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Eurozone: grabbing depositors cash « Previous | |Next »
March 18, 2013

The Euro debt crisis has taken a turn for the worse and the financial repression of the weaker Euro-Zone members has increased.

Cyprus' banks have gone bust. They will collapse without a bailout. The Troika--the European commission, the IMF and the European Central Bank – imposed a levy on savers in Cypriot banks on the grounds that Cyprus part-finance their own bailout . Savings of over €100,000 will be subject to a 10% tax, and those under €100,000 one of 6.7%. Around half of all those higher deposits (estimates vary) are owned by Russians, many of whom allegedly use the country as a tax haven from their own domestic charges. The bail-in of Cypriot depositors to the tune of 5.8bn euros is about a third of Cyprus’ GDP.

PopeDEurocrisis.jpg David Pope

The levy is part of a 10bn euro “bailout” of Cyprus, which does not have the money to bail out its banks. The Troika's "take it or leave it" ultimatum to the Cypriot government and means the debt burden of the banks has been transferred from the banks, where it properly belongs, to households, who had no part in their lending decisions. This marks a new turn in the European crisis.

Cyprus's banks have a problem. Its banks went on a lending spree during the good times – by 2011, they had made loans worth more than eight times the country's national output. Cypriot banks had made loans to Greece worth 160% of GDP and the losses on that high level of exposure have been rising rapidly.

Cyprus also has a problem. Greece is a key trading partner for Cyprus, so there has also been a direct negative impact on the Cypriot economy from the austerity imposed on Greece. Its debt to GDP ratio is 145% and it is bankrupt. So life is going to be grim.

Germany, Finland and the Netherlands are increasingly unwilling to support the weaker Euro-Zone members. Germany is unwilling to pay up for the bailout. As in the case of the 2012 Greek debt restructuring, the ECB and other official lenders are unwilling to take losses on their exposure to the Cypriot banks.

A "stability levy" on those under €100,000 means that 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 the Russians a lesson.

So it is not simply a simply a wealth tax that shift taxes away from income to wealth. It is a form of confiscation and the EU and the European Central Bank (ECB) have actually spooked world financial markets.

Will the levy--or cash grab--- trigger depositors to pull money out of Cyprus at record speed as soon as they have the chance? In the event that the Italians and the Spanish get an inkling that a bailout is looming, won't they immediately withdraw all their euros immediately, triggering a bank run? Causing deposit runs sure is junk public policy

Rather than using the European Stability Mechanism to recapitalise banks, and thereby weaken the link between banks and their governments, the euro zone continues to equate bank bail-outs with sovereign bail-outs. What is not being adopted is the direction of efforts to improve banks’ liquidity position, which should be to encourage them to hold more deposits.

The bond bond holders get away unscathed. The EU, after the financial crash, has not agreed to forgive much of the debts. The Germans, are blocking debt forgiveness with the Finns, the Dutch and the Austrians and so the Cyprus rescue package favours the vested interests of the financial sector, while treating the "population at large" with disdain and contempt.

However, though the package will stave off immediate collapse it may not address Cyprus’ problem. As in Greece and Portugal, privatisation proceeds and the revenue from increased taxes may not reach targets. As with Greece, there is a risk that Cyprus will need additional assistance, entailing further write-offs in depositor’s fund, because it will not generate enough money from tax receipts to repay the loan.

| Posted by Gary Sauer-Thompson at 3:31 PM | | Comments (18)


to prevent debilitating bank runs, depositors need to be sure their holdings are safe. The worse-case scenario reaction is one of bank runs in periphery countries.

What is bad about this is that like everywhere in the EU, bank deposits in Cyprus are guaranteed up to €100,000. Depositors have arranged their wealth accordingly, only to be told that the guarantee has been changed ex post.

This means that depositors in Cypriot banks come to fear another round of levies. Then we would have a full-fledged bank run

The Cypriot bailout could become euro-systemic. This will happen when and if depositors in troubled countries, say Italy or Spain, take notice of how fellow depositors were treated in Cyprus. it will It will be individually rational to withdraw deposits from local banks to avoid the possibility of a confiscatory tax.

Cyprus is a good place for money parking and laundering by criminal gangs. There is a suspicion that much of the funds in the country are only there if this tax haven remains just that. Latvia is another place for hot money, but it is not in the Eurozone.

The Troika are beyond the pale, the real criminals.

I must confess, I am confused about what is BEHIND these money troubles in the EU. How did those governments and banks end up so deep in the deep poo?

My guess is that it somehow links into the 2008 financial meltdown. But how exactly?

Pensioners are losing part of their retirement savings in order to keep afloat the island's two big banks.

The European banks made a lot of bad loans when they went on a lending frenzy---just like Wall Street--before the great financial crisis.

They are so badly in debt --bankrupt---that they require their governments to bail them out and to recapitalise. Just like the US government did with the corrupt too-big-to -fail megabanks on Wall Street. Or Ireland did with its banks.

The governments on Europe's periphery need help to bail their bad banks out--hence the necessary turn to the Troika. This lifeline (borrowing billions) with very harsh conditions attached is a debt burden for the nation state, and so we have the sovereign debt crisis.

We basically have a series of euro bailouts that punishes ordinary people ---through austerity and social regressiveness--- in order to reflate a broken financial system.

The imposed austerity means that there is no economic growth for the nation state to repay its loans to the Troika. Cyprus, like Greece, Ireland and Portugal, borrows its way to destitution.

Some argue that the problems exist in a structural sense in the EU---namely in the relationships between the surplus and the deficit member-states.

This lead to large capital flows (from the surplus to the deficit countries) which, in turn, caused rampant asset value inflation (e.g. real estate bubbles) in the deficit economies and a growth rate that far exceeded the rate of accumulation in their exportables’ sector.

The tension from these imbalances ruptured under the strains of an imported financial crisis from the toxic derivatives in the US and the UK. This soon ignited a classic debt-deflationary spiral with the burden of adjustment disproportionately placed on the shoulders of the weakest member-states.

to save the European Monetary Union from disintegrating the European Central Bank (ECB) had to step in.

However, in exchange of being unshackled from the prohibition from acting as a lender of last resort, the surplus countries demanded that the ECB used its coercive powers to impose the greatest austerity upon the weakest member-states in the EU

Thanks for the information chaps...

So, just more fallout from Alan Greenspan's "Irrational exuberance" then?

Mars08 asks "what is BEHIND these money troubles in the EU. How did those governments and banks end up so deep in the deep poo?"

The best deep structural account that I've seen so far is in this talk by Yanis Varoufakis. It goes behind Alan Greenspan's "Irrational exuberance" to the structure and dynamics of the world economy that was developed after the 1970s by the US, using its hegemonic powers. It is a Marxist account as it highlights the importance of a surplus recycling mechanism to keep capitalism working.

It was given as a keynote speech at a conference near Brisbane, Queensland, Australia late last year. Varoufakis is often interviewed on the ABC's Radio National.

Can't stop smiling at the cartoon, though.
One of the best this year.
Is it the Economy of Excess; seems funny that people can't feel happy without,dog in the manger, seeing others copping it in the neck?
Isn't "situational bad" just a euphemism for kick in the goolies?

why should ordinary Cypriot taxpayers rescue banks at all? Shouldn't the bondholders be responsible for the bank's losses.

If the Euro banks have all these problems of bad debts then the banking system is need of reform . Either by:
(1) making the industry far more robust, by hugely increasing equity capital, or
(2) consolidate fiscal capacity and tighten regulation, to ensure adequate eurozone-wide oversight and fiscal support.

The Cypriot Parliament has rejected the EU deal. Where to next? What is plan B? Have a chat with the Russians for bail out assistance ?

"If the Euro banks have all these problems of bad debts then the banking system is need of reform "

Europe, much like Japan 20 years ago, has done too little to strengthen its financial system.

Will the average Cypriot ever regain total faith in their banking system?