Sunday, March 17, 2013

A Little More On Cyprus

Some of It Was True … has been following the situation more closely.

… those who noted that the Cyprus bailout took place ahead of a local bank holiday on Monday were onto something.

Cyprus was a British colony, and its financial system is modeled after the British system. In Britain, bank holidays are regular holidays that can be used to give regulators extra time to make sure that the books of the banks are in order. So doing this move in Cyprus when they have a bank holiday may be a sign that banks will be shuttered or reorganized too.

Four choices have been faced ahead of every [Eurozone] bailout; screw the local taxpayer; screw the creditors; the Germans pay for everything; or fiddle the numbers in the hope the crisis just goes away. The Irish programme rested heavily on option 1, the Portuguese and Greek (especially) on options 1 & 4. Hopes for option 3 (ESM [kind of an EU version of our TARP] buys shares in the banks) are dead in the water. This programme indicates option 2 gaining in strength, 3 & 4 sinking.

It actually may be a good thing if option 2 is gaining steam, since there are many deep pockets moving presumably ill-gotten money through the European backwaters.

… senior bank bondholders are being protected to save other banks. But this means that Cypriot depositors are being sacrificed that depositors in the rest of Europe can be protected.

This is definitely a move to spread the pain to prevent a contagious spread of the Cypriot crisis to banks in other countries. This then is similar to the U.S. bailout of AIG in 2008; too many foreign financial systems were dependent on the cash flows coming out of that operation, making it risky for it to just be near the borderline of bankruptcy.

And the Russians? … I would guess the thinking is that 10% is seen as a cost of doing business when it comes to money laundering … If the infliction of losses on small depositors has a purpose, it’s probably to reassure the Russians that they are not being discriminated against. Yes, I may have thrown up a little in my mouth typing that.


My own judgement is that inflicting costs on depositors in principle is an extremely important one, but that not sparing the small depositor is worse …

Perhaps so. The long-term problem is that if you don’t do something like this, you end up with zombie banks, that face no risk from taking extravagant gambles: heads they win, tails … well … the rest of us pay.

The bottom line for us here in the U.S. is that you need to hope that this sort of move does preclude contagion, because that can reach back to our financial system too.

Via Marginal Revolution.

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