How To Start A Global Banking Crisis: Cyprus Edition

Usually, when I write a post on this blog, I am either trying to explain a subject which I have expertise in, or I’m soliciting reader input/advice on a particular topic.   Today, however, it’s kinda a bit of both and yet neither:  I know jack doody about Cyprus, and yet the effects of their proposed action are so *obviously* disastrous to me that I am flat out flummoxed.

Cliff notes:  Cyprus has a bank deposit insurance program (100k EUR).    They also have a asset/liability issue.   They decided to impair insured deposit accounts with a mandatory 6.7% “tax” on insured accounts under 100k EUR, and a 9.9% “tax” on accounts over 100k EUR.   You can call it a tax, confiscation, levy, one time special fee, bail-in, or whatever else you like, but the bottom line is this:   they have stated that their deposit insurance is not money-good.

First off, this isn’t a done deal yet.   Secondly, this was done in accordance with the Eurozone and the IMF.   Bondholders are protected and depositors – even insured depositors – are made to eat the losses.

Now, readers know that I’m generally not the kind of guy who looks for cataclysmic read-throughs in every story, who induces panic where no panic is necessary, or who tends to take a “OMG THE SKY IS FALLING” view of every global financial news story.  But this shit, is, as they say: CRAY.

Here’s the question that everyone seems to be asking, but no one seems to have the answer to:

If you have money in a Cyprus bank*, why on earth would you leave that money there after this event?   And oh, while you’re at it trying to answer that question, please ask yourself the same question, only change “Cyprus” to “Spanish”… and then to “Italian”… or maybe “Irish”…

The Eurozone has, by endorsing this plan, committed banking suicide.   Without valid deposit insurance, how do you stop runs on the banks?    Didn’t Cyprus just *ensure* a run on their own depository system?

Or, is this where my lack of knowledge about Cyprus comes in:  I understand that Cyprus is a hotbed for money laundering by Russian Oligarchs – will they just say “Da, Da – cost of doing business.  Still better than Mother Russia” ???   Will Spanish/Italian/Insert-weak-Eurozone-financial-member here depositors shrug this off and not care?

More importantly, as Felix Salmon asks, why didn’t they just make insured depositors whole and hit the uninsured depositors with a higher tax? (Avoid pissing off Russia, obv, but the price of Not-Pissing-Off-Rich-Russians seems, to me, to be banking suicide)   That’s not an ideal solution, but it’s better than the proposed one! (A few people on Twitter answered my call for data by citing a JP Morgan report which estimates 38B EUR of uninsured deposits and 30B EUR of insured deposits).  Felix summarizes:

“What we’re seeing here is the Cypriot government being forced to break one of its most important promises — the promise that if you put your money in the bank, and your deposits total less than €100,000, then they will be safe. What’s more, there’s no good reason for insured deposits to be hit in this manner: the same amount of money could be raised just by taxing the uninsured deposits at a slightly higher rate. The insured depositors are being hit, it seems, just so that the uninsured depositors can be taxed at single-digit rather than at a double-digit rate.”

This post was chock full of questions, and I haven’t seen any good answers from anyone… Which makes me think that either:

1) I am an idiot, and everyone who I read is also an idiot, everyone who reads me is an idiot,  and everyone who I communicate with on Twitter is an idiot, and none of us “get it”, or

2) Someone f*cked up pretty bad here**…

I’m leaning toward the latter.   Or maybe I’m missing some subtlety where the goal of the Eurozone BigWigs is to blow up the Euro once and for all, getting all of the weaker members to implode?

If I have any readers in Cyprus, please do explain to me what you will be doing with your deposit accounts once your funds are freed up after this “one time” tax is levied on your account.   I am quite sure I have readers in Spain/Italy/Portugal/Ireland, and I’d love your answers to the same question:  how do you still have faith that your money will be there when you want it in accordance with the insurances afforded your accounts?

I know one thing:  if my banking system reneged on my deposit insurance, I would not give them the chance to impair me again…

Related:

Nemo @ Self-Evident – Are They Completely Mad?

Felix Salmon – The Cyprus Precedent

FT Alphaville Joe Cotterill – A Stupid Idea Whose Time Has Come

-KD

disclosure: no positions in Cyprus

* Note: there will be no transferring of money out of banks before the “tax” is assessed  – they have already frozen funds, as far as I understand.

** from commenter y2kurtus on Felix Salmon’s post:

“Cardinal rule #1 when trying to solve a financial crisis:

THOU SHALL NOT F**k INSURED DEPOSITORS.

Now we’ll see what happens when you break the rules!”

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