Skip to comments.EU finance ministers approve Cyprus bailout deal, funded by bank assets seizure
Posted on 03/25/2013 9:06:05 AM PDT by redreno
magine waking up to find out that as much as 40 percent of the money you thought was safely deposited in the bank was seized, without your permission, to bail out a near-bankrupt government.
That's just what thousands of large depositors in Cyprus woke up to Monday morning after European Union officials accepted a last-minute deal offered by the island's lawmakers to secure a $13 billion bailout to avert imminent financial meltdown.
(Excerpt) Read more at foxnews.com ...
EU = crooks.
I'm pretty sure it was seized to bail out the bankrupt banks.
So... remind me again, why do we put money in banks?
Once this happens globally, the global economy will collapse. Depositors will pull their money and credit will dry up. This will be a repeat of 29 but violent.
Methinks that this is the first crack in the dam. I truly believe that we will trace the impending economic collapse to this moment in history.
Why would it happen globally?
Why did the bondholders lose nothing?
Seems as though Wall Street initially liked this a little then maybe reality began to creep into their minds as it’s now down.
Isn’t that what bankruptcy courts are for?
Because most of the bondholders are German banks.
It appears they did.
Oh, it’s okay then. :)
I’m not familiar with bankruptcy courts in Cyprus.
It won’t let me read the article. I believe that it refers to the smaller of the two banks. I believe the main bank’s bondholders lost nothing. Correct me if I’m wrong.
You wouldn't want to hurt Angela's shot at re-election, would you?
Of course not. That would be blasphemy.
I don’t understand why rich people in every EU country wouldn’t pull their money out now though.
Because there are very few countries left asking for a bailout, especially after this. And this is probably exactly why the EU did this...to indicate that free bailouts were a thing of the past.
My understanding is that the deposits are much, much more than the bond issues.
I thought Spain and Italy were still in deep S**t?
Okay, thank you.
Please ping me if you find out anything new on this.
Pootie-Poot Putin just lost 40 percent of his bank account. Scalping the KGB like that is going to cause some major Bolshevik Blowback!
Bondholders are taking a haircut also, assuming this agreement passes.
The European Union - the New Soviet Union?
The two banks in the agreement, Bank of Cyprus and Cyprus Popular, are largely government-owned.
Thank you, Toddsterpatriot also informed of that.
I was under the impression there was to be no vote. Has that changed as well?
That seems to be the understanding, but it’s not entirely clear yet. The President has agreed, but the minor sticking point is whether he has the authority to make the agreement w/o Parliament’s consent.
I can foresee the Romanians asking for a bailout. Arguably, it’s the poorest country in Europe.
It’s practically a real-life Elbonia, for all you Dilbert fans out there.
They will think twice about that now.
Bailouts will be slowing appreciably.
Very odd situation. Last week the deal was better, but Parliament voted it down. Now the deal is worse and Parliament might not get a vote?
Better - maybe. Better for whom is what matters tho’.
I, for one, am in favor of the rule of law. Last week’s agreement would have thrown that out the window by imposing cuts on depositors who had their accounts 100% covered by deposit insurance (those with less than 100,000 euros on deposit.) Those were also mostly actual Cyprus citizens, who were a bit peeved.
Yesterday’s agreement follows the contractual terms those depositors have, and only affects those with accounts over 100,000E, i.e., the amount that is not insured against bank failure. Plus, all bondholders take a hit, with junior taking more of a hit than senior. This is how it should be.
Mind you, it’s no fun for anyone involved, but it follows established law and is much more orderly than the mess Merkel and her finance lap-dog threw together last week. Except for the possibility that Parliament might say “You can’t do that!” But I think they’ll punt.
I guess I hadn’t thought that through. This does sound like a fairer deal. It also angers less people. Now I’m interested to see where it goes from here...what, if any, will the repercussions be?
Repercussions... who knows? But if I had money in a Portuguese bank, I’d probably be taking it out.
One thing I can almost guarantee is a bank run on the banks of the next country to approach the ECB for a bailout. That country best close its banks first.
Wouldn’t you take your money out now if you were rich? Who knows what the next threshold will be. 100K? 75K? 50K?
But to answer your question - probably. Just, not being rich, I have no idea where I'd then put it. I'm guessing the mattress isn't big enough.
I would have no idea either. College students don’t have too much money. I have plenty of eggs and Ramen noodles though.
Shh. You are not supposed to know that. And you are not supposed to know that Cyprus banks were busted when the Euro socialist scumbags bailed out Greece. Cyprus tried to help their Greek compatriots out by using the Russian mob money deposits to buy Greek bonds. Then Greece was bailed out by giving the bond holders a > 70 % Devils Haircut. You are not supposed to know any of that.
This excerpt from the following linked article explains how it all went down.
GORGING ON GREEK DEBT
Bulging deposit books not only fuelled lending expansion at home, it also drove Cypriot banks overseas. Greece, where many Cypriots claim heritage, was the destination of choice for the island's two biggest lenders, Cyprus Popular Bank -- formerly called Laiki -- and Bank of Cyprus.
The extent of this exposure was laid bare in the European Banking Authority's 2011 "stress tests", which were published that July, as the European Union and International Monetary Fund (IMF) were battling to come up with a fresh rescue deal to save Greece.
The EBA figures showed 30 percent (11 billion euros) of Bank of Cyprus' total loan book was wrapped up in Greece by December 2010, as was 43 percent (or 19 billion euros) of Laiki's, which was then known as Marfin Popular.
More striking was the bank's exposure to Greek debt.
At the time, Bank of Cyprus's 2.4 billion euros of Greek debt was enough to wipe out 75 percent of the bank's total capital, while Laiki's 3.4 billion euros exposure outstripped its 3.2 billion euros of total capital.
The close ties between Greece and Cyprus meant the Cypriot banks did not listen to warnings about this exposure.
The banks sold down some of their Greek holdings, but then got back into the market as yields rose. "When the Germans were selling, they were buying," said Apostolides, referring to the German banks' 2011 dumping of Greek debt.
Simona Mihai, assistant professor at Cyprus European University's banking and finance department, said the banks' exposure stemmed from a desire to help their nearest neighbors, and a belief that Greece could recover.
"People are thinking in hope," she said. "They do not see it from an analytical perspective."
A former executive of one of the banks, who did not sit on the management team and asked not to be named, said the exposure and the banks' overall expansion stemmed from greed. "To help deliver profits, they lent and lent and lent and invested in Greek bonds," the person said.
Staff, who mostly got small bonuses and annual pay rises of around three or four percent, were unhappy about the mounting exposure to Greece but powerless to stop it, the source added.
Whatever the motive, the Greek exposure defied country risk standards typically applied by central banks; a clause in Cyprus' EU/IMF December memorandum of understanding explicitly requires the banks to have more diversified portfolios of higher credit quality.
"That (the way the exposures were allowed to build) was a problem of supervision," said Papageorgiou, who was a member of the six-man board of directors of the central bank at the time.
The board, which met less than once a month, never knew how much Greek debt the banks were holding, both Papageorgiou and another person with direct knowledge of the situation told Reuters.
Papageorgiou and two other directors voiced concerns about the toothless nature of the central bank board, leading to public and bitter clashes with Orphanides, who stringently denied any lapses and said he had encouraged the banks to offload their Greek positions.
"It was very sad, he accused me of undermining him," said Papageorgiou, who left the central bank board when he was elected to parliament in 2011 for the then-ruling AKEL party, which lost power to the right wing Democratic Rally party in February 24 elections.
Orphanides also clashed with leaders of the AKEL government. Apostolides says the central bank governor had told Cyprus' president that the banks could survive a maximum 25 percent loss on their Greek bonds.
The "haircut" ultimately agreed by European leaders, including Cyprus' president Demetris Christofias, was more than 70 percent, heaping losses of 4.5 billion euros on the banks.
Well, yes, but the amount seized isn’t reflective of the full bailout issue. It was seized because the Germans were not going to see German money go towards propping up the banks to insure that Russian depositors came away whole.
In effect, the Germans said “The Russians must suffer. Period, no negotiation.”
Also note that the amount of loss the Cyprus banks experienced due to the Greek Bailout Bond Haircut (~4.5 billion see above article) is fairly close to the amount the EU demanded from the Cyprus deposits. Coincidence ?
Sigh. No money was seized. No governments were bailed out. The Cypriot banks simply went bankrupt because they made bad investments with the money their depositors loaned them, and now that money is simply gone forever. Pretty bard to repay the depositors when you blew all the money they loaned you.
What people dont realize is that when they deposit money in a bank, its not for the purpose of the bank to hold on to THEIR money for THEIR convenience, but what they are really doing is LOANING their money to the bank! They are actually a lender and not a depositor. And once they loan the money to the bank, it’s no longer their money, it’s the bank’s money! This is all spelled out in the account agreement one signs with a bank, and by loaning your money to the bank you’re giving the bank permission to use the money you loaned them pretty much as they see fit, and there is no real guarantee that youll ever get back any of the money you loaned the bank!
Prior to the illusion of FDIC insured deposits (loans) and its equivalent in other countries, banks used to go bankrupt all the time, completely wiping out ALL investors deposits. That was a big part of the death spiral of the Great Depression and why it was necessary for FDIC insurance to be invented, or otherwise no sane person would ever loan their money to a bank again.
And like in the EU, the FDIC actually only insures accounts up to a certain limit, and for anything over that there simply are no guarantees youll ever get the money you loaned the bank back. Period.
Now when banks DO go bankrupt, there are SUPPOSED to be lawful ways in which the remaining assets are distributed to the banks debt holders in an orderly, lawful fashion, the depositors being simply one class of debt holder. That process has worked pretty well in the U.S. recently, but given the propensity of the Obammunists to ignore the law and just do what they feel like, all bets are off for the future.
And in places like Cyprus, it sounds like they didnt have ready-made procedures for bank bankruptcies anyway, so they had to make some up quickly. One could label such ex-post facto, ad hoc measures theft, but the net result to those foolish enough to make giant loans (deposits) to these crappy banks would probably be pretty much the same if Cyprus had a U.S.-like process in place prior to bank bankruptcy anyway, namely the depositors money has simply completely evaporated because the banks made really, really bad investments with their depositors loaned money, and theyd wind up with nothing anyway.
And most likely nothing criminal has been involved here either, except maybe criminal stupidity or maybe criminal greed by both the depositors and the banks themselves. Because the depositors were chasing unrealistic returns promised by the bank, and which they the bank delivered by investing their depositors money in Greek bonds. Greek bonds were paying extremely high interest rates, but the high interest rates were being paid because it was likely the bonds would fail, which is exactly what happened.
The takeaway lesson here, though, is simply dont loan your money to a bank. Just keep enough money in your bank account to pay next months bills. Even better switch as much of your transactions as possible to cash. Its actually easier to do than most people think. For example, I live in a small town and pay all of my insurance and property taxes by simply walking in and plunking down the cash. I could do the same thing for my utilities if I wanted. And I never use plastic except when I buy stuff on the Internet.
Yes, money was seized - and it’s being seized by denying people access to their money. It isn’t just that there is a haircut of X% on accounts above the deposit limit - people cannot even access their money. Businesses are failing as their suppliers demand cash - because checks cannot be negotiated on accounts with funds in them.
Now, as to “who built the expectation that depositors would be protected?” Well, the various nation/states who have backstopped banks over the years, and the IMF. Since 1970, there have been 147 banking crises, and in none of those cases did anyone go after the deposits of all depositors, as was being proposed last week. This weeks’ policy of freezing deposits and accounts and giving all those accounts over the deposit limit of E100,000 is still rather harsh in comparison to past bank failure resolution practices.
It’s common practice (in the US and Europe) that the investors in a bank should lose their investment(s) before depositors are affected. In the case of the Cypriot banks being taken under, the problem was twofold:
1. The size of the deposits dwarfed the size of the bonds outstanding - so even seizing all the bonds written by the banks wasn’t going to close the hole, and
2. In the case of Europe, due to the incestuous nature in which bank debt is held by other banks, coupled with the absurd leverage gearing with which European banks operate, the Euro-zone policy makers have been loathe to come down convincingly on saying “senior bondholders lose their money before depositors lose a cent.” That’s what would happen in the US.
In short, the bondholders should have been wiped out completely before one Euro was touched in deposit accounts, but that didn’t happen. The ECB and Euro-zone eggheads will rue the day they allowed this to happen.
When banks fail to render demand deposit liabilities upon demand, it results in runs on banks. When people can’t (and don’t) trust banks, then they start stuffing money into hiding outside the banking system (which is, of course, the prudent thing to do in these situations). Once this happens, the velocity of money slows way, way down, as the payment mechanisms by which money changes hand are all mostly ignored as we devolve back to cash, as you suggest. This brings economic growth way down to a mere subsistence level, and perhaps below that. Now, I’m fine with this mode of exchange and this type of existence.
Most people are not. Moreover, many of the people who cannot survive in such an economic situation are many people who have graduated from august institutions of learning with high-and-mighty sounding degrees in perfectly useless bullcrap... but these people have the ear of policymakers because they’re especially good at writing and emoting all manner of nonsense that gives policymakers a “cause for action.” As a result, we end up going backwards in liberty and private properly pretty quickly, with history as our guide.
The ultimate source of this particular problem goes back to Cyprus being a backwater economic dung heap... until Boris and Natasha showed up with a whole lotta money to stash somewhere. Where did Boris get all this cash? Well, that’s the other thing: The Cypriot banks didn’t ask too many questions. Due to economic nationalism, the Cypriot banks took this bundle of too-easily-gotten loot and piled it into Greek paper exactly when it was time to be selling Greek paper, not buying it.
Now, this would have been acceptable and have probably worked out the way many island nations with loose banking laws works out if... Cyprus had not been part of the Euro-pact. Once Cyprus was included in the Euro, there was a yoke around their neck, and they were going to be held to German accounting standards sooner or later. And sooner or later has now come due.
The biggest problem in the Euro zone is that it is an attempt to impose Protestant work ethic and economic thrift on nations who are a) Catholic, and b) therefore given to sloth, economic/fiscal corruption, and economic frippery. No monetary or trade union is ever going to make the Greeks, Italians, Spaniards or French work, save and bank like Germans, Dutch, Danes, Swedes, Norwegians or Finns. We might as well try to cast a spell to make a duckbilled platypus fly.
“Yes, money was seized - and its being seized by denying people access to their money. It isnt just that there is a haircut of X% on accounts above the deposit limit - people cannot even access their money. Businesses are failing as their suppliers demand cash - because checks cannot be negotiated on accounts with funds in them.”
Actually, this exact type of seizure happens when a U.S. bank fails. We’ve had two fail recently in my neck of the woods, and ALL were frozen out of their accounts while the failed banks were seized and straightened out by federal regulators. In some cases, insured accounts could be transferred to other banks. That took about two weeks. In other cases, insured CDs were paid out, but that took much longer than two weeks. And then for the uninsured accounts, those simply went poof, or if they were lucky, pennies were paid back on the dollar.
EU = ROCKS!!!
Eventually someone must tell the truth about FIAT currency. The sooner the better.
Rocks as in Scylla, certainly.