Cypriots Stunned by Forced Savings Cuts

[don]

Re: Cypriots Stunned by Forced Savings Cuts

Isn't that part of the strong affinity that the Cypriots and Greeks have for each other? I think it goes back a lot further than 1974.

Some use that same appeal to history to rationalize every excess in China today...Beijing is taking "the long view". Maybe the EU should try that approach :-)

Maybe the US should take that approach . . . for a change

[globaleconomicollaps]

Re: Cypriots Stunned by Forced Savings Cuts

http://www.telegraph.co.uk/finance/f...-eurozone.html

Cyprus savers face draconian measures in bid to avoid nation's exit from eurozone
Large depositors face heavy losses and the Central Bank of Cyprus will be given new powers to shut down struggling banks under a last-ditch plan to prevent the island’s exit from the euro.

ncluded in legislation drafted by the European Central Bank are draconian controls on capital, including unprecedented restrictions on debit card use and cash withdrawals.

Britain has sent a task force of top civil servants to Cyprus to advise the country on how to rescue its stricken banking system.

Cypriot MPs were meeting on Friday night in a final attempt to stop the ECB and eurozone from carrying out a threat to withdraw cash support from the country’s banks next Tuesday.

Unless the 56-member parliament can satisfy the eurozone by Monday, the financial sector in Cyprus will go bankrupt and the island will be forced out of the euro into economic collapse. Hopes of cutting a deal in Moscow were dashed on Friday. Michael Sarris, the Cypriot finance minister, flew back to Nicosia after failing to renegotiate a €2.5bn (£2.1bn) loan from the Russian government .

The Cypriot government has described the negotiations with the eurozone and IMF over the fate of Cyprus as “hard ... bearing in mind the social misery that a possible rejection of the proposal would cause”.

A spokesman for President Nicos Anastasiades said: “We will be called upon to take the big decisions and reply to the hard dilemmas. The next few hours will determine the future of this country. We must all assume our responsibility. Any solution involves pain.”

All money transfers will be frozen indefinitely. Laiki Bank, the island’s second largest lender, will be wound down, threatening more than 10,000 jobs on the island, which has a population of just over 1m. Individual savings up to €100,000 will be moved to the Bank of Cyprus. All Laiki deposits above €100,000 will be placed in a bad bank and sold off at a discount of up to 40pc.

The wind-down of the Popular Bank, known as Laiki in Greek, means it will not need to be recapitalised, finding between €2.3bn of the €5.8bn in debt reduction that Cyprus must raise to qualify for its €10bn eurozone bail-out and ECB liquidity.

To raise the remaining cash, Cyprus is expected to resurrect a “stability levy” of between 9pc and 10pc on all bank deposits over €100,000, protecting small savers, including many of the 60,000 Britons with bank accounts in Cyprus.

The Laiki wind-down and the levy is expected to save the Bank of Cyprus, the island’s largest bank, which had previously been targeted for closure by Germany during talks.

Respite came for the bank after Cyprus promised the eurozone it would pass legislation giving wide-ranging powers to the central bank, part of the ECB system, to restructure financial institutions. A “solidarity fund” will also be created to pool state assets.

ECB, IMF and European Commission officials stepped up the pressure on Cyprus last night by demanding it find a “safety cushion” of €900m on top of an existing €5.8bn demand.

http://www.nakedcapitalism.com/2013/...-eurozone.html

Cyprus Capitulates to Eurozone

Finance Minister Sarris came back from Moscow without any assistance from Russia. Russia had apparently made clear it was unwilling to offer loans, and would at most buy assets. Pravda reported that the Russians said if Cyprus hit their deposits, they would not put in a dime. And frankly, except for military assets, which could only be offered by the government, they’d do better scooping up bargains in the wreckage of deflation rather than now.

Bloomberg tweeted about 40 minutes ago that Cyprus had approved the legislation necessary for the EU bailout, but still does not have a news story up. The Wall Street Journal as of now has a “Breaking News” item on its website, again no story yet, “Cyprus lawmakers approve key bills aiming to secure broader bailout package.” So this looks to be a done deal.

I wonder how this will work. Capital controls are being implemented, since news reports from Cyprus indicated that residents intended (understandably) to drain accounts once banks reopened. In addition, I can’t see how the current government survives. Indeed, the President and key members of Parliament are likely at physical risk and it’s not hard to imagine that some will find it necessary to leave the country.

[jk]

Re: Cypriots Stunned by Forced Savings Cuts

The theory that it is impossible to leave the Eurozone is beginning to remind me of the Brezhnev doctrine. We'll see if it meets a similar fate.

[GRG55]

Re: Cypriots Stunned by Forced Savings Cuts

The theory that it is impossible to leave the Eurozone is beginning to remind me of the Brezhnev doctrine. We'll see if it meets a similar fate.

I am impressed with the ardour with which the periphery nations embrace the common currency, and the amount of economic destruction they are willing to endure to remain in the union. Do the Germans really think that they will export more Bimmers and Mercedes Benz automobiles to Cyprus after they finish chasing out the laundered Russian money? I wonder how their exports of leading edge machine tools to Greece and Italy has been faring recently. Maybe they are keeping trade with France on an even keel by resorting to barter (I'll trade this Mosel Reisling for some of your Margaux)?

As the rest of Europe implodes around them the argument that the German's export juggernaut benefits from being in the "cheaper" Euro currency gets weaker every day. Either they use their trade surplus to bail out their markets, or...

[lakedaemonian]

Re: Cypriots Stunned by Forced Savings Cuts

Interesting stuff.

While I'm appalled at the behavior towards the little to medium sized guys...I'm not suprised.

What does surprise me though is how tiny Cyprus has become the center of the universe for the latest grand mal financial seizure(or is this just a petit mal seizure)?

[astonas]

Re: Cypriots Stunned by Forced Savings Cuts

The USA taxes on citizenship. That is most unusual. Almost all the other nations in the world tax on residency or domicile. The major benefit that USA citizens derive from this, imo, is that no matter what the USA will come to the aid of its citizens anywhere in the world...that includes evacuation of expatriates who find themselves trapped in a pending or current war zone. When I lived abroad I always found it amusing that some expat citizens of other countries like Canada, the UK and Australia seem to think they are deserving of the same privilege from their government, even though they don't pay taxes to support that function.


Income in most jurisdictions are "self-reported". I have to report and pay tax on my worldwide income, including anything from business ventures offshore. If I don't the penalties are extremely harsh, so I have no incentive to try to cheat the taxman...and these days the media & the taxman appear to have no great difficulty finding offshore bank accounts if they really want to - witness the French Budget Minister debacle this week. As much as most people do not like paying taxes, we might perhaps treat them as a measure of individual success. I would hate to be in the position where my income is insufficient to trigger any tax...life would be a bitch.

I completely agree with everything you've said above. (I do enjoy when I can say that in one of these more extended discussions.)

As for Cyprus, my beef is the hypocrisy being promulgated by everyone involved. Much is being made of Cyprus as an offshore tax haven laundering huge amounts of Russian money. This is not new information to the EU, the ECB, the IMF, Interpol, the Germans, the Russians, the Cypriot bankers or politicians, or the world at large.

Logical Breakdown:
You are of course entirely correct in this. Both in the observation that hypocrisy abounds, and in your observation that none of the information is new. But it is not accurate to infer from this that nothing is therefore new.


I'll break the argument down into two different points for later ease of reference: (1) This is arguably the first time that any of those other parties you listed have sufficient diplomatic leverage to effect meaningful change to resolve the structural problems in Cyprus, even those that have existed for a long time. And point (1) is the case because of point (2): Cyprus is not asking merely to be left alone, as it was before the present crisis. Instead, at this moment it is asking for someone else (ie. the EU or Russia) to pay the bill for any malfeasance (or if you prefer, simple mismanagement) that may have occurred.


These two points (especially the second) necessarily alter whether the other parties should expect have a say. It is one thing to break a window in one's own house, while engaged in an activity that may or may not be of dubious judgement. It is, after all, one's own property, and the neighbors can rightly be told to mind their own business. But it is another thing entirely to break a window of your own house, but send your neighbor the bill, regardless of whether the activity leading to breakage was dubious. The lack of judgement may be debatable, even, for the sake of argument, completely non-existent. But the question of who will pay the bill will ultimately still require an answer if the window is to be repaired. Money was lost. Someone will absorb that loss. Not in punishment, or to teach a lesson, just due to simple, prosaic, arithmetic. A shortfall exists.


The question then becomes: Who absorbs it? Should it be someone participating in the activity that caused the breakage, someone who will benefit from having the window fixed (lives in the same house) but didn't actually break it, or someone far from everything, in a neighboring house? Which allocation provides the better incentive structure to prevent similar window-breakages in the neighborhood's future? Which allocation of pain creates incentives that drive toward a more stable banking system in the long run? The short term risk here is obviously contagion, but the long term risk is (misleadingly) described as "moral" hazard. But moral hazard actually has nothing to do with morality or moralizing at all. Incentives can be (and in my experience, generally are) analyzed numerically, with no moral standards invoked. If a total expectation value (probability x net benefit) > 1 exists in the presence of an incentive, then the action is favorable; an expectation value < 1 makes the action unfavorable. So creation of incentives also boils down to math, not morality. If a bailout can always be counted on, that's "bad", not because of some religious or moral notion, but because it changes the probability and returns in the expectation value computation to always favor greater risk-taking in all cases. "Bad" thus refers in this case not to "immoral", but merely to "destabilizing".


Another false assumption/equivalency implicitly propagated in much of the Mediterranean and Anglo-Saxon media that I have seen, is that it is possible at this point to prevent considerable pain from being inflicted on someone. This is simply, flat-out, false: the window has already been broken! The discussion in Cyprus, as in Greece before, is about dividing the bill, given that fact, or whether to just not bother and leave the window broken.

Back to Cyprus:
It is hard to see how a Cypriot bank, located on the island of Cyprus, under Cyprus' particularly loose laws and regulations, taking mostly Cypriot and Russian deposits, and making inadvisable loans to Cyprus' friend Greece, has a particularly strong claim on, for example, a Finnish taxpayer, "when the window breaks." (I use Finland because for all the talk of Germany, Finland is a much more strident opponent of bailouts, in spite of having less financial heft.) I think it's fair to say that even if the Finn was invited to the party where the window broke, he certainly wasn't still around when it broke at the end of the evening (he's such a stick-in-the-mud!) So simply analyzing the incentive structure, it makes very little sense to establish a system wherein the majority of the bill goes to those like him. That's again, not a moral judgement, but a practical one. Having him foot the bill does nothing to repair the perverse incentive structure that permitted so many windows to break. Indeed, it makes it far worse.


So ultimately, the criticism that is being leveled against Cyprus is not a moral criticism at all. Correctly stated, it doesn't even really have a moral component. A better description might be the following simple legal definition: if I as a businessperson fail to pay my bills, that is classified in contract and bankruptcy law (at least in the United States) as "negligence". In spite of the common connotation of the word "negligent", that assessment is a statement of a fact: it doesn't imply a moral judgement on WHY I wasn't able to pay. It doesn't mean I was able to pay but didn't, or that I wasted the money and therefore couldn't pay the bill. The failure to pay, in and of itself, is enough to classify my action as "negligent" under the law, and that fact makes it redressable in court by my creditor. The "why" would probably scarcely be mentioned in a hypothetical bankruptcy proceeding, since it is not germane to the question of dividing assets and losses.


Similarly, Cyprus' actions, if it were a U.S. company, would be "negligent". If there was no demand from Cyprus for money contributed by those Finnish taxpayers (if Cyprus was able to recapitalize its banks, or had regulated them so they wouldn't fail in the first place) the whole discussion would be completely nonexistent. Cyprus would be doing today exactly what it was doing a month ago, and no one else (regardless of their economic might in Europe!) would have (1) the ability, or (2) the "right" (interpreted either ethically or pragmatically) to do anything about it (based on the first two points I described earlier).


This crucial difference means that the appropriate idiom is not "might makes right", but instead "he who pays the piper calls the tune". The essential difference is subtle, but real. Both involve the powerful retaining power at the expense of the less powerful. But the former implies that an assault is being perpetrated by the powerful against others, while the latter simply acknowledges the fact that payment implies control (because the option to cease payment exists).


If I don't pay my bills, I don't get to keep doing business in the way I want to, or at least not the way I was before. If my neighbor does pay his bills, he will be able to. If I fold, he may well buy my company's assets, at a bargain price. That would not be hypocritical of him. Nor would it be hypocritical of him to bargain with me for the best price on my already discounted assets, or to give me instruction on how to avoid ending up in bankruptcy again. That would of course be annoying, but that is the inherent agony of being bought out by a competitor: you no longer call the shots. The only way to do that is to make sure you don't go under in the first place.


So in Europe, the way nations wound up needing bailout money, was by implementing, retaining, and defending against numerous requests for reform during the Maastricht negotiations, banking systems that permitted structural weaknesses to propagate and grow. Yes, of course every nation's system has some specific weaknesses, and finite risks. And yes, of course it would be extremely annoying hypocritical germanic moralizing to make demands if all those Cypriot banks were humming along as well as the germanic ones right now. But the fact is that some countries are in more trouble, and some in less. So this too is like any other business: those who make their business work in spite of weaknesses and risks get to keep running their businesses, and those who fail to do so fold and hence feel the economic loss (or at least, should do so, I'll come back to TBTF, next paragraph). At its core, that is not hypocrisy either, that is just reality for (most) businesses, and the reality for countries as well.


More importantly I certainly don't get to demand that others give me their assets because of my failures in business. That would be adding an act of aggression (theft, or possibly blackmail) on top of my act of negligence. The too-big-to-fail, too-big-to-prosecute banks are guilty (in my opinion) of such theft, and I think it makes perfect sense to be angry with them. But in Europe, it is the Anglo-Saxon City of London and the Mediterranean PIIGS nations who are trying to pull off that exact same blackmail (demanding bailouts after failing) and for some reason, they appear to be subject to different logic?! I honestly don't understand this. If you can explain it, I would genuinely like to hear a well-reasoned argument delineating the differences. It can't simply be one of protecting the innocent customers/citizens, either. That logic, as far as I can tell, applies to both cases equally. Just substitute "high-level banker" with "senior politician", "client" with "average citizen", and so on, then reduce the tree to elemental logic units, and you find the exact same logical arrangement. Why the outrage over TBTF, but a pass for the Anglo-Saxons and Mediterraneans in Europe. To me, that is hypocrisy. (Just explaining my thought process, here, not making accusations about other iTulip posters ethics.) Seriously, how are banks and nations so very different?


In resisting the funding of Cyprus (and Greece, etc.) the germanic countries are doing exactly what so many on this site screamed in rage at the US government for not doing. Going after the "banks" who claim to be "too big to fail", and forcing them to swallow real, substantive reforms before any cash is forthcoming, to ensure at least that it won't happen again. Even without any moral argument (just from an incentive standpoint) this approach still makes sense to me. Why would the right solution for a country be precisely the opposite from the right solution for a bank?


Media Presentation:
It does not surprise me one bit that the The Anglo-Saxon media (especially the Economist, Financial Times, Telegraph, Wall Street Journal etc.) all love to imply, even state outright, that there is a "german" assault on other nations, generally with little-to-no support. They mounted precisely the same defense of the banks themselves in the domestic US bank crisis, which they are now warming over in defense of the Anglo-Saxon style banking system in Europe. And it's easy to see why, since their advertising is generally dominated by the too-big-to-fail banks that benefit most from that mode of banking. It is clear exactly which philosophy these are backing, and which they find most threatening.


In the US, the only real journalism comes from less mainstream directions. Matt Taibi writes in Rolling Stone, Hudson's work is found in Frankfurter Allgemeine, and Bill Black shows up on Russian TV!? It truly is surreal. Meanwhile the "financial" news sources avoid rigorous analysis like the plague. Does this really not raise any suspicions?


But if one reads a different side of the debate (Der Spiegel, Handelsblatt, Frankfurter Allgemeine, Sueddeutsche Zeitung, Diplomatie, etc.) one generally finds far more logically compelling (and less of the transparently bought-and-paid-for) arguments. From where I sit, we need more, not less of the world questioning the too-big-to-fail, too-big-prosecute, too-big-to-do-anything-less-than-run-the-world banks, and their analogous nations. And nothing in the Anglo-Saxon media is even coming close to articulating that. Instead, the germanics are painted as aggressors, not necessarily because that reflects reality (though if you have evidence, I am more than willing to consider that possibility) but because it is this viewpoint that is threatening the City of London's and New York's hegemonic grip on the world financial system. After carefully following for months both sides of the debate, rather than just one, I really find the Anglo-Saxon's argument to be not only illogical, but also laughably simplistic in comparison to the well-reasoned arguments opposed. From this I am actually coming to believe that it is the Anglo-Saxons, and to a lesser degree the Mediterranean viewpoints that are the aggressors in this struggle for European dominance.


In sum: a person, company, or nation, should of course be free to do what they want, as long as it does not harm those around them. But in the European crisis, harm has already been done (past-perfect tense) in all of the troubled states. Loans were made improperly. Money was lost. Banks have become insolvent. So the implicit contract associated with independent self-determination has already been violated (by the states in trouble). This is based not on any sort of moral or ethical standard, but simply on the fact that there remain claims to be paid, that cannot be paid. It isn't moralizing, or hypocrisy, to ask the question: "who gets made whole, at whose expense, and does the answer to the first two parts produce a stable, or unstable system?" That is entirely a practical question, not a moral one. It is also a very necessary question. To fail to answer the first two parts is to do nothing (withhold all aid and loans) in which case every one of those states would fail, basically overnight. To fail to answer the last part of the question is to create a Europe that will (ever more rapidly) go unstable, and self-destruct. So asking and answering such questions, I hope we can agree, is in fact the central legitimate purpose of any loss-allocation mechanism, and not merely hypocritical moralizing.


(Sorry for the devolving into a tangential rant, I'll now return to responding to your post:

This problem is even larger in Dubai, growing rapidly in Asia as money funnels out of mainland China ahead of the coming crash, and even London is anything but lily-white. Yet they all look the other way. Nobody is suggesting the Cypriots are blameless.

I completely agree that lots of places, especially the EU's own City of London, is probably overdue for similar "attention" from the troika. And I suspect that if the germanic countries get their way, it will get that attention, as soon as achievable. I have argued on this site before that this was the principle motivation driving past conflicts between Merkel and Cameron, in the discussion of a Tobin Tax, and other EU-wide banking regulations. It remains, at this point, a still unresolved conflict, that will eventually come to a head again as Britain votes on its EU referendum.


Indeed, conflicts like the one in Cyprus will continue to arise, involving one nation after another, and each will serve as a microcosm of the greater competition within Europe: "What will the monetary culture of a unified European economy look like?" Anglo-Saxon? Germanic? Mediterranean? What elements of each could a compromise adopt? It is certainly clear that the current disparate cultures cannot co-exist as they now are in a meaningful single union, but it is not yet clear whether it is possible to gradually "convert" the people in one philosophy to another, through the application of regulation. Nevertheless, each of the three sectors is doing its best to effect that conversion on the other two. The final result will either be a unified whole, or a warring mess. But even now we are in the very early stages of the process, and won't know the outcome for years.


The tactics employed in this struggle are fascinating: The Mediterranean makes appeals based on emotion, and the "European Ideal" (as in "how could you abandon your neighbors, whom you claim to support, merely because of money already spent by a previous, unrelated, government? Can we not repudiate that corruption?" The Germanics argue with logic ("what reason have you given us to pay off your debts for you?" "what assurances do we have we won't just have to give you more next year?") The Anglo-Saxons fight mostly with strength of numbers: "we are the largest banking system in the world, to whom everyone comes for their financial products, so we should be the ones setting the rules, and we should be free to do so in our own favor. If we don't get to do so, we will redirect the world's money elsewhere."


The ongoing run-ins that provide forums for demonstrations of a monetary philosophy's dominance are not, as many in the Anglo-Saxon press seem to bizarrely believe, undesired examples of failed dealmaking. The crises are instead desired, selected, and chosen fields of conflict. They are desired by all the dominant players in Europe, not just the germanic ones. (It is hard for issues to really come to a head these days without at least two of three parties, given the split composition of the ECB's board of governors, and Draghi's leading role.) In these conflicts, a very real economic struggle is being conducted to determine the character of Europe.


None of these parties is clean. None of them are "right", except by virtue of any transitory political or financial might they may possess. And it is entirely possible that none will win, no matter how much their people are made to suffer. As you point out next:

Perhaps what needs to be asked "Is this reason enough to bring the entire country of Cyprus and its citizens, residents and legitimate commerce to its knees?"

The empirical answer appears to be "yes". Bringing countries to their knees is, in fact, being done, and these reasons, valid or not, are being given in explanation. I can certainly agree with you that this is highly objectionable in a moral sense, but I think you and I, GRG55, are if anything in "violent agreement" over the fact that this moral parameter does not seem to play a role in international monetary politics.


I do think you are also correct in pointing out a flaw in the rationalization of Europe's actions (which is obviously somewhat weak) rather than the reasoning behind the actions.


The rationalization is that the suffering of the masses is not desired as an end in itself, but merely a tool to effect the power changes, policy revisions, and structural reforms that are required to receive financial support from greater Europe without long-term damage. As such, the rationalization is a complicated story, that includes different arguments for each specific theater of conflict, is always changing, and is inconsistent every day of the week and twice on sundays.


The reasoning is far simpler: Each power block believes that its own monetary model is the best one to exist under, not only for themselves, but for all of Europe. They tell themselves that theirs is the best not only for those in power, but also for the average citizen living under their system. And, when judging based on the values of the people living in their own region, they might even be right. But overall each is delusional: the underlying values of Europe are simply not uniform. The Anglo-Saxon culture, for example, tends to value economic freedom over other priorities. Germanics tend to value an orderly society over other priorities. And let's say for the sake of argument that the Mediterranean culture might value lifestyle (or perhaps relationships?) over other priorities. The specifics can of course be argued all day, but regardless of details, it is differences of this nature that cause the monetary approaches to be different between the regions.


So in other words, the reason for the struggle is to answer the question: "If Europe is to remain united, which philosophy (and hence, which value structure) will it be unified under, and who will be willing to remain within Europe, after that value structure is selected?"


I am mostly discussing the tactics of this struggle. I sympathize with your interest in discussing, instead, its justification, it's reason. I tend to take the view that this struggle is like a war in that it has no clear justification, and perhaps can never have a justification, except maybe of the form that "it is a crime which nations commit to prevent or repair another, ostensibly greater crime". But the decision to enter this struggle was made decades ago, even before the Maastricht Treaty was signed. The EU was formed with conflicting intents: France wanted to bind and limit Germany as a condition of permitting German reunification, Germany wanted permission to reunite and grow without the stigma of open conflict, and Britain (and U.S.) wanted to parasitically sap the strength of both while they wrestled with one another, and with the world. That has evolved into what we see today. The main reason to think that it can hold together is that the struggle has been continuous for decades now, and it hasn't broken up yet. And the longer they remain locked together in conflict, the more the nations slowly drift toward a common history, and hence common purpose.


I am frequently reminded, when looking at the EU, of the Federalist/Antifederalist debates in the US's early history. The same venom was on display. If one had to guess at that time if the US would make it as a nation, one might well suppose that it didn't have a chance. And yet, somehow, those states also forged a common identity to compliment their individual ones. We will see if the language and cultural barriers can be similarly overcome in this case.

And for what purpose?

The purpose is simple: reform, and through that, conversion. The model is that the powers that be (TPTB) in any country are necessarily corrupted by their power. Since all EU nations are to a greater or lesser extent representative democracies, these corrupted people in charge may in principle be removed from power by elections. However, their corruption has permitted them to retain their authority while ceasing to act in the best interests of the people they claim to represent. But if things get bad enough for the people, TPTB will eventually be thrown out by the people. Of course, this will only happen if things get very bad indeed. Exactly how bad they need to get will be directly related to the depth of corruption.


So that's the paradigm that (to minds in the northern states) unites their approach to the PIIGS, and now Cyprus: the unintended suffering of the people will lead to the leadership giving way, because it is the leadership that is diverting the suffering to the people, rather than itself. It is a similar, but mirrored picture in the other direction: The southern states believe that if they can embarrass the people in the northern states with their (southern) suffering and oppression, the north will have to back down (hence the intense focus on Nazi-era imagery during southern protests, they know exactly what button they want to push in the minds of the German voter.)


The key is that all this "bringing a country to its knees" business is sincerely seen in the germanics as a painful, but necessary intermediate step in the process of long-term improvement of the welfare of the people in the corrupted-leadership southern nations. Germany, for example, looks at its own recent decades of painful reforms (undertaken voluntarily) as an example of the best-case scenario. The corruption was low enough that the reform process could be entered into by societal consensus with minimal outside pressure, but even so the consequent economic development dividends speak for themselves. So the Northerners see themselves as helping the people in the south throw off the shackles of their corrupt governments, not as punishers of the people. They go to great pains to point out that the reforms they are asking for are not intended to be directed, as in Cyprus, at pension funds, but at the wealthiest of savers. But the local and corrupt politicians have a deep vested interest (their own continued power) in redirecting both the pain, and the blame, away from the intended objects.


I can easily see why one might respond, "with friends like that, who needs enemies!" And there are plenty of fascinating questions to explore along the lines of "what gives one country the right to determine what is best for the people of another country" and "why is it reasonable to assume that the austerity principle that worked in Germany is even relevant in other countries." Fascinating questions. Questions that I suspect you and I would actually agree on more than might be apparent in this discussion so far. But ultimately not questions relevant to the reality of this theater, since as correctly you point out next:

HSBC and a few other banks get caught laundering Mexican money by U.S. authorities and they get "rap on the wrist" level fines...no other consequences. Why? Blatantly simple...if you are big enough you are above the law:


"...Attorney General Eric Holder told another Senate panel that it was difficult to prosecute some large institutions because it would "have a negative impact on the national economy, perhaps even the world economy...When (Senator Elizabeth) Warren repeatedly asked whether regulators could identify a line beyond which a bank should face losing a license, (Treasury Department's David) Cohen struggled to respond before saying: "The actions that we took in the HSBC case we thought were appropriate in that instance..."




Manipulate LIBOR, with the full knowledge of the FSA. No problem. And on it goes. Russian offshore money laundering looks pretty tame by comparison, imo.

I completely agree with you here. Too Big to Fail is in fact the problem, along with other corrupting influences of strong banks. But as I pointed out above, a more careful examination reveals that the "too big to fail" card is NOT being played much by the Germanics in this game, but mostly by the Mediterraneans, and the Anglo-Saxons. I propose that if that is the logic that you don't care for, that very distaste should place you on the opposite side of this debate.

Cyprus is not a "unique case" as the Eurocrats wish us to believe. It's part of a now long established pattern playing out all over the world. If you are big enough to do damage you are protected at the taxpayer's expense. If not, and you have been trying to play with the big boyz, you will be taken down and your economy destroyed. Ireland, Greece, Spain, Portugal and now Cyprus have all learned that lesson.
Maybe that's how it should be. Let's just stop believing the nonsense that Cyprus is one of a kind, or somehow behaved worse than others.

Nope, Cyprus just got caught. But the difference between getting caught and not getting caught is neither trivial, nor arbitrary. Instead, it is a legally enforceable division, that in any legal system will define who is the winner, and who the loser, of the game. Less "might makes right" and more "the one who pays the piper calls the tune".

I wonder what would happen if the Cypriots called the EU bluff and liquidated their insolvent banks. Make the shareholder and then bondholders take the hit that they should take. Instead of offering future nat gas production revenues to Russia's Gazprom, perhaps instead commit to use those revenues to make good, over the next 10 or 20 years, on every bit of deposit insurance for Cypriot citizen's and small business accounts under $100k that it is unable to service today. Let the northern Europeans figure out how to deal with the knock-on effects from the Cyprus bank collapse on their own banks. That's a performance I would pay to get a ticket to watch...

I believe this is a very real possibility. But it is not obvious to me that it will permit you the Shadenfreude you appear to be anticipating. The result could also wind up strengthening the party toward which you are least favorably inclined. If Cyprus leaves and enters a death-spiral, it will force the other holdouts to either leave, or fold entirely. That could be exactly what the northern europeans want. Remember that many of them didn't want to let these borderline countries in to begin with.

[astonas]

Re: Cypriots Stunned by Forced Savings Cuts

Interesting stuff.

While I'm appalled at the behavior towards the little to medium sized guys...I'm not suprised.

What does surprise me though is how tiny Cyprus has become the center of the universe for the latest grand mal financial seizure(or is this just a petit mal seizure)?

I'm with you on all points. On the last one, however, I've recently reconsidered.

It is precisely because Cyprus is so tiny that it has become the center of the universe.

When a country is big enough to obviously and necessarily cause contagion, interested parties have to tiptoe around issues, and forge delicate compromises, lest everything come crashing down.

When a country is small enough that interested parties think there is a chance to simply take the hit, they feel emboldened to stand on their principles, in the hopes that this will provide them leverage in the next, inevitably much larger and more significant, skirmish.

It brings to mind Sayre's law:

In any dispute the intensity of feeling is inversely proportional to the value of the issues at stake.

which, as a corollary, adds:

That is why academic politics are so bitter.

[globaleconomicollaps]

Re: Cypriots Stunned by Forced Savings Cuts

I am impressed with the ardour with which the periphery nations embrace the common currency, and the amount of economic destruction they are willing to endure to remain in the union. Do the Germans really think that they will export more Bimmers and Mercedes Benz automobiles to Cyprus after they finish chasing out the laundered Russian money? I wonder how their exports of leading edge machine tools to Greece and Italy has been faring recently. Maybe they are keeping trade with France on an even keel by resorting to barter (I'll trade this Mosel Reisling for some of your Margaux)?

As the rest of Europe implodes around them the argument that the German's export juggernaut benefits from being in the "cheaper" Euro currency gets weaker every day. Either they use their trade surplus to bail out their markets, or...

My current theory is that this effort to kick Cyprus out of the union is part of a war between banking centers. In this case Luxembourg will benefit from the outflow from Cyprus. Bruce Krasting wrote a piece on Banking centers where he points out that Luxembourg is actually in worse shape than Cyprus ( and it is implied, would benefit from getting their clients).
http://brucekrasting.com/the-week-th...ters-in-focus/

[don]

Re: Cypriots Stunned by Forced Savings Cuts

My current theory is that this effort to kick Cyprus out of the union is part of a war between banking centers. In this case Luxembourg will benefit from the outflow from Cyprus. Bruce Krasting wrote a piece on Banking centers where he points out that Luxembourg is actually in worse shape than Cyprus ( and it is implied, would benefit from getting their clients).
http://brucekrasting.com/the-week-th...ters-in-focus/

the faint aroma of the Swiss accounts outing just passed through the room . . .

[don]

Re: Cypriots Stunned by Forced Savings Cuts

will those parliamentarians that have withdrawn their personal funds from Cyprus banks please raise their hands . . .

[don]

Will the Cyprus Gambit become FIRE's OJ Simpson?

By LIZ ALDERMAN

NICOSIA, Cyprus — Lawmakers took steps late Friday to revise a formula for obtaining a bailout of Cyprus’s banks but faced strong signals that the plan would not pass muster with international lenders.

The Parliament put off until later this weekend a vote on a crucial new proposal that would confiscate 22 to 25 percent of uninsured deposits above 100,000 euros through a new tax on account holders in one of the nation’s most troubled banks.

So with a deadline imposed by the European Central Bank looming on Monday, it appeared there was still no immediate path to a lifeline of 10 billion euros, or $13 billion, that Cyprus needs to keep its banks from collapsing.

Cyprus’s so-called troika of lenders — the International Monetary Fund, the European Commission and the European Central Bank — must still approve any plan. President Nicos Anastasiades was scheduled to fly to Brussels on Saturday to meet with European Union leaders, a spokesman said.

Monday is a national holiday in Cyprus, but banks are supposed to reopen on Tuesday for the first time in more than a week. There is widespread fear of a classic bank run.

On Friday, Cypriots jammed into supermarkets after lining up all day Thursday at automated teller machines to withdraw as much cash as possible. Gas stations were taking cash only, and some retailers reported that they would no longer accept credit.
One of the provisions Parliament approved Friday would impose new restrictions on withdrawing cash or moving money out of the country when the banks reopen. These new capital controls would prohibit or restrict check-cashing and bar “premature” account closings or any other transaction the authorities deemed unwarranted.

Lawmakers also voted to restructure the nation’s largest and most troubled bank, Laiki Bank, by splitting off its troubled assets into a so-called bad bank. Accounts with no problem would be transferred to the nation’s largest financial institution, the Bank of Cyprus. Lawmakers also voted to require that any bank on the verge of bankruptcy be split apart in the same way.

By effectively shutting down one of the banks needing support, the government could lower the 5.8-billion-euro sum that international lenders are demanding in exchange for a bailout. The consolidation of Laiki, also known as Cyprus Popular Bank, effectively relieves the government of a large expense of supporting the banking system, which is on the verge of collapsing under a mountain of souring loans to Greek businesses and individuals.

Still to be voted on is the measure to impose a tax of 22 to 25 percent on uninsured deposits at the Bank of Cyprus. That proposal was made after lawmakers rejected a plan earlier in the week to tax insured deposits to help raise the amount needed to secure the bailout. The Parliament appears to be trying to make up the difference in part by shifting the burden to large account holders.

When euro zone finance ministers negotiated the original bailout terms last weekend, Cypriot officials had resisted limiting the tax to large accounts, evidently to avoid damaging the country’s reputation as a haven for wealthy banking clients. Many of the wealthiest citizens of Russia have euro-denominated bank accounts in Cyprus, which is one reason that euro zone finance ministers have taken such a hard line.

The decision to tax uninsured deposits came after Cyprus proposed nationalizing the pension funds of state-owned Cypriot companies.

Lawmakers approved the pension takeover on Friday, but the move was denounced in Germany, whose political and financial influence in the euro zone tends to dictate policy.

“When you consider that there was massive resistance against involving the savings, then it is not easy to see how tapping the pension funds, which we view as socially a much more drastic step, is a very good idea,” Steffen Seibert, a spokesman for the German chancellor, Angela Merkel, told reporters.

The suggestion of tapping pension funds touches off a visceral response in Germany, where history has proved the dangers of such ideas. German pensions were tapped to finance both world wars, and the idea remains anathema to German leaders today.

“The German reaction to such suggestions quickly becomes emotional,” said Bernd Raffelhüschen, a professor of economics at the Albert-Ludwig University in Freiburg. “But looking at it rationally, it must be said that the German reaction is not stupid.”

The Cypriot government has ordered banks to keep A.T.M.’s filled with cash so long as the banks themselves remain closed. But that has been of little help to the thousands of international companies that bank in Cyprus, which cannot transfer money in and out of those accounts to conduct business.

Other officials gave assurances Friday that Cyprus could impose capital controls, like strict curbs on daily withdrawals and withdrawals of savings deposits, without violating European Union rules that are meant to foster flows of capital between member states. (no rule violations - whew, that was close )

http://www.nytimes.com/2013/03/23/bu...gewanted=print

[don]

Dmitry E. Rybolovlev - Oligarch Poster Boy

Shock Capitalism had a baby and named it Dmitry . . .

Wealthy Russians Ensnared as Cyprus Crisis Deepens

By ANDREW E. KRAMER

MOSCOW — Two decades ago, Dmitry E. Rybolovlev was a small-town hustler hoping to strike it rich amid the collapse of the Soviet Union. Today, he is one of the wealthiest men in the world, with a penthouse in Monaco, a yacht named “My Anna” worth more than $100 million, and two of the most expensive private residences in the United States.

Much of that money, it so happens, flowed through Cyprus.

His rapid rise was as typical for a Russian oligarch as is his deep dependence on Cyprus for offshore banking. Working in part through Cypriot trusts, Mr. Rybolovlev, a former doctor, sold his gigantic potash fertilizer mining conglomerate after a tumultuous and lucrative run as owner and spirited the money abroad. Then the good times rolled.

In 2008, Mr. Rybolovlev, now 46, bought a Florida mansion from Donald Trump for $95 million. At the time, this was the most ever paid for a private residence in the United States. Almost as an afterthought, he complained it was in such poor repair that it could not be inhabited.

A few years later, Mr. Rybolovlev bought the most expensive apartment ever sold in New York from the family of the former Citigroup chairman Sanford I. Weill, paying $88 million for the penthouse at 15 Central Park West.

“Anyone who is a Russian oligarch and wants to make sure that, over the long term, his assets are protected wants to make sure those assets are out of Russia,” said David B. Newman, a partner at Day Pitney, a New York law firm representing Mr. Rybolovlev’s estranged wife, Elena, in a long-running divorce case. “If you are a friend of the government, you do very well, but if that relationship turns — and this can happen quickly — you want to be out of Russia.”

Today, this common practice among wealthy Russians like Mr. Rybolovlev — using Cyprus to worm their way into the global financial elite and to protect themselves if they should fall out of favor with the capricious President Vladimir V. Putin — has drawn the Russian government deeply into the negotiations for a bailout of Cyprus’s banking system, whether officials there like it or not.

Russian money flowing into Cypriot banks dwarfs the island’s $25 billion economy. About 25 percent of Russian foreign direct investment moves through Cyprus, according to an estimate by Morgan Stanley, frequently in a “round-trip” process that serves to lubricate the Russian economy. Cypriot entities, often owned by rich Russians, lent $40 billion a year to Russia from 2007 through 2011.

With a fortune estimated at $9.1 billion by Forbes magazine, Mr. Rybolovlev has reasons to worry about his status at home. But he is also the largest Russian investor in the Cypriot banking sector, which has given him a huge stake in preventing its collapse. As far back as July, Mr. Rybolovlev was negotiating to help recapitalize the Bank of Cyprus, according to Alithia, a newspaper based in the Cypriot capital, Nicosia.

At the same time, while Mr. Putin might not mind seeing Mr. Rybolovlev suffer a bit, he has an interest in protecting Russian wealth held abroad because of the role it plays at home and the opportunities it presents to expand Russian influence. If no bailout from the European Union is forthcoming and Cypriot banks collapse, the risk to Russian companies and oligarchs, some of them much closer to Mr. Putin than Mr. Rybolovlev is, would be far graver than the potential loss of deposited funds to the 9.9 percent “stabilization tax” originally proposed by the European Central Bank. At a minimum, capital controls could freeze all funds now in Cyprus.

The stakes are particularly high for wealthy Russians: Moody’s, the rating agency, has estimated that Russian deposits in banks and loans to Cypriot companies total $70 billion, or about 4 percent of Russia’s gross domestic product. Some 42 percent of the value of Cypriot bank deposits is in accounts with more than half a million euros.

As is typical for Russian oligarchs, Mr. Rybolovlev set up corporate trusts in Cyprus with breezy-sounding names like Aries and Virgo. These were little more than post-office boxes monitored by lawyers. But those trust accounts owned vast, gritty mining enterprises deep in the Russian hinterlands and filled up with countless riches as worries about global food shortages in the last decade sent fertilizer prices sky-high.

A spokesman for Mr. Rybolovlev, Sergey Chernitsyn, declined to comment on a possible role for Mr. Rybolovlev in propping up Cypriot banks with additional cash, or his reasons for becoming involved in banking and investing in Cyprus. Mr. Chernitsyn cited legal restrictions because of the divorce proceedings, which are under way in a Geneva court.

Details have nonetheless come to light about Mr. Rybolovlev’s wealth and that of other Russians. “We’ve become well aware through the case of the vast amount of Russian money that has made its way to Cyprus through the oligarchs,” said Mr. Newman, the lawyer representing Elena Rybolovleva.

Having much of his money safely parked in Cyprus has an added advantage for Mr. Rybolovlev, Mr. Newman said: the island tax haven has gone out of its way to pass legislation friendly to rich men in such situations.

When Mr. Rybolovlev sold his fertilizer company, Uralkali, in 2007, the proceeds flowed to Aries and Virgo, the Cyprus shell companies, Mr. Newman said, ensuring the money’s safety. In 2010, he bought 9.7 percent of the Bank of Cyprus through a trust in the name of his daughters: Anna, the namesake of his yacht, and Ekaterina, 22, who is studying in New York and lives in the Manhattan apartment.

Around the time of the sale, Uralkali was coming under intense pressure from Russian authorities because of an industrial accident that caused gigantic sinkholes, some up to 50 stories deep, to open under the town of Berezniki, about 990 miles east of Moscow. Dozens of buildings were destroyed and thousands of people had to be moved, at great expense.

Though a government commission in 2008 cleared Mr. Rybolovlev of wrongdoing, a close aide to Mr. Putin, Igor I. Sechin, said that he bore some responsibility. By then, though, the money was in Cyprus and Mr. Rybolovlev was living in Monaco.

Mr. Newman argued that the Cypriot shell companies, in addition to shielding the funds from Mr. Rybolovlev’s wife, served to protect his riches from any effort by the Putin government to force him to pay part of the cost of the mine accident. “The whole idea was to have the interest in the Russian companies held not in Russia, but outside Russia, in Cyprus,” Mr. Newman said.

A Russian government official who advises cabinet members on economic matters said the government was pessimistic about the chances of a bailout working in Cyprus, given the likelihood of a crushing run on its banks once they reopen. And if it were just Mr. Rybolovlev who would be hit, Mr. Putin might be happy to let the chips fall where they may. But it is not just Mr. Rybolovlev.

“He’s not very well received here in Russia,” the adviser said, adding that Mr. Rybolovlev faced no criminal charges, including for moving his fortune offshore through Cypriot shell companies. “What can I say? Some people just don’t deserve the money they have.”

http://www.nytimes.com/2013/03/23/bu...l?ref=business

[GRG55]

Re: Cypriots Stunned by Forced Savings Cuts

My current theory is that this effort to kick Cyprus out of the union is part of a war between banking centers. In this case Luxembourg will benefit from the outflow from Cyprus. Bruce Krasting wrote a piece on Banking centers where he points out that Luxembourg is actually in worse shape than Cyprus ( and it is implied, would benefit from getting their clients).
http://brucekrasting.com/the-week-th...ters-in-focus/

Krasting is completely wrong. Nobody in their right mind is going to move their offshore money to a Luxembourg account, or leave any substantive amount of it in cash deposits in a Euro currency nation, after witnessing what has happened in recent years and now what the EU is doing to Cyprus. This could actually do a lot of damage to the Luxembourg banking industry, and I suspect the Germans, Dutch, French and Finns want that to happen. Remember the controversy not that long ago regarding secret bank accounts in Luxembourg and tax evasion by German residents.

Germany sniffs out Luxembourg tax evaders

Date 15.10.2011: Switzerland and Liechtenstein are no longer the tax havens they used to be for wealthy Germans. Now German authorities are tracking down untaxed funds in the tiny country of Luxembourg, too.

German authorities expect to see up to 900 million euros ($1.2 billion) in recovered taxes after the purchase of a disk containing banking details of thousands of potential tax evaders...

...The German Tax Union, whose members are German tax employees, welcomed the news, saying the purchase of bank data from neighboring countries was the most efficient way to track down unpaid taxes...

The outflow from Cyprus (if it's allowed to outflow) is almost certainly going to Dubai, Singapore, London and possibly Switzerland, in roughly that order. Malta is not highly regarded for banking privacy, so if that is not a concern Switzerland or the Channel Islands are the better bet. Gibraltar levies a 10% business tax on remittances, so is somewhat less desirable than Dubai for that reason.

[Onlooker]

Re: Cypriots Stunned by Forced Savings Cuts

Krasting is completely wrong. Nobody in their right mind is going to move their offshore money to a Luxembourg account, or leave any substantive amount of it in cash deposits in a Euro currency nation, after witnessing what has happened in recent years and now what the EU is doing to Cyprus.

That was actually Krasting's exact point: "I end with where I started, only an idiot would leave more than E100k in a Luxemburg bank (any EU bank for the foreseeable future)."

I really don't know where the notion that he implied that Luxemburg would benefit from the Cyprus situation came from (I realize that GRG55 was just going on what was said by someone else). Completely off base.

[c1ue]

Re: Cypriots Stunned by Forced Savings Cuts

The outflow from Cyprus (if it's allowed to outflow) is almost certainly going to Dubai, Singapore, London and possibly Switzerland, in roughly that order.

If the even larger levy plus capital controls passes - and it is far from clear that it will - I foresee Cyprus' import/export trade suddenly experiencing wild growth for several quarters. Much of the income held in said banks isn't private citizen bank accounts - they are officially for some shell corporation. If said corporation decides to import sea shells at $100,000 a pop into Cyprus, who's to capital control that?

Russians are very, very experienced at transfer pricing - it is how a lot of that money got into Cyprus to start with.

I also find the new levy amount on uninsured deposits interesting. It appears the 'excess' deposits are something less than half of all deposits in the system. If 0.066x+0.099y=bailout needed, and 0.22y (or 0.25y)=bailout needed, then x=1.83y or 2.28y - or in clearer terms, the uninsured deposits are only around 30% to 36% of all deposits in the system.

Equally the fallout from the levy, should it pass, will reverberate for years if corporations' cash accounts are included.