A few Cyprus questions

Week-to-week, holiday-adjusted, how much will Cyprus gdp go down?  Is it the case, as it seems so far, that the small (and large) depositors take a whack and the senior credit holders are spared?  Does that set a precedent for future bail-ins?

How much nicer will the other EU countries be to Merkel now?  To her face?  Behind her back?  How many more votes does she win in September?

What counts as “good news” or “bad news” coming out of Cyprus?  Let’s say things go badly.  That could cause market panic and contagion and of course misery among the Cypriots (and Russian oligarchs).  Depositors might pull out of Greek and Spanish banks to a much greater extent.

Alternatively, let’s say the economic transition from the “Cyprus deposit tax” is relatively smooth and orderly.  Will not some other countries start wondering whether their transition out of the euro also would be relatively smooth and orderly?  Keep in mind that, as it stands, Cyprus is suffering deflationary effects, bank closure costs, capital controls, yet without getting the redenomination benefits and independent monetary policy benefits of leaving the euro.  If that appears “OK” (do note however that Cyprus is spared the burden of creating a new currency), won’t the notion that leaving the euro is practical after all start to spread?  Which could cause bigger bank runs than if the Cypriot transition goes badly?

Can good news end up being bad news?  Or vice versa?  What would Jeff Ely say?  What would Garo Yepremian say?

Addendum: There is much more of interest here.  And a good critique from Schumpeter here.


Excellent questions by TC, but we know the wily old chess master already has the answers, and the questions posed are rhetorical?! Like the chess legend Mikhail Tal, TC loves to pose difficult questions for his readers, to allow them to fall into well crafted traps!

It might be a coincidence, but for the last five months I've been getting money out of Greek banks for clients (I'm all out now, and am in Asia) and I noticed a trend: in October/November it was a hassle to get money out, then, in December/Jan the Greek government placed a new series of onerous rules that required such high degrees of proof that I had to resort to lawyers to get money out (and this is for money that is well sourced and owned by foreigners--if you are a Greek and want to transfer money out of Greece--good luck with that, as you'll be hit by tax fines unless you can prove that you paid tax on the money deposited, which is difficult to do). Did the Greeks know back then about the Cyprus deal just announced? Is there a silent run on Balkan banks? Time will tell.

I'm not very financially savvy, or from Cyprus, but all the answers to these questions scare me.

I feel terrible for all of those Russian "savers" who lost some of their money.

As my comment suggests, this is a one-off solution designed to deal with a small country's insolvent banking sector that is dependent on foreign deposits of dubious origin. Within Cyprus, this approach, while not better than money for nothing, is preferred to almost any other, because its costs are paid by foreigners, many of whom are -- let's face it -- criminals. In other countries with mostly domestic depositors the ECB would not propose this solution. That said, I think this does show that if Germany does not like some aspect of your country's fiscal/financial policy and you are in need of a bailout, the ECB is likely to require some change to those policies as a condition of any bailout.

I wonder if in the coming weeks European banks will be sending letters to all their depositors telling them that no, we will not be taking 10% of your deposits in the case of financial difficulties. That should work.

Dear Depositor,

We are totally not like those banks in Cyprus. For reals.


Your Financial Institution

'How many more votes does she win in September?'

This is not really a big deal at this point - and German voters are very aware of the sort of clients that Cyprus makes a specialty in serving. In other words, not much lost or gained in terms of the upcoming election az zhis point. Besides, her party has already lost power in the Bundesrat anyways.

'Depositors might pull out of Greek and Spanish banks to a much greater extent.'

Well, the Greeks have been doing that for quite a while, if a certain blog I am not a loyal reader is to be trusted as to its factual (re-)reporting.

'Keep in mind that, as it stands, Cyprus is suffering deflationary effects, bank closure costs, capital controls, yet without getting the redenomination benefits and independent monetary policy benefits of leaving the euro.'

Yeah, Cyprus and its ca. 1 million inhabitants are just being hobbled by being bailed out. Almost as if policy decisions entail costs.

So today I learned that German keyboards are QWERTZ, so that was interesting.

This is just an an example of the need for uniform and better EU banking regulation. Notice how s l o w efforts have been to create uniform regulatory oversight?

For a discussion of the pace of regulatory oversight, see http://www.nytimes.com/2012/12/13/business/global/eu-leaders-try-to-show-unity-on-bank-supervision.html

When asked if a deposit assessment could be ruled out for future rescues, Rehn said in an interview: “It can and there is no concrete case where it should be considered.”

So who are these kinds of assurances for? Who actually believes it?

I do believe it. Cyprus is a tax and regulation haven generally hated throughout the whole Europe, attracting oligarchs, tax evaders and tax optimizers from the whole EU. Simply granting them the money is politically unacceptable in lender countries.

It sets no precedence to any PIIGS country, as none of them is a tax haven, but it does set a precedence if eurozone countries will need to bail out Monaco, Andorra, San Marino, Lichtenstein or Luxembourg.

Sure. A politician in Canada who was running on taxing the rich was asked to define rich. She said $46000 iirc.

Taking money from russian oligarchs feels real good and is a great story to cover taking the personal savings from Cypriots. Do you actually believe what European politicians and media say? They are desperate. They gave away an optical backstop necessary for the stability of the European banking system. There are already ongoing runs on European banks. Why did they do that? I suspect that they don't have the cash.

Isn't that pretty much what they said about all the bailouts?

A couple of naive questions.

(1) "Depositors might pull out of Greek and Spanish banks to a much greater extent."

Why, in the long run, would it necessarily be a bad thing if all money flowed out of Greek and Spanish banks to German and other banks, i.e., why does every country need its own banks if their people can get banking services from banks in Germany and other countries? I understand why having a small number of large banks is problematic --- too big to fail. But, for a given number and size distribution of banks, why is having banks with well-defined nationalities better than trans-national, e.g., Eurozone, banks? What would be the advantages of having well-defined Massachusetts banks, Floridian banks, Michigander banks, etc. over trans-state American banks? What problems are caused if too many Massachusetts residents deposit their money into Californian banks?

(2) "Won’t the notion that leaving the euro is practical after all start to spread?"

*If* it turns out that leaving the euro is practical, i.e., one can transition out of the euro in a relatively smooth and orderly fashion, then why would it be a bad thing if countries started to leave?

(3) "Which could cause bigger bank runs than if the Cypriot transition goes badly?"

Related to (1). What is the ultimate policy goal with respect to European banking, to preserve whatever banks exist today and try to ensure that they exist forever far into the future or to allow the market for banking services to determine the future state of banking (which banks fail, which survive, and which new banks emerge, etc.) and try to manage the transition to that state from the current state to make that transition as smooth and orderly as possible? With respect to dealing with bank runs, is the goal of policy to manage the orderly unwinding of weak banks or to ensure that those banks survive in tact?

Cyprus just got a huge gain there. First, more than 2/3 of the bank deposit tax is paid by foreigners. Second, Putin was informed so only Putin's enemies monies are left in Cyprus banks. In exchange for this heads up, Putin will ease the terms of the Russian bridge loans. Third, the EU is sending a fresh EUR 10 billion of the Northeners tax money their way.

It's arguably not a just solution. An extremist could argue that a just solution would have been selling the island to Turkey for some hard currency that would have been used to pay back the debts. I'm just stating the obvious that it's a great deal for Cyprus.

I wonder about follow-on solvency effects for any normal banking system (cyprus maybe wasn't such?)

For example - govt. decides to seize 10% of my bank deposits. I promptly default on my mortgage. Since a great many people do this, mortgage company promptly defaults on its creditors. Who default on something else. To the point where nobody has any money to pay other taxes with, and govt is again insolvent.

I would think that haircuts on bank depositors (especially small ones) are among the most destructive measures - only a part of any population holds govt bonds, and are probably somewhat better suited to cope with a default than the huge number of small depositors in banks.

One also wonders "what next? all $1 bills are now worth only $0.90"????

The people focusing on special features of Cyprus are missing the point. Regardless of whether Cypriot depositors were angels or oligarchs, bank account seizures are now on the table. So every nation whose debts are large relative to income but small relative to assets now has a precedent.

Something to think about when the larger economies start to default.

A second question to consider: if large debts are ultimately going to be paid back at the most inconvenient times and the most economically destructive ways, doesn't that change the calculus regarding Keynesian stimulus?

I mean, Krugman can talk about interest rates all he wants, but nobody is letting Cyprus off with 30 year bonds at favorable rates. Does it really make any sense to build infrastructure with the right hand and seize capital with the left?

Krugman's argument is this is all something to worry about later.

Now we're getting a look at "later" and it isn't pretty.

Something like this can happen in times of economic stress or war in any non-monetarily sovereign nation. In the US we are monetarily sovereign, so it could only through political choice or sheer stupidity. (all too often equivalent)

I don't think we're as "monetarily sovereign" as all that. Our debt has a very short maturity window, plus we're borrowing 1.5 trillion a year.

If you owe the bank a thousand dollars, the bank owns you. If you owe the bank a billion dollars, you own the bank. But if you need to borrow another billion, the bank owns you once again.

excellent extension of an old argument.

I am gonna keep that !

Not even my cynicism could have predicted we'd be robbing depositors to pay off foreign creditors who made poor investment decisions. It's profoundly horrifying.

Do you think the "foreign" modifier is necessary? If you do, you are part of the problem you describe - people who think foreign creditors who made poor investment decisions are less worthy than the domestic variety are the kind of people who think creditors are more worthy than depositors.

The Cypriots should saddle this gift horse and ride away. Half the deposits are by nonresidents, and practically all of them pay the 10 percent tax. A large majority of the large (>eur100k) resident deposits are by foreigners living off their (many times over) stolen loot. On top of that, is the payment from Putin for giving his gang an advance heads up, and of course the eur10b of good money from the taxpayers of the non-deadbeat northern countries.

Don't even try to look into the teeth, just ride it like yo stole it (which you incidentallyt pretty much did).

Counterargument to this is that the main reason why these money laundering banks are in trouble in the first place is the Greek deadbeats defaulting on their debt. But that's water under the bridge at this point.

Under 100k euro they lose 6.9%.

This is a great story to deflect away from what is happening. There is no backstop. Period. The return on keeping your money under your mattress is now 6.9%.

I agree that holding your money deposited in the same banks with the Russian money launderers without having the benefit of getting the advance heads up from Putin about any haircut action has a low expected return. Especially if those banks were heavily invested in Greek government bonds that basically defaulted. My point being is that people depositing money in these banks are not your average European depositors.

Well, you see here's the problem: the banks hold essentially no debt, and the little they hold is secured. There is nobody who made a poor investment decision there.

And a lot of the country's debt is issued under English law, which basically means they can't default (remember even after Greece's first default, they still kept paying the English law holdouts in full and on time).

There were 3 choices: bailout from the EU (never going to happen), banking collapse, or stiff the depositors. They picked door #3 because door #2 would probably be even more painful.

Bitcoin users are unaffected

Linden dollar users are also unaffected.

This was the alternative to cutting public sector compensation.

Expropriation to support a privileged class? This isn't going to end well.

Anyone else struck by the similarities to what Argentina did? I wonder what Acemoglu and Robinson would (will?) say.

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