Europe gets to test the plan Obama is clearly interested in – dip into the savings of Americans. The Cypriot Prime Minister “agreed to force a tax on all bank deposits” to qualify for a bailout from the International Monetary Fund, the European Commission and the European Central Bank. A citizen of Cyprus or anyone having deposits in the country will pay nothing…the government will just ‘take.’ Charles Barkley is on Fox this minute saying the message to Cyprus is you’re bankrupt, you need €10 billion ($13 million). You have to come up with €6 billion before the €10 billion comes your way. So the €6 billion comes from the people’s savings. No warning. Today through Thursday, if you want to get money out of your bank in Cyprus you are SOL. Closed banks was to be a one day event, then lengthened to Thursday. The question now: which Thursday? Frozen assets, broken or frozen ATMs happening now for the people of Cyprus. About half-way down is information on what extent the U.S. funds the IMF.
In a rare move, Cyprus is trying to raise around 5.8 billion euros ($7.5 billion) from a one-time bank charge on local deposits. Unlike in other European countries, local banks only have a small amount of outstanding bonds, which have their own set of legal complications. So the Cypriot government was unable to require the banks’ creditors to take major losses to finance the bailout.
“Authorities have taken a calculated risk. If the problem escalates, the entire euro zone banking system could implode,” said Cormac Leech, a banking analyst at Liberum Capital, in London. The deposit levy “shows that it’s O.K. to break the rules. Politicians are betting that they won’t have to do this again.” Source: New York Times
Zerohedge reports that small accounts are also included and that there is likely no way Bernanke and Obama did not know of the plan. Some of those smaller account are foreign depositors.
The first proposed haircut on Cypriot deposits, which saw deposits under €100,000 haircut by 6.75%, and those €100,000 and larger (i.e., the “Russian oligarch” pool) trimmed by 9.9% appears to be hours away from renegotiation.
The reason is that Europe now is convinced the only reason the bailout proposal would not pass parliament is that the tax on the “common man” deposits is too high, which means it will be revised to 3% or perhaps lower, with the possibility of staggered thresholds, such that deposits under €20,000 remain untouched…
…the open question is what will be the Russian impairment – i.e.,what is the most that whale deposits can be cut by?We now know the answer, courtesy of this interactive widget from Reuters, which allows one to calculate what the haircut on large deposits would be assuming an X% haircut on smaller deposits. It appears that the worst case for Russians will be 15.26% – this is how much of all Cypriot deposits €100K and higher would be taxed by if there is 0% tax on the small deposits. Source: Zerohedge
Bailing out Cyprus will be Europe’s fifth in cooperation with the IMF, of which the U.S. is a member (Greece, Portugal, Ireland, Ukraine and Romania). IMF member countries contribute to the IMF through quotas designed around wealth of the country. The US quota is almost 18%, followed by Japan 6.6%, the UK at 4.5%, France 4.5%, Italy 3.3%, Canada 2.6%, India 2.4%, The Netherlands 2.2%, Belgium 1.9%, Brazil 1.8%, Mexico 1.5%, Korea 1.4%, Australia 1.3%. Of the 188 member countries, these are the only countries contributing a full one percent or more of their wealth with the U.S. contributing over twice that of the next largest contributor.
Because we are basically the IMF, we get more voting shares. Big deal.
The idea is that the fund will be reimbursed. Right.
Cyprus built its economy in recent years by becoming a financial center, much the way Ireland and Iceland before it did. Its banks offered Internet accounts to foreigners, were renowned for their service, provided substantial privacy to clients and had very low taxes. It worked so well that Cyprus’ banking industry ballooned to nearly eight times the country’s gross domestic product at the height of the boom. In December, it was still more than seven times Cyprus’ (EURO)17.5 billion GDP. Russians — looking for warmer climes, lower tax rates and shared culture in the form of Orthodox Christianity — are thought to hold the majority of those accounts, with about (EURO)20 billion in the island’s banks.
But Cyprus’ banks held a lot of Greek debt and suffered significant losses when they took a writedown of those bonds as part of the Greek bailout. Much of Cyprus’ bailout money will be used to recapitalize Cypriot banks to prevent them from collapsing. Like other eurozone countries, Cyprus has also seen its deficit and debt explode as growth has ground to a halt. And with the banking system so large, the government wouldn’t have been able to bail it out even in a healthy economy. Source: CTVNews
No doubt, bankers are among the most irresponsible, often evil people walking the face of the earth today. We are at their mercy.
…the German-led group of EU officials who engineered this weekend’s Cyprus bank bailout don’t have a leg to stand on. Although they had years to consider their options (Cyprus’s problems are closely related to those of Greece and have long been almost as obvious), they have opted for a “solution” that amounts to probably the single most inexplicably irresponsible decision in banking supervision in the advanced world since the 1930s.
As my colleague Tim Worstall has pointed out in a well argued contribution yesterday, they have weakened – perhaps catastrophically – the principal pillar supporting modern banking. This pillar is deposit insurance. Ordinary savers who had received a solemn assurance that deposits up to 100,000 euros were safe are now being asked to take a haircut. This raises questions about deposit insurance throughout the EU and invites runs on banks not only in the most “financially-challenged” nations such as Greece and Spain but even in Italy and France. Source: Forbes – Eamonn Fingleton
Italy and Spain coming up next. Déjà vu: The people’s money will be used to shore up Cypriot banks. Sound familiar? Read what’s brewing in the U.S.