the original country and parked in a bank
which cannot even invest them properly - no one benefits, except bankers and
criminals.

There is also nothing special in that EU elites want to break the scheme - why
should they care about Russians laundering money? They would prefer their own
schemes.)

So, nothing to see here. Parking money abroad is a risky enterprise, so, just
take some loses and diversify better next time.)))

~~~
gruseom
Not everyone who's being hurt here was "parking money abroad". They're
stealing 6.75% of ordinary people's savings. That's shockingly unfair and
stupid.

Does anyone know why they didn't restrict this to accounts over the insured
100K limit? It makes no sense to me why they would take the political hit of
doing something this evil. If it's about taxing Russian criminals' billions as
we're hearing, why would they need to raid average citizens' accounts?

~~~
OGinparadise
_They're stealing 6.75% of ordinary people's savings. That's shockingly unfair
and shockingly stupid._

Who is stealing? Certainly not EU. It sucks for the people involved but the
country has no money. So instead of having an extra tax on real estate or
income they added a tax on this and they can collect it in a minute. Others
would have complained about an extra tax on their income, electricity,
property etc as well. At least here outsiders pay too, otherwise the Cypriots
would have paid a larger share.

~~~
gruseom
To me the word "tax" includes some expectation that the funds be used (however
imperfectly) for the public good. But the bailout-and-austerity regimen seems
to be about protecting financial institutions at common people's expense. For
example, it wasn't the Greek people being bailed out, but rather the banks who
lent to Greece. Yet we don't hear about that, we hear about irresponsible
Greek bus drivers and the like. (As a side point, such fanning of
nationalistic flames has served its diversionary purpose well in this case,
but is really playing with fire.)

It seems to me the bottom line is clearly: are the bondholders of insolvent
institutions expected to take a hit as well? If the answer is no, as it mostly
has been throughout this crisis, that's "heads I win tails you lose" — rotten
both morally and from a market point of view. The bondholders in this latest
case are not touched at all, according to
[http://yanisvaroufakis.eu/2013/03/17/cyprus-stability-
levy-a...](http://yanisvaroufakis.eu/2013/03/17/cyprus-stability-levy-another-
sad-euphemism/).

(You make a good point that this surprise tax isn't the worst way they could
do it, but that's what makes it so puzzling politically. The way they're doing
it is so naked, so brazen, that it's bound to cause a larger backlash.
Everyone can understand someone reaching into their bank account and taking a
fistful; that's political poison. Why didn't they find a worse way (if need
be) to do it, cloak it in complexity, and exempt the poorest citizens to
mitigate criticism? Something along those lines would be standard political
practice, and it's puzzling why they didn't do it in this case. Is it simply
that Cyprus doesn't matter? Edit: I now see that the Economist is asking the
same question.)

~~~
TillE
> The way they're doing it is so naked, so brazen, that it's bound to cause a
> larger backlash.

Quite right. The more I think about it, the more I believe there's an extreme
risk that this could be the first domino in a catastrophic chain reaction. All
because of a few lousy billion dollars that surely could have been borrowed
and paid back in a more reasonable fashion.

I don't get it. I don't understand how the people involved here could be so
enormously stupid. Just as it looked like the Euro crisis was ebbing, they're
set to reignite it in a whole new way.

~~~
vacri
"borrowing to pay back in a 'reasonable fashion' later" is exactly how all
this started in the first place.

------
fishcakes
German bankers sending a message to people to move their money to Germany
because it isn't safe elsewhere

~~~
seivan
Singapore. Germany is the last fucking place I would put my money. Income tax
around the 50-55% bracket. Good luck.

~~~
bitcartel
One view is that if you have Euros, the safest place for them is Germany,
because if the single currency does break up over a weekend, at least your
Euros will be converted into Deutsch Marks.

~~~
vonuebelgarten
If Germany is not safe enough for your money, nowhere in the Eurozone will be.
Recent history shown that German banks are safer than USA or UK ones.

As a small saver, if I was a Cypriot, I would move all my remaining (i.e. not-
yet-stolen) money to Germany ASAP.

------
omgyeah
This is nothing more than a warning for the rest of the countries with
"failing economies".

Banks can afford destroying people's lives to simply increase numbers in excel
sheets.

Greed is human kind's drive force and it's unstoppable.

------
tezza
This grab from domestic savings is a new item.

Yet will anyone outside Cyprus, EU or small niche communities like HN take
notice ? It is hard to say.

Portugal seized money from pensions (2.5%) and hardly anyone noticed. They
called it a "Solidarity Tax"

[http://www.portugaldailyview.com/whats-new/press-review-
gove...](http://www.portugaldailyview.com/whats-new/press-review-government-
injects-e100m-to-save-tap-treasury)

There has been a lot of head-in-sand citizen behaviour. This lack of alarm is
aided by shockingly bad press reporting of the issues.

------
afterburner
Insured deposits being raided? Bank runs anyone?

------
OGinparadise
The Germans have had enough of this and when they can (couldn't in Greece,
even though the population suffered) they let others share in the pain.

Cyprus along with Dubai is known as a place to send your hard stolen billions
so you could understand the goodwill towards them.

Edited to add: Cyprus also doesn't make it easy for EU. EU has master plans,
namely more or less to get along with Turkey to the extent they can, and to
start the remaining Eastern European countries in the EU path. Cyprus were let
in EU as a divided country, only after Greece (their sister /mother country)
threatened to veto any new other members unless.

Once Cyprus got in they threatened veto against cooperation with Turkey, the
other part of the island etc., making work much harder for EU and especially
NATO. US would like for EU and NATO to cooperate but Turkey is a member of
NATO but not EU and Cyprus is a member of EU but not NATO. Both can veto but
Turkey has a million man strong army, and has been a NATO asset for 60 years.

In other words, they were in for some payback. A tiny country played the
entire EU for fools for a long time.
[http://www.bing.com/search?q=Turkey+eu+cyprus+veto&](http://www.bing.com/search?q=Turkey+eu+cyprus+veto&);

~~~
seanmcdirmid
I'm just curious, are you Turkish? Not that I disagree with you, but it does
seem to be one of those issues that seems to be charged by one side or the
other.

~~~
rolleiflex
I am Turkish, so I might be able to offer some commentary. What is said is
essentially correct, but I'm more reluctant to assume this is the reason why.
Turkey has a long way to go and many other problems to solve before it can
become an EU member, and Europe has its own problems too. Cyprus is too
unimportant for both sides to care about right now. When Turkey's time comes
for the full membership and agreed by both parties and if the Cyprus remains
the only roadblock, the heat from Turkey and EU can sink the entire island in
one day so it is likely that they will cede. In the meanwhile, it's a
convenient excuse. However the other issues facing EU membership of Turkey are
pretty serious, so they'll be able to play this game for a while. The problem
facing Turkey is, essentially, when or if the country joins the European
Union, it's going to take around 1/4 of the chairs in the European Parliament
(it's based on population, Turkey is about the same size as Germany
population-wise), effectively becoming an instant major player in EU decisions
alongside UK, France and Germany. This upends the power balance in Brussels.
While on paper Turkey looks like an another regular Eastern European
acquisition for EU, it is in effect a larger process than the entire history
of acquisitions combined because of political, cultural and populace
implications.

Even then, Turkish population has largely soured by the 30-year-long waiting
at the gates game, and they are not as likely to accept then shown the
financial implications of an EU membership. Considering Turkey has largely
been impervious to financial perils of the EU (chugging along with a fine 5%
growth rate through it all) and also considering GDP wise it is now one of the
Top 20 economies in the world, with the second largest army of NATO after the
United States, an EU membership, once a dream, is starting to look like not
that good of a deal.

Turkey is essentially the thing that stands between perpetual war and
dictatorships of Middle East and "civilised" Europe.

~~~
jballanc
I am not Turkish, by birth, but I am Turkish by choice (I currently live
there)...

This is a really good summary, but I think you're downplaying the importance
of Cyprus a bit. Yes, Cyprus is a bit of a pawn, but it's an increasingly
dangerous pawn. The other angle to the Cyprus question is the discovery of gas
reserves off the coast, the debate over who has rights to exploit those gas
reserves (since the Turkish Republic of Northern Cyprus controls the north,
but is only formally recognized by Turkey), the deals that the Greeks and
Greek Cypriots have struck with Israeli firms for the exploitation of said
gas, the recently soured relationship between Turkey and Israel (who have been
traditional allies), and the desire of the current Turkish government to
become a champion for the middle east and/or (depending on how you spin it)
the Muslim world.

Cyprus may just be a tiny island, but it increasingly seems to become the
focus of so much of what is going on in the region. That said, I agree that
the whole relationship between Turkey and the EU has become...complicated. It
is interesting the reversal of fortunes that has led to the situation going
from one where the EU was reluctantly working with Turkey on accession in 2005
to one where Turkey is the reluctant partner today. As distasteful as it might
be to some in the EU, I think it's become clear that Turkish accession to the
EU would be the _best_ outcome for the EU.

~~~
rolleiflex
I never met a foreigner deciding to live in Turkey before, it's interesting!
I'm currently living in the States, so I am also an expat. The question of gas
reserves is a serious one, but as the saying by Mao Tsetung goes, "You can get
much farther with a kind word and a gun than you can with a kind word alone",
and Turkey has many (way too many, in my opinion) guns.

Souring of relationships of Turkey and Israel was only a matter of time, I
believe. The populace is overwhelmingly against Israel and the government
played that hand for votes. It is also important in the area which Turkey
wants to assume leadership, Middle East, in that any action, words or whatever
against Israel gets many applauses. I personally believe future of the country
lies in the West, not the East, but I am of a dying breed of Turks that
identify with the West rather than Middle East.

~~~
jballanc
My wife is Turkish, and over the years of visiting Turkey, I fell in love with
the country. Also, given the state of affairs in the US (especially with
respect to education), we figure we're no worse off raising our children in
Turkey. Of course, we also have a number of contacts in Turkey which make it
easier (we plan on sending our kids to private school)...but that's a whole
different topic for another time!

I think it's definitely interesting times in Turkey. I know a lot of people
are worried that a turn to the east is a foregone conclusion, but at the same
time the growth in places like Istanbul and Izmir is hard to ignore. Just a
few weeks ago there was a major meeting of tech startups and VCs in Antalya.
There's no guarantees, of course, but I think it's not impossible that Turkey
could become a major player in the world economy in the next 15-20 years...

~~~
rolleiflex
One potential downside: I personally could find no satisfactory career paths
in Turkey—that's why I decided to come here to the States to study. Any place
that would accept me as a designer were paying below $1500 start-up salary per
month, which is ridiculous in a city like Istanbul, which has traditionally
been one of the more expensive european cities. The living cost in Istanbul
and New York is pretty much the same for me, at least, while in New York, as
what I strive to be, I am far more confident in that I can make a living out
of it.

Turkish public high school education is far better than the U.S. public
education, and the private schools, provided you pick carefully, should be up
to par with their european counterparts (which is pretty good). But for the
universities, definitely send them abroad.

I didn't even know Turkey had VC's! Interesting. If you do such things, we can
meet up for a coffee somewhere in Istanbul this summer, I'll be back for a
short break. Meanwhile, enjoy the country!

