The Good, the Bad and the Extremely Ugly (aspects of the Cyprus deal)

There are some good features of the Cyprus deal and, of course, some bad aspects. However, its repercussions for the Eurozone as a whole are exceptionally ugly and will, I submit, mark a turning point for Europe; a point at which Europe took a nasty turn toward a set of mutually disagreeable outcomes.

The Good

  • Unlike the Eurogroup’s original decision, deposit insurance for accounts up to €100 thousand will be respected. The reversal of the decision to ‘tax’ insured depositors constitutes a last minute restoration of common sense.
  • Marfin-Laiki Bank’s bond and shareholders will be wiped out – as they ought to. The original Eurogroup decision to let them off the hook (especially the bond holders) while haircutting depositors (including those whose deposits were guaranteed by the state) would have been an indefensible re-ordering of a failed banking system’s creditors.
  • The new deal treats different banks differently, as it ought to. The earlier Eurogroup decision imposed blanket haircuts on all accounts irrespectively of the bank’s bottom line. At least now uninsured deposits will be haircut in proportion to the size of the bank’s black hole, thus restoring a degree of private responsibility on the part of depositors viz. their choice of banker.
  • By forcing losses on uninsured depositors and the banks’ bondholders, taxpayers have to bear a smaller burden of the bailout loans; and this is, ceteris paribus, a good thing.

The bad

  • The Memorandum of Understanding has not been written up yet and, thus, the deal is utterly incomplete. In particular, we have no idea what degree and type of austerity will be imposed upon a collapsing social economy. Given the troika’s track record, it is almost certain that yet again they will elect an austerian package bound to crush the weaker Cypriots with ever-increasing verve.
  • The effect of the complete wipe out of the foreign depositors will have a devastating effect not just on the banking sector but also on the hotel and tourist industry. As a Russian commentator noted: “Now that the Russians’ deposits have been all but confiscated, who will stay in the €500 per night five star hotel rooms on the island? Mrs Merkel?” It is highly doubtful that the troika will factor in the deflationary effects of this aspect in their fiscal consolidation and debt sustainability plans.
  • The transfer of €9 billion of ELA money from winding down of Marfin-Laiki to the Bank of Cyprus – it flies in the face of basic banking resolution principles, reflecting the ECB’s Taliban-like defence of what it considers to be its ‘realm’.
  • Capital controls have been touted, even though it is not clear how they will be implemented, creating a second-tier euro: Cypriot euros that are no longer exportable (nb. Imagine Vermont dollars that cannot be taken out of Vermont: a logical travesty within a currency union)

And the extremely ugly

Setting aside the Cyprus drama and the tragedy awaiting its people, the repercussions of the past week’s shenanigans for the Eurozone as a whole are exceptionally ugly. As I wrote the other day, in one short week Europe has managed to put in jeopardy the sacrosanct concept of state guaranteed deposit insurance (even if, in the end, they took this threat back), to bring back into question the integrity of the Euro-area and to sacrifice the European Union’s single market principle according to which capital controls are inadmissible.

However, the ugliest dimension that the new deal has introduced is the effective end of any hopes of a genuine Eurozone-wide banking union. Mr Dijsselbloem, the new Eurogroup head who seems terribly keen to be more amenable to German thinking than his predecessor, Mr Yuncker ever was, said so in no uncertain terms when rejoicing that the Cyprus deal paves the ground for new bailout arrangements such that the European Union “…will never need to even consider direct recapitalisation” of failing banks. This constitutes the death knell of both the direct recapitalisation agreement reached last in the EU’s June 2012 summit and, naturally, of any meaningful banking union. The message is thus clear: Each to his or her own! All plans to use the ESM in order to de-couple the banking from the public debt crisis are off the table.

The combination of (a) the denial of the need to effect public debt consolidation, (b) the derailing of a meaningful banking union and (c) the heavy-handedness with which Cyprus was treated over the past week, spell a new, uglier, state of affairs in Europe. Up to now, supporters of austerity and of the German approach to the Eurozone Crisis in the deficit countries (including France) have argued that we need to go along with Berlin and Frankfurt so as to inspire sufficient confidence in those who control the purse strings (in our willingness to ‘do our homework’) before they can yield to the inevitable eurobonds, to the logic of a banking union, to whatever it takes to bring about greater political and economic union.

Alas, the Cyprus deal reveals how wrong this view was: Even though peoples throughout the periphery (in Ireland, in Portugal, even in Greece and Italy) have, however grumpily, bowed their heads to severe austerity and the removal of labour protection laws, the powers that be in Berlin and Frankfurt are shifting away from unifying moves, adopting increasingly authoritarian, divisive policies that are pushing the Eurozone in precisely the opposite direction to that dictated by political and economic sustainability.

In short, while the bailing in of inane Cypriot bankers and risk-taking depositors is to be welcome, I would not be at all surprised if the Cyprus week-long episode does not register in history’s annals as a major turning point; as the moment in history when Europe moved beyond the pale.

84 thoughts on “The Good, the Bad and the Extremely Ugly (aspects of the Cyprus deal)

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  5. Cyprus-Style “Bail-Ins” Are Proposed In The New 2013 Canadian Government Budget!

    The politicians of the western world are coming after your bank accounts.

    In fact, Cyprus-style “bail-ins” are actually proposed in the new Canadian government budget. When I first heard about this I was quite skeptical, so I went and looked it up for myself. And guess what? It is right there in black and white on pages 144 and 145 of “Economic Action Plan 2013” which the Harper government has already submitted to the House of Commons.

    This new budget actually proposes “to implement a ‘bail-in’ regime for systemically important banks” in Canada. “Economic Action Plan 2013” was submitted on March 21st, which means that this “bail-in regime” was likely being planned long before the crisis in Cyprus ever erupted.

    So exactly what in the world is going on here?

    In addition, as you will see below, it is being reported that the European Parliament will soon be voting on a law which would require that large banks be “bailed in” when they fail. In other words, that new law would make Cyprus-style bank account confiscation the law of the land for the entire EU.

    I can’t even begin to describe how serious all of this is. From now on, when major banks fail they are going to bail them out by grabbing the money that is in your bank accounts. This is going to absolutely shatter faith in the banking system and it is actually going to make it far more likely that we will see major bank failures all over the western world.

    What you are about to see absolutely amazed me when I first saw it. The Canadian government is actually proposing that what just happened in Cyprus should be used as a blueprint for future bank failures up in Canada.

    The following comes from pages 144 and 145 of “Economic Action Plan 2013” which you can find right here. Apparently the goal is to find a way to rescue “systemically important banks” without the use of taxpayer funds…

    “Canada’s large banks are a source of strength for the Canadian economy. Our large banks have become increasingly successful in international markets, creating jobs at home.
    The Government also recognizes the need to manage the risks associated with systemically important banks — those banks whose distress or failure could cause a disruption to the financial system and, in turn, negative impacts on the economy. This requires strong prudential oversight and a robust set of options for resolving these institutions without the use of taxpayer funds, in the unlikely event that one becomes non-viable.”

    So if taxpayer funds will not be used to bail out the banks, how will it be done? Well, the Canadian government is actually proposing that a “bail-in” regime be implemented…

    “The Government proposes to implement a “bail-in” regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.”

    So if the banks take extreme risks with their money and lose, “certain bank liabilities” (i.e. deposits) will rapidly be converted into “regulatory capital” and the banks will be saved.

    In other words, the banks will just be allowed to grab money directly out of your bank accounts to recapitalize themselves.

    That may sound completely and utterly insane to us, but this is how things will now be done all over the western world.

    Sometimes a “bail-in” can be done by just converting unsecured debt into equity, but as we just saw in Cyprus, often when there is a major bank failure a lot more money is required to “fix the banks” than can possibly be raised by converting unsecured debt into equity. That is when it becomes very tempting to dip into uninsured back accounts.

    In fact, some European politicians are openly admitting as much. According to RT, the European Parliament will soon be voting on a new law which will make Cyprus-style bank account confiscation a permanent part of the solution when major banks fail throughout the EU…

    A senior lawmaker told Reuters the Cyprus model may not be an isolated case, and is perhaps a future template in dealing with troubled European banks.

    The new template is now likely to turn into a full-scale EU law, letting taxpayers off the hook in case a bail-out is needed, but imposing major losses on bigger savers on a permanent basis.

    “You need to be able to do the bail-in as well with deposits,” said Gunnar Hokmark, member of European Parliament, who is leading negotiations with EU countries to finalize a law for winding up problem banks, Reuters reported.

    “Deposits below 100,000 euros are protected … deposits above 100,000 euros are not protected and shall be treated as part of the capital that can be bailed in,” Hokmark told Reuters, adding that he was confident a majority of his peers in the parliament backed the idea.

    The European Commission has written the draft of the law, which now awaits approval from eurozone member states and the parliament on whether and when it can be implemented. It’s been reported, the law is planned to take effect in the beginning of 2015.

    Are you starting to understand? […]

    A lot of people have just had their entire lives turned upside down.

    But there were some people that were told ahead of the crisis and were able to get their money out in time.

    According to the BBC, foreigners pulled a whopping 18 percent of their money out of Cyprus banks during the month of February alone…

    “Information from the Central Bank of Cyprus released on Thursday showed that foreign depositors had already withdrawn 18% of their cash from the nation’s banks during February, before the current crisis hit home.”

    So how did they know to pull their money out and who told them?

    In addition, branches of the two largest banks in Cyprus were kept open in Moscow and London even after all of the banks in Cyprus itself were shut down. So wealthy Russians and wealthy Brits have been able to take all of their money out of those banks while the people of Cyprus have been unable to. It is hard to even find the words to describe how unfair that is. The following is from a recent article by Mark J. Grant…

    So let us then turn back to Cyprus and see why the Russians are not quite so upset as they were at the beginning of the crisis. The answer to this question is Uniastrum bank which is headquartered in Moscow. Eighty percent (80%) is owned by the Bank of Cyprus. After the crisis began and right up until the capital controls were implemented the bank was open for business with no restrictions upon withdrawals. So the crisis began, was all over the Press and the Russian depositors walked into the local bank and withdrew their money from Uniastrum, the Bank of Cyprus, or had it wired in from the other local Cyprus banks and it was then withdrawn. Problem solved!

    At the same time Laiki bank and the Bank of Cyprus had operating branches in London. There were no restrictions there either so people could walk into those banks and withdraw their money as well. No restrictions at all right up until the time of the Capital Controls. In the meantime, in Cyprus, people and institutions could not get at their money so the Russians and many British took out their money, closed their accounts while the people in Cyprus were left high and dry.

    The wealthy always seem to come out ahead somehow, don’t they?

    Meanwhile, those in Cyprus with deposits under 100,000 euros are now dealing with some very stringent capital controls. In other words, there are some very tight restrictions on what they can do with their money. For example, the maximum daily cash withdrawal has been set at 300 euros. The following are some of the other restrictions that are in force right now…

    As well as the daily withdrawal limit, Cypriots may not cash cheques.

    Payments and/or transfers outside Cyprus via debit and or credit cards are allowed up to 5,000 euros per person per month.

    Transactions of 5,000-200,000 euros will be reviewed by a specially established committee, with applications for those over 200,000 euros needing individual approval.

    Travellers leaving the country will only be allowed to take 1,000 euros with them.

    When the next great wave of the economic collapse strikes, capital controls and bank account confiscation will suddenly become “normal” all over the world.

    So get prepared while you still can.

    One thing that you can do is make sure that you don’t have all of your eggs in one basket. The following is what Jim Rogers recently told CNBC…

    “I, for one, am making sure I don’t have too much money in any one specific bank account anywhere in the world, because now there is a precedent,” he said. “The IMF has said ‘sure, loot the bank accounts’ the EU has said ‘loot the bank accounts’ so you can be sure that other countries when problems come, are going to say, ‘well, it’s condoned by the EU, it’s condoned by the IMF, so let’s do it too.'”

    The more places that you have your money, the more difficult it will be for “the powers that be” to loot it.

    The global elite are fundamentally changing the game. From now on, no bank account on earth will ever be able to be considered “100% safe” again. This is going to create an atmosphere of fear and panic, and no financial system can operate normally when you destroy the confidence that people have in it.

    Confidence is a funny thing – it can take decades to build, but it can be destroyed in a single moment.

    None of us will ever be able to have confidence in our bank accounts again, and I fear that the next wave of the economic collapse may be closer than I had first anticipated.

    • Hyperbolic language aside there isn’t a single point of interest in this post. You’re simply restating and rehashing a string of commonly accepted ‘facts’ that have been force for longer than I’ve been in long trousers. Fotis, I politely suggest that from now on you stay glued to CNBC and leave the analysis to the grown-ups.

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  8. Δεκάρα δεν δίνω για σένα. Τσακίσου φύγε!

    ………συπεριφέρθηκαν οι νεοαποικιοκράτες της ΕΕ στον πρόεδρο της Κύπρου Ν.Αναστασιάδη κατά το γεύμα όπου απείλησε με παραίτηση: “Δεν δίνω δεκάρα για το πολιτικό σου μέλλον. Τσακίσου και φύγε αν θέλεις. Μόνο το ευρώ με ενδιαφέρει” του απάντησε ο χοιροτρόφος, υπουργός Οικονομικών της Ολλανδίας και πρόεδρος του Eurogroup Γ.Ντάϊσελμπλουμ, μη σεβόμενος καν την ηλικία του Κύπριου προέδρου.

    Αυτό αποκαλύπτει η WSJ η οποία συμπλήρωσε ότι ανάλογη συμπεριφορά είχε και ο Β.Σόιμπλε.

    Εν συνεχεία του επέβαλαν ότι δεν θα περάσει καν την συμφωνία από την Βουλή (και η νέα συμφωνία ήταν βέβαιο ότι θα πορριπτόταν και η Κύπρος θα έσπαγε τα δεσμά της ευρωζώνης).

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  12. I’ve been made redundant more times than I care to remember having been forced out of a reasonably good job in the early 1990’s recession and into the retail sector where I sadly remained stuck for many years thereafter. At no point did the state intercede on my behalf or left wing bleeding hearts offer up their ‘solidarity’. So you won’t be to surprised to hear that I won’t be shedding a tear for Cyprus and its reality defying populace. Why left wing intellectuals think that it is imperative that the EU should levy a tax on all its citizens in order to pay-off Russian gangsters is completely beyond me, and probably explains my progressive disillusion with the left.

    Never before has the gulf between what is required of and what is on offer from the left been starker. With the evidence of systematic collapse all around: from youth unemployment rates of 50% in Spain, etc., to moribund growth and the steady economic evisceration of the middle class you would think that a radical response offering not just a coherent analysis, but more importantly a practical alternative vision might not be too much to ask for? Alas no, what we’ve actually had from our well paid publicly funded intellectuals is essentially a deeply conservative appraisal of our situation: the result of too much greed at the top, too little union power at the bottom and not enough benign Keynesian corporatism from our political masters in the middle. This diagnosis is sheer nonsense and therefore the prescriptions on offer: namely borrowing and spending more in order to boost demand and get the whole show on the road again are equally flawed and doomed to failure.

    Richard Duncan is at least half way right when he says that the history of the last half century is essentially one of “Creditism” but he fails to ask the question why? Why was it essential in a post Bretton Woods world to inflate global credit on the gigantic scale that we’ve witnessed. The answer is simple, machines have replaced and are replacing people. People who in the real world (you know the one not inhabited by members of the economics profession) who then either receive no wage or a much depleted one, but even if this wasn’t the case and their wages stayed relatively constant they’re effective demand would erode rapidly over time as the inexorable divergence between wage generated demand failed to keep pace with technologically enhanced – potential – production. This is exactly what we’ve seen in the advanced western economies over the last few decades. The response of elites has been to borrow ever greater sums of money with which to pay for current consumption by a number of various means, the two most obvious being: directly expanding the public workforce – even under Thatcher, the state payroll rose to historic highs, and even more perniciously by encouraging asset price inflation on a criminally ruinous scale – see UK house prices since the 1970’s which is essentially no different to an internet Ponzi scheme, just on a vastly greater scale.

    Why the majority of left intellectuals still see this current crisis as one of distribution and not of production/consumption is beyond me, other than to conclude that like many whose experience of the world is almost entirely second hand in nature they simply lack the eyes to see. If like me you’ve spent the last twenty or so years working a series minimum wage, dead end jobs, the surprise isn’t that the system is screwed, but that it took us so long to get there.

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  16. The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich but for everybody.

    Friedrich Hayek

  17. I agree with your more pessimistic assesment. However I don’t agree that cutting large deposits in one bank is correct. Sharing the loss across all Cypriot banks was the worst possible choice, but the obvious right choice is to share the loss across all eurozone banks. The cut would of course be smaller, but would happen more often (and it would be simpler to achieve the same goal with inflation).

    While banks have the right to issue money as deposits (M1), this money has to have the same value across the zone. Otherwise we don’t have a single currency. If a million Euros in Laiki, or in another Cypriot bank, or in a Greek, or Italian or French or German bank is not the same thing then what we have is an opaque, non-convertible, high risk premium system of balkanized pseudocurrencies. Businesses sitting in perceived low-risk regions get to post nominal prices in a single currency, but any payments they do receive from high-risk regions take a free appreciation when they cross the risk threshold and enter a German bank. That’s a scam. A euro should be a euro in any EZ bank (offshore banks might hold M0 in vaults) or we should have floating exchange rates on transfers.

    • Well said. We can see the repercussions of this situation, in practice now.

    • In response to Pavlos:

      Why does everyone confuse deposits with currency?

      Deposits are a short-term debt instrument, and a Euro lent to Laiki overnight is not worth the same as a Euro lent to Commerzbank overnight. A Euro lent to a crook is not the same as a Euro lent to your parents. Until it’s back in your pocket (then these Euros are worth the same again). There’s no magic in that.

      KS (@KarlStrobl;

    • “the obvious right choice is to share the loss across all eurozone banks”

      Hell, no. The obvious right choice is to let failed banks go bust instad of keeping that in a zombie life stat. And if someone has to take a hit, it must be in exactly the same sequence which is now foreseen for the Cypurs banks (however, I have doubts that the different treatment of the customers in the two large banks will end up well in court).

      The rest of the eruozone banks have nothing to do with the reckless business done by the Cyprus banks. Not even more socialism for lossy banks, this must end, the sooner the better.

    • “the obvious right choice is to share the loss across all eurozone banks”

      Haha,, than all smart people will move their money out of Europe and the stupid and poor get stuck with the bill.

    • @Sam @Pedro
      If banks are treated differently with respect to risk, as just happened, than individuals and businesses have to “shop” for low risk banks. How would they do that? Banks are not funds. It would lead to flight into the perceived safest banks, and in the process destabilize them (deposits are liabilities, after all).

      Or if we want to expose people to risk then forbid bank deposits over the insured limit and force people and businesses to put the remainder in funds. It would make payments unconvenient but otherwise be a good idea.

    • @karlstrobl
      Yes, bank deposits are supposed to have the same value in any bank within a currency zone (any bank that can create M1). Otherwise, there should be an exchange rate on transfers. The current system where there’s de-facto risk pricing but no exchange rate is at best incompetent and at worst a scam.

      It may be best to keep the Euro as a physical and electronic payment currency (M0) and let it be controlled by the ECB. But each EZ country turns its M1 back into a national denomination which then floats against the Euro. Trading will be in Euro but everyone will experience the echange rate when they pay cash in or out of a local bank. Bad banks, insolvent states, and all that would then be dealt with nationally by floating exchange rates.

      Actually I think this is the best option right now. We can’t have off-parity national M1 and no exchange rates. If unified M1 is not politically acceptable any time soon then own up to the current system and make it formal with floating M1. These would be bank-only units like the ECU or SDR. They can be called DE-Euro, GR-Euro, etc. to quash the expectation of seeng them as notes.

    • @Sam, @Pedro
      If banks are individually exposed to risk then depositors and businesses have to shop for (perceived) low-risk banks. Large payments would have to be negotiated for the perceived risk of the banks involved. This is rather awkward bordering on untenable. Also, there’s no upside.

      If we want to limit deposit insurance then simply forbit deposits above the insured limit and force people to put the excess in funds. This woudl solve many problems. We’d also need a full-reserve or central bank curremcy to make large payments though (see above).

    • We should just get rid off deposit insurance alltogether. Problem solved.

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  20. Quando não conseguiram,conquistar o poder pelas armas,tudo vão tentar,pelo poder
    económico o nazismo adormecido,está a ACORDAR!!!!CAUTELA

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  23. Mr.Varoufakis, do you agree with the following theory (the new bankers resolution).

    The Long-planned Confiscation Scheme

    The deal pushed by the “troika” – the EU, ECB and IMF – has been characterized as a one-off event devised as an emergency measure in this one extreme case. But the confiscation plan has long been in the making, and it isn’t limited to Cyprus.

    In a September 2011 article in the Bulletin of the Reserve Bank of New Zealand titled “A Primer on Open Bank Resolution,” Kevin Hoskin and Ian Woolford…….

    ….ensure that, as far as possible, any losses are ultimately borne by the bank’s shareholders and creditors . . . .
    The spectrum of “creditors” is defined to include depositors:…………
    ……..The bank gets the money. The depositor becomes only a creditor with an IOU……..
    The New Zealand OBR said the creditors had all enjoyed a return on their investments and had freely accepted the risk, but most people would be surprised to learn that too

    the very smart people found the answer, who to pay the bill from the banks bankruptcy,
    the depositors, (instead of your “modest proposal”)

    Do you agree with them ?

    • It is not so much a question of whether one agrees or not. It is a question of fact: When you deposit money, you no longer own the money, you owe debt (although very high in the capital structure) that you can convert back into money any day the bank is solvent. When the bank is insolvent, the capital structure sets clear rules how much you get. This has been true for well over a century.

      KS (@KarlStrobl,

    • Mr. karlstrobl
      Can you give me examples of German failed Banks , that the depositors lost their money, the last 20-30 years. I would like to learn.

    • S.T., there may be several examples, but Phoenix Kapitaldienst GmbH springs to mind, where 30,000 Depositors lost money. I am not sure whether similar things happened in Cyprus in the past, but I am also not sure that it’s hugely relevant if it hasn’t.

      Germany has several mutual insurance funds where banks contribute into sinking funds to re-insure each other against failure of one of the member banks. Membership in such a mutual insurance scheme is legally mandatory. The system is very complicated and, as in the case of Phoenix, doesn’t always do what it was designed to do, and even where it does, depositors usually wait years for their money back.

      I am not necessarily very much in favor the German system either. It sometimes works, and sometimes doesn’t. But I am not sure there are easy answers: clearly, the general public (whether this is the state the EU, or some other political “unit”) cannot give limitless, unwritten guarantees against incompetence and failures in the private sector. And whether it was incompetence or simply bad luck if most often a question of taste rather than fact.

    • Mr. karlstrobl
      It seems that in USA, they solve the problem, much better
      ” …Now it’s very rare for the acquiring bank to not assume all deposits even those above the FDIC limit.
      . If the FDIC can’t find a buyer, the FDIC will only pay out insured deposits. Uninsured deposits over the FDIC limit will be loss (some may be recovered based on the sale of the failed bank’s assets)………
      a quick count of the banks that failed this year (2010) that weren’t acquired by another bank.
      There appears to only be 7 banks out of 149. ”

      Also we have recently the Dutch SNS Reaal. not haircut there also.

      But the worst of all, is how the ECB gave ELA 9 billion for 18 months, the 50% of Cypriot GDP, to the dead LAIKI bank ONLY, and now they transferred ELA to other bank, to destroy it also.
      What is the responsibility of the depositors ?
      Sorry for my English.

  24. I will mention the lord of darkness, the Schäuble.
    He says “” Whoever deposits their money in a country because it will be taxed less and controlled less runs a risks when the banks in these countries are no longer solvent. ”
    His excellency does not say that if someone deposited money in a bank with bad management, e.g in Germany, he has a responsibility and should lose his money, in case of failure.
    He says that anyone who deposits the money in a country where he will be taxed less and controlled less , runs a risks.
    What is your opinion mr.Varoufakis?
    Do you agree with the haircut on deposits based on the rational of mr. Schäuble?
    The European central banking system , who controlls the eurozone banks, is for the trash, not worth anything?
    Schaeuble thinks about n the interests of Germany, but what about the rest of Eurozone? What IMF says on this matter?

    • Higher return comes with higher risk. Very simple. 15 years ago the risk in the South was devaluation, now it is bankruptcy (thanks to the Euro).

  25. I agree with most points. Except:
    (x) The ELA transfer is just a consequence of the merger of the good part of Laiki with BoC. It’s inconceivable the ELA would go to the bad bank (to a bank to which the ECB would not and could not provide ELA).
    (x) The whole deal proves that a banking union IS possible. There can be no banking union if it is an automatic bailout union. There can be no banking union without a resolution mechanism. And the powers worked very hard to invent a resolution on the fly and did a good job at it. The problem EU-wide is simply too big to let creditors off the hook in all cases.
    more on that in

    • Only Berlin is point blank refusing a common resolution mechanism. The result is that no rational Spaniard should keep any money in Bankia or Stantander today.

    • These naughty Germans! After lending their credit rating to the South for 10 years which ended up in a mess, they refuse the South to have direct access to heir bank accounts!

    • Dear Yanis
      Sure the fact that bank deposits above EUR 100’000 bear some of the losses could set a precedent – and contribute to the problems of the e.g. Spain.

      I am quite sure though that Cyprus is in a different situation and will be seen as a different case: Very small, relatively wealthy, with natural gas hopefully to be produced in abundance in a few years and a location that is a bit far off – but on the other hand gives it competitive advantage in terms of tourism: If you want to go somewhere in the European winter without flying to the caribbean or so, Cyprus is (next to the Canary Islands and Madeira) one of the few options you have witin the EU.
      Plus it’s got half the size of Israel (in terms of non-desert land) and is in a comparable climate – considering all the fruit I see at the supermarket from Israel and southern Spain, that part of the economy together with more tourism should provide a decent number of jobs.

  26. It seems, from both the events and your analysis, that the “Modest Proposal” cannot be implemented any more. Given that Greece is arguably no longer “systemic” it has no negotiating power left – the only option is to play along. At least until Italy – or Germany – decides to drop the Euro…

  27. Real bummer for Mr. DIjsselbloem to be surpassed already by his chef d’equipe Mr. Van Rompuy, the latter off course being haiku expert and trouble shooter at the same time. Some few weeks on the job and already taken off it, actually, which is a blemish for DIjsselbloem and all those appointing him in the first place; former fast climber taking a nose dive in the abyss. First we had Greece and all its financial troubles, reason for the gambling conglomerate to step up the pace, up the ante with Spain, Italy, and France even.

    Finally, rest came to our rescue, thanks to Mr. Draghi, only to be put into jeopardy by someone thinking this by whatever yardstick tiny economy with some regional Ussr banking fronts needs the lesson learned not even the big nations seem to have harnessed.

    I have but one conclusion: the Global Minotaur is getting back on track, with 14 consecutive quarters of growth in the US. Does it pull yet another trick out of its sleeve here, for who is culprit here in the first place… Is it Germany, wanting its proper place back in the Minotaur-configuration? I think not: it hasn’t been out of it to begin with. If these crises have shown us one thing it must be that the roots of evil are deeper t and more cunning we could anticipate. Since there these troubles over next to nothing are in favour for the US Dollar hegemon(e)y they must somehow stem from within the Minotaur itself, not out of the woods yet.

    Pity though the stunt Wikileaks pulled wasn’t aimed at the financials. Conspiracy wise all of this could be interpreted as the most favorable scapegoating ever: what exactly did Wikileaks yield if not a lot of diverted attention…

  28. It seems, from both the events and your analysis, that the “Modest Proposal” cannot be implemented any more. Given that Greece is arguably no longer “systemic” it has no negotiating power left – the only option is to play along. At least until Italy – or Germany – decides to drop the Euro…

  29. Depositors have responsibility for bankers decisions;
    Depositors have all the information to decide taking the risk;
    The states, the central banks have not responsibility;
    if everyone is on his own, and even the uninsured depositors money is not enough,
    then the insured depositors should pay also, according to your logic.
    Because responsibility is the same for rich and poor.

    No, something is wrong in your arguments. I don’t accept it.

    • What nonsense is this, that depositors possess perfect information? That is not true even for the USA or Germany. It sounds like neoliberal claptrap to me.

    • @Guest (xenos)
      that depositors possess perfect information?

      This is what Varoufakis says, the result of his thought.

      I have the same view with you

    • Not a question of perfect information. Some information would suffice. E.g. we have all known that Marfin-Laiki was run by a gangster gang. Anyone who put millions in it deserves a greater haircut than depositors that placed their deposits elsewhere.

    • Well, large-scale investors have access to more and better information than Mr Average who merely saved some thousands and thought that all banks are safe, especially given the EU 100,000 guarantee. IN that sense, larger investors should have known that there was a risk, but presumably most of the large investors actually were the cause of the risk. The reason for not confiscating money from their accounts would be to preserve the Cypriot banking system’s relationship with Russian investors and companies.

      AS others with more knowldge than me are pointing out elsewhere, all banks in the developed world have very dodgy money and relationships, and German banks are the least regulated in the eurozone (some are saying). So, if links to criminal activity are the issue here, then let’s have some European policy on shutting down all of it. Why focus on Cyprus? Merely because it bought 4b euros of Greek bonds (at the behest of the Germans, especially Schauble, I am told by German friends)? It doesn’t make sense, other than a political decision made by Germany to close down Cyprus.

    • mr.Varoufakis,
      be sure that during 2 years, after you heard about the gangster gang, the men with millions and connections, would have taken out their money and cleared their deposits. Why doyou think, they would do business as usual ?

  30. “Unlike the Eurogroup’s original decision, deposit insurance for accounts up to €100 thousand will be respected”

    This wasn’t the Eurogroup’s decision. It was the decision of Cyprus’ government. So would you kindly stop spinning the facts until they meet your prejudices?

    “Given the troika’s track record, it is almost certain that yet again they will elect an austerian package bound to crush the weaker Cypriots with ever-increasing verve”

    Wait and see. It is by now accepted by the Troika that to much austerity in such phases is increasing the problems. I assume that this time their recipes will be different.

    “Mr Dijsselbloem, the new Eurogroup head who seems terribly keen to be more amenable to German thinking than his predecessor, Mr Yuncker”

    Juncker is a socket puppet of the finance industry. His tiny Luxembourg is much more dangerous than Cyprus ever was. It is high on time that all the finance and tax havens get a loud and clear message, I applaud Mr. Dijselbloem to have given it, finally.

    ” the powers that be in Berlin and Frankfurt are shifting away from unifying moves”

    You keep forgetting Brusselles (EU) and Washington, D.C (IMF).

    • Not only stubborn and egotistical — but also idiots!

      And look at the conclusion:
      This is all a lie. Germans haven’t just paid for the crisis, they’ve also profited from it. The savings in interest payments, which Germany have enjoyed since the beginning of the crisis, amounted to €10 billion last year alone. Plus there are the interest payments from debtor nations. The reality of the euro crisis is this: The poor of Athens are paying the rich in Germany.

      Such experiments failed in the past, and they will fail in the future. Europeans will not allow it. As Germans keep cheering on their chancellor, they should mark the words of former Euro Group chief Jean-Claude Juncker: “Anyone who believes that the eternal issue of war and peace in Europe has been permanently laid to rest could be making a monumental error. The demons haven’t been banished; they are merely sleeping.”

    • Of course it’s a lie Xenos.

      This is typical Berlin propaganda and crocodile tears. This well known tactical/behavioral pattern goes as follows:

      Print an article which embraces the “feelings” of the losing side and then proceed to do as you please anyway. The vanquished appreciate that you “took the time” to see things from their own point of view and begin to hope again. Such false hope then opens the way for the complete and final steam rolling of innocent citizens.

      It’s very cruel and sadistic stuff really. But you know all of this already, don’t you?

      This is nothing more than scripted cruelty towards the victims. It also increases the torturer’s sadistic pleasure. The final byproduct is the discovery of the exact tolerances of individuals which are carefully recorded towards future experimentation.

    • @Dean. In any democracy, there are different factions of opinion and locations of power and it is rare for those opposed to government policy to be completely stifled. The bigger question with this article is if it was published in German, or was simply made for foreign consumption.

    • “The savings in interest payments, which Germany have enjoyed since the beginning of the crisis, amounted to €10 billion last year alone.”

      What nonsense! It only is going back to normal. Germany always enjoyed better interest rates than the South. And looking at the current crisis you can see why. If you take away the tool of devaluation from politicians of Latin countries their failure in managing finances becomes ever more apparent!

  31. Thanks for the informative analysis, so much better than main stream media.

    One thing that no one ever explains is, what do they do with the bail out money. Where does it go? Who gets it?

    Just sounds like they are robbing average citizens to pay for their mega bonuses.

  32. “Turning point?” My goodness. Were you have been the last 3 years or so?
    Eurobonds? equal interest rates for cyprus and finns or germans, for example? sure…i just wonder when you consider yourself as to be totally on the wrong track…another 3 years?

    • “equal interest rates for cyprus and finns or germans, for example? ”

      There were almost identical interest rates for all Eurozone countries between 2001 and 2009. A lot of good some countries made of this for them much to cheap money.

  33. So the ESM may never come into effect as an instrument for the direct recapitalization of banks. What was good about the idea of direct recapitalization of banks? It was the severing of the link between bankrupt banks and states. However what sustains that link is the premise that when a bank is failing it will be bailed out. The ESM would simply be the one doing the bailing out and not the state, or in other words, the EU citizen and not just the national citizen. This should only ever be done for systemic banks (i.e. perhaps it should have been done for Lehman Bros) and even there with huge penalties for the bankers. In European banking sector landscape that is changing (very slowly?: yes!, as yet insufficiently?: yes!) as evidenced at least by increasing capital ratios the poor decision-making of bankers should be born by the corporation and its environment (sadly this includes uninsured depositors) – not the EU citizen. Where however the plot thickens and the story turns nightmare is that Laiki and BOC may not be systemic for the Eurozone but most certainly are for Cyprus; also the vastly different treatment of the Irish banks suggests that this is not enlightened principal that is guiding the hand of the European authorities but a biased assessment of the identity of depositors.

    • The idea of systemically important banks is bankrupt. Northern Rock in Britain, Bankia in Spain, MPS in Italy, Dexia in the Low Countries, the cypriot banks now – none of them would ever qualify as systemic. And yet they are the banks that caused the Eurozone banking system to teeter on the verge. You are quite right that bankers and their creditors must pay when their banks go under. Direct recap, however, together with a common deposit insurance scheme (FDIC-like) is part and parcel of an orderly resolution of banks within a monetary union. Now, without direct recaps and a banking union, all we shall get is a massive capital flight from the periphery and the irreversible decomposition of the monetary union. Cyprus gave the green light to this terrible process.

    • @yanisv: I don’t understand. Direct recap was meant to save the banks when the state is bankrupt, not simply in all other cases too. Resolution does not mean automatic bail-out. It can mean orderly wind-down, as it does in this case.

    • Not so. The Cypriot state is also going bankrupt on behalf of the banks. It has to borrow from the troika 65% of GDP under conditions that will deepen its insolvency.

    • Yani, you touch on an important problem: The EU takes the blame for lending too much (65% is a lot to pay back) and for lending too little (65% is not enough to leave the depsitors untouched). The truth is, there are no easy answers any more, other than handing money over and writing it off on day one. That’s an easy answer, but no-one is ready for that one (yet).

    • Completely disagree. If the bank recap and resolution Laiki was handled directly by the ESM, it would cost less all around and would produce a very good outcome.

    • You are rushing to conclusions about my position. For three years I have, too, been advocating bank resolutions in order to avoid the zombification of Europe’s financial system. BUT, I have also insisted that this must be accomplished centrally, by an ESM which, in collaboration with the ECB, takes equity in the failed banks, shrinks them appropriately, recapitalises the viable parts and then sells off the latter to private investors at a profit (TARP and Sweden circa 1992-like). The idea that different banks will be treated differently depending on the strength of the state in which they are domiciled is inconsistent with the notion of a currency union.

    • “If … Laiki was handled directly by the ESM, it would cost less all around and would produce a very good outcome.”

      Well that depends on the stakeholder. It would not produce a good outcome for German & Finnish taxpayers.

  34. “The transfer of €9 billion of ELA money from winding down of Marfin-Laiki to the Bank of Cyprus”

    Are they not transferring the linked collateral assets as well? Isn’t this to save the Cypriot Central Bank calling in the collateral and liquidating them?

    • “linked collateral assets”

      Which would be worth more than a lemon tree?

  35. It´s time to think the unthinkable. Everyday it seems increasingly impossible to find a solution to the troubles of the Mediterranean countries in the confines of the E.U.

    How about a trade of partners? If instead of Northern Europe , Mediterranean countries should establish a trade community with Latin America? That´s far fetched , I know, but some radical re-think must be in the cards , otherwhise there’s not even leverage to negotiate. Maybe if Germany an France contemplate the economic mess that will result from something like this , they will be more open to a real federal Europe, which is the only way forward.

  36. Me thinks the Cyprus-Deal is UNFAIR. For two reasons:

    (1) why is the ESCB made whole? Compared to ordinary depositors the ESCB had for months intrinsic knowledge about the financial situation of Cyprus’ banks. Nonetheless they continued with ELA.

    (2) why are foreign bank deposits (interbanking credit) privileged and there’s no haircut on these deposits? Again the Eurogroup and the Troika are protecting their banking buddies at the expense of innocent outsiders, this time depositors.

    Summary: the ESCB and foreign banks helped themselves and made themselves whole at the expense of uninsured deposits. And this is UNFAIR.

  37. What I don’t understand is why we aren’t seeing bank runs in Spain. I have been hearing that their banks are teetering on the edge for months — and the news from Cypress suggests that depositers can expect to see their money evaporate.


    • We have been withdrawing money in Greece, for over 2 years. Its a cultural thing. So there isnt much left for a haircut. They wanted to, but we failed them.
      A lot more is done here, quietly. The end is coming, with a bang !
      Guess whoś gonna fall the hardest. Hellas or the germans?

  38. This was the start of the END.
    Hopefully the Greek authorites will start preaparing for the change to a naitonal currency.

    • that’s a good one. As if they were even considering the thought of initiating a discussion on whether it would be even remotely possible to start investigating this possibility….

    • No. You have to Keep the peace & prosperity currency (EUR). It will bring peace & prosperity to Europe! – If not, send us your sons and daughters to work off your debt in Restaurants etc..

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