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The Jehoshua Novels


Pay Attention! The EU and IMF confiscate private deposits

cypressThe next stage of the global financial collapse has now arrived.

In an announcement this weekend, the EU and the IMF have come to the rescue of Cyprus, at the request of the government, by offering Euro 10 billion in aid, in exchange for which the Cyprus government will impose a “one-off tax” on all private deposits in Cyprus banks. Depositors with Euro 100,000 or less in a bank account will be assessed a 6.75% tax, and deposits over this amount will be taxed at a rate of 9.9%

However politely this is described in press releases, this is nothing more than a confiscation of private property from people who did no wrong. The Cyprus banks prior to the 2008 financial collapse played a game similar to the Icelandic banks – offering lavish interest rates on deposits to attract hot money, and investing the money in a real estate bubble that has now collapsed and crippled the banks. Most of the money in Cyprus came from Russian business interests.

Iceland chose a different tack in dealing with its crisis. It essentially stiffed the IMF and the governments of the UK and The Netherlands, which were the source of hot money for Icelandic banks and which governments fully expected the Icelandic government to cover the losses. The Icelandic government refused, it allowed the banks to go under, it placed the losses on the the bank shareholders and bondholders, and it jailed the top bankers involved in the debacle. Iceland’s economy took a severe hit, but the pain was relatively short term and the economy has recovered nicely.

Elsewhere in Europe and the US, governments have chosen to protect bank management, bank shareholders, and bank bondholders, arguing that a “systemic crisis” will result if the banks are allowed to fail. The total deposits in the banking system of Cyprus account for less than 1% of total EU deposits, but nonetheless the EU is now arguing that a systemic crisis will engulf Europe if any bank in Cyprus is allowed to go under.

What is likely to happen after this decision is a systemic crisis of a different nature – bank runs throughout all the periphery countries, such as Spain and Italy, which have also asked for EU and IMF help for their banking industries. The citizens of Cyprus rushed to the ATM machines Saturday evening when this announcement hit the news wires, but the ATMs quickly ran out of cash. Cyprus is on holiday Monday – the announcement appeared to be timed to coincide with the holiday weekend – and the central bank of Cyprus is now going to impose a freeze on electronic transfers in the banking system until the “tax” is withdrawn from each account.

This development in Cyprus is getting very little press in the US and other countries, but it will. A basic doubt has been raised about the sanctity of private property in the banking system anywhere in the world. You can be assured that savvy investors will be paying attention to this development. You should too.

(Image:Newtown graffiti)

Cyprus Savers Bear Brunt of Financial Bailout Mar 16, Reuters

37 comments to Pay Attention! The EU and IMF confiscate private deposits

  • Cyprus Savers Bear Brunt of Financial Bailout Mar 16, Reuters

    (Reuters) – The euro zone agreed on Saturday to hand Cyprus a bailout worth 10 billion euros ($13 billion), but demanded depositors in its banks forfeit some money to stave off bankruptcy despite the risk of a wider run on savings.

    The eastern Mediterranean island becomes the fifth country after Greece, Ireland, Portugal and Spain to turn to the euro zone for financial help during the region’s debt crisis.

    In a radical departure from previous aid packages – and one that gave rise to incredulity and anger across the country – euro zone finance ministers forced Cyprus’ savers to pay up to 10 percent of their deposits to raise almost 6 billion euros.

    Why today’s Cyprus bailout could be the start of the next financial crisis Neil Irwin, Wash Post WONKBlog, Mar 16

    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).

    For the past six months, the global financial markets have become increasingly complacent, convinced that the euro-zone crisis is, for practical purposes, over. Cyprus is the test of whether that is correct, or whether the complacency was instead misplaced.

    In other words, if there is going to be a new wave of crisis in Europe, historians will be able to trace its starting point back to today’s Cyprus bank bailout.

  • Jonathryn

    Is this not complete madness? Folly?

    This must surely be calculated. What “solution” will they be peddling tomorrow for the catastrophe they’re causing today?

    • They’re opening in Connecticut before they bring it to Broadway…and we’re Broadway.

      • Numerian

        This is probably the best laugh and maybe the only one I’m going to get ouf of this crisis.

      • Kathleen Pistono

        My bet is that when “they bring it to Broadway,” the first accounts hit will be the IRAs.

      • Jonathryn

        Felix Salmon opines that this bringing of the IMF to conclusion wasn’t arrived at after measured deliberation. If that’s the case, the negotiators might be realizing the inevitable, throwing up their hands, and muttering “whatevs.” If there’s ever a question between malfeasance and incompetence, it’s usually both, and at the same time.

        But what if the IMF and the European Bank are really working at the behest of the larger Northern European banks by nuking all Mediterranean banking activity? Draining those countries of every last Eurocent and tilting the Euros into US and Franco-German banks? Is that the game? They’re acting like they know where the chess pieces will be two moves ahead. When the contagion hits Deutsche Bank and Société Générale, then and only then will they step in with unlimited Eurozone backstops?

  • Celsius 233

    Well, so much for the already corrupt World Banking system and the IMF…hopefully.
    Let’s see; we’ll steal from you and if we’re caught; you pay, yeah, sounds about right to me. ;)

  • Arnie

    @ 233ºC
    This is again an example of willful ignorance and intellectual sloth that have overcome the populations of the so called first world. You might as well bash your head against a stone as try to have a discourse with the 99% for all the good it may do. Only preadolescent children might be receptive to anything outside their opinions, and they do not run things and count for less (fine way to treat the receptacles holding our future).

    It is doubtful that many will have the opportunity to reside on Iceland, it is a very small island and has scarcely any resources available to sustain a greater population. It is the IDEA that Iceland has provided that holds the key we may need to control our future, if we can only discern its form and how it may be applied to unlocking the economic chains that bind us. Knowledge, not only dangerous, also your friend should you choose to listen to its words.

    • Celsius 233

      Yes. I seem to remember recently accusing most Americans of having the maturity NOT exceeding a post pubescent 17 year old (on another blog). I’ll stand by that and give a hearty second to your willful ignorance comment. Aspirin isn’t working too well… ;)
      It gets lonely crying in the vast wilderness; but the wolf in me enjoys it for its own reward.
      Alas, Iceland is indeed become an IDEA whose time has come; even if not capable of supporting a mass inflow of humanity. But fortunately for them; the majority doesn’t get it and never will.
      Cheers and nice to hear from you.

  • JustPlainDave

    If, as you say, the Cypriots were playing Icelandic games, why should I care that they’re getting bladed by their government if it helps stabilize the system and reduces the chances of systemic collapse? I presume this is the sort of thing that could lead to the type of cascade EU defaults that folks have been afraid of – why is it in anyone’s interest that that occur? I’m ass deep in helping charities deal with the social//health consequences of inequality – the last thing that we need is for the global financial system to take a header off the deep end again. If there’s anything that I learned from the last time it’s that that sort of thing has disproportionate impact – both in terms of severity and duration – on those at the bottom of the income distribution. Putting some bankers against the wall in exchange for that is cold comfort for folks on the front lines.

    • Tina

      I disagree, why should the whole population be penalized because of the bankers? It may reduce the chance of systemic collapse but it also lets those who caused it off the hook again. I must have missed the part about the bankers being arrested and prosecuted. It does also make me wonder who moved their money before the weekend, I’m guessing it wasn’t the little guys.

      • pihwht

        I’m pretty sure that I saw several references to rumors of some hedge funds and large depositors getting a heads up before the public announcement. I totally discount such rumors, because I cannot imagine the leading lights of the banking world doing such a thing. Of course, if this is reasonable for Cyprus, it is certainly reasonable for the rest of us. It might even streamline the process of moving money upstream to the few.

        Wasn’t there something at Zerohedge yesteday about Germany and the IMF wanting a 40% “haircut.”

      • JustPlainDave

        Why shouldn’t the population be penalized? If they were engaging in Icelandic games as asserted in the piece, then there’s a significant level of complicity in the population. When my countrymen start paying the piper in coming months and years for their shitty saving habits, I’m not going to be arguing that the poor dears should be absolved of their responsibility. If I ain’t cutting slack for them, I sure as hell ain’t gonna for the Cypriotes.

        As for letting the bankers off the hook, that’s the responsibility of the Cypriote government – their call. Me, as an external party, I care primarily about whether they manage to drag the financial system under – what they do at home to avoid that, I care much less about. I’d love to see them bring their bankers to book, but I’m not so wedded to the idea that I’m going to pay their butcher’s bill to do it.

        • Tina

          So the whole population is complicit? That doesn’t make sense Dave. The government has decided to punish the population but allow the people to cause it off the hook. Why shouldn’t the little people be pissed?

          • JustPlainDave

            This isn’t punishment. This is a collective trying to dig itself out of a hole they collectively dug.

            It’s their place to decide whether they’re going to go along with this, not mine to determine what’s “fair”. This reflex to reach into other cultures and countries with our own morality is something we should suppress. I’m not so dimly recalling that the same sort of thing led some folks to some rather spectacularly unsuccessful ideas about whether the Iraqi populace would “rally to the cause of liberty”…

            Our overriding questions should be whether the external manifestations of their decisions are in our interest or not. The internals, barring offenses against universal human rights are in a category labelled Not Our Problem [tm].

    • Numerian

      We have two models we can follow.

      Model One requires the bankers to manage their assets (loans and investments) judiciously, so as to minimize losses from credit defaults and still generate an interest return in excess of interest expense, administrative and operating expense, and loan charge offs. Under this model, the banks suffer the consequences of misjudgments regarding their assets.

      Model Two absolves the banks of managing their assets by providing access to the state (usually through the central bank) should losses from defaults start to jeopardize the bank’s existence, or lead to systemic defaults among other banks. Under this model, the bankers maximize earnings on their assets and suffer few if any consequences from misjudgments regarding their loans and investments.

      Model One leads to more severe economic recessions when banks have to write off loan losses. Since banks “travel in herds” and chase after the same assets, their tolerance for risk increases as the business boom cycle ages, until eventually the economy can expand no more (usually because the central bank has raised interest rates so high in order to suppress inflation). Some banks don’t survive this crisis, and credit standards are tightened noticeably as banks learn the lessons (yet again) of the failure to exercise judicious caution in their investments.

      Model Two leads to more tolerable recessions. No big bank is ever allowed to fail. The taxpayers absorb the losses, but the banks learn no lessons. The boom cycle starts up quicker than usual, and during the next boom credit standards get even weaker at the peak. Boom cycles lengthen; bust cycles shorten, and banks become so reckless that Ponzi finance characteristics infiltrate the system. Banks tolerance for risk is so high that their ROE targets progressively increase to 20% p.a. or higher, which means they must double their earnings every three or four years. As their customer base cannot provide such income, banks begin poaching other customers by offering them riskier loans, new products are developed that provide opacity in pricing iand risk, and therefore higher profits. Accounting standards are violated, regulators are bought off or intimidated, banks seek equity extraction opportunities from their clients, outright fraud is perpetrated, the economy suffers serious investment maladjustments in speculative industries like real estate, and the finance industry takes an enormous share of national wealth out of the system (at the Ponzi finance cycle peak, banks take 30% to 40% of all national income). Ponzi finance schemes always collapse and lead to depressions, not recessions, that last for years and cause widespread unemployment and misery.

      Which model is superior? We are using Model One, because politicians and regulators are terrified of recessions more than they of depressions, which seem to happen way in the past until the Ponzi finance scheme cracks. All I know is that in the current model, only community banks engage in actual banking, with loan officers who make loans based on careful credit analysis and are fired if they make too many bad loans. In the TBTF banks, you may notice that loan departments and credit analysis groups have been almost entirely eliminated, as loans are sold off to investors as quickly as they come in. Once the depression begins, it takes five to ten years for big banks to rebuild these departments, train themselves in traditional banking, and alter their culture accordingly. That is one main reason why depressions last so long.

      It seems to me we need to restore Model One and find some way from preventing it distoring into Model Two fifty years from now.

  • Arnie

    Arriving at a suspicion, the reason Cyprus is experiencing the kind attentions of IMF and EU Central Bank at this moment, lays under the sea floor surrounding that island in the form of natural gas deposits. What better way to destabilize and disempower a government than to demonstrate that government’s inability to protect the interests of its citizens, and what better way to do that than rob their savings. The government is quickly discredited and rendered incapable and useless to further protect the population’s interests, particularly when those interests are assets in petroleum reserves not yet developed. It is curious that such a small economic state should receive such virulent attention in a manner its people are left with no political means to defend themselves from such egregious attack on their possessions. It also serves as an exemplar to Portugal, Spain, Italy and Ireland that they need be very fearful about contravention of the troika’s policies and causing the collapse of the EU house of economic cards.
    It is precisely that collapse of the EU house of economic cards that needs be brought down and the power that usurped the European experience. This collapse will take down the Washington-Wall Street axis of evil as well, in its wake.

  • Tina

    Former Bank of Cyprus chief wins €2m in compensation compromise
    By Elias Hazou Published on March 15, 2013

    Cyprus Mail

    UNDER threat of litigation, the Bank of Cyprus (BoC) has awarded former CEO Andreas Eliades compensation to the tune of some €2 million.

    The move comes after a majority decision of the bank board last Friday. No money has been disbursed yet; given that the bank has requested state assistance, the final say rests with regulatory authority, the Central Bank.

    On resigning his post in July last year, Eliades demanded €3.5m in total. The €2m figure awarded last week is seen as a compromise.

    It’s understood that Eliades had taken out a €1.9m loan from the bank; so his compensation covers the amount he owed plus a little extra.

    Sources said the bank’s leadership were in two minds, but buckled under pressure from the provident fund committee, which in turn had been threatened with lawsuits by Eliades.

    Some in the bank thought Eliades’ demands from the provident fund to be inflated.

    Provident fund payouts are based on the salary. In the past, Eliades had received a bonus – linked to bank profits – that far exceeded the limit set out in his contract. To overcome this restriction in the contract, a formula was devised so that part of the sum would be logged as salary and the rest as a bonus.

    But the one-off arrangement had the side-effect of raising Eliades’ salary on paper, and thus also increasing his retirement benefits.

    On leaving, Eliades asked for the full provident fund he felt he was entitled to, as per the previous arrangement. Initially the bank was averse, and at that point Eliades sued each member of the provident fund committee individually.

    Legal precedent in Cyprus has established that provident benefits must be paid irrespective of any other financial dispute between an employer and an employee.

    Apparently faced with the prospect of being dragged to court, the bank’s provident fund committee urged the board not to contest Eliades on this point.

    In Eliades’ case, his bonuses have had an impact on the compensation figure, even if in a roundabout way. But some in the bank dispute the very bonuses paid out over the years to the former strongman.

    It’s understood that during his stint as CEO, Eliades received around €1.8m in bonuses.

    Sources close to the BoC said at least some of these bonuses were linked to posted bank profits which, in hindsight, were “artificial given what we now know about the last couple of years.”

    It would be best for the BoC to have withheld compensation until ongoing probes into possible bank malpractice are completed, the sources said.

    They were referring, among others, to an independent investigation conducted by Alvarez & Marsal, a US-based firm hired last August to identify how the island’s largest banks ended up needing billions of euros in bailout money.

    The sources even suggested that, should these investigations find that certain people were responsible – through actions or omissions – for the state of BoC today, the bank could ask these people to return their bonuses.

  • “Something doesn’t add up here.”

    That is the conclusion to Illargi’s piece over at The Automatic Earth . Well worth a read…, here’s a snip:

    More tomorrow (the vote coincides with a national carnival holiday) and Tuesday. Let’s be clear on one thing in the meantime: the deal as it is on the table is an unmitigated disaster for Europe, and the effects will spill to at least the rest of the western world. At the same time, if Cyprus says no, the implied threat is that Europe will let it fall like a stone, bankrupt the banks, and throw it out of the Eurozone.

    And that would be the end of the Eurozone; if Cyprus leaves, so will others. Are they really going to take that risk after 5 years, 500 emergency meetings and €5 trillion in bailouts? Hell no, you kidding?, but they still threaten to do it, and in such a transparent fashion? Why would Anastasiades, or anyone else for that matter, fall for that? Something doesn’t add up here.

    I couldn’t agree more…, “Something doesn’t add up here.”

  • jo6pac

    Well the morning news in Euro land should be fun.

  • Skriz

    The average American, if they read this news at all or if they even know where Cyprus is, will shrug their shoulders and say “meh”. They will not analogize the situation to the U.S. If they did, they would realize we followed much the same path, in that we socialized the costs of the bank bailouts through higher public debt (I.e. taxes), lower interest rates on deposits, high unemployment and devaluation of financial and real estate assets. We just weren’t so explicit by levying a tax on bank deposits. We should have followed Iceland’s lead and put the hurt where it belonged – on the wealthy and powerful who benefitted so greatly from inflating the bubble. Now, the poor and middle class will pay again through years or decades of austerity and declining government services. Thanks, Numerian, for highlighting this important international development.

  • [...] Pay Attention! The EU and IMF Confiscate Private Bank Deposits Numerian [...]

  • Jeff Wegerson

    Iceland has their own currency. Cyprus is in the Euro. Iceland forced the banks to eat theirs and then because the country lacked the banking controls necessary to prevent the bank speculation that caused their crash was forced to make their own citizens eat some too in the form of currency devaluation.

    Cyprus does not have that option short of leaving the Euro. Apparently there is a lot of Russian Mafia deposits in Cyprus. In the end the government of Cyprus is likely more corrupt than the government of Iceland and that will cause those on the bottom to suffer more than those on the top.

    But since this is a Euro mess they cannot bring this Connecticut show to Dollar Broadway land at least not directly.

    At least those are my understandings.

  • nihil obstet

    I’m interested in the level of outrage here. This has been going on in the U.S. for years. Only the corporations taking money out aren’t banks, they’re manufacturers. And the people whose money has been confiscated aren’t called depositors, they’re called workers. The deferred compensation called pensions have been redefined as “legacy costs” for the poor beleaguered auto makers suffering from the demands of greedy union members. The objections to this kind of thing have been pretty weak bleating. But what is a bank deposit except a “legacy cost” for the banks? And now everybody goes ballistic about taking the depositors’ money?

    This is not an observation favoring the confiscation of bank deposits. It’s rather a sense of disconnect over the sense of fairness towards work vs. property. I think this lays out as few other issues do how the economic system is designed to enforce class advantage/disadvantage.

  • Tina

    BBC ticker: MPs in Cyprus parliament vote to reject controversial levy on bank depositors as part of EU-IMF bailout

    • Raja

      Cyprus votes to reject bailout plan that would make savers pay

      Washington Post, By Michael Birnbaum, March 19, 2:37 PM EDT

      Berlin – Lawmakers in Cyprus on Tuesday rejected a bailout plan that would have rescued the country’s banks but forced savers to chip in for the cost, throwing down a gauntlet to the rest of Europe over the financial fate of the tiny island nation.

      The plans to save Cyprus’s collapsing banks but to charge depositors for the service proved so controversial that not a single one of the 56 members of Cyprus’s parliament voted for the plan on Tuesday evening. The rejection leaves the fate of rescue plans up in the air, with other European leaders thus far unwilling to step in to save Cyprus, whose bank deposits tower over the rest of its economy.

  • [...] austerity, now, another country is in danger of collapse. Thanks to fast money, and get rich quick, Cyprus is now the new poster child for financial disaster.  Once again Germany is making demands, and those who [...]

  • [...] told us to Pay Attention when the EU and IMF came up with a plan to bail out Cyprus banks (Greek Cyprus) by confiscating [...]

  • […] Pay Attention! The EU and IMF confiscate private deposits […]

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