EU finance ministers approve Cyprus bailout deal, funded by bank assets seizure

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 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.”

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.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.