If these worries become really serious, . . . [s]mall savers will take their money out of banks and resort to household safes and a shotgun.
Martin Hutchinson on the attempted EU raid on deposits in Cyprus banks
The deposit confiscation scheme has long been in the making. US depositors could be next . . . .
On Tuesday, March 19, the national legislature of Cyprus overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout. Reuters called it a stunning setback for the 17-nation currency bloc, but it was a stunning victory for democracy. As Reuters quoted one 65-year-old pensioner, The voice of the people was heard.
The EU had warned that it would withhold 10 billion in bailout loans, and the European Central Bank (ECB) had threatened to end emergency lending assistance for distressed Cypriot banks, unless depositors including small savers shared the cost of the rescue. In the deal rejected by the legislature, a one-time levy on depositors would be required in return for a bailout of the banking system. Deposits below 100,000 would be subject to a 6.75% levy or haircut, while those over 100,000 would have been subject to a 9.99% fine.
The move was bold, but the battle isnt over yet. The EU has now given Cyprus until Monday to raise the billions of euros it needs to clinch an international bailout or face the threatened collapse of its financial system and likely exit from the euro currency zone.
The Long-planned Confiscation Scheme
The deal pushed by the troika the EU, ECB and IMF has been characterized as a one-off event devised as an emergency measure in this one extreme case. But the confiscation plan has long been in the making, and it isnt limited to Cyprus.
In a September 2011 article in the Bulletin of the Reserve Bank of New Zealand titled A Primer on Open Bank Resolution, Kevin Hoskin and Ian Woolford discussed a very similar haircut plan that had been in the works, they said, since the 1997 Asian financial crisis. The article referenced recommendations made in 2010 and 2011 by the Basel Committee of the Bank for International Settlements, the central bankers central bank in Switzerland.
The purpose of the plan, called the Open Bank Resolution (OBR) , is to deal with bank failures when they have become so expensive that governments are no longer willing to bail out the lenders. The authors wrote that the primary objectives of OBR are to:
- ensure that, as far as possible, any losses are ultimately borne by the banks shareholders and creditors . . . .
The spectrum of creditors is defined to include depositors:
At one end of the spectrum, there are large international financial institutions that invest in debt issued by the bank (commonly referred to as wholesale funding). At the other end of the spectrum, are customers with cheque and savings accounts and term deposits.
Most people would be surprised to learn that they are legally considered creditors of their banks rather than customers who have trusted the bank with their money for safekeeping, but that seems to be the case. According to Wikipedia:
(Excerpt) Read more at webofdebt.wordpress.com ...