2013 March 18 Monday
Bond Holders Protected In Cyprus
In Europe the first €100,000 of bank deposits are, in theory, covered by depositer insurance. This is like FDIC insurance for deposits in America. But the EU found a loophole: they are intervening before the banks fail. So they say the deposit insurance provision doesn't kick in. No bank failure? Then no deposit insurance payout. Instead they fleece depositors and reward bond holders. The bond holders and stock holders of the banks ought to lose their investments. But that's not what's happening.
What's more, there is something morally offensive about a plan that makes ordinary Cypriots lose a chunk of what will in many cases be meagre savings while bond holders get away unscathed. As Marc Ostwald of Monument Securities noted, the deal "highlights how post 2007 efforts to resuscitate and rescue western economies have continued to favour the vested interests of the financial sector, while treating the "population at large" with disdain and contempt – this sort of attitude is still a seedbed for social revolution, as has been witnessed above all in the Arab Spring."
To be clear: People who actually save money are being punished for their prudence. But Euro banks and investment funds that bought bonds of dodgy Cyprus banks are being rescued. The irresponsible are protected. The responsible are fleeced. This is the story of the modern Leviathan.
With the huge surge in living standards of the last couple hundred years we have lost the selective pressures that the Malthusian Trap used to exercise to improve the gene pool. Governments captured by a combination of the irresponsible poor and the irresponsible rich subsidize even more irresponsibility.
The Cyprus parliament might not pass the tax on deposits. Will a failure of the banks then lead to a better resolution of the crisis? The European financial crisis and southern European economic depression goes on. Is an economic depression in America's future too?
By Randall Parker at 2013 March 18 08:32 PM
You've not mentioned that a large portion of these deposits are held by foreigners, primarily Russians looking to launder money. Thus, this deposit haircut, I believe, is targeted towards the underground taking advantage of Cyprus's lax bank regulation.
I'd be surprised if the terms aren't changed so that only FOREIGN account holders get fleeced. In return, the ECB would likely demand far greater oversight over Cyprus' banks. This seems like a solution most could live with.
What really gripes me about banks is they can take $1 and lend it out 10 to 20 times. Still they can't make money. What incompetents. Minting money and they still can't make it work. To add to this the wealthy shaft the depositors. I used defend the salary of people like Jack Welsh of GE. I believed that he added enough value to be worth his enormous salary. Now I'm not so sure. I'm not sure that ultra-wealthy add value to the economy. Could be they just ride the ups and downs like everyone else. The difference being they use political capital to rob the middle class on the downs.
I'm not sure there's any place safe to put your money.
This is the second throwing out the book move by the ECB. First was in the Greek debt haircut when they tossed pari passu, and now this, which is in effect confiscation of private property. The alliance between the banks and progressive elements to fund their social welfare with easy money has had horrible effects on Western society in general and the economy specifically. The financialization of our economy combined with consolidation within the industry itself has concentrated wealth, control, and risk in the six top banks in the US. They are now all caught in a credibility trap because they are so interconnected and the good times have ended.
@DdR - Check out this link on why now of all times for Cyprus. Burden still falls mostly on Cypriots. http://www.zerohedge.com/news/2013-03-18/cyprus-why-now-follow-money
Looks like I was partially right: Cyprus is going to demand that Russians take it on the chin. In return, Russian depositors receive equity in Cypriotic banks and energy companies.
This still doesn't solve the fact that Cyprus has become a money-laundering target for the Russian Bear. Where is the ECB here demanding greater oversight?
I'd link the WSJ article, but I don't have an account with them:
Who cares about Cyprus, really?
How wonderful for the people of Cyprus, how joyous they must be at having joined the jolly Euro-Club. Why, now their hard-earned savings are going to be stolen from their bank accounts before their very eyes, while the people who got them into this mess receive millions in bonuses. Welcome to the EU!