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“Unique Stability Levy”

Early this morning in Cyprus, the government announced an agreement with the IMF and the European Union on a bailout that it had long sought. Rather than €17 billion, the outside lenders provided only €10 billion.  

The remainder, it was decided, would come largely from a one-time forced reallocation of deposits from the banks to the government. Those with deposits over €100,000 would have 9.9% of their deposit taken away, replaced by equity in the bank. (Hint: If the banks were well off enough for that equity stake to have value, Cyprus wouldn’t need a bailout.)  

Now, most of those deposits are from foreign sources, largely Russian, who find Cypriot banking laws pretty lax. There are estimates that Russian corporations had around €20 billion on deposit, and a 10% hit to their deposits might be accepted as a cost of doing business.  

However, the agreement also taxed those deposits below €100,000 at a 6.75% rate. This will include many citizens who believed their deposits were insured. I guess they weren’t insured for government failure, just bank failure.  

It doesn’t take too much to suppose that the consideration was whether the government could still have its banking system if they whacked the large deposits at a higher rate and spared their citizens. That they didn’t speaks volumes of the degree to which these programs protect banking interests rather than everyday people.  

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.  

A great deal of anxiety and anger has resulted. The local press is reporting that the Germans and the IMF had agreed that Cyprus was small enough to fail. There was also a condition in the bailout that the banking system, which holds assets 7 times the size of the country’s GDP, needed to shrink to European norms over the next few years.  

This “unique stability levy” imposed on depositors — that’s what the official document calls it — is not causing stability in Cyprus, and it is causing consternation elsewhere.  It will be interesting to observe depositor behavior in places like Lisbon and Athens Monday morning. Would they feel safe now that this is a situation unique to Cyprus? It is remarkable that a continent that has thrown nearly a trillion euros at banking problems over the last three years would take such a risk to its banking system over a few billion more. On the other hand, if it turns out that you can impose costs on creditors this way in Cyprus, you might find out that you can do something more than just stick it to taxpayers or beg the Germans for help.  

  1. Nick Stuart

     

    Fake John Galt: What worries me is that I can see those in DC thinking this is an option in the US. There was a reason our grand parents kept their money under the mattress. In bad financial times you can never trust a government. · 4 hours ago

    Our government is already doing it via inflation.

  2. ChrisC

    The Cypriots gave up the tried and true method for dealing with their financial situation when they hitched their wagon to the Euro.  We still have that option available – printing money and inflating our currency.

  3. Eric Hines

    This is supposed to raise €5.8 billion ($7.6 billion).  Think about this, though.  Are the interest rates or investment rates of return that the Cypriot banks are paying on those deposits more or less than those taxes?  You get three guesses, and the first two don’t count.  For how long will those depositors leave their remaining money in those banks?  Again, three guesses, and the first two don’t count.

    The Cypriot Parliament was supposed to vote on this over the weekend, but that vote has been postponed until Monday amid fears that the Parliament would vote it down, having more integrity than Finance Minister Serris, who put a freeze on electronic transfers:

    We have taken immediate measures so that electronic transfers cannot take effect before banks reopen on Tuesday.

    Cash withdrawals at the ATMs also are limited to €400 ($520).  The ATMs aren’t refusing withdrawals, they’re out of money and not being replenished.

    Willy Sutton couldn’t have done it better.

    Eric Hines

  4. BrentB67

    Great write up King. What could be more interesting is that the Russian depositors may not consider 9.9% the cost of doing business and I think it is reasonable to expect that some of those depositors may be well connected within Russia.

    The law of unintended consequences between a 2nd tier super power (that considers itself 1st tier) and an island banana republic may re-define Black Swan.

    We live in interesting times. 

  5. Neolibertarian

    Close your eyes, tap your slippers together three times and repeat:

    “There’s no place like Bretton Woods…There’s no place like Bretton Woods…There’s no place like Bretton Woods…”

  6. Eric Hines

    A metal standard is still just a hypothetical construct, with no theoretical basis in economics.  Debase by printing or debase by “revaluing” the metal, or debase by government stealing metal wealth outright, like FDR’s confiscation of privately held gold and the output of privately owned gold mines.

    A nation’s currency is worth what the market says it is, not a fen more or less.  That value will be realized only in what sellers are willing to accept in trade for their goods.

    Eric Hines

  7. PaulAZ

    When the rational response is to bury your cash in a coffee can in the backyard, government has officially destroyed the financial system of a country.It’s gonna be a bumpy ride….

  8. iWc

    This is coming to a bank near you… it is how Obama will “ask those who are able, to pay their fair share.”

    Money will flee Cyprus and the entire Eurozone. People will search for other ways to hoard and hide. Expect property to go up in places like London and New York.

  9. Fake John Galt

    What worries me is that I can see those in DC thinking this is an option in the US. There was a reason our grand parents kept their money under the mattress. In bad financial times you can never trust a government.

  10. SParker
    Nick Stuart:  

    Fake John Galt: What worries me is that I can see those in DC thinking this is an option in the US. There was a reason our grand parents kept their money under the mattress. In bad financial times you can never trust a government. · 4 hours ago

    Our government is already doing it via inflation. · 3 hours ago

    That’s the time-honored approach.  Which is why it’s so astonishing when members of a “ruthlessly efficient criminal enterprise”*  do something so ham-handedly trust destroying.  You’d think they’d know that the key to  good theft is not making too much noise.  Although I guess there is the  ”be loud and brutal” school of thought.

    *from a recent Barry Ritholtz rant.  On the US banking system.  But more-or-less applicable world-wide.  Apparently.

    H’mmm rant fans, the editor doesn’t appear to want to take my link. So:  

    http://tinyurl.com/cj9yqco

  11. Steve MacDonald

    We should fear deflation because it brings at best stagnant economic growth and at worst a terrible depression. However to be honest, I do not believe that an economic crisis triggered by deflation would be worse than what I believe is coming towards us. As a nation we have suffered through periods of inflation and deflation, all the while maintaining broadly the value of the dollar. With the growth of the money supply (debt) since we left the gold standard, he value of our currency has declined substantially. I shudder to think what deflation would bring today – but feel it would be less painful than what we will eventually pay.

  12. Steve MacDonald

    I find this truly amazing. The EU essentially declares that its deposit insurance is fiction and arbitrarily imposes a wealth tax in order to save the banks (opposite of Iceland). Raises some interesting questions:

    - What % of the population of Spain, Italy, Greece, Portugal etc is sentient? Anyone with an IQ in double digits or above has to realize that the same thing can easily happen to them.

    - What will be the reaction of Russian oligarchs as 10% of their black money disappears to the EU banking coffers?

    - How big will the wave of money be that flows to Switzerland or Singapore to protect deposits? What will be the impact on gold and silver physical purchases?

    The magnitude of unintended potential impacts from this absurdity is mind blowing. I have to believe that:

    - The powers that be truly believe the masses to be imvicilic or

    - The powers that be are dumb, desperate or both or

    - This is an experiment in a microscopic setting few care about to see how far they can push state controlled theft or

    - all or some combination of the above.

  13. Steven Jones

    Why are these leaders always surprised when people behave in predictable fashion (trying to get their money before the gate closes)?

    It seems to me that rightward-leaning economists develop theories to explain how economies actually function. Leftward-leaning economists develop theories to explain how they would like economies to function.

  14. Sisyphus

    Does anyone doubt that Obama is upset that the Eurograspers rammed this through first? Do the French or the Germans truly believe such draconian stupidity will be spared them in the long run? Will Lassie be able to communicate t0 mom that Europe fell into the well???

    Elections have consequences. 

    Say goodnight, Gracie.

  15. King Banaian
    C

    Eric Hines is correct, as I understand it, there was a €400 limit on withdrawals, but the machines got run out very quickly.  The latest is that the government is renegotiating the haircuts, but still plans a 5% reallocation of deposits under €100,000.  The Russians sleep a little less easily…

    I checked a couple of banks; savings accounts pay less than a percent and time deposits around 3 years pay near 5%.  Foreigners can get 8% on a dollar account, 7% for a euro account, for terms over 1 year.

  16. BrentB67

    Nasdaq 100 Futures -24 gap down on the open and S&P 500 down 14.25  at the open.

    This is early thin, knee jerk reaction trading, but it is easy to imagine we will have some tough sledding tomorrow.

    Disclosure: Short NQM13.

  17. Roberto
    BrentB67:  This is early thin, knee jerk reaction trading, but it is easy to imagine we will have some tough sledding tomorrow.

    Agreed. Monday will be panic. Looking at the mid-term though there will be a bounce back due to all the money fleeing Europe. 

  18. Eric Hines

    Watch the mid-morning moves.  Cyprus’ Parliament may very well reject the scheme.

    Eric Hines

  19. Steve MacDonald

    Roberto, I agree that money flowing out of Europe would be a logical reaction. It will be interesting to see if it actually happens to any significant degree.

  20. Roberto
    Steve MacDonald: Roberto, I agree that money flowing out of Europe would be a logical reaction. It will be interesting to see if it actually happens to any significant degree. · 13 minutes ago

    It will, for a time. We are speaking of next week. After that macro factors will dominate.