Europe

Does it again:

Late last night, after markets closed for the weekend, following an extended discussion the European finance ministers announced their “bailout” solution for Russian oligarch depositor-haven Cyprus: a €13 billion bailout (Europe’s fifth) with a huge twist: the implementation of what has been the biggest taboo in European bailouts to date – the impairment of depositors, and a fresh, full blown escalation in the status quo’s war against savers everywhere.

This is not going to end well.

[Update late Saturday evening]

Glenn Reynolds has a lot of updates. Monday may be bloody. And Monday starts late Sunday evening on the Left Coast…

76 thoughts on “Europe

  1. Martijn Meijering (@mmeijeri)

    Without this intervention savers would have lost everything, since the Cypriot state isn’t in a position to make good on its promises related to its deposit insurance scheme. The thing that is outrageous about this is that bondholders get off scot-free.

  2. ken anthony

    Come monday, is this the assassination of archduke Franz Ferdinand of Austria? Will this spark, bank after bank to go under in the next year?

    It’s not just about 6.75% to 9.9% loss of savings. Engaging in fractional banking means depositors could lose a lot more and the bank will go under. The question is will this just be a bank run in Cyprus? All these banks are interconnected.

    Obama complains about companies sitting on piles of money. but this could be the only thing that keeps the whole house of cards from falling.

    We don’t need mars to save us from too big a rock hitting the earth. We need mars banks to get away from fractional banking.

  3. George Turner

    It’s typical statist thinking. All money comes from the government, and they just loan it to us temporarily so we can make use of some of it (which is why so many countries have onerous inheritance taxes). Thus, the government is just “unloaning” some of the funds people had incorrectly assumed was theirs.

    I predict a big boom in the Swiss construction industry as their banks expand to handle the new volume of deposits.

    1. Godzilla

      Actually these deposits were built recently in Switzerland and Singapore. Most of them to stock art and gold and other valuables. Its like they are expecting Armageddon or something.

  4. Martijn Meijering (@mmeijeri)

    It’s unclear what will happen to shareholders of the banks involved. Are they simply getting free money from the government? This might seem like an academic distinction since they’re not going to be able to repay it, just as the Cypriot government won’t be able to repay its emergence “loan”, but it isn’t, because it determines whether shareholders are wiped out or not. If the banks are recapitalised without dilution of existing shareholders, then that would be outrageous. In fact, I think they should be wiped out entirely, as this is what would happen in a free market.

    We do know that there will be substantial dilution for another reason though, because the ~10% of their money savers have lost are converted to shares in the bank. I wonder if this is before or after recapitalisation and whether these depositors’ shares are diluted.

  5. Martijn Meijering (@mmeijeri)

    Also note that the oligarchs are getting a bigger bailout than they would have under the existing Cypriot deposit insurance scheme, which fully reimbursed losses up to E100,000. If you had > ~E110,000 then you are getting a *better* deal now.

  6. Joe Triscari

    So if I have savings in *any* bank in a European country with a distressed economy do I…
    1) Leave it in the bank to collect near zero interest against the risk of some gas-bag politico telling me he has no choice but to give me a 10% wedgie? or
    2) Withdraw it all and store it in jelly jars in my basement.

    A tough decision facing every European Monday morning.

    1. Thomas Matula

      Joe,

      You forgot the intermediate step. Withdraw it, convert to gold or silver in case the currency becomes worthless, then store in jelly jars…

          1. Larry J

            Several of my coworkers have large collections of firearms. Many of them store a considerable amount of ammo. One in particular owns at least 2000 rounds for every size of ammo he needs. He bought the ammo over time before the prices rose so fast, so if he were to sell, he’d get a sunstancial return on his investment. He says that his .50 caliber rounds alone are worth $4 each.

          1. Larry J

            Once I was happy and had a good wife
            I had enough money to last me for life
            I met with a girl and we went on a spree
            She taught me to smoke and drink whiskey

            Cigarettes, whiskey and wild, wild women
            They’ll drive you crazy, they’ll drive you insane
            Cigarettes, whiskey and wild wild women
            They’ll drive you crazy, they’ll drive you insane

  7. DaveP.

    1- This is the biggest hint I’ve seen that (especially, but not only) Germany is getting tired of footing the bill for the PIIGS nations; the EU wouldn’t have pulled something this sketchy if they could’ve just tapped the German taxpayers for a few (more) billion Euros.
    2- Cypress was first because it had money worth the taking (as a banking haven/money laundering establishment/what have you) but no powerful friends to protect it; it won’t be the last.

    1. Martijn Meijering (@mmeijeri)

      Money worth taking? The money is flowing from Germany *to* Cyprus, not the other way around.

      1. DaveP.

        Only about one-third of the bailout, which is about two-thirds of Cyprus’s GDP. Only 5.6 billion Euros. Pocket lint, no doubt.

      2. Godzilla

        These IMF ‘bailouts’ always turn into loans where you pay more in interest than you ever got from the loan anyway. If it goes like in South America and Africa eventually the debt will be pardoned. In like 20-30 years after it has been paid over and over in interest.

  8. Arizona CJ

    This may be decidedly… unwise.

    Yes, they caught the Cypriot depositors, giving most of them little chance of avoiding the hit.

    Now, what happens when the depositors in Greece and Italy and Spain (etc, etc) see this? Think they just might want to move their money elsewhere before they get whacked? This is a recipe for a bank run. A big one.

    They may have cleverly caused precisely what they were trying to avoid.

    1. Edward M. Grant

      From what I’ve read, there have already been massive outflows of Euro savings from Greece to safer countries, and presumably the same is true in Spain and Italy. I’m sure this will just accelerate that trend and thereby help to ensure the countries need more bailouts.

    2. DaveP.

      Actually, we’ll have to wait a while longer for the really fun stuff…

      What do you think is gonna happen a little down the road when the stolen money is gone, the Cypriot government hasn’t changed its ways, the EU is still economically hosed, and the bills come due again…?

  9. rickl

    I saw this at Market Ticker early this morning. If this doesn’t trigger bank runs throughout Europe, and possibly around the world, then I don’t know what would. Could this be the Black Swan we’ve been waiting for?

    And still not a word on Drudge. Incredible. This is the biggest news story today, in my opinion.

    1. Peterh

      I would not be surprised to see actions in that direction before this mess is over. I would also not be surprised to see leftist dolts inflicting it on innocent scape goats. We could see a replay of elements from the French Revolution.

      1. Der Schtumpy

        Or, like with almost every other financial crisis in European history, they could just blame the Jews who run the banks.

        1. Barbara Skolaut

          “they could just blame the Jews who run the banks

          Naaaahhhh, they’ll just blame the Joooooos, period. It’s their fall-back position on damn near everything. >:-(

          1. Der Schtumpy

            …and that’s why I keep waiting to hear it said aloud.

            I’m surprised with as many poor Muslims as now reside in the EU that it’s not reached the chanting level already.

  10. Karl Hallowell

    It’s interesting that the levy in question is applied equally to all deposits no matter the condition of the bank. There’s still no incentive for someone to avoid the riskiest banks offering the highest interest rates. The deal also has to be approved by the Cyprus legislature which may be a failure point.

    Finally, the size of the bailout is apparently about two thirds of the GDP of Cyprus. I imagine the only country comparable is Iceland. They too were treated pretty shoddily by the EU in 2009 with the assets of their banks’ seized by the UK.

    1. Martijn Meijering (@mmeijeri)

      There’s still no incentive for someone to avoid the riskiest banks offering the highest interest rates.

      That’s a very important and very regrettable point. However, shareholders are taking a hit, though bondholders unfortunately aren’t. Still, this will make it harder for bad banks to attract funding, which is a good thing. Also, depositors from abroad will be more reluctant to use Cypriot banks. And while there may be no incentive to differentiate between Cypriot banks, there is plenty of reason to differentiate between Cypriot (our Southern) banks and Northern banks.

      They too were treated pretty shoddily by the EU in 2009 with the assets of their banks’ seized by the UK.

      Getting loads of money doesn’t sound like shoddy treatment to me.

      1. Karl Hallowell

        Getting loads of money

        After your comment, I googled around. Iceland received some bailout funds from the IMF, but not from the EU.

      2. Godzilla

        The Deutsche Bank was one of the first to be hit by the financial crisis. Of course they made sure the details were never made entirely public. Same thing happened with Barclays in the UK.

        But sure keep piling on the “Southern” banks. The wealth is in the people, natural resources, industrial resources, the rest is just paper.

  11. Mike Borgelt

    A lot of this money belongs to the Russian mafia(or government officials – same thing really). Dumb move. Might be a few sudden deaths, polonium poisoning etc.

  12. ken anthony

    They may have cleverly caused precisely what they were trying to avoid.

    Political science: the art of screwing everybody, yourself last.

    This could be the dam bursting scene from Force 10? Drip… drip… drip.

    1. Der Schtumpy

      Rick C,,
      it also depends on the Daily Withdrawal Maximum, if Cypriot banks / laws have one set.
      .
      .
      [somehow, my last Comment never showed up...hmmmm so I'll try again]

      I also wonder about people who don’t deposit any money.

      I’m sure that just like here, there are people who still do all their personal business transactions with cash. And I expect just like those who get AFDC, SS Survivors Benefits and other Gov’t checks, they live hand to mouth. They are a HUGE part of the problem and won’t truly ‘pay’ any of the coming new taxes to be collected.

      And I’m waiting to see how the WH weighs this, against BHO’s line about us not having a deficit problem, that we’re good for ten years. If they think they could get away with it, will they jump up and scream,”… OMG, we DO have a deficit problem after ALL! Who knew?”

      1. Thomas Matula

        Der Schtumpy,

        I had problems as well. It looks like Rand is messing with the mobile settings again and messing up the website.

        1. Peterh

          I suspect a bug in the software that’s supposed to identify mobile browsers. It’s hit me on firefox on 2 different linux distributions.

          1. Thomas Matula

            Rand,

            I agree with Peterh, it might be a bug leftover from when you did work on it..

            Sometimes is looks like it does now, sometimes like the mobile version like it did this morning. And its seems browser independent. Although I use Firefox, it looks the same when I switch to MS Explorer or Safari.

            It also seems to change sometimes after I make a comment, going from the mobile look to the traditional one. But not always.

          2. Der Schtumpy

            Tactful, very tactful.

            I’ve never had this problem before. It whirred and whirred, then came back full page, it looked OK, so I left. But when I came back again, the comment was ‘gone’.

  13. Thomas Matula

    True ATMS are cash limited, but ATMs, along with online EFT, is getting the run started while the news images generated of long lines and cashless ATM put folks into the necrssary state of hysteria needed for a 1930′s style run when the banks actually open.

    1. ken anthony

      The article said the ATMs are giving messages rather than cash. They don’t have to run out of money. The just need a switch in software to say No Mass.

      1. Thomas Matula

        Ken,

        Yep, which is building pressure up even more for when the banks open on Tuesday (Monday seems to be a national holiday).

        I wonder if the cards still work for purchases, which would be another option.

        1. Ed Minchau

          Electronic transfers have also been halted, so that might mean no credit cards either. All the more reason to have a hundred bucks or so in your bug out bag.

  14. ken anthony

    This is rich…

    Naturally, people started going to the ATMs to get their money out of the banks before Tuesday (banks are closed Monday for a national holiday.) The ATMs, though, were already refusing withdrawal requests. I read one report that you could deposit on the machines, however.

  15. ken anthony

    …the developed world has $20 trillion in debt over and above the sustainable threshold [180% of GDP.] …the Fed’s relentless pursuit of inflating our way out this insurmountable debt load have been for nothing. …the only way to resolve the massive debt load is through a global coordinated debt restructuring (…push all global banks into bankruptcy) which, when all is said and done, will have to be funded by the world’s financial asset holders: the middle-and upper-class, which, if BCS is right, have a ~30% one-time tax on all their assets to look forward to…

    …and you can’t do a thing about it but watch it happen…

    1. DaveP.

      Gold? Nah. Lead, copper and brass (with some sidelines into various grades of steel)? Yep. If things get so bad that paper money and banks crash, the only thing gold will make you is a target.

      1. Der Schtumpy

        I think we’ll see the same mediums of ‘exchange’ here too eventually. The question comes down to weights and measures.

    2. Darkstar

      Wow. Something Krugman and I agree on.


      The Nobel Prize-winning economist and New York Times columnist wrote in a blog post Sunday that the proposed bailout of the Cyprus banking system,…

      Do you have a link for the original blog post?

  16. ken anthony

    I asked my ex the other day what she thought, having lived though something like this in Russia. “Silver”, I asked. “No,” she said, “Skills that people will pay for.” Is the only commodity worth anything. As an old, obsolete computer programmer… I’m in trouble. Especially out here in the sticks.

    1. Al

      Small CNC lathe andor 3D printer.

      They aren’t “user friendly” enough to just hit print.

      Figure out recycling HDPE plastic and making aluminum ingots from cans.

    2. DaveP.

      There’s more than one kind of ‘valuable skill’. Wiring a house, basic plumbing, fixing a car (and reading a Chilton’s manual), jackleg carpentry… you’d be surprised how many skills our generation of guys learned at our father’s knee and take for granted that the next generation don’t know at all. All of these things are valuable.

    3. Thomas Matula

      Ken,

      Go to the Gutenburg Website

      http://www.gutenberg.org/

      And download some of the old books on agriculture and crafts written before the modern age of fertilizer, pesticides and power skills and read up. Knowledge of both will be useful, especially in a ranching community like Springerville.

      Also look into the old prospecting books as many a person made a living placer mining old mine dumps during the depression.

      “Beans and Bacon from a Gold Pan” is a classic about how an Arizona couple survived the Depression that way.

      1. ken anthony

        I have more problems than growing a garden Thomas. I’d make a lousy martian as well, even in the weaker gravity. I’m just not physically able to do the things I’d like to do. Even typing is difficult. For every couple of dozen letters I type I have to go back and delete some. It sucks. I just can’t tell you in how many ways. I used to like gardening when I was young, but that was in Tacoma. If you left your sneakers outside overnight, they’d be growing in the morning.

  17. Dry end of the Titanic

    Given that if this starts a Europe wide bank run, it will likely start in Spain first, so I will get to see it first hand here in Andalucia. I was half expecting to see queues forming in front of my local banks this morning. But no, they all looked like having the normal level of activity. This news was covered in the Spanish media, so people are well aware of it.

    There was a huge outflow of deposits from Spanish banks in autumn of last year, so the nervous money has already moved on. Everyone seems to me to be adopting a wait and see attitude. If things start getting hairy here, you’ll be the first to know.

    1. Frank

      Nothing is safe from powerful governments. That is why we need weak governments.

      I wonder how many people are ready for alternative money like bit coin now.

      1. Thomas Matula

        Frank,

        Yes, Even assuming you didn’t give your money to Mr. Madoff for safe keeping your 401K is only as safe as the institution its in. And if the government needs to bail it out and decides to give you a “Cypriot Haircut” in the process, well that is just the risk associated with it.

        1. someguy

          Who said the government should bail it out? Why do people keep reverting to that option? Why is Madoff the only option?

          Why can’t there be good institutions that aren’t the government?

          Man, it’s like the communists on this board only believe that there are evil rich people or the government, where the government is some set of angels who will take care of you. Those are the only two choices.

          Does it ever occur to the communists that the people in government are just as greedy and evil as the evil rich men they rail against? Does it ever occur to them that their politicians are just Madoffs using taxpayer money instead of swindled investor money?

          Does it ever occur to communists that the recipients of government welfare checks can be just as greedy as the evil rich men? Do communists ever think that maybe those people receiving government welfare checks just go and spend it on booze and the casino, and that is just one reason why forced redistribution of wealth is wrong on a fundamental moral level?

          1. Thomas Matula

            someguy,

            I not only don’t expect a bailout, I don’t even want the 401K.

            The problem is that the 401K are creatures of the government don’t you? That the great and powerful government “kindly” invented them to “encourage” you to put a very limited amount of YOUR own money away for the future before taking their “share”. And pf course because the government ‘kindly’ invented them to “encourage” you to “save” for the future they are constrained by all types of government regulations – with penalties if you don’t follow them.

            Which BTW is why I avoid 401Ks whenever possible and cash out them as soon as I am allowed to.

          2. someguy

            I’m having trouble parsing your “you” and “they” as it seems to switch a bit, and there’s an incomplete question in there as well.

            However, as for my 401k, my employer matches up to a certain percentage, so from that perspective it is lost money if I don’t take advantage. But, I only contribute up to the matching percentage.

            I would prefer the entire system just be that an employee is paid straight cash and no benefits, and then there is no trouble with losing insurance between employers or trying to engineer society through taxes here and not there on this benefit or that benefit. The employee is paid straight cash and decides for himself what to do.

          3. ken anthony

            The government doesn’t tolerate competition. Which is why they stole millions of dollars of silver and gold from that guy in Idaho that was holding it to back certificates he issued.

            The government considers you its personal property.

    1. Karl Hallowell

      At a glance, “Open Bank Resolution” (“open bank” here refers to getting an insolvent bank open for business in a timely manner) is a policy proposal that has been bouncing around for at least two years. So it’s not a dead-of-night raid on peoples’ deposits like Cyprus might be.

      I actually support reducing the degree of insurance on any deposits to say 80% or 90%. This would both reduce moral hazard by getting bank customers to actually think about the stability of the banks they choose, and encourage modest bank runs which stress test a bank more effectively than what’s currently out there.

  18. Karl Hallowell

    The Cyprus parliament rejected the bailout terms (unanimously with a large number of abstaining votes).

    Now there are two possibilities here. First, that the EU people are truly incompetent and showed us their hand for nothing. Or that they’re going to now propose the real plan with somewhat less of a haircut. Well, they now have time pressure. If they don’t reach a decision soon, then that money will go away in a giant bank run (they can’t keep the Cyprus banks closed forever) and they’ll be left with a worse problem than if they had done nothing at all.

    It’s also yet more evidence of the absurdity of the “social contract” idea. The governments of the world ignore actual bank insurance contracts when it doesn’t suit them. Why in the world does anyone think they’ll honor the imaginary social contract?

    1. ken anthony

      Since consent of the governed can never be anything but a fiction and is the basis of the social contract, then it is nothing more the veiled tyranny. Unveiled tyranny may be worse, but it can be argued either way.

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