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The madness of the bailout in Cyprus

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Re: The madness of the bailout in Cyprus

#221

Post by omgyeah »

seanmcdirmid wrote: post #197
omgyeah wrote: post #179

Earlier quoted context omitted.

1: Because it's not a solution. 2: It's a temporary measure that will only lead to a worse temporary measure. 3: GOTO 2;

So what was the right solution? Kick Cyprus out of the EU and let them scavenge for themselves? Letting the banks fail might attract an invasion from Russia, and then it becomes a NATO problem....such a mess.

There ain't no right solution.

That's the biggest problem of them all.

Earlier, in biblical period, god would flush the toilet and things would start from scratch.

Now, we can't afford to flush.

Re: The madness of the bailout in Cyprus

#222

Post by justincormack »

jpdoctor wrote: post #208
justincormack wrote: post #202

Earlier quoted context omitted.

Depositor insurance is not about legal seniority in debt, it is about an insurance scheme that is made available (usually funded by a levy on banks). Covered bonds own a specific pool of assets. But the issue now is that there is legal restructuring, or taxes like this, without any bankruptcy, so it is a bit random what happens...

> Depositor insurance is not about legal seniority in debt It absolutely is. When a bank fails, the regulating institution steps in and performs the capital restructuring. The statement of depositor insurance is that they are to be made whole, even if the regulatory institution must dip into the depositor insurance fund. The EU restructured the Cyprus banks, but they did not haircut the bondholders for the difference…

No. eg in Cyprus http://www.centralbank.gov.cy/nqcontent.cfm?a_id=8158&la...

"On the activation of the DPS, an announcement is made in the Official Gazette of the Republic of Cyprus and in the local press stating that the member bank is unable to repay its deposits and specifying the manner in which claims could be submitted and the necessary documentary evidence that accompany each claim."

This is not related to the restructuring and payment of creditors (which usually takes years, while deposit insurance pays out quickly). The deposit fund it is true then becomes a creditor and might get some money back later. This happened with eg insured UK depositors in Iceland.

The ECB has not restructured the Cyprus Banks. Cyprus is going to inject equity into them as a going concern, the equity paid for from this tax (and then the equity will be distributed to the taxpayers). This not really restructuring and other models where banks are left as going concerns with arbitrary appropriation of various bonds (somewhat at random it is true) is becoming normal in Europe (eg see SNS Reaal).

Re: The madness of the bailout in Cyprus

#223

Post by justincormack »

bjornsing wrote: post #220
jpdoctor wrote: post #208

Earlier quoted context omitted.

> Depositor insurance is not about legal seniority in debt It absolutely is. When a bank fails, the regulating institution steps in and performs the capital restructuring. The statement of depositor insurance is that they are to be made whole, even if the regulatory institution must dip into the depositor insurance fund. The EU restructured the Cyprus banks, but they did not haircut the bondholders for the difference…

I wholeheartedly agree. And this in my mind is what the whole story comes down to. I've written about it here: http://bit.ly/1103Gkq . But to summarize, when both the banking system and the government is insolvent it's relatively obvious to me that loses should be imposed in this order: 1. First bank shareholders should be wiped out(!), 2. then junior bondholders, 3. then senior bondholders and uninsured depositors,…

There is a full resolution (ie non bankruptcy) proposal in place, due for 2015. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:20...

It should be less arbitrary that the current scheme, where senior bondholders and the ECB are not being touched.

If you look at the balance sheet of Cyprus Laiki half way down http://ftalphaville.ft.com/2013/03/16/1425732/a-stupid-idea-... then you see that debt is almost nothing. There is a lot of central bank (ECB indirectly) money which has not been haircut. The decision to haircut the "insured" depositors was a political one, allegedly made by Cyprus itself.

Re: The madness of the bailout in Cyprus

#224

Post by angersock »

tatsuke95 wrote: post #178
znowi wrote: post #116

Earlier quoted context omitted.

No doubt you know your trade. The problem is that it's more of a witchcraft and the way you smoothly lay things out here in the complex intricacies of the financial sector evades people from the simple fact that the banks fucked up. And the question of who bears the burden is only a question for the banking industry, in how to leverage public funds to cover their losses.

> "the simple fact that the banks fucked up" The banks are run by citizens and funded by citizens. So when the banks "fuck up", it's going to end up on those same citizens. There is no way to isolate losses to some "bank" entity.

Er, I'd be rather surprised if some of the banking entities were not established by foreigners and monies not actually coming from their country of operation.

Hell, Harris Bank in Chicago is owned by Bank of Montreal--so, unless I'm grossly misunderstanding the situation, it would be entirely possible for Canadian executives to set policies that could affect clients in the US. That's not those citizens' faults.

I think you have an incorrect view here.

Re: The madness of the bailout in Cyprus

#225

Post by jaydz »

TillE wrote: post #4

It's absolutely insane. I can't understand how they think this will cause anything other than a catastrophic bank run on Tuesday. At least they get to skim off a percentage before the banks collapse, I guess? Someone's benefiting, somehow.

Banks are closed on Tuesday too (they extended the bank holiday).

Re: The madness of the bailout in Cyprus

#226

Post by bitcartel »

jpdoctor wrote: post #195
justincormack wrote: post #191

Earlier quoted context omitted.

There are almost no bondholders. The junior bondholders have probably been wiped out, it is unclear. The senior bondholders there are (very few) are secured (covered bonds) which are senior to depositors.

> which are senior to depositors. Not for any definition of "depositor insurance" that I'm familiar with. The whole point was that the investors of the bank would lose their money first, then a gov't agency would make good on the deposits. Anything less is a return to the days of unstable swings banking and deflationary depressions. Or perhaps the wizards at the EU thought/didn't care that Cyprus would join Greece in…

I'm sure people across the EU are paying close attention, especially with many financial pundits holding a view that Cyprus is just a guinea pig.

If the people there roll over without too much fuss, stealing directly from deposit holders will become the template for future banking bail-outs.

Bondholders and shareholders of Spanish and Italian banks could then avoid losses on their bad investments by pointing to Cyprus as a shining example of things done right.

Re: The madness of the bailout in Cyprus

#227

Post by [deleted] »

jpdoctor wrote: post #195
justincormack wrote: post #191

Earlier quoted context omitted.

There are almost no bondholders. The junior bondholders have probably been wiped out, it is unclear. The senior bondholders there are (very few) are secured (covered bonds) which are senior to depositors.

> which are senior to depositors. Not for any definition of "depositor insurance" that I'm familiar with. The whole point was that the investors of the bank would lose their money first, then a gov't agency would make good on the deposits. Anything less is a return to the days of unstable swings banking and deflationary depressions. Or perhaps the wizards at the EU thought/didn't care that Cyprus would join Greece in…

[deleted]

Re: The madness of the bailout in Cyprus

#228

Post by JumpCrisscross »

jpdoctor wrote: post #190
JumpCrisscross wrote: post #98

When a sovereign fails, its banks fail, and private sector losses are virtually assured. The question is who bears the burden. Roughly half the deposits in Cypriot banks, with assets five times its GDP, are of Russian, Greek, or British origin [1]. They were attracted by high deposit rates (roughly double EMU average) and a system tolerant of likely tax evaders. >" This whole thing is entirely unfair for the people l…

> this is not a terrible deal. Nonsense. The EU just made the depositors junior to the bondholders of the bank! On what planet does that not have permanent implications for trust in the banking system? Every EU depositor (esp in Greece, Spain and Italy) should start thinking about where to store their money besides the "insured" banks. Hell, with 0% interest in US banks, the FDIC should at least make some high-profil…

Depositor insurance replaces the bank's credit with the state's. That happened here. It's just that the state's credit is trash. If you are in a country with trashy credit it would be highly advisable to move your funds to the closest Switzerland, Germany, or United States.

Why is the EU promoting such fragmentation? Again, remember there are a lot of political and financial flows constraints here that are unique. Pragmatism must trump principle. The choices to the bailout team were let the Cypriot economy crater by refusing funds, grant funds and watch foreign depositors leave the islanders with 145 percent debt to current GDP, or take rapid measures.

My hope is that this prompts the EMU to finally implement a pooled depositor insurance scheme. The present scheme is akin to each state in the U.S. providing its own depositor insurance.

Re: The madness of the bailout in Cyprus

#229

Post by jk4930 »

kitsune_ wrote: post #215
st0p wrote: post #29

To quote the article: "This is why The IMF and the ECB has stepped in and bailed out the banks. Rumor has it that without the bailout Cyprus two largest banks would be bankrupt in a matter of days. A situation no economy can survive, especially not one with a disproportionally large banking sector." I don't see the problem to be honest. We (I live in the Netherlands) are paying a lot of money to help them out, which…

You have it the wrong way. You are paying exactly nothing to "help them out". Money is being borrowed through the EFSF and EFSM and being lent to Ireland et al. This money goes directly to the bondholders of the defunct banks. These bondholders are the major German, Dutch and French banks. Deutsche Bank would have defaulted if the Irish or Spanish banking system went under. In essence, The Irish have bailed out Germa…

"Funny" how nearly everybody from each Euro country seems to think that _they_ are bearing the major burden. I hear it from the Germans, the English, the French, the Greek, the Irish...

The blaming and hating is growing. The EU received the Nobel peace prize just in time, could be too late some years later.

Re: The madness of the bailout in Cyprus

#230

Post by bjornsing »

justincormack wrote: post #223
bjornsing wrote: post #220

Earlier quoted context omitted.

I wholeheartedly agree. And this in my mind is what the whole story comes down to. I've written about it here: http://bit.ly/1103Gkq . But to summarize, when both the banking system and the government is insolvent it's relatively obvious to me that loses should be imposed in this order: 1. First bank shareholders should be wiped out(!), 2. then junior bondholders, 3. then senior bondholders and uninsured depositors,…

There is a full resolution (ie non bankruptcy) proposal in place, due for 2015. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:20... It should be less arbitrary that the current scheme, where senior bondholders and the ECB are not being touched. If you look at the balance sheet of Cyprus Laiki half way down http://ftalphaville.ft.com/2013/03/16/1425732/a-stupid-idea-... then you see that debt is almost not…

I can well imagine that Cyprus made the controversial decision (to haircut the "insured" depositors) themselves, for political reasons. It's exactly the decision I'd make in Mr Anastasiades' place if I was being strong-armed by a German delegation. The simple reasoning (for me) would be to increase the risk of contagion above and beyond what Germany can accept, so as to maximize the likelihood of Berlin folding and offering better terms.
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