I do not have a whole lot to say about the Cyprus story, but I do want to point out some of the already more ridiculous comparisons that have been made.

This is not about punishing savers. It is about a 1 million person island that has become a tax haven for Russian oligarchs.It is not another MF Global.

I expect to see a run of very serious articles about “Confiscation” and “Moral Hazard” and other such empty headed filler. I plan on ignoring much of the blather, choosing to focus my limited time and attention on smart analysis and commentary. Like this and this.

No one is confiscating things in France of Italy — but just you wait, we are told.

An important skill to develop is the ability to read critically and think analytically. After years of practice — I taught the GMAT & LSAT while in grad school — it becomes second nature. I can tell in a sentence or three if something is worth reading further. Perhaps this accounts for the popularity of the AM and PM my reads.

Regardless, before you get yourself worked up into a frenzy over this story, try to take a deep breath and put it into context.

I am not at all suggesting that this is not potentially a significant development; I am saying  that the usual suspects have blown up describing it the way they often do — turning a backyard pit BBQ into a nuclear conflagration.

Yes, a room full of gas fumes is very dangerous — especially when it meets an open flame.  Ask yourself if that is the situation at present, and make your plans accordingly.

Category: Bailouts, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

36 Responses to “Watch the Cyprus Bombast”

  1. constantnormal says:

    Sound advice, except for the part about the “gar fumes” … a gar is a fine fish, with no more or less fumes than any other …

  2. gms777 says:

    Even presuming you are 100 percent correct, try telling that to hordes of people trying to get their money out of banks. Those folks are not going to take a deep breath and think it over. A mob is a dangerous thing.

  3. Oral Hazard says:

    Barry, I have to cop to a knee-jerk “WTF!?” reaction to the Cyprus story. But I can give you a pretty straightforward (hopefully) rational basis for my alarm: Cyprus is a full EU member state, unlike Brazil. The fact that Cyprus is tiny misses The Big Picture, namely the precedent that this sets: depositor funds are on the table — EU wide now. There are better, more narrowly tailored legal means of targeting money laundering — if that is your true goal. See HSBC, Vatican Bank, etc.

    Detroit is a poor comparison; it’s a municipality — and Detroit residents’ deposits aren’t being taken in a forced purchase of bank shares. It’s a depressed and insolvent political division with a Rule of Law legal method to put it into orderly receivership.

    The global reaction to Cyprus IMHO is a too-rare example of people recognizing the interconnectedness of the world and intuitively grasping that this can easily be them. Last point: doesn’t this method of taking on Russian oligarchs just serve to benefit a different set of oligarchs?

  4. TennesseeTrader says:

    I agree it’s probably overblown, but I also know that if I lived in Italy, Spain, or Greece I’d be wondering about how safe my money was in a bank. Russian oligarchs do not have less than 100,000 Euro in the bank, so they definitely did hit normal people with the “tax”.

  5. Roanman says:

    Of course it’s a confiscation. While Cyprus is a haven, it is also like every other place on earth in that it’s somebodies home, where those somebodies trusted the banks and the government to protect their deposits. Which trust is now blown to hell all over the world.

    You can also argue if you wish that Cypriot’s were culpable, or stupid to allow their country and their banks to come to such a situation and thus deserve it. I might agree except that the little savers there are as clueless and disenfranchised as the little savers here and everywhere else. They’ve been told all along from their elected and supposed representatives that the debt is manageable when it ain’t.

    An attitude among the deep pockets of the world has been revealed, and it’s coming to an account near you.

    The grand unintended consequence of this fiasco will be that brand spankin’ new Russian naval base in the Mediterranean.

  6. ironman says:

    Speaking of the situation at present (we agree with Barry regarding Cyprus, but we recognize that conditions in the market are such that the timing couldn’t be worse….)

  7. PeterR says:

    Every raging river begins with a small drop of water . . . here and there.

  8. BennyProfane says:

    I just worry about my IRA. I’m not talking about an outright confiscation, or “tax”, like this, but, my guess is, in a not too distant time in the future, that, any Boomer with a substantial amount of savings in a tax free account will be suddenly classified as wealthy, because, heck, they will be, relative to their peers, and then will be taxed accordingly, or, indirectly, by receiving less in Social Security and Medicare. I can easily envision a time soon when anyone with any kind of wealth will be shut out of both programs.

  9. forexgump says:

    With all due respect Barry, many innocent or naive investors may potentially have to lose real deposits to compensate for real estate fraud, money laundering, and good old Cypriot Bank gambling on Greek sovereign debt. That´s plain old wrong. It doesn´t matter how big or small Cyprus is, it´s the wrong legal precedent to set for the Eurozone, and you as a law guy should understand that.

    The principle is what´s important, the next time GM or AIG goes bust maybe the Feds assess what little savings remain or perhaps tax IRAs/401(k) accounts.

    It´s hard to believe these Eurogroup/IMF guys are so arrogant, and all they are doing is making financial preppers look legitimate. Pathetic these people have the power to make such hopelessly stupid decisions.

  10. Herman Frank says:

    Minor event tackled in the wrong way. Somebody was not thinking thru “the reasoning of the man in the street with the < 100K account". OK, there's been ups and downs in the European financial opera theater; the possibility of bank runs, shifting of depo's to different countries, putting money under the mattress etc. was countered with a bank-union with deposit insurance up to Euro 100K. That gave tranquility to the masses with smaller accounts and set the high-water mark for the pro's. The present proposal is to levy a % on the balance below and over 100K. The levy below goes against the bank deposit guarantee. The German reaction was immediate – they don't want to touch that line. Above, OK, below, no-way. Supposedly the IMF, ECB and Brussels wanted it. "The Cypriots proposed it!" The requested 17bln is impossible for anyone, except if the gas-deposits for the coast of Cyprus are given as collateral ("the Finnish method": give support, get collateral). IMHO The Cypriot parliament will now come up with the proposal to leave the deposits under 100K without levy, but increase the levy for those above up to 20% (the reasoning is "they lose it in any other way"). By week's end the Russians will come thru with an additional loan of 2.5bln, parties agree, the banks will open, money will flow, and everyone will know the 100K is the next item to tackle – to lower it to the previous 50K. In the mean time everyone should buy the stock on their wish-list hitting the agreed low targets!

  11. V says:

    The thing with theives is they rarely steal once.

    My reading indicates 80% of the deposits are not those of russian oligarchs. Also if money laundering is the problem, then investigate and prosecute in a court of law, if guilty take the proceeds. When did it become acceptable to tar everyone with the same brush?

  12. Whiskey Lunch says:

    It may be all about the Russians, but what if all austerity-torn southern europe is willing to hear is the German bullying angle, and they seriously begins to see their savings at risk?

  13. one_north says:

    The post is oblivious to the reality and largely dismisses how the EU is set on pillars that are being shaken and put in question. Of course Cyprus’ deposit base has a significant % of russian money, of course it is insignificant in the context of the EZ but if you take away the deposit protection scheme then repatriation of funds is bound to start happen again (you just have to look at where eur/xxx are trading today).

    ~~~

    BR: The post merely suggests that there will be some excess screaming about this, and to be on the look out for it

  14. gms777 says:

    From Wiki on the origins of WWI:

    “Although the chain of events unleashed by the assassination triggered the war, the war’s origins go deeper, involving national politics, cultures, economics, and a complex web of alliances and counterbalances that had developed between the various European powers since 1870. Some of the most important long term or structural causes are: the growth of nationalism across Europe, unresolved territorial disputes, an intricate system of alliances, the perceived breakdown of the balance of power in Europe,[3][4] convoluted and fragmented governance, the arms races of the previous decades, previous military planning,[5] imperial and colonial rivalry for wealth, power and prestige, and economic and military rivalry in industry and trade – e.g., the Pig War between Austria and Serbia.”

    The Pig War!

  15. MayorQuimby says:

    This is a mini-disaster (okay – teenie) but the precedents set are alarming. Many normal people will see their CASH aka MONEY confiscated and well – that is pretty much the beginning of very bad things socially speaking.

    No, this is not a TSHTF run to your bunker moment.

    It is also not a ‘nothingburger”.

  16. Cyprus Isn’t Taxing Deposits, It’s Confiscating Them

    When I started to read about the special tax Cyprus was planning to impose on bank deposits as a condition for a European Union bailout of its financial system, I went straight to a dictionary:

    “Tax: A fee levied by a government on income, a product or an activity….The purpose of taxation is to finance government expenditure.”

    In this situation, depositors aren’t being asked to cough up additional money to meet a tax liability. To the contrary, a portion of Cypriot deposits will be confiscated — electronically, no less — by the government because that’s what euro zone finance ministers, the European Central Bank and International Monetary Fund demanded as a precondition for a 10 billion euro bailout.

    The alternative? Allow Cyprus’ two biggest banks to collapse, which could cause an implosion of the entire financial chaos and a swift exit from the euro zone.

  17. wally says:

    It is totally unnecessary to take money from small savers; it goes beyond mean-spirited into the realm of deliberately harmful. I expect that terms may be modified to avoid that – due only to public outcry – but maybe not. At any rate, violating the terms of ‘insured’ deposits shows the utter heavy-handedness of the ruling/banking cartel.
    This may not be a big deal in practical terms, but it is a very big deal in symbolic terms. That’s the sort of thing that changes public opinion and changes votes.

  18. Moss says:

    They probably thought it would be OK since all the hot ‘dirty’ money in the Cypriot banking system was the target. I imagine further ‘finesse’ is needed so the legitimate small guy does not get unduly hit.

  19. milo says:

    Confiscation by any other name…

    I find it terribly disturbing that the general attitude in society is now that masses of people can (or should be) punished for the problems of a few or that personal property rights are irrelevant in the discussion if enough politicos, bankers or leftist bloggers determine that it should be taken.

    This is all going to end very badly for the collectivists.

  20. AHodge says:

    sorry barry Im the other way on this-tho this is everyones shoot frrom hip first cut
    regardless of size– this is possibly the dumbest concept come up with
    ever in the entire history of eurpe recent crisis management.
    including panicking bank depositors averwhere
    even your own citations call it “What were they thinking”
    we can bicker over not confiscation, a 10% wealth tax forced you by ec finance ministers with no debate, could be more to come
    europes fiscal idiocy and no restructuring no writeoffs no Private Sector Involvement for Debt
    these are much bigger than this which is small
    ive ranted on this before
    but this falls in the no PSI stupidity file
    but what you have is hosing the depositors, so you dont have to hose the bondholders and equity
    NO PSI WTF??
    not just my view lot of solid people like Charles Wyplotz (sP)
    fortunanely this idiocy will probably not be passed by cyprus
    w the current uproar
    -tempoprarily works for my europe shorts though
    i take the point about depos coming from skeepby russians and greay money. not the way to handle that though

  21. killben says:

    Barry,

    If the idea is to target Russian Oligarhs then make it explicit like all Russian accounts will be confiscated, Russians cannot deposit more than 1000 euros etc. Even this cannot be done retrospectively because if you did not want Russian money why did you take the deposits in the first place.. You have put systems in place to effectively seal them off. Instead what you are doing is whacking a guy who might have put in his hard earned money in it and then one fine day you tell him I am going to confiscate some per cent of it. How would ordinary Americans react if US Government confiscates 10% of their deposits in HSBC Bank because they are money launderers?

    The principle is plain and simple — you cannot confiscate deposits of ordinary citizens because there are ill-gotten deposits there.

    Now next the alternative is the depositors lose everything because the bank will fold up. This is fine. In this case I have deposited money at a bank which went bust. Period. There is no day-light robbery here. To cite an analogy. I make a bet and I lose money. That is OK. What is not OK is some thief stealing the money and openly at that and getting away with it. In this case the thief is the government. IS THERE ANYTHING CALLED LAW ANYWHERE TODAY.

    To sum it you can lay a case as to why it is being done, whether it is important etc., but the point is GOVERNMENT CANNOT CONFISCATE PEOPLE’S MONEY IN THE GARB OF DOING SOME GOOD. It is daylight robbery and grand larceny plain and simple. Not done in any society. Everything else is besides the point (even that today it is 6%, tomorrow 20%, today Cyprus, tomorrrow Greece etc)

  22. rd says:

    It is pretty clear that money laundering and black accounts is a major international business that has been actively supported and even sought out by many large banks and governments. The real moral hazard is allowing and facilitating dirty money in the world-wide financial system without any attempts at cleaning it up. The recent slap on the wrist of major banks in the US doing drug money laundering and the known use of banks in Cyprus and other locations for Russian criminals are just some examples. When the Cayman Islands start to appear tougher than the US and EU, you know there is a major issue.

    The Cyprus ambiguity is just one more example of the overall moral hazard in the system. What should be a very poor precedent is being executed (probably) using the whispered justification that it is just Russian mob money and therefore doesn’t count as a real example. Based on that philosophy, we could potentially see a 1 or 2% “tax” on HSBC and JP Morgan deposits as well that would be morally justified.

  23. Theravadin says:

    The odd part about this story is that apparently “residents” in Cyprus (not counting Russian and other offshore account holders) have bank deposits totalling 4x GDP… That’s a pretty anomolous situation, so there is something to this story that we’re not hearing.

  24. 10x25mm says:

    This is one of those events where the reactions to articles and opinion pieces covering the event are more important economically than the substance of the event. I focused on the comments posted on the websites of Spanish and Italian newspapers over the weekend. So far, it appears that Italians and Spaniards are quite upset over the Cypriot bailout terms, by a margin of about 10 to 1. The comments express real fear of the future. This suggests that wholesale bank withdrawls will develop unless the terms of the Cypriot bailout are changed or some kind of ironclad guarantee can be offered to Mediterranian basin savers..

  25. 873450 says:

    Putin the Populist?

    http://www.nakedcapitalism.com/2013/03/will-cyprus-become-creditanstalt-2-0.html#OhZEFbT80PQDiT8X.99

    “The Greek blog Clockwork Project (hat tip George P) says, per Google Translate: An angry phone call from Russian President Vladimir Putin received early Sunday morning, Nikos Anastasiadis.

    The Putin reportedly said verbatim in-Cypriot President – ‘Better to put the German flag at the Presidential Palace. Do not you understand that this decision destroy your country?’”

    He sounds more like the threatening, international thug that he is. Now we know where his billions are stashed.

    Putin and Russian gangsters should have taken their lead from the Vatican, South American drug cartels, WMD proliferators and embargoed terrorist harboring nations depositing their dirty money in JPMorgan Chase sweep accounts in Frankfurt. Even if this episode passes benignly, these killers are capable of taking out a Cyprus politician or two just for spite, just to send a message. For them it’s like eating breakfast.

  26. slowkarma says:

    This wasn’t intended to “punish” the Russians, it was intended to mollify the northern Europeans who would be on the hook for the full bailout if a good part of the money weren’t raised with the bail-in. A number of apparently qualified commentators have mentioned that the EU tried to keep the confiscation of funds over $100,000 below the double-digit level, so that the Russians *wouldn’t* start yanking their money out. That’s why the smaller depositors got hit — to raise the amount the northern Europeans wanted, but to keep the hit on the big depositors under 10%.

    I wonder if there’s another shoe to drop here, in terms of scandal. This whole idea didn’t just come up Friday night, people must’ve been talking about it behind the scenes. I wonder if any of the big depositors got warned? It would be interesting to know what the Cypriot banks saw in the way of large withdrawals in the last week or so…

    Another question of equity…if you kept your money in stocks, or in German bonds, or under your bed, or in rental units, you presumably are okay. This is confiscation of the funds of the naive, the dumb, the people who keep 90,000e in cash rather than other instruments. That doesn’t seem fair. It seems to me that they might have more equitably raised the the money with an increase in property taxes, with perhaps a “homestead” exemption for residences.

  27. beaufou says:

    The problem I see with this developing story is the danger of widespread bank runs, which the ECB might be able to support, but after having lost complete confidence in politicians, people will now lose all confidence in their banks and deposits. They already knew bankers were a criminal syndicate, now they have confirmation.

  28. Moss says:

    Seems like the powers that be will do anything to protect the bond holders, just like in the US. If they could print they would.

  29. [...] Watching the Cyprus Bombast (TBP) [...]

  30. socaljoe says:

    An attempt to postpone the bankruptcy of an insolvent organization by taking a portion of their depositors funds… how is this not confiscation?

    Of course bailing out a financial system with taxpayer receipts and central bank money printing is also a form of confiscation.

    Both are forced transfer of wealth from one group to another.

  31. louis says:

    Does the Cypriot National Guard use Direct Deposit?

  32. GeorgeBurnsWasRight says:

    I suspect this is the reason that my tiny position in EMD (an Emerging Market bond fund), dropped sharply on Friday on no news and above average volume.

    Fortunately, there’s no such thing as people trading in advance of news, so I feel so much better.

    FWIW, EMD is still acting weak today.

  33. Quid says:

    Mr. Ritholtz,

    I rarely take advantage of your generous offer to allow me demonstrate my ignorance or imbecility because, well, I rarely disagree with you. I feel, however, that your dismissal of the Cyprus bank ‘bail-in’ is, while refreshingly contrary, a bit glib. You may well be correct that the episode will blow over and have no significant lasting effects. But I’m surprised that your native sense of justice isn’t more outraged by the immorality of a combined EU-Cypriot government action which not only punishes the innocent but does so in a manner that sets a disturbing precedent. Yeah, we know that the (relatively) innocent American public paid for bailing out our extensively criminal banks; still, the government didn’t actually take cash directly out of our FDIC insured bank accounts. To not be outraged by Cyprus’ decision to violate the deposit insurance guarantee, especially for small accounts, strikes me as morally insensitive. Personally, I think even the insured deposits (the first € 100k) of Russians should be protected. I do not see how the issue of dirty Russian mafia money is in any way relevant or possible justifies expropriating money from innocent depositors; it’s a transparently phony rationale that if sincere would be blatant, and lazy, collective punishment

    I understand why the EU is going after depositors rather than bondholders (the EU is the bondholder) but that doesn’t make it right, anymore that it was right for the US to protect the bondholders of our Big Failed Banks — something which stirred you to a justified rage that is noticeably absent in your response to the Cypriot case.

    The uninsured deposits are a different matter. One might still object to the very principle of taking deposits but at least the uninsured money is, well, uninsured and taking it does not abrogate the principle of deposit insurance. And if it’s rich gangsters the EU is after, let them target the rich. Perhaps the Cypriot government is responsible for the decision to extend the levy to small accounts rather than impose a 17% tax on the over €100k sums and “overly burden” the rich; shame on them, regardless of the political or economic concerns over Russia’s response. But shame too on the EU from not quashing the move – and the fact is, they didn’t. Nor did they object or even declare that they would never allow such a thing, or would never do it again. So they have accepted the principle and precedent that the rich will be spared and the rest punished and that insured accounts are not in fact insured.

    Again, you may be right that the bell, while it cannot the unrung, will raise no alarm. But it should and its failure to may well prove the worst possible outcome.

  34. WorldJazz59 says:

    Perhaps the deeper issue here is the respectability of the Euro? Do you agree? Where could this lead?

  35. Pantmaker says:

    I don’t care if it’s the deposits of the devil himself…taking money from your customers without their consent is theft. Taking that same money from your investors/bondholders is called the result of making a crappy investment in a bank.

  36. VennData says:

    LOL “…the usual suspects…”