Perdido 03

Perdido 03

Sunday, March 17, 2013

In The Cyprus Screw Job On Bank Depositors, The Hedge Fundies Win Again (UPDATED)

Cyprus is delaying a parliamentary vote on the bank bailout that is slated to "tax" depositors under $130,000 at 6.75% and those over at 9.9%:

Cyprus’s President Nicos Anastasiades will seek approval to impose losses on the island- nation’s depositors tomorrow, a day later than planned as he seeks more time to convince lawmakers to back him.

Anastasiades, less than a month in the job, will meet with the country’s lawmakers tomorrow, before the Parliament session on the legislation begins at 4 p.m., the Press and Information Office said in a statement on its website. The vote on his decision to accept a rescue that includes the euro area’s first move to penalize depositors was initially slated for today.

With his Disy party holding 20 seats in the 56-seat legislature, he needs at least nine more votes to secure approval and avoid the financial collapse of the region’s third- smallest economy. If he doesn’t get backing for the plan, the banks may stay shut starting March 19, state-run Cyprus Broadcasting Corp. said. Tomorrow is a bank holiday in Cyprus.

“If tomorrow Cyprus’s Parliament rejects the bill, Cyprus opens the road to chaos,” said Afxentis Afxentiou, who was governor of the Central Bank of Cyprus from 1982 until 2002, said on CYBC. If the bill is rejected, “Cyprus will turn into Libya. Even with the pain, we need to follow a normal course, with hope we’ll see better days.”

Whew - hand over your 6.75% or 9.9% "tax" to the ECB and the IMF or watch your country turn into Libya.

Swell way to sell the looting of depositor accounts.

The Guardian has a pretty good Q&A on the whole thing you can read here.

And The Economist offers three reasons why this is a horrible deal here:

Whatever the rationale, it is a mistake for three reasons. The first error is to reawaken contagion risk elsewhere in the euro zone. Depositors have come through the financial crisis largely unscathed. Now they have been bailed in, some of them in breach of an explicit promise that they can be sure of getting their money back even if a bank goes belly-up.

Euro-zone leaders will spin the deal as reflecting the unique circumstances surrounding Cyprus, just as they did the Greek debt restructuring last year. But if you were a depositor in a peripheral country that looked like it needed more money from the euro zone, what would your calculation be? That you would never be treated like the people in Cyprus, or that a precedent had been set which reflected the consistent demands of creditor countries for burden-sharing? The chances of big, destabilising movements of money (into cash, if not into other banks) have just shot up.

The second error is one of equity. There is an argument to be made over the principles of bailing in uninsured depositors. And there is a case for hitting everyone in Cypriot banks before any taxpayer in another country. But there is no moral imperative for whacking Cypriot widows and leaving senior bank bondholders untouched, as appears to be the case here; or not imposing any losses on sovereign-debt investors in Cyprus; or protecting depositors in the Greek operations of Cypriot banks, as has also happened. The euro zone may cloak this bail-out in the language of fairness but it is a highly selective treatment. Indeed, the euro zone’s insistence that this is a one-off makes that perfectly plain: with enough foreigners at risk and a small enough country to push around, you get an outcome like Cyprus. (That is one reason why people are now wondering about the implications of this deal for little Latvia, also home to lots of Russian money and itself due to join the euro zone in 2014.)

The final error is strategic. The Cypriot deal has no coherence in the larger context. The euro crisis has been in abeyance for a few months, thanks largely to the readiness of the European Central Bank to intervene to help struggling countries. The ECB’s price for helping countries is to insist they go into a bail-out programme. The political price of going into a programme has just gone up, so the ECB’s safety net looks a little thinner.

Many hedge funds will make out like bandits if Cyprus doesn't default.

They have been betting heavily on Cyprus debt and come out winners in this "bail-in" deal.

Make no mistake - the precedent is now set.

When push comes to shove, they will come for your savings account, regardless of the FDIC insurance.

Yeah, yeah - I know.

Cyprus is small and unique, the United States is not the Eurozone and the Fed is not the ECB, blah, blah, blah.

If you're really paying attention, what you saw this weekend was the looting of the little people so that the big guys can get 100 cents for every $1 they have in the system.

Not much different than in the past.

But this time they crossed a line that hasn't been crossed since the crisis started.

UPDATE: More on how the hedge fundies win at the expense of the Cypriot widows:

 If you have anything up to €100,000 in a bank, by the time you next get access to your account on Tuesday (there’s a bank holiday on Monday) some 6.75% of your cash will have disappeared into the Government’s coffers to help keep the country afloat. That goes for everyone, from a pensioner to a small business owner to a millionaire (although Greek depositors get an exception). If you have more than €100,000 the charge is 9.9%.

In exchange, Cypriots will get a share in the relevant bank, equivalent to the value of the tax deduction – although this is unlikely to be of much consolation given the country’s current financial woes.

To make those distributional consequences even more egregious, the word from Brussels is that while depositors will get hit, the senior creditors who own bonds in the banks (including, naturally, some of the racier hedge funds) will escape scot-free.

There really is no precedent for a policy of this sort, on this scale, and in an economic system where there are no controls on the movement of cash from one country to another, which leads one to believe that it will trigger depositors to pull money out of Cyprus at record speed as soon as they have the chance.

Moreover, given that this policy was not merely rubber-stamped but engineered by Eurozone finance ministers and the IMF (indeed, the IMF wanted an even deeper cut of deposits), it sends a disquieting message to anyone with deposits in a euro area bank. Although the ministers were quick to insist that this is a one-off and is “exceptional”, anyone even vaguely acquainted with the initial Greek bail-outs will remember precisely how long such exceptions last.
The move has all sorts of implications, whether it’s for the state of the euro crisis, the prospect of future assaults on bank deposits, and the British deposits in Cypriot banks, which will now be gouged for the bailout. However, most of all, one’s sympathy has to be with the country’s savers. Consider it: overnight a widow’s life savings, carefully saved up over decades, have been gouged, simply because EU bureaucrats decided to protect hedge funds and the German surplus, and to teach Russians a lesson.

 The consequence of this move is obvious:

A friend of mine has had money seized from his (perfectly legitimate) Cyprus bank account this morning. It represented some of his (earned and taxed) life savings. Yes, some of the victims of this “one off” tax will be Russian oligarchs and other undesirables, but many will be like my friend and many more will simply be people who chose to retire to Cyprus. For that matter, if oligarch money has been stolen from the Russian people or state, how does that give EU governments the right to steal it in turn?
My friend has instructed his investment advisor to get all of his assets out of “this ****ing continent.” He reasons that if the EU can force Cyprus to steal from depositors, they can force other member states and perhaps even countries under EU influence like Monaco and Switzerland to do so. Indeed, if this raid on innocents is tolerated, other governments will probably want to emulate it. Another ethical boundary has been crossed. I wonder how many other investors instructed their advisors to get them out of Europe this morning?

Another ethical boundary has been crossed.

That pretty much sums it all up.

And crossed once, it can (and probably will) be crossed again.


  1. Incredible - then gain, it's not - that they'd use the Orwellian phrase about the depositors being "bailed in," rather than calling it what it is: confiscation.

    1. We are in uncharted territory now. You can bet we'll see this move again before everything is all said and done.

      They're stealing money through currency inflation. They're stealing money through 0% interest rates for the gov't (and the banksters) to borrow at. They're stealing money through qualitative easing.

      And now they're stealing money through a one-time-only bank levy or "bail in."

      They just keep confiscating the wealth and until people rise up and put a stop to this, it will continue.

  2. I’m less than 100% sympathetic towards those depositors in Cyprus.

    What depositors in Cyprus and all round the World want is interest on their money. But that can only be obtained by lending their money on in ways that are not 100% safe. However when that risk doesn’t pay off, depositors expect taxpayers to rescue them. I.e. depositors (along with everyone else connected with banks – shareholders, etc ) have been ripping taxpayers off for years. Now the tables have been turned: taxpayers have been spared, and depositors are having to cough up. Boo hoo.

    Of course it’s unfair to impose a charge on depositors which was not part of the conditions on which they originally deposited their money. So I have SOME SYMPATHY. But as I said, I’m not 100% sympathetic.

    Also my above point in no way detracts from point made in the above article about small people being screwed while hedge funds and other bond holders are let off.