

Cyprus Bailout: Stupidity, Short-Sightedness, Something Else? - mike_esspe
http://www.cyprus.com/cyprus-bailout-stupidity-short-sightedness-something-else-.html

======
alan_cx
Er, this turned in to a rambling rant. Some of it might be worth reading....

I don't agree with this analysis. Its a one sided argument against the current
plan. Which is fine, but its certainly not the whole story. Part 15, the
solution, is absurd. It has all the problems outlined in the previous 14
points. It is no solution, because there isn't a reasonable no pain solution.
People are literally saying anything that pops in to their heads because the
cant cope with the idea proposed already. I get that, but there isn't really
an alternative. The country, or to put it another way, a big group of people,
have gone way too far in to debt. An individual in the same circumstances
would go bankrupt, but that is not an option for a country, as far as I know.
In the end, they have to settle the debts. Not only that, borrow more money to
survive.

What interests me is the reaction of the people. It all seems a bit civilised.
There isn't much worse a government can do to its people, yet the people seems
incredibly calm about it. I am still surprised that the people haven't stormed
their parliament. This i the real test. How far can you push a population?
Looks like you can push them pretty far.

Also, I still cant get my head round peoples who vote in governments then
trying to separate themselves from the actions of that government. Or take out
loans, then blame the banks for handing those loads out. Or scream
hysterically about socialism, when its capitalism and its basic law of supply
and demand that has caused the whole mess.

The biggest joke of all, in the UK at least, is that with a disaster caused by
banks dishing out toxic loans, the banks are now under pressure to loan out
more. Half the problem is people now working to pay off loans, reducing the
amount of money that can be spent in general. We want them to borrow more,
when their jobs are uncertain?

In the end, the problem is greed and impatience, and us the people demanding
that we are loaned the money to satisfy that.

Im sorry, but IMHO, the whole system is a wreck, and no one wants to take
responsibility for any of it. Governments are too interested in protecting
votes, and that is making them avoid any harsh but effective solutions.

Anyway, point being, I'm not seeing any realistic long term solutions
anywhere. The Cypriot idea is interesting to me, and rather than knee jerk
against it, I am interested in seeing how it pans out. I mean, what if it
works? The UK is said to have triple dipped, so what ever is going on here
isn't much cop, we are just scraping along the financial gutter. Could a one
off injection of all our money save the day? Its our country, our debt.

I'm stopping now. I'm boring and confusing myself....

~~~
DeepDuh
Why is insolvency not an option for a country? It was in Sweden, which is
doing fine now, and in Argentina more recently. Oh look, there's a whole lot
more of them[1]. It only isn't an option for a member state of the EU. I sure
don't see how Germany's strategy of starving those already struggling
economies to death is going to work out.

[1]
[http://en.wikipedia.org/wiki/Sovereign_default#List_of_sover...](http://en.wikipedia.org/wiki/Sovereign_default#List_of_sovereign_debt_defaults_or_debt_restructuring)

~~~
namdnay
Sweden isn't in your list. In fact the last "rich" country was Germany in 48.

Btw, defaulting was an absolute disaster for Argentina

~~~
alberich
Could you expand on why do you think it was a disaster? Argentina was pretty
screwed up, I'm not sure it got any worse than it already was.

~~~
namdnay
This article describes things well, especially the last paragraph:

<http://www.economist.com/node/21533453>

~~~
alberich
Hm, while the economist's article points out how messy the process became, it
doesn't makes an evaluation of how the default actually affected the
argentinian economy.

I think that Greece and Argentina will make a good examples for comparisons of
different approaches, when both recover economically (if they do recover, that
is).

------
arethuza
"You never, ever, ever, hit insured depositors."

The current deal only impacts depositors with more than 100K in the banks -
more than this wasn't insured anyway.

"You should basically never hit non-insured depositors either."

Why? Since when is there a guarantee that banks are 100% safe? If people
deposit large (i.e. over deposit guarantee limits) in a bank to benefit from
the high interest rates they are taking a risk with a reward - if this goes
wrong then why should other more prudent people have to bail them out?

~~~
yannis
Agreed that no depositor should be hit. The failure here is that of the ECB
which has not managed to regulate banks properly to reduce the risks of
failure.

~~~
netcan
I completely disagree with this idea.

It's trying to avoid avoid reality. What you are saying is that no one should
ever be hit. banks shouldn't fail. The reality is that banks do fail. They
fail because of bad management. They fail because of bad financial
environment. They fail because of bad regulation. Whatever. They _do_ fail.
That is reality.

We need rules that define what happens when they do fail. We need to be able
to survive bank failures the way we can survive failures of other companies.

We can't just keep deciding that banks should never fail again.

~~~
arethuza
Exactly.

Poorly managed banks should be allowed to fail just like any other business -
creative destruction is a vital part of a free market economy.

However, what to do now that "too big to fail" banks are so common?

~~~
netcan
Case by case.

In Cyprus, I'd say put these banks into some sort of bankruptcy. Give everyone
haircuts in whatever order a court (remember rule of law?), not some dark room
full of politicians, beuarocrats and bankers decides is correct. Then have the
Cypriot government or the EU (we also need to figure out who is liable here)
make good on the promises to insured depositors.

I don't see how dooming the next generation of Cypriot taxpayers to high taxes
and low public services in order to save uninsured depositors who _benefited
from the high interest rates these risky accounts yielded_ from taking a
haircut. Not from a legal perspective, or a moral one. It doesn't sit well
with socialism or with capitalism.

I don't buy the argument that it will in any way preserve choruses ability to
borrow in international markets.

~~~
arethuza
I'm pretty sure that EU has no role in actually providing deposit insurance,
it only requires that member states provide deposit insurance.

So what would happen if the Cypriot government couldn't handle the payouts
required?

------
return0
As an indie developer who had established an online business in cyprus and is
now being hardly hit by the bail-in, i agree with a lot of the observations
made. Cyprus offers high quality financial services for people who do
international business transactions. I am not aware how much of this business
is from russian mafiosos, but I was certainly not one of them.

Establishing a business in southern europe is risky anyways in the past 5
years with national governments failing left and right. The red tape and the
ability of the state to impose arbitrary "urgent taxation" (has happened twice
in greece already) hurts all business planning in an already shaky business
environment. For me, cyprus was an obvious choice because of its "most lawful"
status (the country is in the EU and in the euro for years, which requires a
high level of transparency, and it is not in considered a tax heaven by OECD),
plus when you don't do business in your home country you have the freedom of
choice. Compared to the bailed-out european south, cyprus was actually the
safest option. From my experience, i did have to provide adequate
documentation for all business transactions and the red tape overhead was much
reduced.

The whole handling of the situation until now is a hugely chaotic freak show,
a pretense battle between white knights of capitalism and socialism, and a
huge display of how ineffective it is to run europe without a central
trustable government.

~~~
claudius
> huge display of how ineffective it is to run europe without a central
> trustable government.

Thank our friends in Westminster who first bullied their way in and then have
been blocking further European integration for the last 40 years.

~~~
return0
> Thank our friends in Westminster who first bullied their way in and then
> have been blocking further European integration for the last 40 years.

I wouldn't assume the spanish, italians, french are very much in favor of it
either (given that they will have to accept a de facto german authority)

~~~
claudius
With a proper democratic parliament based on population size, Italian, Spanish
and French could easily outvote German delegates. I don’t know about Italy and
Spain, but the impression of Germany in France and the other way around is one
of the best[0].

[0]
[http://www.germany.info/Vertretung/usa/en/__pr/P__Wash/2013/...](http://www.germany.info/Vertretung/usa/en/__pr/P__Wash/2013/01/22-Elysee-
JointArticle-st.html)

> Recent surveys confirm that over 85 percent of citizens in each country have
> a good or very good image of the other.

or [http://www.nytimes.com/2013/01/23/world/europe/france-and-
ge...](http://www.nytimes.com/2013/01/23/world/europe/france-and-germany-
celebrate-50th-anniversary-of-elysee-treaty.html?_r=0) .

~~~
return0
You 're assuming that these nations trust their own leaders / nationals only.
If you were an italian having to choose between Berlusconi and Merkel based on
their track record what would you choose?

~~~
claudius
Well, Berlusconi just got back into the Italian parliament together with that
other clown, so I prefer not to take guesses at the outcome of Italian votes.

My point was that there wouldn’t be such a thing as a ‘German authority’ to
accept in a united and democratic Europe and that at least the French don’t
appear to be entirely opposed to the idea of working closely with Germany.

(Oh, and Merkel isn’t all that popular in Germany – (un)fortunately, her
social democract contender is the guy (not necessarily seriously) suggesting
to send the cavalry into Switzerland[0] and pirates to Cyprus.)

[0] [http://www.euractiv.com/elections/outspoken-spd-
chancellor-c...](http://www.euractiv.com/elections/outspoken-spd-chancellor-
candida-news-515100)

[1] [http://www.spiegel.de/politik/ausland/spiegel-
gespraechsreih...](http://www.spiegel.de/politik/ausland/spiegel-
gespraechsreihe-steinbrueck-droht-zypern-mit-stoertebecker-a-885530.html)

------
raverbashing
Oh by the way

While Cypriots were queuing in the ATMs to withdraw 300€ tops (then reduced),
Laiki Bank was open in London, and accepting all withdraw orders.

[http://www.zerohedge.com/news/2013-03-25/have-russians-
alrea...](http://www.zerohedge.com/news/2013-03-25/have-russians-already-
quietly-withdrawn-all-their-cash-cyprus)

~~~
Devilboy
What the fuck

~~~
chollida1
UK banks aren't regulated by the EU, so the banks essentially act as if they
were divorced from their counterparts in Cyprus.

The same thing happened to Cyprus banks with branches in Russia.

I'd be more than a bit pissed if I was from Cyprus, though if I was a wealthy
Brit or Russian, I'd be very pleased about this...

~~~
justincormack
Thats not entirely true. Laiki UK is a branch, which means it is regulated and
supported by Cyprus, while Bank of Cyprus UK is a subsidiary, regulated in the
UK. However some sort of deal seems to have been done with Laiki UK.

------
bobbyongce
A great article. I think the EU made a big mess up by even considering not
honouring the deposit insurance scheme. Now everyone knows that the insurance
is not really an insurance and the government can grab it anytime a crisis
happens. All the trust built up over the years is gone with just one action.

Also all the big accounts with a large haircut will now cause almost all
businesses to be affected. It will be very hard to see any business surviving
this cashflow crunch in Cyprus.

~~~
tkorri
It has been reported that the initial idea to not honour the deposit insurance
actually came from Cyprus, not from the EU. But I agree it was stupid move
from the EU to go along with this plan.

------
mmariani
To be honest, expect more of this crap.

The only question now is who's next?

<http://youtu.be/thSTpGnWEAs>

~~~
maked00
We are. The laws have been passed. Our (US) savings are now up for grabs. In
return, you get some worthless stock.

------
lazyjones
I like the conspiracy theory about natural resources. Incidentally, Greece is
also sitting on huge natural gas reserves: [http://www.globalresearch.ca/the-
new-mediterranean-oil-and-g...](http://www.globalresearch.ca/the-new-
mediterranean-oil-and-gas-bonanza/29609)

The way the greek problems were handled by the EU under german "leadership"
could be interpreted the same way (extremely stupid or conspiracy).

~~~
terhechte
Time to quote Hanlon's razor again:

“Never attribute to malice that which can be adequately explained by
stupidity.”

I doubt there's any conspiracy at work here, it's just the outcome of large
scale politics.

~~~
lazyjones
What if the action actually doesn't seem so stupid in the long run, if they
manage to force these countries to give up their resources in exchange for a
bailout?

~~~
terhechte
Still doesn't make it a planned action by necessity. When the Spaniards
discovered the Americas with all of its Aztec gold, it was an accident that
made them very rich for a long amount of time; still it would be stupid to
claim Colombus was sent on his journey with the task to deprive indigenous
people of their treasures.

~~~
lazyjones
> still it would be stupid to claim Colombus was sent on his journey with the
> task to deprive indigenous people of their treasures.

Wikipedia: "In the "Capitulations of Santa Fe", King Ferdinand and Queen
Isabella promised Columbus that if he succeeded he would be given the rank of
Admiral of the Ocean Sea and appointed Viceroy and Governor of all the new
lands he could claim for Spain. He had the right to nominate three persons,
from whom the sovereigns would choose one, for any office in the new lands. He
would be entitled to 10% of all the revenues from the new lands in perpetuity.
Additionally, he would also have the option of buying one-eighth interest in
any commercial venture with the new lands and receive one-eighth of the
profits.[31]"

~~~
terhechte
Aw ok, I clearly didn't research this enough. Thanks!

------
don_draper
Maybe I missed it. What solution does the author offer?

~~~
vwinsyee
There's a link at the top "UPDATED: What do we do now?" --
<http://www.cyprus.com/cyprus-bailout---what-to-do-now.html>

~~~
arethuza
"Supplement with nationalization of pensions"

So the alternative is to take money people have saved for pensions rather than
hit bank depositors over 100K???

~~~
fakeer
And what will those people do who have their pensions as the only source of
livelihood or major source?

~~~
arethuza
I have no idea - seems an appalling idea to me.

------
thebmax
This is really interesting and makes the whole situation seem absurd. It makes
you wonder what they (the EU) are thinking. It is really scary that this can
happen in this manner. Each individual bank was not treated differently - some
Cyprus banks stayed conservative and didn't put their depositors money at risk
and are still being wiped out. Amazing - and scary.

~~~
ProblemFactory
Is that really the case? From what I've understood from the news, accounts in
banks that haven't lost their customers' money are safe and operating as
usual.

Depositors are only taking a loss at bankrupt banks where their money was
wiped out by bad investments, and now EU and Cypriot taxpayers are refunding a
portion of it.

------
maked00
As we speak, laws are/were passed here in the US that will make it ok for
predatory banks to confisticate your savings and give you some worthless stock
in exchange.

It's open season on savers now.

------
claudius
> Cyprus is a 78% services-based economy.

Well, fix that.

~~~
return0
Why? Services (incl. tourism) are great; it's a tiny country in a region which
actually needs financial services (arab countries, russia). Is the EU
unwilling to save their banks? fine, let them bail themselves (which is what
they are doing). Why the fuck do they have to order a whole nation what to do?
What's next? ask luxembourg to start herding cows?

~~~
claudius
> Services (incl. tourism) are great

Until they fail, cause a world-wide recession and main street has to bail out
wall street.

> Is the EU unwilling to save their banks?

Ideally, it indeed would be unwilling to save bloated up banks unrelated to
the local financial needs.

> fine, let them bail themselves (which is what they are doing). Why the fuck
> do they have to order a whole nation what to do?

They tried to get money elsewhere, but even Russia didn’t feel like helping
out. Now they want European money and I would assume it only to be fair to
require that in order to get that money, they have to ensure they won’t need
it again in the near future, i.e. scale down their bloated banks which
apparently threaten the actual economy on the island.

> What's next? ask luxembourg to start herding cows?

Basically, yes[0]. Though nobody minds banking as long as you don’t request
other people’s money to continue banking and last time I checked, Luxembourg
didn’t need a bailout.

[0] It might be pointing out that you can run a nice economy not relying on
banking even when not herding cows.

~~~
return0
seriously, you expect a nation of < 1mil people to have a diversified economy?
Have an example?

~~~
claudius
Saarland (1.013 mil, 7.6% unemployment rate), from Wikipedia:

> automobile industry, steel industry, coal mining, ceramic industry and
> computer science and information systems industry.

Bremen (547000, 10.2% unemployment rate), from Wikipedia (paraphrased)

> Airbus, EADS Astrium, OHB-Systems, Mercedes-Benz, Beck & Co […]
> Anheuser–Busch InBev (Beck's Brewery), Kellogg's, Kraft Foods (Kraft, Jacobs
> Coffee, Milka Chocolate, Milram, Miràcoli), Frosta (frosted food), Nordsee
> (chain of sea fast food), Melitta Kaffee, Eduscho Kaffee, Azul Kaffee,
> Vitakraft (pet food for birds and fishes), Atlanta AG (Chiquita banana),
> chocolatier Hachez (fine chocolate and confiserie), feodora chocolatier

Hamburg (1.8 mil, 13.9% unemployment rate), from Wikipedia (paraphrased)

> Berenberg Bank, M.M.Warburg & CO and HSH Nordbank […] Port of Hamburg […]
> Blohm + Voss […] civil aerospace industry. Airbus […] E-Commerce […] Media
> businesses employ over 70,000 people

~~~
return0
Come on, those are german cities/areas. These cities have harvested the best
talent from the total german population (80 million) to come up so successful.
Cyprus is 1/80th of that. And Germany has a huge science and engineering
tradition, it didn't exactly form ex nihilo.

I'm not saying it's not desirable to be well diversified, it's just
unrealistic to do it overnight (or over-decade for that matter)

~~~
claudius
Actually, Hamburg and Bremen are likely to be the least successful states in
Germany with the larger southern states (Bavaria, e.g.) usually taking the
lead when it comes to economic strength and wealth. And while there might be
some sort of engineering tradition, that doesn’t mean said tradition is a
prerequisite to form a diverse economy.

The real lesson here is probably that, while size is not a sufficient
prerequisite for economic stability, it might well be a necessary one.

------
vxNsr
Wow, great run down, kinda makes you wanna keep your money in a mattress
though, especially if you're from some small country like that...

------
acqq
The best analysis of what was really going on I've read up to now.

~~~
anigbrowl
The Economist has pretty good analysis too, but then they would, wouldn't
they? This is excellent, and refreshingly grounded.

------
OGinparadise
_(c) The banks are almost 100% deposit funded (something that regulators
across the world have been encouraging because deposits tend to be sticky if
you take care of them)._

Uh... if you pay 1% or less a year in interest as they in USA. Many Cyprus
banks were paying north of 5% a year so they'd have to make maybe 7%-10% a
year to break even after expenses and taxes.

 _8\. You never, ever, ever, hit insured depositors._

Great point, expect that no one is touching them. Deposits over EUR 100K are
being hit /frozen, those up to EUR 100K are not touched, which just happened
to be the insured amount. The banks could have bought private insurance and
threatened to take down the next AIG with them (Now that's leverage), but they
apparently didn't.

The real fault lies with the banks and Cyprus gov (or the people, indirectly).
They could have cracked down on these shady deals and limited the bank's
exposures to Greek debt. They didn't and Germans /N Europeans don't want to
ask their taxpayers to bail another country. Someone has to pay, it clearly
can't be the taxpayers given the ratio to GDP so it's the depositors and bank
owners. To summarize:

There is no money.

No one wants to give them more money.

Banks are broke and as usual you can lose all the money that is not insured.
It says so, or it should say so on the tiny print.

~~~
yannis
You are forgetting where and why the financial crisis started. Although in the
US the financial institutions were saved by printing money in the rest of
Europe the ECB controls the presses.

~~~
arethuza
"You are forgetting where and why the financial crisis started."

I don't think it is accurate to say that the 2008 financial crisis had a
single cause. If you think it was the boom in sub-prime mortgage lending in
the US and the resulting popularity of CDOs and CDSs how did that cause the
Irish problem (insane property speculation), Iceland (asset speculation in
other countries used borrowed cash), Greece (fiscal irresponsility) etc.

~~~
claudius
Greece had very little to do with the ‘global’ sub-prime bubble, it was merely
the following recession that exposed the fiscal irresponsibility, originally
resulting from low interest rates due to Euro membership. When people realised
that Euro membership does not imply northern European standards, Greek
interest rates soared and since Greece couldn’t print money as in the good old
days, there was no way to fulfil these interest rates.

