TEXT-Eurogroup statement on Cyprus

[dipsydoodle]

Source: Reuters

I recall that the political agreement reached on 16 March on the cornerstones of the adjustment programme and the financing envelope for Cyprus reflects the consensus reached by the Cypriot government with the Eurogroup. The implementation of the reform measures included in the draft programme is the best guarantee for a more prosperous future for Cyprus and its citizens, through a viable financial sector, sound public finances and sustainable economic growth.

I reiterate that the stability levy on deposits is a one-off measure. This measure will - together with the international financial support - be used to restore the viability of the Cypriot banking system and hence, safeguard financial stability in Cyprus. In the absence of this measure, Cyprus would have faced scenarios that would have left deposit holders significantly worse off.

The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below EUR 100.000. The Cypriot authorities will introduce more progressivity in the one-off levy compared to what was agreed on 16 March, provided that it continues yielding the targeted reduction of the financing envelope and, hence, not impact the overall amount of financial assistance up to EUR 10bn.

The Eurogroup takes note of the authorities' decision to declare a temporary bank holiday in Cyprus on 19-20 March 2013 to safeguard the stability of the financial sector, and urges a swift decision by the Cypriot authorities and parliament to rapidly implement the agreed measures.

Read more: http://www.reuters.com/article/2013/03/18/eurogroup-cyprus-idUSB5E8KL01020130318

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EDIT original post changed - I posted an earlier statement in error

[Kelvin Mace]

1. The Germans just committed financial suicide

They have set the entire Eurozone up for a run on the banks.

[Renew Deal]

3. I agree about the bank run

[dipsydoodle]

4. Nothing like that happened today

a simple search will confirm that for you.

[Occulus]

6. I just followed your advice. Perhaps you should as well.

The exact Google term I used was "Cyprus bank run" in the Google search bar, without the quotes.

Many sources are in fact calling what happened today a "run", at least according to the results Google spat out.

[slackmaster]

8. The only reason Cyprus isn't experiencing a complete banking melt-down is that its banks are closed

...until Thursday.

[dipsydoodle]

10. By then

I reckon they'll have capital control in place to prevent flight.

[slackmaster]

12. Way too late to restore trust in the government, or faith in the banking system.

There are some things that cannot be un-said. "We're going to confiscate a share of your money" is one of them.

[dipsydoodle]

9. The only occurence today

was those getting cash from wall machines in Cyprus - longest queue was eight people. Nothing elsewhere in Europe.

[slackmaster]

13. The daily withdrawal limit is 500 Euroes. There are no lines now because the machines are empty.

[Occulus]

14. I just searched Google News using the same term.

Google search and Google News don't return the nearly universal results against the seriousness of the situation as the certainty expressed by your comments should lead one to believe would be returned. There are many, many sources on this from just today, some from less than an hour ago as of this writing, calling these "runs" and very rightly showing concern that this may spiral completely out of control. A (on first glance) large subset of these are saying bank runs occured. At least one is stating as fact that nearly all the ATMs are empty.

I'm not going to wade through it all, but the upshot is that Google Search and News are returning very different results that they ought to be if your comments on the situation represent something close to an accurate picture of the situation.

This tiny little lapse in judgement on Germany's part is already having a greater negative social response in Cyprus than was initially feared- indeed, prior to today's announcements regarding the planned levy against accounts, citizens of Cyprus were essentially being told in as any words that their money was not safe in their own country's banks.

This happened because Greece got bailed out. Not Cyprus; Greece. The current and very large concern is that other nations who contributed more to the bailout of Greece, or any other country, for that matter, may eventually end up being met with treatment similar to what Cyprus is receiving right now... and I should be careful to note hear that the economy of cypress is the third smallest in the European Union.

If this situation cam happen to Cyprus, it can happen to any EU member whose banks are in a similar state or have done similar things, like bailing out Greece.

Please don't try to poo-poo this away anymore as insignificant. This small lapse in judgement by Germany has set the stage for, potentially, a long series of very nasty financial and political repercussions that may threaten the very viability of the Euro and even the stability of the EU itself. This terrible "remedy" Germany has imposed on Cyprus could eventually spread to our own country's financial sector if it isn't managed very, very carefully. I don't even want to think what might be uncovered regarding our own financial house should that happen.

The citizens of Cyprus are very angry, and they have every right to be. This isn't over yet, and isn't going away soon.

[dipsydoodle]

15. I googled the exact words you originally suggested "Cyprus bank run"

Reply #1 had referred to a run in Europe and there was none - just concerns it may happen.

Aside from that our constantly updated tv news on the subject here in the UK being maybe more up-to-date that you have access to. That was how I knew about the ATMs there : live from Nicosia they were functioning ok with minimal queues mid afternoon GMT which is late afternoon there - they are 2 hours ahead of London.

The background and origin of their woes is aptly stated here :

Q&A: Cyprus bailout

Was Cyprus not doing quite well before the global financial crisis?

Yes. The International Monetary Fund described the country's economic performance before 2008 as a "long period of high growth, low unemployment, and sound public finances". There was a recession in 2009 but it was the mildest in the eurozone. But two interlinking factors have brought Cyprus close to default - the deteriorating government finances and the country's struggling banks.

So what went wrong?

During the good years Cyprus did build up what the IMF calls "vulnerabilities". There was rapid growth in credit, the banks made many loans to Greece and there was a property market boom.

The banks are central to this story. They grew rapidly. By 2011, the IMF reported that their assets - which include all the loans they have made - were equivalent to 835% of annual national income, or GDP. A chunk of that is down to foreign-owned banks, but those that are Cypriot had made loans to Greek borrowers worth 160% of Cypriot GDP. There have been losses on the loans to private borrowers because of the depression that has hit the Greek economy. And the value of the debts owed by the Greek government was cut in a debt relief exercise undertaken last year. It might have helped Greece, but the Cypriot banks were hit.

http://www.bbc.co.uk/news/world-europe-21817197

They suffered first from the antics of US financial institutions and then the write down on Greek bonds. Their banks now also hold substantial delinquent internal debt from the collapse of their property market - referred to above as "losses on the loans to private borrowers".

I'm not defending what's occurring there : just explaining. What's been asked is that they come with €7 billion or so to go with €10 billion from the ECB. There are other ways in which that could be managed but with no bailout , their banks fold, the country goes bankrupt and they're still up for future bond repayments already secured against state assets and repayable in Euros regardless of using a new currency. With the inevitable inflation which would follow what's on the table now might looking back have been a better choice for their population.

The ECB has already said that its the figure of €7 billion which is fixed and how they achieve that is up to them. At present it seem that the % for below €100,000 will be reduced, the poor pay nothing and the figure for above €100,000 increased.

[Kelvin Mace]

11. The banks in Cyprus have been shut down to prevent a run

Let's see what happens when they re-open.

[Renew Deal]

2. Ahhh, a threat

They did the same stuff to Greece and Greece is significantly worse off. The Cypriots should allow the banks and their shareholders to take the losses.

These guys privatize the profits and socialize the losses over and over.

[Wellstone ruled]

5. It's the Russian Mafia and

Oligarchs that have created this mess. Look not further than the Bankstyers of Wall Street.

[quadrature]

7. I don't want this idea to spread

hopefully, this will go very badly.

best outcome would be for Cypriots and
Russians to get even with the local politicians

[Benton D Struckcheon]

16. There's two things I detect from you

...and yes, I just read your latest on this.

1. Lack of any empathy: I don't see that you're able to put yourself in the shoes of some regular guy from Cyprus who put his money in the bank at minimum expecting he'd get that amount back, and now finding out he won't.

2. Lack of realization of the consequences: insurance in Cyprus, according to what I've read, is 100k in euros. So deposits less than 100k are supposed to be sacrosanct. This violates this very very simple principal. If it can be violated once, it can be violated again. No one in Europe seems to understand this or to understand what it will mean to the ordinary person living in Europe. It's easily worth pissing off some Russian oligarchs to keep that principal in place in full.

To put it bluntly: they have blown up confidence in all of their banks for the sake of what amounts, in the context of the amounts of money at stake here, to petty cash. Never has this saying been more appropriate: penny wise and pound foolish.

[dipsydoodle]

17. The issue concerning the €100k insurance is still being looked at

Its not lack of empathy : its the cold hard facts of the situation. The figures mentioned are a TAX which could easily be expressed in other ways but would not be instantaneous as is expected by the ECB.

Worst case scenario for the Cypriots would be that their banks did fold completely. Thier banking sector represents a considerable proportion of their GDP. Cyprus would be bankrupt and out of the Euro. I really don't think their public would find that too funny especially given it could increase Turkey's influence via Northern Cyprus.

It's not easily worth pissing off Russia : Putin is already involved now. Doing so would reduce the chances of Russia extending their current loan of €2.5 billion accompanied by an interest rate reduction.

btw - the €100ks are sacrosanct inasmuch their government has the funds to pay all affected.

[Benton D Struckcheon]

18. 2.5 billion????????!!!!!!!!????????

I mean come on. That 2.5 bil shoulda been in with the money the eurofolks should have extended to Cyprus.
It's not like it wasn't known that Greece's blowup affected Cyprus pretty badly and they'd be next in line. This ad hoc response is so out of line it's not even funny. This should have been settled very quietly a very long time ago. Confidence in the financial markets isn't everything; it's the only thing. If the leaders of the EU haven't learned that by now they need to find other work, like now. Incompetent wouldn't even begin to describe them.

[dipsydoodle]

19. That was done in coordination with the EU.

Fri Sep 28, 2012 Russia to coordinate Cyprus loan decision with EU.

(Reuters) - Russia said on Friday it would only grant a bailout loan to Cyprus as part of a coordinated rescue with the European Union for the Mediterranean island state, which it said was seeking a total of 20 billion euros ($25.7 billion) in aid.

Finance Minister Anton Siluanov told Reuters that Russia was considering a request for a 5 billion euro loan, and added that Cyprus was seeking a further 15 billion from the EU.

There was no immediate comment from authorities in Nicosia.

In June, Cyprus became the fifth country in the 17 nation euro zone to seek some form of international aid, when its banks needed state support to cover massive losses on their exposure to debt-crippled Greece.

http://www.reuters.com/article/2012/09/28/us-russia-summit-cyprus-siluanov-idUSBRE88R0BL20120928

For whatever reason the loan from Russia was halved and the requirement form the ECB increased to match the shortfall.

btw - on the subject of the tax............don't think for one minute there is anything innovative about a tax being deducted at source. That's been the case in the UK for living memory with regard interest payments from banks whatever and similarly on share dividends too - both at standard rate. Where appropriate the tax is then refunded , left as is or topped up as necessary at year end.

[Benton D Struckcheon]

20. This isn't a tax on interest, right?

It's a tax on the actual amount on deposit, or at least that's what I've read everywhere. If they were doing a withholding tax on interest it would be noncontroversial. That's done here in the US if the IRS figures you've been substantially underreporting or underpaying your owed income tax. This is, as far as I can see, completely different from something like that.

[dipsydoodle]

21. I know its not.

That was just an illustration of tax taken at source. What is proposed there is a tax which has been expressed in a specific way. That means their government could tax in advance without disturbing the €100k guarantee which as such would become €100k less tax for example.

If their own population do empty their a/cs I'm not sure what they'll do with funds other than put 'em in shoeboxes. You can't move more than £10000 / €12,000 over here without an anti laundering investigation. I fell foul of that 4 years ago when I needed to move £16,000 or so to a dealership just to pay for my Jeep. I said to the bank "fine - transfer 10k today and 6k tomorrow if you really want to make work for yourselves". They thought about it and transferred 16k for me straight away.

[Benton D Struckcheon]

22. No, it would be 100k less the tax, that's the problem

Unless you can show that it's not on the amount deposited. If it is it doesn't matter what the law says, it's a violation of the 100k deposit guarantee. Arguing that it's only a guarantee if the Cypriot gov't can afford it is not what is understood as implicit in eurozone membership by, well, everyone. Sucks for the Germans, Dutch, Finns, et alia, but that's what they got themselves into, and this constant attempt to dance around this reality is just making, as you said to that bank that didn't want to transfer that money, work for everyone.
It's also, far more importantly, killing confidence. That's the really important part of this.

[dipsydoodle]

24. nb. edited - Wouldn't worry about killing confidence over here too much

That's already done.

If it kills confidence in the US then tough - they started this mess across 2007/2008.

The government's €100k's max only comes into being in the event of banks folding. So - no I the tax shouldn't be payable in that case,

Goodnight - I'm UK.

[Politicub]

23. Sounds like the FDIC

Our banking system is far from perfect or a model to follow, but FDIC was an important innovation from the Roosevelt administration. It restored people's trust that their deposits are safe.

The banking system needs a lot of reform, but I don't believe small deposit insurance is a bad thing.

[dipsydoodle]

25. The difference is

that the US can just print more fiat money as usual. EU member states cannot do that.