More on Cyprus

It's Offical : Banks In Europe May Now Seize Deposits To Cover Their Gambling Losses

By Henry Blodget

Information Clearing House,

25 March, 2013

As expected, Cyprus and the EU reached a new late-night bailout deal last night that will reduce the chance that Cyprus's financial system and economy will completely implode.

The new deal is better than the last deal in one key respect:

Deposits under 100,000 euros will be protected

That's very important. Those deposits were ostensibly "insured." To seize them, the way the last bailout deal would have, would have been grossly unfair and would have set a truly alarming precedent.

Now, small depositors in European banks can breathe more easily. At least in this case of gross malpractice on the part of reckless bank managers, their life savings have been preserved.

Alas, the good news ends there.

Although deposits under 100,000 euros will be spared, deposits over 100,000 euros will be seized and subjected to an as-yet undetermined haircut--with the confiscated money going to bail out the gambling losses of the aforementioned reckless idiots who run some of Cyprus's banks.

This seizure, needless to say, will dampen the enthusiasm of rich depositors for keeping money in banks that get themselves into financial trouble.

And because many, many banks in Europe have gotten themselves into financial trouble, this will create a general state of unease among rich depositors throughout the Eurozone.

And it should wig out some bank lenders, as well.

After all, never before in the history of this global financial crisis has a major banking system allowed depositors to lose money, no matter how reckless and stupid and greedy their bank managers have been. And only rarely have bank lenders--those who hold bank bonds--been asked to pony up.

In this case, however, the depositors will lose money. Perhaps a lot of money. And if there had been big bank debtholders in Cyprus, they probably would have been socked with losses, too.

It's possible that everyone will just laugh off Cyprus, viewing it as an exceptional one-off. After all, the Cyprus banking system was notorious for being the offshore money-laundering arm of many Russian oligarchs, so many folks will likely view this asset seizure as a case of "just desserts."

But this optimistic view of the Cyprus horrorshow overlooks one key fact:

The main reason that Cyprus depositors will lose their cash is because it has become politically difficult (impossible?) for leaders in Germany and other rich European countries to bail out their brethren in the "periphery" without taking many pounds of flesh.

And it is that precedent, in addition to the fate of big depositors in Cyprus, that should spook Europe's big bank depositors and lenders.

If Germany is done bailing out countries and banks without having those countries and banks cover some of the cost, it's not clear why Germany will relent next time Spain, Italy, Greece, and other countries in near-desperately bad financial shape come rushing to the EU with their hands out.

Unlike Cyprus, the banking systems in these countries do have bondholders that can get haircut before the depositors get haircut, but the effect will be the same.

For the first time since the collapse of Lehman Brothers, those who lend their money to banks or keep their money in banks are at risk.

Because the neighborhood loan shark (Germany) is now extracting much more onerous terms.

That's a sobering precedent.

And it will likely cause many people to wonder and worry about where their money is.

A People's Revolt in Cyprus: Richard Wolff on Protests Against EU Plan To Seize Bank Savings

Democracy Now!

The eyes of the financial world are on the small Mediterranean island of Cyprus today. The government of Cyprus has brokered a last-ditch $13 billion bailout deal with European officials to stave off the collapse of its banking sector. Under the deal, all bank deposits above approximately $130,000 will be frozen and used to help pay off the banking sector's debts. An earlier version of the deal collapsed last week when Cypriots took to the streets to protest paying a tax of up to 10 percent on their life savings. The plan led to mass demonstrations as well as panicked bank withdrawals as Cypriots rushed to protect their savings. "It's a demonstration of people power in this little corner of the world that's very impressive and the basis, I think, for some optimism about opposition," says Richard Wolff, economics professor emeritus at University of Massachusetts, Amherst and visiting professor at New School University. He is the author of several books including most recently, "Democracy at Work: A Cure for Capitalism."