Cyprus govt to seize 6.75% of all bank accounts as of Sat morning

[FUEGO]

Looks like a new deal is nearly done. Of course there have been several "deals" almost done, so hard to be sure about what will happen until it's finalized. Banks appear to be honoring the EU bank guarantee of accounts under 100,000 Euro and taking most or at least a large amount out of any deposits above that amount.

In many ways this is like FDIC insurance in that in case of an insolvent bank, deposits up to the insured limit are guaranteed and above that are not. In practice FDIC has worked to make those depositors with large accounts lose little, but the confidence in the system through the stated guarantee remains.

From the onset, it sort of sounded like this "tax" was a way to implement major financial overhaul and restructuring of banking finances in way that is least bad. With this method you get a structured default (whether you call it that or not is functionally irrelevant) instead of a relatively more disorderly chaotic default.

 

[Brat]

I predict that folks will spread their Euro money around. Interest rates will be the least of their concerns.

 

[jon-nyc]

“When the Russians leave who is going to stay at the Four Seasons for $500 a night? Angela Merkel?”

Russians prepare to quit Cyprus - FT.com

 

[Running_Man]

Dutch Finance Minister Jeroen Dijsselbloem, who committed taxpayer funds to take over SNS Reaal NV (SR) last month, said troubled lenders in the euro area must now fend for themselves as part of future euro rescues.
Dijsselbloem, who leads the group of 17 euro finance ministers, said imposing losses on depositors and bondholders must be part of the bailout toolkit after such measures were taken to avoid default in Cyprus. His comments, to Reuters and the Financial Times, were confirmed today by Dijsselbloem’s spokeswoman, Simone Boitelle.

One percent on your savings and a need for depositors to pitch in for bad loans, I wonder how a banking system is supposed to have a valid working model in such an enviroment.

Ukip leader Nigel Farage in England is recomending all English people take their money out of banks in Spain. It will be interesting over the coming months to see if the European Union is able to avoid other major banking issues.

 

[audreyh1]

One percent on your savings and a need for depositors to pitch in for bad loans, I wonder how a banking system is supposed to have a valid working model in such an enviroment.

Ukip leader Nigel Farage in England is recomending all English people take their money out of banks in Spain. It will be interesting over the coming months to see if the European Union is able to avoid other major banking issues.

This is normal procedure when a bank fails. Insured deposits are covered, but deposits above the insured level may not be made whole. Same in the US.

What was amazing was that the initial proposal from Cyprus would not have made the insured deposits (up to 100K Euros) whole, but charged all depositors. The current agreement is more like a normal bank failure. Banks fail, and depositors need to take precautions when they make deposits. No free lunch, depositor beware, etc. In the US we all pay attention to FDIC limits on accounts (I hope).

 

[Alan]

This is normal procedure when a bank fails. Insured deposits are covered, but deposits above the insured level may not be made whole. Same in the US.

What was amazing was that the initial proposal from Cyprus would not have made the insured deposits (up to 100K Euros) whole, but charged all depositors. The current agreement is more like a normal bank failure. Banks fail, and depositors need to take precautions when they make deposits. No free lunch, depositor beware, etc. In the US we all pay attention to FDIC limits on accounts (I hope).

Exactly. The banks were paying 4.5% compared to <1% from their counterparts in France, Germany, etc. When investors chase such high yields they have got to know it is high risk. I was pleased to see that the small investors are being made whole, just as they are here with gov backed insurance.

 

[RetireBy90]

I didn't see anyone notice that the fed has done the same here, taking $$ from savers and giving it to those that will/can borrow at ultra low rates. These engineered rates cause savers to get less than you lose to inflation, so considered a wealth confiscation by some. Not trying to beat up the fed, but it does grate wrong way for me at least.

 

[clifp]

This is normal procedure when a bank fails. Insured deposits are covered, but deposits above the insured level may not be made whole. Same in the US.

What was amazing was that the initial proposal from Cyprus would not have made the insured deposits (up to 100K Euros) whole, but charged all depositors. The current agreement is more like a normal bank failure. Banks fail, and depositors need to take precautions when they make deposits. No free lunch, depositor beware, etc. In the US we all pay attention to FDIC limits on accounts (I hope).

I agree this is more or less a normal bank failure, although depositors losing 20% and senior bondholders being wiped out, I think is pretty unusual for medium sized bank.

I also know there is some very unhappy Russian Mafia, and wonder how they are going to react. Let's put it this way I wouldn't want to issue life insurance for any bankers/finance minister who pushed this proposal.

 

[MichaelB]

My understanding from the FT this morning is depositors don't lose, deposits over 100K euros are moved into a bad bank and the depositors will get whatever the bank can bring. All bondholders are stockholders are wiped out. That seems a typical approach for bank failure.

 

[imoldernu]

I didn't see anyone notice that the fed has done the same here, taking $$ from savers and giving it to those that will/can borrow at ultra low rates. These engineered rates cause savers to get less than you lose to inflation, so considered a wealth confiscation by some. Not trying to beat up the fed, but it does grate wrong way for me at least.

+1
and that's just for starters.
Leverage the that same money by X times and it explains the US Banking System.

The "saver" gets it all back as shares of the banks stated assets.

Likely the new EU model.
http://dealbook.nytimes.com/2013/03/25/cyprus-rescue-deal-establishes-addresses-important-principles/?src=recg

 

[clifp]

My understanding from the FT this morning is depositors don't lose, deposits over 100K euros are moved into a bad bank and the depositors will get whatever the bank can bring. All bondholders are stockholders are wiped out. That seems a typical approach for bank failure.

But the large depositors are just one of the creditors of the bad bank, ahead of stockholder but equal to senior debt holders, and there is no where near enough assets to pay off all of the creditors. I have heard numbers as low as 20% and as high as 40% haircut for the depositors (for the Lativa bank).

 

[Stanley]

I am going to cash in my Greek bonds and use the money to buy waterfront property on Cyprus. Finally, I will have my 2nd home away from the cold and snow.

 

[MichaelB]

But the large depositors are just one of the creditors of the bad bank, ahead of stockholder but equal to senior debt holders, and there is no where near enough assets to pay off all of the creditors. I have heard numbers as low as 20% and as high as 40% haircut for the depositors (for the Lativa bank).

I haven't seen anything on how the new creditors line up. Certainly, your numbers do not seem out of line.

 

[traineeinvestor]

Meanwhile Russia was reportedly advising all their citizens to withdraw everything from all Western banks. Not sure what they were supposed to do with it then.

My guess would be Switzerland or some of the Asian banks. Of course, if they want to stay small, Iceland is open for business again: Einstaklingar | Íslandsbanki

 

[UserRequested]

I rather doubt that there would be too many wealthy Americans using bank accounts in a place as small and flaky as Cyprus. Switzerland, Luxemburg, etc. would be more like it.

I doubt whether even Switzerland is worth it anymore to Americans. Banking secrecy laws are no longer what they were. The IRS is after all the tax it can get.

 

[traineeinvestor]

My understanding from the FT this morning is depositors don't lose, deposits over 100K euros are moved into a bad bank and the depositors will get whatever the bank can bring. All bondholders are stockholders are wiped out. That seems a typical approach for bank failure.

I'm not sure why bondholders (other than holders of subordinated bonds) should be treated any worse than uninsured depositors and other unsecured creditors? In theory they should all rank pari pasu for their claims.

 

[bondi688]

After Cyprus, eurozone faces tough bank regime - Eurogroup head | Reuters

"A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors, the head of the region's finance ministers said.

Asked what the new approach meant for euro zone countries with highly leveraged banking sectors, such as Luxembourg and Malta, and for other countries with banking problems such as Slovenia, Dijsselbloem said they would have to shrink banks down."It means deal with it before you get in trouble. Strengthen your banks, fix your balance sheets and realise that if a bank gets in trouble, the response will no longer automatically be that we'll come and take away your problem. We're going to push them back. That's the first response we need. Push them back. You deal with them."

That statement by Eurogroup head Jeroen Dijsselbloem to the Financial Times and Reuters has sent the euro tumbling, his office is now busy doing damage control by saying the Cypress case is specific and not meant to include banks in Spain, Italy and other countries.

Was his statement mis-interpreted or did he let the cat out of the bag inadvertently?

 

[MichaelB]

One has to love the financial media. "Sent the Euro tumbling" all the way from 1.305 to 1.295. The need for drama and overstatement is amazing.

 

[bondi688]

One has to love the financial media. "Sent the Euro tumbling" all the way from 1.305 to 1.295. The need for drama and overstatement is amazing.

Maybe you should tell that to the Guardian newspaper, that is where I got the statement from, and the Guardian is supposed to be not in the same league as the Daily Mail, Telegraph or the Sun

 

[Texas Proud]

One of the things that I find interesting is that it seems that the reason that the Cypress banks are in trouble is because they held a lot of Greek bonds...

IOW, the EU 'fix' for the Greeks (a 70% haircut on their bonds) caused the Cypress banks to go under... I am sure the ripples will continue to cause other things to happen...

 

[Running_Man]

Another intersting tidbit, if you put 100K Euros in the biggest and second biggest banks in Cyprus it is being viewed as 200K and you are a large depositor with a probable 40K Euro hit. If you put in one of the two largest and 3rd or smaller bank you are going to be made whole.

 

[imoldernu]

Before you get too worried about the Russian Millionaires who had their money stashed in Cyprus Banks, you might want to read this Reuters article.

INSIGHT-Money fled Cyprus as president fumbled bailout | Reuters

Apparently many if not most of those "savers" used loopholes in the system, to withdraw their wealth either before, or in spite of the "Asset Freeze". Essentially this leaves the unsecured (and maybe even the secured) people of Cyprus to absorb a loss that is likely to bankrupt the entire country for decades.

Locating Cyprus

 

[clifp]

The pain to large depositors is even worse than envisioned.

From the WSJ

NICOSIA, Cyprus—Cypriot officials gave the first indications of the steep losses facing large deposit holders at the island's two biggest lenders, as hundreds of angry bank workers staged a demonstration outside the central bank and demanded the resignation of its governor.
Cyprus's central bank chief said Tuesday that large depositors at the island's biggest lender, Bank of Cyprus Pcl, could lose as much as 40% on their deposits. In a television interview later, the finance minister said large uninsured deposit holders at the second-biggest, Cyprus Popular Bank Pcl, might only see one-fifth of their money returned and could wait several years before being paid back.

 

[growing_older]

This is probably a direct result of the other large depositors who were allowed to remove much or all of their deposits while this solution was being negotiated and debated. The banks were ordered to be closed, but many allowed substantial hardship withdrawals, with only discretionary rules for what constituted hardship, and banks with offices or corresponding banks outside Cyprus kept those outside locations open and allowed more or less unlimited withdrawals. The smart (or connected) money was allowed to flee, so only those who didn't know or couldn't act will be in the pool of uninsured depositors. The supposedly "clean" solution of following typical insured deposit rules is deeply tainted by allowing many to escape consequences.