Cyprus Bailout: Stupidity, Short-Sightedness, Something Else?

http://www.cyprus.com/cyprus-bailout-stupidity-short-sightedness-something-else-.html

by mike_esspe • 13 years ago

68 85 13 years ago

acqq• 13 years ago

The best analysis of what was really going on I've read up to now.

anigbrowl• 13 years ago

The Economist has pretty good analysis too, but then they would, wouldn't they? This is excellent, and refreshingly grounded.

don_draper2• 13 years ago

Maybe I missed it. What solution does the author offer?

vwinsyee• 13 years ago

There's a link at the top "UPDATED: What do we do now?" -- http://www.cyprus.com/cyprus-bailout---what-to-do-now.html

avel• 13 years ago

The last paragraph (15.) offers alternatives as well.

arethuza10• 13 years ago

"Supplement with nationalization of pensions"

So the alternative is to take money people have saved for pensions rather than hit bank depositors over 100K???

vxNsr• 13 years ago

Wow, great run down, kinda makes you wanna keep your money in a mattress though, especially if you're from some small country like that...

raverbashing• 13 years ago

Oh by the way

While Cypriots were queuing in the ATMs to withdraw 300€ tops (then reduced), Laiki Bank was open in London, and accepting all withdraw orders.

http://www.zerohedge.com/news/2013-03-25/have-russians-alrea...

Devilboy• 13 years ago

What the fuck

chollida1• 13 years ago

UK banks aren't regulated by the EU, so the banks essentially act as if they were divorced from their counterparts in Cyprus.

The same thing happened to Cyprus banks with branches in Russia.

I'd be more than a bit pissed if I was from Cyprus, though if I was a wealthy Brit or Russian, I'd be very pleased about this...

bobbyongce• 13 years ago

A great article. I think the EU made a big mess up by even considering not honouring the deposit insurance scheme. Now everyone knows that the insurance is not really an insurance and the government can grab it anytime a crisis happens. All the trust built up over the years is gone with just one action.

Also all the big accounts with a large haircut will now cause almost all businesses to be affected. It will be very hard to see any business surviving this cashflow crunch in Cyprus.

tkorri• 13 years ago

It has been reported that the initial idea to not honour the deposit insurance actually came from Cyprus, not from the EU. But I agree it was stupid move from the EU to go along with this plan.

thebmax• 13 years ago

This is really interesting and makes the whole situation seem absurd. It makes you wonder what they (the EU) are thinking. It is really scary that this can happen in this manner. Each individual bank was not treated differently - some Cyprus banks stayed conservative and didn't put their depositors money at risk and are still being wiped out. Amazing - and scary.

ProblemFactory• 13 years ago

Is that really the case? From what I've understood from the news, accounts in banks that haven't lost their customers' money are safe and operating as usual.

Depositors are only taking a loss at bankrupt banks where their money was wiped out by bad investments, and now EU and Cypriot taxpayers are refunding a portion of it.

lazyjones3• 13 years ago

I like the conspiracy theory about natural resources. Incidentally, Greece is also sitting on huge natural gas reserves: http://www.globalresearch.ca/the-new-mediterranean-oil-and-g...

The way the greek problems were handled by the EU under german "leadership" could be interpreted the same way (extremely stupid or conspiracy).

terhechte3• 13 years ago

Time to quote Hanlon's razor again:

“Never attribute to malice that which can be adequately explained by stupidity.”

I doubt there's any conspiracy at work here, it's just the outcome of large scale politics.

xfs• 13 years ago

"Any sufficiently advanced incompetence is indistinguishable from malice."

lazyjones3• 13 years ago

What if the action actually doesn't seem so stupid in the long run, if they manage to force these countries to give up their resources in exchange for a bailout?

alan_cx• 13 years ago

Er, this turned in to a rambling rant. Some of it might be worth reading....

I don't agree with this analysis. Its a one sided argument against the current plan. Which is fine, but its certainly not the whole story. Part 15, the solution, is absurd. It has all the problems outlined in the previous 14 points. It is no solution, because there isn't a reasonable no pain solution. People are literally saying anything that pops in to their heads because the cant cope with the idea proposed already. I get that, but there isn't really an alternative. The country, or to put it another way, a big group of people, have gone way too far in to debt. An individual in the same circumstances would go bankrupt, but that is not an option for a country, as far as I know. In the end, they have to settle the debts. Not only that, borrow more money to survive.

What interests me is the reaction of the people. It all seems a bit civilised. There isn't much worse a government can do to its people, yet the people seems incredibly calm about it. I am still surprised that the people haven't stormed their parliament. This i the real test. How far can you push a population? Looks like you can push them pretty far.

Also, I still cant get my head round peoples who vote in governments then trying to separate themselves from the actions of that government. Or take out loans, then blame the banks for handing those loads out. Or scream hysterically about socialism, when its capitalism and its basic law of supply and demand that has caused the whole mess.

The biggest joke of all, in the UK at least, is that with a disaster caused by banks dishing out toxic loans, the banks are now under pressure to loan out more. Half the problem is people now working to pay off loans, reducing the amount of money that can be spent in general. We want them to borrow more, when their jobs are uncertain?

In the end, the problem is greed and impatience, and us the people demanding that we are loaned the money to satisfy that.

Im sorry, but IMHO, the whole system is a wreck, and no one wants to take responsibility for any of it. Governments are too interested in protecting votes, and that is making them avoid any harsh but effective solutions.

Anyway, point being, I'm not seeing any realistic long term solutions anywhere. The Cypriot idea is interesting to me, and rather than knee jerk against it, I am interested in seeing how it pans out. I mean, what if it works? The UK is said to have triple dipped, so what ever is going on here isn't much cop, we are just scraping along the financial gutter. Could a one off injection of all our money save the day? Its our country, our debt.

I'm stopping now. I'm boring and confusing myself....

DeepDuh3• 13 years ago

Why is insolvency not an option for a country? It was in Sweden, which is doing fine now, and in Argentina more recently. Oh look, there's a whole lot more of them[1]. It only isn't an option for a member state of the EU. I sure don't see how Germany's strategy of starving those already struggling economies to death is going to work out.

[1] http://en.wikipedia.org/wiki/Sovereign_default#List_of_sover...

namdnay2• 13 years ago

Sweden isn't in your list. In fact the last "rich" country was Germany in 48.

Btw, defaulting was an absolute disaster for Argentina

klapinat0r• 13 years ago

For a country whose sole gdp generator is the banking sector, with that amount of foreign holdings it would be fatal. I'd only imagine how their relationship with Russia would be if Cyprus null'ed their holdings.

I may be exaggerating, but think of it as Switzerland losing it's bank sector. How would you begin to build up a new economy which, as of yet, biggest sector is banking, for instance. Think of the large population that would be instantly out of work.

At least, that's my guess at why an insolvency wouldn't be the best option for Cyprus.

pmorici• 13 years ago

"I'm not seeing any realistic long term solutions anywhere."

What about what Iceland did? They actually held the people that ran the banks accountable and let them fail.

don_draper2• 13 years ago

I think Iceland is a great example of a better option. Iceland is still a tourist destination with educated people providing other products and services. As long as your country has stuff people are willing to pay for you'll be ok (even if you go bankrupt).

adestefan• 13 years ago

Because Cyprus doesn't have the money to back the insurance on accounts less than 100,000€. If Cyprus did the same thing as Iceland, then a lot more people would be losing a lot more money.

zby• 13 years ago

Is it really the country that is insolvent or is it only the two banks: Laiki and Bank of Cyprus?

justincormack2• 13 years ago

The country is insolvent too, has been unable to borrow for some time. This makes the options available rather limited. Iceland had little government debt when it had problems.

auxbuss• 13 years ago

"In the end, they have to settle the debts."

This is the foundation or your argument and it is wrong. At best, it's an assumption.

The best treatise on this subject, imo, is David Graeber's : Debt: The First 5000 years.[0]

Graeber is an anthropologist -- he's about to take the Chair as Professor of Anthropology at LSE -- so it is far from being a dry financial read.

It's a fascinating text that will, if not change, certainly make you rethink any assumption you have about debt and money. In fact, in the early chapters he disconnects debt from money entirely.

From page 2: "Surely one has to pay one's debts". It tackles your comment head on, but not in the way you might expect.

[0] http://en.wikipedia.org/wiki/Debt:_The_First_5000_Years

arethuza10• 13 years ago

"You never, ever, ever, hit insured depositors."

The current deal only impacts depositors with more than 100K in the banks - more than this wasn't insured anyway.

"You should basically never hit non-insured depositors either."

Why? Since when is there a guarantee that banks are 100% safe? If people deposit large (i.e. over deposit guarantee limits) in a bank to benefit from the high interest rates they are taking a risk with a reward - if this goes wrong then why should other more prudent people have to bail them out?

danmaz74• 13 years ago

I completely agree. IMHO the real mistake was "just" the initial announcement that included a tax on the insured <100k part of the accounts.

arethuza10• 13 years ago

Wasn't that the Cypriot's own idea though - the EU didn't suggest that?

youngerdryas• 13 years ago

Only in Europe could this seem reasonable. This is a horrible precedent and I wonder how much money will move out of EU banks.

arethuza10• 13 years ago

So you suggest that the banks should have been allowed to fail and only deposits up to 100K Euro would be guaranteed?

yannis2• 13 years ago

Agreed that no depositor should be hit. The failure here is that of the ECB which has not managed to regulate banks properly to reduce the risks of failure.

akjj• 13 years ago

Bank regulation is not the responsibility of the ECB. Each EU country is responsible for regulating its own banks. This is one of the criticisms of the EU system: the currency is continent-wide, but there's no centralized bank regulator.

netcan2• 13 years ago

I completely disagree with this idea.

It's trying to avoid avoid reality. What you are saying is that no one should ever be hit. banks shouldn't fail. The reality is that banks do fail. They fail because of bad management. They fail because of bad financial environment. They fail because of bad regulation. Whatever. They do fail. That is reality.

We need rules that define what happens when they do fail. We need to be able to survive bank failures the way we can survive failures of other companies.

We can't just keep deciding that banks should never fail again.

mmariani• 13 years ago

To be honest, expect more of this crap.

The only question now is who's next?

http://youtu.be/thSTpGnWEAs

maked002• 13 years ago

We are. The laws have been passed. Our (US) savings are now up for grabs. In return, you get some worthless stock.

claudius12• 13 years ago

> Cyprus is a 78% services-based economy.

Well, fix that.

return06• 13 years ago

Why? Services (incl. tourism) are great; it's a tiny country in a region which actually needs financial services (arab countries, russia). Is the EU unwilling to save their banks? fine, let them bail themselves (which is what they are doing). Why the fuck do they have to order a whole nation what to do? What's next? ask luxembourg to start herding cows?

claudius12• 13 years ago

> Services (incl. tourism) are great

Until they fail, cause a world-wide recession and main street has to bail out wall street.

> Is the EU unwilling to save their banks?

Ideally, it indeed would be unwilling to save bloated up banks unrelated to the local financial needs.

> fine, let them bail themselves (which is what they are doing). Why the fuck do they have to order a whole nation what to do?

They tried to get money elsewhere, but even Russia didn’t feel like helping out. Now they want European money and I would assume it only to be fair to require that in order to get that money, they have to ensure they won’t need it again in the near future, i.e. scale down their bloated banks which apparently threaten the actual economy on the island.

> What's next? ask luxembourg to start herding cows?

Basically, yes[0]. Though nobody minds banking as long as you don’t request other people’s money to continue banking and last time I checked, Luxembourg didn’t need a bailout.

[0] It might be pointing out that you can run a nice economy not relying on banking even when not herding cows.

arethuza10• 13 years ago

FYI The United States economy is 79.6% services:

http://en.wikipedia.org/wiki/Economy_of_the_United_States

return06• 13 years ago

As an indie developer who had established an online business in cyprus and is now being hardly hit by the bail-in, i agree with a lot of the observations made. Cyprus offers high quality financial services for people who do international business transactions. I am not aware how much of this business is from russian mafiosos, but I was certainly not one of them.

Establishing a business in southern europe is risky anyways in the past 5 years with national governments failing left and right. The red tape and the ability of the state to impose arbitrary "urgent taxation" (has happened twice in greece already) hurts all business planning in an already shaky business environment. For me, cyprus was an obvious choice because of its "most lawful" status (the country is in the EU and in the euro for years, which requires a high level of transparency, and it is not in considered a tax heaven by OECD), plus when you don't do business in your home country you have the freedom of choice. Compared to the bailed-out european south, cyprus was actually the safest option. From my experience, i did have to provide adequate documentation for all business transactions and the red tape overhead was much reduced.

The whole handling of the situation until now is a hugely chaotic freak show, a pretense battle between white knights of capitalism and socialism, and a huge display of how ineffective it is to run europe without a central trustable government.

claudius12• 13 years ago

> huge display of how ineffective it is to run europe without a central trustable government.

Thank our friends in Westminster who first bullied their way in and then have been blocking further European integration for the last 40 years.

return06• 13 years ago

> Thank our friends in Westminster who first bullied their way in and then have been blocking further European integration for the last 40 years.

I wouldn't assume the spanish, italians, french are very much in favor of it either (given that they will have to accept a de facto german authority)

OGinparadise2• 13 years ago

(c) The banks are almost 100% deposit funded (something that regulators across the world have been encouraging because deposits tend to be sticky if you take care of them).

Uh... if you pay 1% or less a year in interest as they in USA. Many Cyprus banks were paying north of 5% a year so they'd have to make maybe 7%-10% a year to break even after expenses and taxes.

8. You never, ever, ever, hit insured depositors.

Great point, expect that no one is touching them. Deposits over EUR 100K are being hit /frozen, those up to EUR 100K are not touched, which just happened to be the insured amount. The banks could have bought private insurance and threatened to take down the next AIG with them (Now that's leverage), but they apparently didn't.

The real fault lies with the banks and Cyprus gov (or the people, indirectly). They could have cracked down on these shady deals and limited the bank's exposures to Greek debt. They didn't and Germans /N Europeans don't want to ask their taxpayers to bail another country. Someone has to pay, it clearly can't be the taxpayers given the ratio to GDP so it's the depositors and bank owners. To summarize:

There is no money.

No one wants to give them more money.

Banks are broke and as usual you can lose all the money that is not insured. It says so, or it should say so on the tiny print.

arethuza10• 13 years ago

To be fair to the Cypriot people - they did the same as everyone else in the UK, Ireland, Iceland etc. did and allowed the finance sector to become far too large relative to the rest of the economy assuming that there were no possible downsides.

Who would ever vote for a politician who tries to constrain the growth of a financial sector that appears to be able to generate money out of thin air?

yannis2• 13 years ago

You are forgetting where and why the financial crisis started. Although in the US the financial institutions were saved by printing money in the rest of Europe the ECB controls the presses.

OGinparadise2• 13 years ago

Doesn't matter at all where it started, Cyprus and it's people benefited a lot from the financial bubble (and from EU,) until it collapsed. No country has it better now, taxes are going up and spending is being cut down even in richer countries. Everyone was living in a bubble

We forget how bank operate: they ask you to trust them with your cash and in return they promise to safeguard your capital and even give you interest a year. Well, what if their investments lose most of the money and the government cannot bail them out? They go kaput!

arethuza10• 13 years ago

"You are forgetting where and why the financial crisis started."

I don't think it is accurate to say that the 2008 financial crisis had a single cause. If you think it was the boom in sub-prime mortgage lending in the US and the resulting popularity of CDOs and CDSs how did that cause the Irish problem (insane property speculation), Iceland (asset speculation in other countries used borrowed cash), Greece (fiscal irresponsility) etc.

svv• 13 years ago

Great point, expect that no one is touching them. Deposits over EUR 100K are being hit /frozen, those up to EUR 100K are not touched

Yes, that's the current decision. The linked article was written at the time the Parliament was about to ratify haircut of the insured depositors along with the rest.

(There's no timestamp on the page, but I saw this text around 21th of March.)

maked002• 13 years ago

As we speak, laws are/were passed here in the US that will make it ok for predatory banks to confisticate your savings and give you some worthless stock in exchange.

It's open season on savers now.

Cyprus Bailout: Stupidity, Short-Sightedness, Something Else?

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