Cyprus: European Economic Heart Attack Ahead?
Some call what just happened to deposit holders in Cyprus banks ‘daylight robbery’, others suggest the European economy is now likely to suffer the equivalent of a heart attack. An Irish analyst labelled it an EU “smash and grab raid”. Initial Internet reactions appear overwhelmingly negative as seen below.
The Zero Hedge website warns of much much worse to come.
Its headline says starkly For Everyone Shocked By What Just Happened… And Why This Is Just The Beginning: “Today, lots of people woke up in shock and horror to what happened in Cyprus: a forced capital reallocation mandated by political elites under the guise of an “equity investment” in insolvent banks, which is really code for a “coercive, mandatory wealth tax.” If less concerned about political correctness, one could say that what just happened was daylight robbery from savers to banks and the status quo. These same people may be even more shocked to learn that today’s Cypriot “resolution” is merely the first of many such coercive interventions into personal wealth, first in Europe, and then everywhere else.”
Zero Hedge refers readers to its earlier September 2011 report where it recorded the views of BCG-Boston Consulting Group analysts predicting that what has now occurred was a very possible scenario.
Read the full BCG report here via ZH:
Below is just one of the hundreds of reactions still rolling in on Twitter under the hash-tag #cyprus for readers interested in following developments. The usefulness of the Twitter site is that the tweets frequently include links to stories and reports from around the globe with additional insights into the development.
FOR A FULL REPORT see this French-News-Online blog: Ask Cypriots: Are Banks Criminal Enterprises?
— hotairmail (@hotairmail) March 17, 2013
This is the EU/IMF Statement in part: “The Eurogroup considers that in principle financial assistance to Cyprus is warranted to safeguard financial stability in Cyprus and the euro area as a whole,” said Jeroen Dijsselbloem, president of the Eurogroup meeting of the 17-nation eurozone’s finance ministers, after almost 10 hours of negotiations. While the bail-out for the east Mediterranean island nation is many times smaller than Greece’s or Ireland’s, it was still considered crucial to the eurozone’s future because a default even by a small country could roil financial markets and undermine investor confidence in other nations. A default of Cyprus and banks would have direct stability implications for Greece and indirect consequences for the wider euro area,” said Joerg Asmussen, a member of European Central Bank’s executive board. This could lead to renewed financial instability, requiring further mitigating policies and to a further loss of jobs and growth in the eurozone.”
Interviewed below by the RT -Russia Today network (Russian depositors in Cyprus are scheduled to take the biggest hit) global markets analyst Patrick Young said the EU’s “proposition to encroach on personal as well as foreign bank deposits deeply endangers the banking system”.
According to Tim Worstall, this is the guarantee offered to deposit holders in Cyprus banks, protecting them against any bank failures: The Cypriot government deposit insurance scheme: “The maximum level of compensation, per depositor, per bank, is €100.000. .. Note that last number. Under the system until yesterday all depositors in Cypriot banks were insured up to the value of €100,000 with any one bank. Today that solemn and governmental promise has been shown to be false. And not even the European Union nor the European Central Bank are going to make them stick to it. Indeed, very much the other way around. The EU and ECB are insisting that the Cyprus authorities breach this deposit insurance provision. – Tim Worstall
In France and indeed across all eurozone banks, the same level of deposit guarantee applies. Here is the relevant French government website: “Maximum compensation limit and special rules for its calculation (Regulation CRBF no. 99-05 ). The maximum compensation limit is € 100,000 per depositor and per financial establishment.”
Marios Skandalis, vice president of the Cyprus Institute of Certified Public Accountants, added: “There is a very high risk that this could be the end of Cyprus as a strong and reliable financial centre.The whole banking system is based on trust. If the trust is lost, the whole system is going to collapse,” he said.
Felix Salmon writes: “Don’t for a minute believe that this decision is part of some deeply-considered long-term strategy which was worked out in constructive consultations between the EU, the IMF, and the new Cypriot government. Instead, it’s a last-resort desperation move, born of an unholy combination of procrastination, blackmail, and sleep-deprived gamesmanship… If bank deposits can be seized in Cyprus, they can be seized in other EU countries as well… The Eurozone has always had a democratic deficit: monetary union was imposed by the elite on unthankful and unwilling citizens. Now the citizens are revolting: just look at Beppe Grillo. Across the continent, they’ve lost their democratic right to determine their own fate at the ballot box, and instead they’re being instructed what to do by Germans. Now, in Cyprus, they’re simply and directly losing their money… This decision is important not only because of the precedent it sets with regard to bank depositors, but also because of the way in which it points up just how powerless all the Mediterranean countries (plus Ireland) have become. More than ever before, it’s Germany’s Europe. That’s bad for Cyprus — and it’s not even particularly good for Germany”.- Felix Salmon, Reuters.
Eamonn Fingleton is highly critical:”Probably the single most irresponsible decision in banking supervision in the advanced world since the 1930s…This raises questions about deposit insurance throughout the EU and invites runs on banks not only in the most “financially-challenged” nations such as Greece and Spain but even in Italy and France…It is time for plain words. The ultimate source of Europe’s financial malaise is Germany. The German financial establishment was complicit from the beginning in the inflating of some of the bubbles in the afflicted nations. Now it is not only disowning its role in causation but, by forcing austerity on national governments and refusing to allow more than token inflation of the euro, it is turning the knife in those nations’ wounds. – Eamonn Fingleton , a former editor for Forbes and the Financial Times.
A commenter on a Cyprus newspaper site “Andrew Tolley: Financial repression at its finest. I am very sorry for all Cypriots. To all others who think the governments and banks act in your interest get your money out of the banking system now. Do you think they really have your money with the fractional reserve system? This will be part of the solution to the global banking problem and the solution will be theft from anyone who is silly enough to leave their money to these predators and the global banking cartels”.
“A “one-off” often isn’t. Calling something after “stability” isn’t very stable. Saying that something is not a precedent usually makes it one”.- Joseph Cotterill on FTalphaville.
A commenter on Ekathimerini.com notes: “Amateur: Forget Cyprus. The logical consequence may be a run on Spanish, Italian and French banks.The Cypriot cabinet has declared Tuesday a bank holiday, for fear of capital flight, and this may even be stretched to Wednesday, as depositors are certain to withdraw huge sums from the Cypriot banks after the haircut imposed.
Lars Seier Christensen CEO of SaxoBank is scathing: “Shocking! It is difficult to describe the weekend bailout package to Cyprus in any other way. The confiscation of 6.75 percent of small depositors’ money and 9.9 percent of big depositors’ funds is without precedence that I can think of in a supposedly civilised and democratic society. But maybe the European Union (EU) is no longer a civilised democracy? I heard rumours about this when I visited Limassol last week, but dismissed them as completely outlandish. And yet, here we are. The consequences are unpredictable, but we are clearly looking at a significant paradigm shift. This is a breach of fundamental property rights, dictated to a small country by foreign powers and it must make every bank depositor in Europe shiver. Although the representatives at the bailout press conference tried to present this as a one-off, they were not willing to rule out similar measures elsewhere – not that it would have mattered much as the trust is gone anyway. It is now difficult to expect any kind of limitation to what measures the Troika and EU might take when the crisis really starts to bite… if you can do this once, you can do it again. if you can confiscate 10 percent of a bank customer’s money, you can confiscate 25, 50 or even 100 percent. I now believe we will see worse as the panic increases, with politicians desperately trying to keep the EUR alive… This is a major, MAJOR game changer and the fallout will be with us for a long time to come. I believe it could be the beginning of the end for the Eurozone as this is an unbelievable blow to the already challenged trust that might be left among investors. Talk about a possible own goal.-Lars Seier Christensen, co-founder & CEO, Saxo Bank A/S.
Former banker Frances Coppola warns of the precedent set: “…it is dangerous, not just for Cyprus but for other countries too. For the fact is that deposit insurance everywhere in the EU has now been undermined. The precedent has been set for insured depositors to suffer losses in order to protect Russian oligarchs and reckless banks. If the Eurogroup can impose this on Cyprus, it can do so elsewhere too. Yes, Olli Rehn says they have no current plans to do so, and insists that the Cyprus bailout is unique. But haven’t we heard this before? Wasn’t the Greek bailout “unique”, and the Irish bailout, and the Portuguese bailout, and the Spanish bailout? It is only “unique” until the next domino falls. I would not be surprised now to see bank runs across the entire Eurozone periphery, and perhaps in other EU countries too. Frances Coppola– a former banker…who now writes about them.
French economist Paul Jorion says his concerns are coming true: “A warning has now been sent to all bank account holders in the euro-zone: ‘We told you that the first 100,000 euros deposited were protected against any possible loss, well as it happens we were wrong. What we meant to say was the first 93 250 was safe.” Furthermore when you wake up one morning to find that all the euros in your bank account are only worth 93.25 cents, you should not be surprised: your wealth in a bank, is essentially an IOU and when all goes well, an IOU, is what is written on it, but when things go bad, the IOU is worth somewhere between the figure stated and zero. And that is exactly what could happen to your money when you lend it to a bank. In exchange for your deposit the bank gives you a statement, which is nothing more than an IOU. The day you want your money back you might find the bank saying: This is what you lent us and this (smaller amount) is all that we can repay, because, alas, those who had promised to reimburse us for lending your money did not”.
Mats Persson is blunt:”Seventeen Eurozone finance ministers locked themselves in a room and decided that every Cypriot depositor – whether super-wealthy or dirt-poor – will, out of the blue, see part of their hard-earned money seized. Remember, Cypriot President Nicos Anastasiades explicitly promised in his election campaign, only a few weeks ago, that depositors were safe. The Cypriot electorate now faces losses on deposits as well as years of austerity (under the bailout loan). What’s worse, deposits under €100,000 are supposed to be protected by EU law, not raided by EU leaders. And Cypriot banks have frozen close to €5.8bn, i.e. imposed capital controls which is meant to be illegal under EU single market rules. This is political dynamite”.- Mats Persson Director of Open Europe.
“Throughout the Eurozone over the past five years, deposit guarantees have risen, in a so far pretty successful attempt to prevent bank runs. Overnight, that model has now been thrown out with the bathwater. And all of Europe should be wary of what happened. A precedent has been set, and what’s good for the goose fits the gander….What’s to say that what can be done to depositors in Cyprus’ banks, cannot just as easily be repeated for Greek, Italian, Spanish ones? If the EU wasn’t yet scared enough of Beppe Grillo and his still surging popularity, now would be a good time to start being afraid. While everyone’s focus is on the Russian mob, nobody (just read the press reports today) talks about the law-abiding Cypriots who see their hard earned savings wealth forcibly taken from them. Nobody but the likes of Grillo, that is. Who said earlier this week that (northern) Europe would drop Italy like a stone once German, French and Dutch banks have shed their risky Italian assets…. Brussels has laid out its true intentions on the table. Like a big red flag. In Europe, the much touted government deposit insurance itself has now become a risky asset.” The Automatic Earth.com.
Neil Irwini in the Washington Post:”European officials have spent the past six years moving heaven and earth to ensure that no depositors with the continent’s banks suffer a loss despite the financial strains the banks have been under…. They have feared that if depositors in any country were forced to take losses, it would spark a destructive cascade of withdrawals across Europe…The European Central Bank will now be on high alert, monitoring activity in Greece, Spain and beyond for evidence that the Cyprus precedent will result in new runs on those nations’ banks. Expect a flood of central bank liquidity into those nations if there is any hint that depositors across Europe seem to be thinking that Cyprus is the new normal and that their seemingly safe bank deposits could be reduced 10 percent without warning.The best the rest of the world can hope for is that Cyprus’s case is sufficiently unique that it won’t spark panic in Athens and Madrid (or in Lisbon, Dublin and Rome)”- Neil Irwin-Washington Post.
The BBC has an appropriate song for the event – Horrible Histories – Dick Turpin Highwayman Song:
- Shock in Cyprus over bailout levy (bbc.co.uk)
- Why today’s Cyprus bailout could be the start of the next financial crisis (washingtonpost.com)
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- Signs of (US) Justice against Misery Makers
- A Coup to Cure EU’s Economic Gangrene?
- A Guest Blog: Is The EU Cracking-up?
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- Global Noise says Don’t owe, Won’t pay