|
Cyprus "Breaks the Bank"
"Welcome to the year-round island. Enjoy a tour around Aphrodite’s Cyprus. The
Mediterranean island at the crossroads of three continents, where there’s always a new world to
discover. Where East meets West and a new experience awaits for you under the sun everyday." -
From the official website of the Cyprus Tourism Organization.
|
This article first published March 29,
2013
The island of Cyprus, in the far Eastern part of the Mediterranean
Sea, just south of Turkey, has long been known as a prime vacation destination. Over the past
two decades it has also become a popular place for foreign nationals, especially Russians,
to park money safely and securely with a minimum of questions asked. During this period deposits
rolled in, swelling the little island’s banking system beyond all recognition. Bankers there
of course had to do something with all the funds coming in, and the short story is that risky
bets, including too much exposure to Greece, took its toll. As has been all over the news lately,
today many banks there are on the brink of insolvency.
To bail them out, the European Union and the IMF came up with a rescue proposal: tax the depositors
of the Cypriot banks, down to even the smallest amount. The idea was the EU/IMF would provide
aid, but only if depositors with less than 100,000 euro in the bank would pay a tax of 6.75%
towards the bailout, with depositors with accounts over that amount paying 9.9%.
There’s nothing like the prospect of a ‘tax’ on money deposited by individuals in banks to
put a scare into savers. ATM machines in Cyprus worked overtime all this past weekend as people
were desperate to get as much money out as possible. Individual’s deposits in Cypriot banks
were supposed to be insured against loss, up to 100,000 euro, much as our FDIC insures US bank
deposits up to $250,000 per individual depositor. But with this proposed 6.75% ‘tax” (read:
confiscation) on even the smallest depositors, a panic set in. And no wonder.
The solution that was proposed for this banking crisis in a country of some one million residents
seemed to combine the worst of all worlds: a ‘tax’ on all bank deposits, even those supposedly
insured, and no losses whatsoever for investors who owned the bonds issues by those profligate
banks.
But Cyprus’ Parliament voted no to this proposal, which, if approved, would have enabled the
European Union and International Monetary fund to bail out Cypriot banks. Not one member of
the Parliament voted in favor, with 36 voting against, and 19 abstaining.
BBC Europe reported on 3/19:
German Finance Minister Wolfgang Schauble said he "regretted" the vote and
that Cypriots must understand ECB aid was contingent on a reform programme."There's a
danger that they won't be able to open the banks again at all," he said. "Two big
Cypriot banks are insolvent if there are no emergency funds from the European Central Bank."
Of all the blows to the reputations of banks worldwide, none could be more frightening than
the idea that a government authority would decide that the easiest route to restoring solvency
to a shaky bank would be to give a haircut to its depositors, extending down even to those
who had sums in these banks much less than the supposedly ‘insured’ 100,000 euro level. Of
course, this was Europe where this desperate idea was nearly put into action, but the immediate
thought that occurred to many in the US was, could this happen here?
Earlier this week, an email sent out by veteran precious metals promoter/opiner Jim Sinclair
set off the US blogosphere reaction to the Cyprus banking crisis. This Sinclair quote was emailed
by jsmineset.com on March 19th:
"If people believe that $13 billion is the total of this bailout, they are out
of their minds. $130 billion is not the true total of even the Russian deposits in Cyprus banks.
One important Russian businessman, in his various business enterprises, would have $100 billion
on deposit himself. 10% of all deposits in Cypress could be $500 billion or more because Cyprus
is the banking entity for Russia, not Switzerland or Grand Cayman.”
As of Thursday, 3/21, business on Cyprus has almost come to a halt: checks and credit cards
are not being honored, ATMs are being refilled daily, but banks are closed entirely. In order
to get the required EU/IMF bailout, Cyprus has to raise some 7 billion euro. The latest plan
is that this will be accomplished by a combination of privatizing some industries, increasing
both corporate taxes and taxes on capital gains, and selling bonds to a “investment solidarity
fund.” Russia is also being asked for help with a 2.5 billion euro aid package, with rights
to some offshore Cypriot energy fields being used as bait to reel in Russian help.
All this negotiating and proposed solutions are being put together in frantic haste - day-to-day,
even hour-to-hour. If no solution is found by this weekend, on Monday current EU aid in propping
up Cypriot bank is supposed to end. Should that happen, it is likely that at least two banks
will go belly up, and also that Cyprus will soon thereafter exit the euro entirely.
- In the end, an agreement was reached with the EU/IMF for a bailout for Cyprus'
banks. Some will fail, or be merged, but deposits up to 100,000 euro will be protected, with
deposits in excess of this figure likely to take big losses.
On Thursday 3/28, banks in Cyprus finally re-opened under limited hours, and on Friday were
open all day. Orderly lines formed to withdraw funds to the limits allowed, but there was no
sign of panic.
Cyprus’ economy is now primarily a cash economy, with an imposed limit of 5,000 euro per month
per credit or debit card. The country’s second-biggest lender, Cyprus Popular Bank PCL, is
being merged with the largest, Bank of Cyprus CPL. Depositors with more than 100,000 euro in
their accounts are likely to suffer what the Wall Street Journal called “huge losses.”
In Cyprus, merchants are having to pay suppliers in cash, due to heightened credit uncertainties,
and the fact that checks are just not yet viable. The stores that have stayed open are thinly
stocked, and many have not opened at all in the past few weeks. Port deliveries to this import-dependent
nation have ground to a halt. The long-term ramifications of the bank collapse in this tiny
country’s economy are uncertain.
If there are broad lessons to be taken from this crisis, the first is that un-insured bank
deposits are called that for a good reason. The act of parking money in banks without protection
is risky. This harkens back to the lesson that we learned from Iceland a few years back – whenever
a country’s banks are over-stuffed with deposits - due to the attraction of relatively higher
interest rates being offered, or the reputation that that country’s banks offer a reassuring
veil of secrecy - those banks come under a great deal of financial strain as they hustle to
invest or lend those swelling deposits somewhere, anywhere.
Here in the US, we have become accustomed to the concepts of ‘too big to fail,’ and the general
belief, born of the crises of the past few years, that our government will always provide a
benevolent ‘no-fault’ financial insurance to one and all. Slowly, and almost accidently, it
has become our federal policy that no large financial institution should ever suffer a fatal
loss, because the Treasury and Federal Reserve can always provide the capital to prevent that
from happening.
But the banking collapse in Cyprus followed a different scenario, with lessons to be learned
by one and all. And it's not likely that the phrase ‘safe as money in the bank’ will be said
in seriousness anytime soon. |
|
|
