Bailing Out

Blog
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This weekend brought news of the shocking bail out tax on savers in Cyprus. This panic scheme is surely bound to lead to a 'run' on the banks. Announcing that all Cyprus savers with less than 100,000 euros in the bank (yes that's most normal people with a rainy day fund) will be charged 6.75% one off tax on their savings in return for 'shares' in the bank if they leave their money in for the next 2 years. Those lucky enough to have over 100k euros will pay 9.9% (probably lots of Russian & Chinese money launderers according to speculative reports).


Not surprisingly there are queues at cash machines as people try to withdraw their money to avoid the tax. There has been action taken by the banks apparently for electronic transfers (probably just putting the systems offline - well it is Cyprus). Confusion now reigns over whether non-resident cypriots with bank accounts will have to pay the tax including UK government workers and military personnel (3000 are based on Cyprus - my brother having been one of them previously).


Cyprus is well known as a destination for British Expats and second home owners - this tax may affect them too. I feel sorry for those which have just sold up and have all their euros sat in their bank account ready to move into sterling...the exchange rate improvement won't offset this ridiculous tax.


According to President Nicos Anastasiades two Cypriot banks could run out of money within days and the island may be forced into a default and out of the euro currency. He has said he is in talks to try and limit the bailout’s effect on smaller savers, but has repeatedly stressed there was little other choice to save Cyprus after its banks took huge losses from the debt writedown in Greece.


“We would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis,” he said in a statement.


How on earth did someone advise that taxing ordinary savers would do anything but cause panic and people to withdraw their money in droves. The 2 year guaranteed share idea will do nothing to appease the fact that people will now not trust the Cyprus Government or for that matter other EU governments. If a country can propose something as serious as this affecting ordinary people - many of those farm workers and retirees with low income and sensible enough to maintain some savings then how can one be certain one's money is safe in the bank? But what choice do we have?


I also fear that there will now be an increase in speculative break-ins to people's homes if undesirables think that cash may be being stored 'under the bed' like in the old days.


What choice does Cyprus have though? If it defaults on the debt then it is either bankrupt and leaves the Euro or looks for other sources of finance - probably Russia. As we have an interest in Cyprus (our parents have their dream holiday home there!) I think I'd better get out the Russian language books again!

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Sure Norman, I agree about the frighteners. Unfortunately that goes two ways. Look at the UK, they have a bunch of loonies who would run the asylum in the shape of UKIP. What a bunch. Lead by a demagogue who decides who does what, if they may stand for office or not when in many countries he would not be able to hold political office because he has a pending bankruptcy order against his company, has massive debts, on top of which he was a trader in banking who bailed out and more. They then imagine they can leave the EU but will be allowed to keep the trading agreements, etc, etc. They are seen in economic terms as people who create financial disasters that will drag down the economy. They are jumping up and down shouting about Cyprus bringing down the EU and especially the Euro. What for Pete's sakes has the Euro to do with them? The UK is not in so why does a political party plot its downfall as they are? Thus back to square one. Cyprus, despite the jumping up and down by these gloom mongers will not bring down the EU. At this precise point in time one might be better off sticking their money in a Cypriot bank rather than a British or French one since the indicators show that the situation is such that they will hit zero soon and once they have done that, those that survive can only bounce back up and EU/IMF subvention will prop them up. Put money in them soon and it will grow.

Has anyone heard about New Zealand? They are passing legislation which will give their reserve bank rights to seize deposits? It is being called a 'shave' and other countries such as Australia are watching it with similar in mind. It is very similar to what Cyprus tried. As with all depositor charging, especially the Russians who invested in Cypriot banks who started this collapse by not wanting to pay, it cannot go well. If the UK leaves the EU and UKIP has too much influence for external investors to like what they see, then 'shaving' will be inevitable. Around 50% of all the deposits in Cyprus are have been said to be Russian. 'Official' statistics say €20bn of €70bn which is about 28%. Paul Krugman's blog is saying that the figure is most likely higher. I tend to agree and it is probably not 50%, but 35 to 40% might actually be closer. If the UK left the EU and too many concessions were lost then the vast amounts of money depositors have in UK banks that make €70bn look like bird seed would start to bleed out because with lost subventions like agricultural subsidies only higher taxation and 'shaving' could make up those losses. As Cyprus tried, tax the money of the wealthy and they'll take it away and put it somewhere where it is not taxed.

I think Cyprus will be sorted out, but what has actually happened should be a warning and the frightener message should be that the world is getting 'smaller' and the places to hide away in are being ringed by powerful forces. We may not like what is being done in France but one thing is sure, none of this is likely here because the big money is generally not kept here anyway, so nothing for the government to shave. As much as I hate to say it, but it is one thing they have (accidentally) got right.

I used the UK as my example of the loonies running the asylum but they are appearing in too many places and Grillo's 'Five Stars Movement' being another news making example. It might look like a bit of fun or a great way of ending some kind of confederation of European countries but economically it is as suicidal as the Cypriot government's actions have been. Watch out everybody, there are interesting times coming but if you have any money, then stash it under your mattress rather than trust a bank.

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John, I was being sarcastic & maybe should not have written of Berthold Brecht but about Dante's "divine comedy": the decision on expropriation of savers in Cyprus is aimed directly at the four main characters of this morality play outcome of the election in Italy! This is worthy of the wackiest tradition of commedia dell 'arte.

My hope Italy will not be the €uro-killer is fading with the same speed as Cameron and Hollande, are quick on hand to raise pulses with an Anglo-French offensive to weaponize Syrian "rebels", - a bunch of criminals supported by Salafist ideologists and royal Saudi dictators. As with all matters EU, if it can get more pathetic, it will. All hell is breaking loose in the EU. Le Monde insists Europe is not in agony. Oh yes, it is in a coma.

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Hi Brian, of course you are quite right, but there really is an urge in me to 'put the frighteners' on these buggers destroying not just us oldies lives, but those of generations to come.

They (banksters and politicians) really do seem to be doing precisely what they like and 'two-finger's to anyone who doesn't like it. In the words of someone or other - maybe me - it pisses me off mightily that we the 'sheeple' don't seem to have found a way of getting through to them.

I always remember in days of yore when I was in the business, I always used the word 'fear' in its widest use, as being the prime motivator, but I think I am having to revise that to just 'greed' at least in the case of our great leaders.

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Some great wisdom in there Norman. True, 'we' made the crooks by accepting their faux generosity. Their hands were out with the money that from top to bottom nobody could quite resist. Now that cycle has reached an end, it is at breaking point but cannot concede that. On the other hand, none of the numerous 'great empires' we know of has ever gone down too easily and most have only themselves to blame for their demise. So, seen economically, is this phase of capitalist social organisation. That is not to say that it will collapse, as it eventually will if even 60 years hence rather than today, that it will be replaced by a socialist world, Utopia or any other supposedly 'better' world. It will be replaced by something. Will a 1789 type of change come about? Perhaps not, I think that what the world has made of itself works counter-intuitively to the world of that age, we have too much material comfort in the world where revolution would need to begin to change the world but there is too much angst in the world left from the world wars, the continued 'threat' of nuclear weaponry, even the changes in the late 80s that removed 'them' and 'us' and saw Russia emerge out of the Soviet ashes to become one of the richest nations in the world against all predictions.

Survival is the instinctive thing that remains but in a world of individuals less self-reliant than a couple of hundred and some years ago revolution also does not work. Urban society is already chaotic, to render that into anarchic chaos would be to see entire nations become ungovernable, to be ungovernable would mean that the anarchy would need to spill over to give respite, food and a notion of 'escape'. Would our little bits of land and couple of chickens be secure? That is the question. The cycle of self destruction would need to be an equivalent of the European 'Dark Ages' between the end of the vestiges of the massive Roman empire and the rise of new and gradual formation of nations. That is all also part of the economic cycle as well as simply social history. It is the point at which banks and the rest of the financial world no longer matter. The extremely rich and powerful oligarchy will be able to do what their historical predecessors did and remain rich and powerful within 'fiefdoms' and some time in the future will be equivalents of royalty and aristocracy in even not by those names. It is not really apocalyptic, simply what we build up and break every few centuries because the world becomes overloaded and saturated with excessive power that has no foundations. Today that is the enormous burden of all the finance in the world that is slopping around but does not actually exist. We old timers, Norman, may not see this. I suspect my children will in their lifetimes. I feel sorry for them.

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I am a bit like Brian on this one, as I too have learned (early) never to trust banks, and/or Governments, and have no debts. When did you last see a poor politician? Politicians in Australia wiped out our pensions there as 'there is no protocol between France and Australia for payment' (Hmm?) Ditto in New Zealand, and even Brits don't get them either if they leave the country.

This new scam is proclaimed a 'one-time levy' but it establishes a precedent - as if any were needed by these economic vandals.

However, I think we do need to think about many of the causes of the whole rotten mess - that of banks offering easy money to people who should never have received it. In many countries including the UK it wa sno secret that people were living way beyond their means, often using a spurious (as it turned out) increased value of their homes to substantiate their spending. I recall seeing youngsters with almost wads of credit cards with spending limits (limits?!) of up to £2000 a time. They were walking round with credit of £20-30,000!!

OK blame the banks for making it easy, but there is I suggest a case against those of us who didn't have the brains or sense to realise that borrowed money a) has to be paid back and b) at high interest rates. Not exactly rocket science is it?

WE have made the crooks by playing into their hands.

Even those of us who have no overt debts are still vulnerable simply by having a bank account now, and even stashing it under the mattress wouldn't make a difference if the financial/thought police (aka politicians) decided to send in the troops to ransack your house to get at it.

Not so long ago I went through the exercise of "what happpens if.........?" - in my case 'if my small pension vanished?' We discovered we had three assets of merit. 1) we had enough land to at least grow subsistence food 2) We had an open fireplace for cooking and 3) above all we had a source of natural fresh water.

Happily we have just about replicated that with our new purchase, but with less land of our own, but surrounded by fields.

On the downside is of course age, and probable increasing infirmity. Not exactly a paradise on earth, but a lot better than those people stuck in cities and appartments. Where will they find these things? Obviously by raping the countryside - and who could blame them? Survival is a basic instinct.

Of course this is a apocalyptic scenario, but not one that hasn't been seen before in Europe is it?

I keep hoping to see some brains and leadership breaking out from those far more intelligent than I am, but I must be looking in the wrong direction as I can't see any, anywhere. Maybe it is time to make our leaders fear us a bit - and not just at the ballot box which today is a mere sop.

I seem to recollect there was something along these lines in 1789?

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John, quite right. I cannot remember exactly but perhaps it was Paul Krugman who compare economies to dogs. They spend a lot of time sleeping, other times laying their looking, then they get up and bark a lot, sometimes they bite. What you never see until you look closely are the ticks and fleas that keep them itchy. Your parasites.

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Celeste all these guys take a percent here, a percent there and of course no matter if your investment goes up or down their fees have to be paid. IMHO there are too many opportunistic parasites dealing in financial mumbo jumbo.

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Take into account £ deflation and UK price inflation its a better deal to keep your money in a Cyprus Bank than a UK one

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I'm not sure I understand your point Theo. One scrimps and saves and deposits one's money with a banker who then through greed and/or incompetence bankrupts the bank. He/She keeps their highly paid job, the civil servants that should have regulated keep their jobs but the depositor (and taxpayer) pays the price. Not really on is it?

For me Theo Brecht's most apposite quote is......

"Do not rejoice in his defeat, you men. For though the world has stood up and stopped the bastard, the bitch that bore him is in heat again."

Nothing has really been done to curtail the excesses of the Financial Services sector.

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Brain glad to read that you are no Don Quixote in fighting reality ;-) Even Bertolt Brecht would certainly be happy in the face of such evidence of expropriation in capitalism: in his Drei-Groschen-Oper he is asking "What's a lock pick against a stock? What's breaking into a bank compared with founding a bank?" (perhaps if such measure would have been used to save Northern Rock in 2007 with savings of their clients many collateral damages would have spared because the educational impact of a "compulsory purchase" provokes even in the prosperity milieu of blue-eyed voters some illuminating insights.)

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Good post Brian.

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I gave up on banks and finance years ago and concentrated on economics. I cut my teeth on Marcel Mauss's Essaie sur le don (The Gift) and went to the Faculty of Economics and Politics seminars for years. Once I learned it was not mathematics but something entirely different I was hooked. Although that was Keynes's department I never subscribed to his theories, much preferring Friedrich Hayek, Joan Robinson and Amartya Sen. They explained about capitalism and society.

For all of that, I walked into a finance trap. My local tiny little insurance and mortgage broker persuaded me to take out a pension. I was coming up 25 and so he said if I paid in for 40 years it would be a tidy sum. I suppose 20 something years ago the pension fund was taken over and I was promised all but paradise on earth. The taken over company was taken over by a big bank and split into various bits, the pension going to company X but soon on to somewhere else. In 2007 the fund went into a sticky situation but nobody told me, then their major stockholders, the Lehman brothers went bottom up in 2008. End of road roughly five years short of what should have been when I would get my pension. To add insult to injury, my stupid bank paid two standing orders into my 'pension fund' after the collapse. I went into a branch and nearly did somebody an injury. Now I must wait patiently for my compensatory payment of a fraction of what I paid in, Hardly what I would call compensation - if the courts ever get a bean out of the vanished Lehman billions, of course.

I sort of sat ringside as though in an auditorium for the show as in the USA Fannie Mae, Freddie Mac and the Federal Home Loan Banks started to sag a bit in 2007 and then in 2008 when Fannie Mae and Freddie Mac went down it was fascinating economic things happening, probably not for the world of finance. It was not long until my pension went on the rocks.

I had not trusted finance since taking an interest in economics and see how dips, depressions and so on actual have lives of their own and no bank, government or any other body can brake one when it is moving top speed. This where just about all of European finance is heading. For a century and a half the gold standard has no longer been the basis of what 'money' there is but debt. For each unit, £, $ or € for instance, put into circulation somebody has to owe some money to the 'central bank' or treasury of a nation. We are now at the stage where the money created by quantitative easing has created debts in the form of non-existent money created on paper by the central bank of each country that it then loans, usually to 'real' banks. They then predate on hedge funds, investment banks and so on who trickle on down to our credit purchases, loans, mortgages and overdrafts. It is one huge game of Monopoly. Cyprus has just lost a game, Greece nearly did, Italy and Spain sail close to the wind, the UK is not far behind, nor is France and even mighty Germany is digging deeper into the recess of its national purse. To quote Private Frazer "We're doomed, we're all doomed". It is not economically so far from the truth.

I have not trusted what the media tells us for years. Even the Financial Times does not go to those places and the Economist is not about economics in that sense. So whilst I look at them and take in information, I still go to look at economists' work through their institutions and academic faculties. What I have come to notice over the last couple of the years is that on both the left and right wings of their discipline there is profound gloom and really what they are saying is that nothing is worth a bean. If you have it, spend it and do not try to gain from it unless you have such a large amount of wealth that if you lose 90% of it you will still be a billionaire, at worst a millionaire and will survive the worst when it comes.

What a gloom monger, you are all thinking. No folk. I have zilch, nada, rien, nothing to speak of but also no debts. With a vegetable garden and a few chickens we could ride it out. I may have lost my retirement nest egg but I have never ever been in debt and now I know that it was right despite all the advice on loans and mortgages I never took. Something very basic in economics I learned was that if you start with nothing you can build on it, the other way round you only stand to lose. I walked the line between and my bonus. I am happy!

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ha - I know Carol - we keep saying that to our parents - don't try giving us any inheritence as the taxman will get it one way or the other - just enjoy yourselves now whilst you still can. We will plod on paying our mortgage and for once see ourselves as fortunate not to have savings!

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Looks like my kids have it right...in moving to Dubai. But I think comments about other European countries needing bailouts...looking and wondering...is going to scare anyone living in Europe. It seems every day governments are thinking of new ways of raising money, house taxes, bank account dipping, pension funds... nothing, but nothing will be safe. A good friend who is about to hit 70 and her husband...have decided to start travelling around the world...and spend their money before it disappears in some fashion which gives them no pleasure at all....sounds like an idea.

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bodes not well for Eurozone is spot on and worldwide. Is any bank now safe... ! And what about deposit insurance. Last post on subject.

http://www.zerohedge.com/news/2013-03-17/rape-cyprus-european-union-imf

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Anyone with the bulk of their assets in a bank has not been paying attention. There are better places to park one's money. I would suggest looking into Eric Sprott's Canadian Companies, Assets Management Funds. They have returned record high profits over the past decade. They are tied directly to audited physical gold and silver held in secured vaults. Also goldmoney.com, run by James Turk, is another secured place where your fiat currencies can be converted to gold holdings which move in value in relation to the movements in gold. At all costs stay away from electronically traded precious metals funds operated by the major banks (SPDR, SIL, etc). I watched the Asian gold market opening this morning. It seems that many around the world today are rushing to a safe haven. The Cyprus situation bodes not well for the Eurozone.

We can see that the big investment banks, who are very short gold and silver, did their best to suppress the opening rally, but when the COMEX (NY) opened the buyers overran the sellers. We live in interesting times.

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"they raided pension funds"

For a so called job creation scheme which has so far yielded nothing. Another case of ripping off the prudent. Though, smart pension fund trustees only need to move the management of the pension fund offshore to avoid this appalling tax. Of course Public Sector pension funds were not impacted because they don't exist :-)

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Sorry I forgot you may want to read this also.

http://www.zerohedge.com/news/2013-03-17/cyprus-world%E2%80%99s-biggest-poker-game

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THEFT on a grand scale. Astonishing and the thin edge of a potential very large wedge and an experiment in a tiny place like Cyprus is a way to test resolve on this issue. Then it could be rolled out everywhere! Its set a precedence doesn't it!!! Almost beyond comprehension and why can a government insist on giving you shares you don't want... Are they a illegal broker as well! (assuming they don't back down and pass it). Its also ILLEGAL according to this article... but they will find a way around it I expect. Hold on to your hats.

http://blogs.telegraph.co.uk/finance/matspersson/100023412/tomorrow-cyprus-could-vote-to-leave-the-euro-this-is-political-dynamite/