Economics, International economy

Desperation in Cyprus bank deal

Image Credit: Shutterstock

Image Credit: Shutterstock

When is confiscation “a contribution”?  When is seizing something a “request”?

When politicians say they are, of course.

The Cyprus bank deal reveals how desperate the Europeans are.  Cyprus has large banks, mostly because it helps Europeans avoid taxes.  Those banks invested in Greek debt (it paid the highest rates on sovereign debt, after all) and therefore took large losses when investors were NOT bailed out as part of the Greek rescue, which was too large for the other Euro Zone governments to fund.  So the Cypriot banks now need a bail-out themselves.  But the cost of THAT bail-out is more than the Cyprus government—that is, it’s taxpayers—could ever hope to pay, so money has to be found from some other source.

The market’s reaction to the haircut imposed on investors as part of the Greek bail-out was so severe that the Europeans had to solemnly pledge that they would never again impose losses on investors.  The Europeans fear that if they renege on that pledge investors will desert sovereign debt issued by many European governments.  But they need additional money. They can’t get it from Germany, because German voters have figured out that they have to fund most of the bail-outs.  They can’t get it from US taxpayers because the US won’t allow the IMF to participate in a bail-out that has zero chance of being repaid.

So where is the money to be found?

The depositors can take a haircut on their deposits! Oops.  Bad rhetoric. Surely they will respond favorably when asked to contribute to the bail-out.  Of course, they won’t, but their money can easily be forcibly taken.

Meanwhile, the Europeans are busily making arrangements to deal with the bank runs they fear their desperate actions will bring.  And again the Europeans are solemnly pledging that they’ll never haircut investor assets again—ever.  Trust me.  Never.  Unthinkable.

2 thoughts on “Desperation in Cyprus bank deal

  1. It will be interesting to see how this plays out. News of Cyprus’ problems has been poping up for months, but so far what others are saying is that Cyprus simply isn’t big enough to have that much overall effect. If, however, runs on their banks induce runs on other countries’ banks…

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