There are now four possible outcomes: either Cyprus surrenders and passes a modified cash grab (possible, but may involve seizing private pensions and could turn ugly); or the Eurozone blinks and hands over cash anyway (quite likely); or Cyprus gets bailed out by Russia, jeopardising the island’s relationship with Brussels (possible); or it becomes the first country to quit the euro (not yet the most likely outcome, but increasingly possible). The Cyprus affair won’t destroy the Eurozone – but it will show the world just how rotten the whole superstructure really is.
There is also talk of capital controls – the ultimate sign of political failure.
The contingency measures, described by three European officials, may not need to be implemented if the deposit outflow looks containable.
The measures include imposing limits on daily withdrawals from bank accounts; capping the amount of money that can be electronically taken out of the country and making these transactions slower to clear; and introducing border checks to cap the amount of cash leaving the country.
I keep hearing that Cyprus is too small to cause a run on the Euro – maybe. Yet I can’t work out why anyone would hold a Euro denominated bank account after last weekend.
And that was a deliberate choice taken by the EU to generate a degree of distrust in the currency.
So.. why do it?
Driftforge
20 Mar 13 at 8:01 pm
There’s a fifth possibility which Greece has flirted with but hasn’t yet done.
Go bankrupt and stay in the euro.
The EC and the council of ministers don’t want to kick any countries out – and they legally can’t kick them out as there is no mechanism for this anyway. If a country doesn’t voluntarily leave then it won’t.
The reason why Cyprus might do this is the recent poll which said that 71% of Cypriots rejected the cash grab but 62% of them wanted to stay in the euro.
So if they go bankrupt and stay in the euro what’ll happen really? The ECB will be pissed off since they are one of the big creditors. Merkel will not much care, since she’s got what she wanted, which is a casus belli to be re-elected. And the Russians get stiffed, which is what the Germans want anyway.
I need to go down to the store for more popcorn.
Bruce
20 Mar 13 at 8:06 pm
I certainly know ordinary French people (not your high flying movie stars or handbag makers) who have moved all their funds to Australia. Poor suckers.
lem
20 Mar 13 at 8:23 pm
Is no country to small to fail
JIm Rose
20 Mar 13 at 8:46 pm
Hmmm, a tax on bank deposits, now isn’t that normally the sort of thing the left would be in favour of? What shocks me is that supposedly smart people didn’t seem to understand they were setting up for bank runs, and not just in Cypress.
Pedro
20 Mar 13 at 9:08 pm
Currency zones have dissolved in europe before such as after world war 1.
Another example is after hyperinflation
Jim Rose
20 Mar 13 at 9:09 pm
Pedro – that is what I can’t understand. What could they possible have been thinking?
Sinclair Davidson
20 Mar 13 at 9:12 pm
Driftforge,
I’m with you.. what was this whole exercise really about? The euro-weenies in Brussels may want to control the EU frmo on high, but they’re not stupid. There’s more here than meets the eye.
One of the major outcomes from this will be yet more people distrusting Brussels – it will hasten the collapse of the EU.
duncanm
20 Mar 13 at 9:14 pm
.. oh forgot to add.. more shite like this and the EU will collapse with violence. Like the Greeks, Cyprus has learnt how powerless they are to influence anything with their vote any more.
duncanm
20 Mar 13 at 9:15 pm
“I keep hearing that Cyprus is too small to cause a run on the Euro – maybe.”
Sometimes the tiniest spark is all it takes.
Paul
20 Mar 13 at 9:16 pm
Merkel and Schäuble are of the right and Schäuble is the nearest thing to a dry in the whole EU. François Hollande has no clue and Italy has no government. That is the three top nations in the euro. Merkel needs to get re-elected. Her voters are extremely peed off by the bailouts. Is the ECB and the commission going to defy the only mob with money and balls left in the EU?
Bruce
20 Mar 13 at 9:22 pm
Bruce
I think you need this popcorn maker.
Mk50 of Brisbane
20 Mar 13 at 9:23 pm
Peter Schiff said this morning that the Cyprian banks are all basically exposed to Greece, and that they are all insolvent – this was apparently a rescue the banks operation but also ripping off of the KGB/Russian Mafia who use Cyprus as their offshore banking centre.
The EU colleagues are that slow witted.
Louis Hissink
20 Mar 13 at 9:24 pm
As the history of the 20th Century has shown, Europeans are highly sophisticated and cultured. We can’t possibly hope to understand them with our 2nd rate colonial minds.
They know what’s best.
Infidel tiger
20 Mar 13 at 9:27 pm
LOL that’ll do, Mk50. And if I run short I can borrow a full size fluid-bed roaster.
Bruce
20 Mar 13 at 9:31 pm
There a few interesting aspects to this from a pathological perspective.
Firstly the EUrotrash had to decide between ripping off the bankers or the Russian mafia. Apparently bankers are more scary than the Russian mafia.
Europe has banks that have insufficient deposits. So those clever EUropeans decide to punish the savers rather than the lenders. Truly a stroke of Genius from EUrope
John Comnenus
20 Mar 13 at 9:35 pm
One perspective that I have seen that I am pondering over is that the EU is intentionally telegraphing what is inevitably to come in order that people can and do get prepared.
And it’s hardly only those in the EU that are taking notice.
Driftforge
20 Mar 13 at 9:59 pm
Drift
You’re giving them too much credit. Hitting the Cypriot depositors was an attempt to rip money in a small place hoping it wouldn’t hit the radar.
To be perfectly honest though if they had actually proposed moving the deposit holders down to equity it would have pretty much resembled a bankruptcy.
JC
20 Mar 13 at 10:03 pm
The right seems to have jumped from claiming deposit insurance is evil to favouring deposit insurance.
Any chance of some consistency?
sdfc
20 Mar 13 at 10:21 pm
This is an option and one that get’s far too little consideration. The problem of course is that once you default you would lose your line of credit almost entire and would then have to run balanced budgets. Although I’d call that a feature not a bug.
TerjeP
20 Mar 13 at 10:22 pm
It’s the Cypriot people’s debt so why shouldn’t they pay it. Govt of the people by the people and all that. Democratic stupidity has a cost. And here’s the bill.
Pickles
20 Mar 13 at 10:32 pm
Government debt or bank debt?
Driftforge
20 Mar 13 at 10:34 pm
All of it.
Pickles
20 Mar 13 at 10:35 pm
Not just an option, but the designed intent of the Euro system.
Driftforge
20 Mar 13 at 10:35 pm
You seem woefully confused, SDFC. The proposal wasn’t in any way resembling a bankruptcy, otherwise they would have suggested a mechanism whereby the depositors received equity for moving down. They didn’t, which is why you see opposition to it.
It was basically an attempt to steal money. Shocking that you don’t see that.
You do realize that the government was suggesting that depositors even with large banks (but the money domiciled in (Cyrpus) would also have to take a haircut.
You have to try and understand shit before you speak, Mr. Big Bucks.
JC
20 Mar 13 at 10:37 pm
???
I can’t see that. It’s seems to be a solid offshore banking centre. You are hardly going to pinch $6B without repercussions; especially with $3B of that being Russian.
This was done knowing it would hit the radar.
Driftforge
20 Mar 13 at 10:37 pm
Richard North posted this beautie
Says it all.
Louis Hissink
20 Mar 13 at 10:38 pm
I see no particular reason why they should pay for bank debts rather than the banks default on their bonds.
Driftforge
20 Mar 13 at 10:39 pm
It’s hard to believe but that isn’t a load of money. it’s tiny considering the billions that have floated around over the crisis.
JC
20 Mar 13 at 10:40 pm
Peter Schiff on the Cyprus situation
Deposit insurance has also something to do with it.
Louis Hissink
20 Mar 13 at 10:41 pm
I thought the grab was by thevGovt for govt debt. Bank debt is private debt owed to various degrees by individuals. Govt debt, whatever that really means, is spread evenly. Add them up and that’s the debt isn’t it ?
Pickles
20 Mar 13 at 10:44 pm
Sure, in terms of scale its similar to the Tasmanian govt budget; not that huge in global terms.
In Cypriot terms however, its significant. And everyone elsewhere is looking at it as a 10% haircut to depositors, which translates to whatever scale you are at.
Then again, I’m assuming that the EU government isn’t as incompetent as ours. This may be a poor assumption. These are the people who labeled Wayne worlds best treasurer…
Driftforge
20 Mar 13 at 10:49 pm
My impression was it was a bank bailout, where the banks are bigger than the national government.
Driftforge
20 Mar 13 at 10:50 pm
Cause the banks went broke lending to the Greek Govt. So all the people from all about, including Tommies, who had money in Cypriot banks lost to pay for the democratic stupidity of the Greeks. But if they don’t cough up then the banks fall over and depositors lose heaps and the Govt hasn’t got the $ to pay the deposit insurance. And then something about confidence in the financial system. Good Grief.
Pickles
20 Mar 13 at 11:02 pm
I think it is you who are confused JC. In a bankruptcy the depositors would have lost a lot more than the relatively small amount of the levy.
Without the EU funds the Cypriot banking sector basically goes belly up. No independent central bank you see.
Ain’t the euro grand?
sdfc
20 Mar 13 at 11:05 pm
The banking aspect is like the Iceland financial crisis a few years ago. Most of the Iceland banks went bankrupt. The government then separated out domestic deposits and let the foreigners burn.
The main difference here is one is likely to find polonium 210 in ones soup, since dioxin turned out to be so inefficient for such things. Perhaps the Cypriot pollies should buy Geiger counters while they still have money.
Bruce
21 Mar 13 at 7:17 am
An interesting parallax take on Cyprus can be read here.
I don’t understand why this erudite writer is not on your blogroll.
Richard of OZ
21 Mar 13 at 9:23 am
I’d recommend this to read as well: http://detlevschlichter.com/2013/03/cyprus-and-the-reality-of-banking-deposit-haircuts-are-both-inevitable-and-the-right-thing-to-do/
As I understand it, the original proposal from the EU (and IMF I think) was to honour the deposit insurance for accounts under $100K Euro and apply a bigger “haircut” to the unsecured amounts over that figure.
It does seem to me that would have been a more sensible option, and not sure what the government was thinking when it decided to hit all depositors, maybe the threat of upsetting the Russians was a step too far.
But what are the options, make the Germans pay for it all ? Bugger that, the banks are failing, primarily because they are over-invested in Greek Bonds and took part in the general haircut applied there last year. When a bank fails, depositors not subject to insurance will potentially lose the lot, so this sounds like a better deal, and I agree with Detlev in the link.
Worth adding that the Cypriot Banks are an extremely dodgy lot as well, they (and the Cypriots generally) have made a lot of money out of being the prime location in the EU for money laundering and general financial shenanigans. Karma can be a bitch…
Ed Snack
21 Mar 13 at 9:40 am
“Merkel
and Schäuble are of the rightis a filthy commie who’s father was a member of the East German Stasi”There, fixed it for you.
The Beer Whisperer
21 Mar 13 at 9:56 am
It’s for that.
The Beer Whisperer
21 Mar 13 at 9:59 am
Dang. Whatever.
The Beer Whisperer
21 Mar 13 at 10:02 am
“As I understand it, the original proposal from the EU (and IMF I think) was to honour the deposit insurance for accounts under $100K Euro and apply a bigger “haircut” to the unsecured amounts over that figure.”
Actually the first plan was to take 6% of accounts under 100K, 7%+ for any over.
This was always aimed at all bank deposits.
ugh
21 Mar 13 at 10:06 am
sdfc, you can be for deposit insurance and against bank bailouts (or more accurately, bank management and shareholder bailouts). But even if you don’t like deposit insurance, you can quite consistently be against sudden taxes on bank deposits.
Pedro
21 Mar 13 at 11:22 am
“The right seems to have jumped from claiming deposit insurance is evil to favouring deposit insurance. ”
Funny @sdfc – I can’t seen the term “deposit insurance” mentioned once in the Cat article…
“Any chance of some consistency?”
Any chance of you reading the article?
ugh
21 Mar 13 at 12:49 pm
That would be “see” the term obviously…
ugh
21 Mar 13 at 12:50 pm