Tuesday, March 26, 2013

Cyprus: One-Off or Template?

The notion has been floated, repeatedly, that Cyprus is a “special situation”, that the confiscation of bank deposits is an “extraordinary” measure peculiar to the dynamics of this one little country’s current financial crisis.

Well, I guess that notion is blowing up faster than Cyprus’s overworked ATM machines:
The euro fell on global markets after Jeroen Dijsselbloem, the Dutch chairman of the eurozone, announced that the heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe.
Could never happen here, though, right? No, of course not.

Er, by the way, coming soon from Paco Financial Services (Cayman Islands): Perdurable Asset Caching Offshore. Yes, in these ominous times, we think it wise to consider socking away a significant amount of getus in an IRA, Roth or 401(k) account that provides diversification among a range of assets sure to increase in value: gold, silver, guns, ammo and canned goods. A P.A.C.O. account can help you achieve your retirement goals – and it’s fully compliant with all IRS regulations (no need to look it up; just take our word for it).

Paco Financial Services: Commando investing in a time of economic apocalypse.


Michael Lonie said...

The terrifying thing is, that PACO Enterprises ad sounds plausible. The world is so crazy that it is becoming impossible to satirize it. No sooner do you think of a satirical idea, than you find somebody either doing it or advocating doing it.

Robert of Ottawa said...

I notice a few things here:

1: Governments have a debt problem, most money is owed to banks and private and corporate purchasers of their bonds.

2. This debt is due to politicians promising payments that are not affordable, but the promises get them elected.

3. Banks are broke, possibly because they own all those junk government bonds.

4. Governments attempt to bail out these broke banks with taxes, printed money and more debt.

5. The banks go broke.

6. The governments go broke.

7. The governments steal the people's money stored in the broke banks to support the broke banks so the governments will not go broke.

How am I doing?

Paco said...

Robert: I think you've got it pegged pretty well.

Michael: That's what Ed Driscoll refers to as "Muggeridge's Law".

Anonymous said...

Paco, I suggest you build your financial services building in the shape of a mattress to give people that feeling of security not provided by the governmentbankingindustry (yes, all one word)

Paco said...

Anon: Inspired! You're now head of marketing.

RebeccaH said...

Also, Paco, instead of issuing checks to your depositors, I advocate issuing socks. They're softer when you put them under the mattress.

mojo said...

Let's not miss any bets: How about a "First National Bank of HIM", Cayman Islands?

"Put your money in the bank before you go, it'll be waiting for you when you get there!"

What? Blasphemy?

No, I don't think so...

Ed Snack said...

The problem is, Paco, that depositors in a bank that is insolvent (because it made poor and often political choices in its investments with depositors' money) will lose some or all of their money when the bank goes bust. What you and others appear to be advocating is that the taxpayers (the ultimate source of the funds) bail these banks out. Why ?

The shareholders lose their money (yep, the Cypriot bank shareholders will see nothing from the bailout), the bond holders lose their shirts (yep, bondholders lose their investment), and now gauaranteed depositors (under 100K Euro) will get their money (but no more interest), those uninsured will lose some of that uninsured money.

That's what happens when a bank goes bust, like by investing heaps in Greek government bonds which have effectively been defaulted on.

What's the option ? Taxpayer bailout ?

Paco said...

No, I'm not advocating that the taxpayers bail out the depositors. In countries where the banking sector dwarfs the non-bank economy, this kind of thing happens (it can happen anywhere, but countries like Iceland and Cyprus are particularly vulnerable). I suppose the real take-away is that people shouldn't take the risk of uninsured deposits. The larger lesson is that worldwide distortions of market signals, due to the collusion of governments and banks, resulting in the artificial inflation of asset values in conjunction with low-cost borrowing, is ultimately going to be bad news for everybody.

Ed Snack said...

Paco, then why "The notion has been floated, repeatedly, that Cyprus is a “special situation”, that the confiscation of bank deposits is an “extraordinary” measure peculiar to the dynamics of this one little country’s current financial crisis." Why say "Confiscation" of deposits. The bank is broke and can't pay up without a bailout.

That's not confiscation except tha the bailout is a confiscation from taxpayers paying feckless depositors who weren't perhaps careful enough about which bank they chose.

The only way to stop this is do exactly what has happened, let the banks fail (and the EU has ponyed up to enable the Cypriot government honour its deposit guarantee which is probably wise), and caveat emptor. It's been the belief in the "too big to fail" banks that has contributed to the current crisis, if depositors are more prudent perhaps banks will need to be more prudent in order to attract deposits. Sounds like win-win to me.

Paco said...

Then, if it's just a garden-variety bank failure, why is it unique and limited to Cyprus, as many eurocrats have been claiming? This kind of thing can happen anywhere. If you don't like the word "confiscation", then we'll just call it, say, "insufficient funds". And recollect, insured depositors were also originally scheduled for a haircut.

I don't disagree with letting banks fail. I'm certainly not going to be passionately angry on behalf of Russian billionaires who should have known better. My point is that the entire international banking system is starting to show cracks, and we're not immune in the U.S. Caveat emptor.

Ed Snack said...

Paco, that's fair, insufficient funds is exactly it, the banks are broke.

I think we can see that the original proposal to give the insured depositors a shave (don't think 6.5% counts as a haircut, maybe a light trim) was a Cypriot attempt at a virtual "fig-leaf" to attempt to mollify various Russian types who might cut up extremely rough. "Look, we TRIED to help you and get others to contribute, but we just couldn't get away with it...". As I understand that was a Cypriot government innovation and not one suggested by the EU/IMF.

Two other similar cases were in Iceland and Ireland, with bank collapses from imprudent lending. Ireland simply took over the bank debts at taxpayer expense and I don't think that has been a good way to go from the outcome. Iceland went the other way and scalped all non-domestic depositors. Harsher but with a better result, economically, so far.

I think the EU keeps saying it's special because they want it to be so, and they want to try to keep any contagion to a minimum. Will it work, maybe.

The Cyprus problem isn't unique, IMHO, but it is unusual. The main broke bank was, I believe, majority Cypriot government owned (80%), and for local political reasons they were very active investors in Greek bonds. That did not turn out well as we all know, but although a lot of other European banks have taken losses on Greek bonds, none have or had anything like the same proportion of those as the Cypriots did. There is a local political angle.

Paco said...

Good luck to the eurovolk in containing the contagion. I hope they can, but an awful lot (in the larger scheme of things) depends on Germany, and I believe their patience is, perhaps not at the breaking point, yet, but getting there (kind of like the fellow who had the tiger by the tail; how do you let go?)

mojo said...

Re: Tiger dismount

"Very carefully"