Friday, March 22, 2013

Cyprus bailout savings tax is better than alternatives

First, let me start with some background. Cyprus is an island in the Mediterranean Sea, South of Turkey. De iure, there is the ethnic Greek "Republic of Cyprus" covering the whole island. De facto, the Northern 40% is controlled by an independent Turkish Republic of Northern Cyprus. The problematic co-existence of Greek and Turkish Cypriots is a major cause of the continuing military tensions between Greece and Turkey.

The total population of the island – a member of the EU and the eurozone – is 1 million people. At most, the Greek problem is 10% larger than we thought: I don't think that any realistic development on the island is a legitimate reason for hysteria. Their banking sector is overbloated and close to bankruptcy (which would quickly cripple the whole Cyprus as an economy), primarily – but not only – because of its exposure to troubled assets in Greece; in particular, look at the Laiki Bank website. The European creditors including the European Central Bank have offered them a bailout but they demanded that Cyprus will show its ability to collect a part of the required money – perhaps by a "tax" that cuts a part of the savings stored on the island.

This step is generally criticized by the libertarians including Tomáš V. and the Václav Klaus Institute. I happen to disagree. I think that the proposed solution is better than all the alternatives I can imagine.

Well, the savers – many of whom are foreign individuals or companies – would pay for something they have no responsibility for. Really? I think that if someone saves his or her money in Cyprus banks, whatever his or her reasons are (and be sure that the reasons were certain financial advantages of the saver – who only saw these advantages but overlooked the risks, many of which are inseparably associated with the advantages), he or she is displaying some degree of faith in the state that has sovereignty over that territory and he or she preferred those banks because of higher interests or tax haven status of Cyprus (so yes, they have benefited and risked). The banks don't exist in the vacuum.

(When the saver is a Cypriot, the guilt is clear: he or she helped exuberant and populist politicians to be elected and he or she has probably personally benefited from the money that was spent. Most of these people have lived beyond their means and they have made wrong investments, too.)

When someone robs the bank, it's the task for the enforcement forces – the police paid by the government – to find and punish the thieves. When the government that is responsible for these important services faces an existential threat, it's obvious that it may use some non-standard tools. Those who deposit their savings in foreign banks are surely showing some degree of faith in the local government. This faith is not terribly reasonable in countries such as Cyprus.

Exactly 100 years ago, in March 1913, Turkey lost the Battle of Jannena in Greece. Czech soldiers were helping the Greeks, too.

Now, when such a tax is imposed, it's obvious that the people who will pay are not exactly the same people who caused the problems – or at least their contribution to the funds isn't exactly proportional to their guilt. And there are lots of arguments such as "all savings are insured" or "all savings up to EUR 100,000 are insured" – claims that clearly can't be mindlessly believed because such guarantees only make sense if the guarantor is able to fulfill the commitments, if he's alive and kicking, and if the commitments may be enforced by someone. But the Cypriot savers are still a more accurate "proxy" for the culprits than some other groups that would pay if other solutions are picked.

What are these other solutions? Well, one of them involves the European taxpayers. A simple alternative that has been very close to the solutions that were chosen in all similar situations is that the pan-European funds of a sort simply pay whatever these troubled countries and banks need. I think that the correlation between the culprits and those who pay is much weaker in this scenario than it is if the Cypriot savers pay.

Cyprus may get the money differently – e.g. from an extra loan backed by some public assets or as a gift from Russia compensated by some semi-transparent, semi-opaque advantages that Russia may earn in the region. For example, there's some oil around the island and Russia would like to control it except that it's not too attractive. The total volume of the sweet liquid is unknown and Russia would be at risk that Turkey would claim the ownership rights for the deposits. (Update: it seems pretty clear at this moment that the negotiations with Russia and Russian subjects are over and no money will arrive from Russia.)

Greece has proposed to overtake the Cypriot banks. I had to laugh. That would be the same jump to safety and stability as something that the Czechs describe by the idiom "hiring a billy goat as a gardener" (borrowed from a fairy-tale), whatever is the English counterpart of this idiom.

If the savers were stolen something like 10%, it would be annoying and some mostly innocent people would get poorer, too. But I think that the precedent would be a good one. The moral message would be that if someone gets a bailout, it costs something. This elementary message hasn't been conveyed for many years. Irresponsible nations such as Greece were getting arbitrary amounts of money and they never paid anything for them. They never faced any disadvantages. What a surprise that the bad behavior has been spreading if no one has ever been punished for it in any way.

Now, the markets may realize that Cyprus is a small country but they may be afraid that such a solution – if it is ultimately accepted (the bailout savings tax was unanimously rejected by the Parliament because voting "Yes" would probably be a political suicide for any lawmaker) – will become a precedent for larger countries such as those in PIGS. This could make investors poorer, more anxious, and so on.

Well, I understand that people are psychologically unstable even if the reasons are infinitesimal or downright irrational. Nevertheless, I think that the precedent would be a helpful one. It would not only help to fight against the moral hazard. But it would also force governments, banks, and others to behave in a more fiscally sustainable and responsible way in the near future. Soon or later, that could improve the fiscal soundness of the governments, banks, and others.

Lucie Vondráčková: Fear

People, banks, and nations dislike pain and fear. Pain and fear is what sends the stock indices to the South. But pain and fear exist for good reasons: they inform us about some real dangers that are coming or that may come in the future. A tax reducing the account of a saver who is using the services of banks on a problematic island is a pain and others may be scared of such a pain, too. But all these things are just perceptions that help to prevent the really bad, big events such as the disorderly collapse of the continental financial system or, less dramatically, a long, slow, but inevitable downward spiral of the continental economy.

So whatever the detailed procedure is, I think it would be great if some of these countries and banks that are broke – or people around them – started to pay and if they were no longer getting arbitrarily large bailout funds literally for free. This desire of mine seems much more important to me than some comments about the EU oppressors etc. The EU and the ECB may be annoying power groups with authoritarian tendencies but they're still subjects that are paying to someone and this status comes with certain rights, I think.

Incidentally, Bundesbank has concluded that the German households are vastly poorer (several times!) than the households in PIGS countries. I find this fact stunning. Germans are hard-working, disciplined, and modest. I feel that the world is sort of wrong because of this anomaly, too.


  1. 1) The tax is not really stealing money.

    A rough example:

    1) Cypriot banks offered interest rates of roughly 4%
    2) German banks offered interest rates of roughly 2%
    3) Invest 100 in both banks for the last 5 years
    4) German account: 110
    5) Cypriot account: 122
    6) Now tax Cypriot account by 10% to save 90% of your money!
    8) Result: Cypriot account: 110

    The Cypriot savers got an excess interest rate which effectively was a risk premium. They should be happy that someone allows them to pay back the risk premium for a safe capital-preserving investment!

    2) There was no need to tax the small savers. The Cypriot government could have decided to only tax the 100k plus investments. And then they would certainly have destroyed the lucrative banking industry they built up. They didn't want to do that. But to be honest, the industry is dead now anyway.

    3) I just hope they don't take the people's pension savings that would really be a crime. And I can't see the troika accepting that.

  2. I agree, up to the point about pension savings. I view pensions - those administered by the government - as something that may always be adjusted at the level of the society. Pensioners may have been getting money that the government couldn't afford, so they - or other pensioners - will be getting less afterwords. It seems logical and sort of fair to me, too. One may also say it was a risk premium for them to be waiting for pension on Cyprus. If they were living in Romania, they would be expecting much lower pensions, but without the risk because Romania is actually much more sustainable economically.

  3. But as I understand they want to put the pension fund as a collateral to secure the loan. If the loan fails, everything could be lost.

    There are two types of pensions schemes really.

    One is just a promise by the government to pay out a certain amount at age 65 or so given some contribution. And they don't need to have the funds backing it right now. Defined-benefit pension. And here I agree with you that they could adjust it (or tax it), but as I said they want to put it up as a collateral for a loan so that they don't have to do the EU bailout.

    The one they probably have is based on the contributions that the people have made to the fund. And the benefits are linked to the contributions. It truly is their property, whereas the bank saving's account is effectively a loan to the bank.

  4. Right, it's one of the major plans. I don't understand what's your problem with that. It's really the definition of the term "collateral" that one offers something rather existential - most often, the roof above one's head - to guarantee that the repayments and other financial commitments and plans won't fail. If it does fail, he loses the roof above his head. That's how the things should be, shouldn't they? Already this situation and negotiations are "another chance" that the nation received as an alternative to bankruptcy. You can't have "other chances" indefinitely.

    And the benefits are linked to the contributions.

    Fine, these funds are linked to the people's contributions but they're linked not *only* to people's contributions. They're also linked to the situation of the bank or government that manages the funds. If that goes downright bankrupt, the funds are lost for everyone, regardless of their links. If that goes partly bankrupt, the funds people have been saving are reduced. In both cases, the funds clearly depend on the aliveness and financial health of the "guarantor", don't they? If the guarantor is broke, his commitments just can't mean anything because it's not physically possible to fulfill them. So one has to find another outcome.

  5. 1 million people getting a debt of 17 billions... respect! (sarcasm). In Ireland they've managed to renegotiate their debt of 60 billions to over 30 billions now. ECB has given them 20 billions in order to breathe a bit (kudos to Enda Kenny the prime minister).
    Ireland taking tough measures for people heavily indebted:

  6. I agree with Klaus on this one and totally understand why any libertarian would go ballistic. This seizure of up to 10% of depositor savings is (correctly) perceived as confiscation. People deposit money in banks for safety and (these days) not really to get measly interest. They believe the promises of deposit insurance so that if a bank fails, they are covered to say, $100,000 losses.
    Now, ignoring this and seizing savings may be equivalent to a tax, but it totally undermines the populace's trust in the banking system and would lead to bank runs in Cyprus, Spain, Portugal etc.
    Much better would be a tax that isn't seen as confiscation. I do realize that the EU wanted to create some responsibility of the citizens and also to punish Russian oligarchs for money laundering. The impulse was good, but the effect would have been horrendous.

  7. This is a very special case, the main reason for not wanting to bail out the bank in this case is that a lot of the money is dirty money.

    I suggest one-on-one 5-10 minute interviews with the depositors-starting from the biggest - if they refuse to be interviewed - take 10% of their money. If they seem at all shifty during the interview, take 10% - controversial I know, but this way 90% of the decent people will not be punished.

    Most of the Russian money launderers will just give up 10% - if it's not enough then raise it to 20%.

    Allow an appeal process, and assume small enough percentage of successful appeals (say less than 10%) - calculate if that gets the 7 billion (or whatever) euro contribution cyprus needs, and bob's your uncle.

  8. Dear Gordon, right, you implicitly wrote the reason why I don't go ballistic: this partial confiscation is just like a tax. After all, it's sometimes called "a savings tax".

    How is income tax different from a partial confiscation of the income? ;-) The only difference here is that people are used to the income tax but not savings tax. Right, but it's just because the income tax is for "every weather" while the savings tax is a gadget for special circumstances only.

    I don't understand the explanation about the undermined trust in the banking system. We're talking about these proposed solution *because* the banking system in Cyprus has de facto collapsed, indeed, so if someone is losing trust in the Cypriot banking system, he's probably doing the right thing although he's arguably a bit retarded - he should have lost the trust a few years ago! ;-)

    Needless to say, the same comment holds for other PIGS, too. These nations and their banks are just not fully trustworthy institutions and everything is possible with a certain probability. I don't understand why this fact should be blamed on some proposed solutions in Cyprus because this fact has been a fact for quite many years! At the same moment, it's no reason for hysteria because increasingly devastating steps are increasingly unlikely.

    But if your problem with the situation - or the people's problem - is that they have believed that certain banks or things in PIGS are 100% safe, then, indeed, it's a good thing to undermine their belief because their belief is utterly idiotic and this belief that there is "no risk in something" is exactly a key source of the irresponsible behavior that leads and has led to many problems. There's *always* a nonzero risk and if most people won't learn to deal with this trivial law of Nature - and to distinguish higher and smaller risks - then it's too bad.

  9. You would probably need to go above 20% to raise the required money from these particular sources. It may sound intriguing to identify Russian creditors with criminals but Cyprus isn't living in the vacuum. I am sure that if it were too arrogant in this respect, it would be invaded by Russia.

  10. I simply can not agree that this bank robbery could be called a tax. The difference between tax and confiscation is that tax rules are known beforehead but confiscation is retrospective. As a retail shop owner you know how much you would pay on VAT tax if you sold a bread. The biggest problem of this huge bank robbery is that it completely undermines trust in banks. I agree that 100% guarantee of money savings is stupid and that people should choose between high interest rate and lower risk, but when this guarantee was made, the guarantor can not suddenly do just opposite.

  11. What? Cyprus tried to set itself up as an almost "offshore" tax-avoiding banking system, just without the skills of Switzerland, the Isle of Man or even the Cayman Island etc.

    Iceland attempted a similar model (high interest rates no questions asked) and nearly bankrupted themselves doing so.

    I agree that I shouldn't single out Russian creditors, as I don't know shit - but otherwise I don't get your point. You want ordinary folk in Cyprus to pay up on a few thousands of hard-gained savings rather than going for the big money??

  12. Dear Tomasi,

    it's just not true that taxes must always be known in advance. Pretty much every country in the world allows some retroactive arrangements like that - look at the page about the ex post facto law

    and search for the word "tax", just to pick the examples that are retroactive taxes.

    The guarantor doesn't do the opposite by himself because the guarantor is not fully in charge of things anymore. The guarantor has mostly died. If there's no bailout, Laiki Bank will go bust on Tuesday or Wednesday and the Cypriot government will follow in hours. The rules of the game are at least partially dictated by the creditors now and they haven't promised anything to the Cypriot savers.

    In particular, the Laiki bank is being nationalized right now, it's worthless, so all the guarantees given by such a bank are worthless at this point, of course. Others are trying to reduce the losses of everyone involved but it's silly to assume that the promises given by the Laiki Bank are still 100% relevant. Pretty much the same thing holds for the Cyprus as a country.

    Best wishes

  13. Estimated 50+ percent of deposits in Cypriot banks are owned by Russians. Does anybody have an estimate of a Russian share of Cypriot pension funds?

  14. I also think that stealing money from bank accounts is wrong, especially from the smaller ones.

    It has been rehashed from almost all sides on my G+ post (

    Some good articles that I found explanatory:

  15. Yes, I think that the idea that one should look for "the big money" when something needs to be paid is a pernicious, hardcore populist, communist idea.

    When it comes to pensions, free education, unemployment benefits, and so on, and so on, where everyone may be paid or insured in some way, all the "ordinary folks" want to be counted and the political correctness favors egalitarianism. But when their system goes bust because these "ordinary folks" have just consumed too much and were living beyond their means and when it's necessary to actually pay something, the egalitarianism suddenly disappears and it's the "big money" that should pay the bill.

    Give me a break with this disgusting hardcore Marxist attitude. The "big money" are no more responsible for the financial problems of the Cypriot banks and the Cypriot state than the "ordinary folks" - quite on the contrary. It's not just about the evaluation of the guilt, it's also about the future of the country. If the wealthiest people are those who are most massively robbed, it's very bad for the future of their economy because the rich people are those that may or may not create jobs.


  16. No one is robbing a bank at a gunpoint. The bank is absoultely free to go bankrupt.. Saviors of a bank are free to specify their own conditions, take it or leave it. I don't see a robbery.

  17. I'd agree with you in some cases but not this one, the "ordinary" Cypriots didn't ask for their country to be transformed into a finance economy it was foisted on them by idiots. When the opposite of the marxists are really thick greedy morons I kinda get some temporary sympathy for the marxists - it was their big argument and probably the only true observation they ever made of human nature - there are really stupid people trying to make money in the capitalist system and ruining many people's lives by their stupidity.

    The best solution here would be to jail the bankers (just for a year or so, they could learn to play piano or something) and charge a large "tax" on the bigger depositors.

    That's good capitalism for you - it teaches to not put your big money funds in a high interest rate mickey mouse bank in the hope that you'll be bailed out by Europe if the worst comes to the worst.

  18. James, you say that "ordinary Cypriots didn't want their country to be a banking power".

    What does it mean and in what sense it is true? It's just a totally bizarre rhetorical trick. Being a financial power is normally a great job, especially if one is good at it - and if one sucks at other things - and that's exactly true for the Cypriots. They speak English, they're equipped to do banking and international services, so to say, and they're not so good in other things, so that's why this sector grew in that country. They still did it badly at the end.

    But did the ordinary Cypriots asked their country to be a financial power? Well, probably Yes. The question is totally equivalent to the question whether, for example, ordinary Czechs wanted their country to be the world's #1 beer superpower. Well, probably Yes! We're drinking the largest amount of beer per capita per year, and that's the primary reason why the breweries keep on flourishing.

    Something could go wrong about the beer industry, too. Would it be fair to scream that ordinary Czechs didn't want their country to depend on beer? (Just imagine that beer is relatively more important than it is; of course that we don't really depend on breweries.) No, it wouldn't be fair. It would be an alibistic lie. And the claim that the Cypriots didn't want their country to be a banking power is exactly the same alibistic lie.

    The banking is how they were getting much of their income (some large percentage)! That's why they could buy lots of things and that's why they expect big pensions now! And I am talking about the ordinary Cypriots and not about some virtual billionaire scapegoats. The powerful banking sector also carries its disadvantages and risks. When things go bad with it - which is mostly some Cypriot folks' fault - one can't or shouldn't scream that he has nothing to do with it. Of course that he has.

    Cypriot savers were getting large interests from their local banks and even if they were not savers, they were getting lots of benefits that were paid from the taxes paid from the banks' profit. If the banks didn't exist, they couldn't have been getting these benefits!

    So all your proclamations are just fraudulent alibistic lies. And there aren't really any particular "greedy morons" behind this mess. It's a problem caused by largely ordinarty people, get used to this elementary fact and stop emitting fog about this trivial point.

  19. Jesus fucking Christ,

    the fact that you czechs have successfully swamped the planet with your mind altering piss isn't because the common man or women in Czechoslovakia wanted it to be so it's because some really clever (probably other europeans or americans) marketed it in some slightly lucky but no doubt interesting way at the right times in the right place. Your industry will die maybe pretty just as quickly as it's risen so enjoy the good times.

    And, pretty random and unrelated, but I don't think numerically talented people should be allowed to work in banking without agreeing to at least a 3-year teaching stint in maths/physics at the state schools.

  20. This is your dumbest post ever. Consider the precedent set. You are saying it is OK for the government to take a share of deposits at your bank. Now think of the consequences, if they haven't already started. People will start withdrawing money from banks throughout Europe. Once this starts, it creates a run and the whole banking system collapses.

  21. Dear MikeNov,

    in my country, the government repeatedly cut the savings - in a way that depended on the size of the savings - even though its public debt was essentially zero. It was during communism, of course.

    It has never made people abandon banks and it hasn't moved "all" the cash to the people's pillows in the bedroom for a simple reason: in the pillows, the money isn't safe, either. The government may in principle not only invade the banks and confiscate things in the banks; it may also change the currency and render the cash in your pillows worthless. It may also strengthen the currency by various methods if it needs to punish those who hold other currencies, and so on, and so on.

    So your proposed knee-jerk reaction is really utterly irrational. During the war, there are other special decisions that affect private property and that are done because of interests that simply transcend the individual property rights.

    Otherwise I surely don't expect the Czech government to do anything of the sort in the next 10 years, not even a socialist-communist government. I am pretty sure that the German government won't do it in the next 50 years. It's not a part of the business-as-usual.

    But if you haven't noticed, the Cypriot economy, government, and banks are 4 days from death today. This is not business-as-usual. It's too bad that so many people are as blind as you that they haven't noticed. It's critically bad that these blind people who live outside the reality influence the decisions of the Cypriot government and Cypriot banks, too.

    Something irregular that is equivalent to $10,000 money flow per capita has to occur in Cyprus by Monday. There are options to make the pain smaller, perhaps even a relative non-event. When these options aren't used, what the people will get is disorderly bankruptcy, eurozone and perhaps EU exit for Cyprus, and reclassification of the island as a 3rd world banana republic. It's mathematically inevitable. It's way too bad for people like you to completely deny the reality.


  22. Lubos--it is the perception that counts. People see this as confiscation, not a tax, even if it is one, and this will lead to bank runs and undermine any trust. Imposing something that can be "sold" as a tax would not have the host of unfortunate ramifications that this would.

  23. no it won't it's just Cyprus - almost any shit won't affect anything apart from idiot speculators having to adjust their models up and down 1% and silly media folk looking for a story which won't ever materialise but maybe hitting the headline because they've mananged to trigger some retarded derivatives models to deliver their payload because the majority of the banking sector is run by cunts.

  24. if it wasn't for Greece we would never be in this situation. not only we forgo their debt to us, they didn't want to give to us as a loan a much smaller amount than the one we gave them for free.

    whenever i would talk bad about those parasites in greece the last 3 years i was called a Turk and a communist. now many cypriots realised how good greece is and how much they care. and this is not the only problem they caused and the greek debt was not the only damage they did to our economy.

    many people here feel like 1974 when after the failed coup they caused the turkish invasion and later left us alone without help.

  25. the republic of cyprus that has the debt is about 800 thousands

  26. Because some people have been talking of money laundering in Cyprus have a look at: particularly the linked table, which shows that Cyprus is high in compliance to the directives for "clean" transactions. Does anybody believe that financial sectors are churches?

    Also Lubos to clear up about the banks, the parts that are in Greece, 250 outlets, are being bought by a Greek bank conglomerate ( private ), not the Cyprus banks.

    The problem with Cyprus is not that its financial sector was ten times the GDP ( Luxemburg has 80 times its GDP) but that it went bankrupt as a government . The reason it went bankrupt in six years from being the healthiest economy in the eurozone was twofold: a communist presidency for several years that "gave a lot to the people", and the bankruptcy of the banks because of the cuts in the 40% greek bonds they were holding . ( a small domino).

  27. Sorry anna v, I really don't mean to be rude, but that is just dumb. It's like WMD all over again. The Russians put huge amounts of money into this bank - for what reason?

    And your reliance on international organisations to check this stuff is a little misplaced - sorry - I like you a lot.

  28. I'll answer taht,since I'm off to bed

    The Russian corporations gambled that the EU would bailout any default by the Cyprus Banks - coupled with having many nations by the ball wrt Gas suppy and Russia just being a corrupt state - that'swhat cause it.

    Global Capatilism shouldn't allow states like Russia to partake on an equal footing - but some stupid people do (introduce the tards gradually over the decades)

  29. just 2 notes: 1. the 10% or whatever confiscation is extremely unfortunate, as it destroys trust in the entire EU banking industry - and even the strongest bank cannot survive a bank run. I expect a run on all Cyprus banks and foreign bank branches (as soon as the banking holidays end), where the government will try to limit the run by artificial obstacles. The transaction cost will be enormous.

    2. the existence of Cyprus as "tax haven" maybe is not totally fair, but it has extreme positive impact on the rest of EU: it keeps the governments in check should they come up with crazy taxing ideas. It is good to know that the subject are not totally helpless in the face of populist crazy socialistic harmful (French-ish) ideas.
    To be sure, I am not in favor of the "too big to fail" paradigm. The weakest banks should be either bankrupted, with all market consequences, or saved by someone in the way AIG etc were saved by the US government: infusion of new capital diluting the previous shareholders almost to zero. Note that the US government has sold recently some of the stakes in banks like AIG for a profit (!).

  30. Hi Lubos,

    would you apply same reasoning for the PIGS? Nobody of these is like Cyprus

  31. Nancy B. HultquistMar 23, 2013, 4:07:00 AM

    John writing, not Nancy

    “Czechs describe by the idiom "hiring a billy goat as a
    gardener" (borrowed from a fairy-tale), whatever is the English
    counterpart of this idiom.”

    That would be: Hiring
    a fox to guard the hen house.

  32. Three possibilities for the idiom:

    1) like the fox guarding the henhouse
    2) jumping from the frying pan into the fire
    3) the pot calling the kettle black

    I usually agree with you, Dr. Motl, but I think any government taking any bank savings from private individuals sets a very bad and scary precedent. But I'm American, so its especially a horror to me (don't tread on me).

  33. You should read May Ellen Synon's blog entry "

    The New Soviet Union: Cyprus shows how the EU destroys democracy"

    Cyprus is small but significant in that it exhibits all the problems of the EU. It is foreboding for other countries in the Eurozone, including Germany.

    Look how much Bitcoin exchange rates have jumped since the 16th.

  34. Thanks, 1) is closest.

    You may better learn how to get used to such things because chances are about 50% that similar steps will be the least bad solution of the U.S. debt crisis within some 5-10 years.

  35. Hi Maznak, your thinking is the typical euronaivist's thinking. A bank levy "destroys the trust in the entire EU banking industry". What does the EU banking industry have to do with that? It's a collection of fucked-up banks that invested into fucked-up Greek assets and were paying unaffordably high interests. They're neither owned by the Czech banks nor vice versa, for example. We have nothing to do with them.

    Saying that it destroys "the trust in the entire EU banking industry" is the same as saying that this events "undermine our faith in the Higgs mechanism". It's just a megalomaniac overstatement. Cyprus is just a fucked-up island somewhere with 1 million people, it's smaller than Prague, and the GDP is orders of magnitude smaller than the income of the largest global corporations. Places - e.g. companies - of this magnitude routinely go bust and no one thinks that it undermines the whole system, or similar big words.

  36. Your pov is funny, since there exists the opposite pov that it is the Oligarchs who put their money in off shores and banks in Cyprus to evade tax laws in Russia. There was a list published of the so called oligarchs that are involved in the Cyprus financial sector.

    Have a look at figure 1 to see the numbers for Luxemburg . The IMF is also an international organization. Do you expect the countries themselves to say they obey a different method for themselves and demand a different one from the others?

    They relied on nothing but the easy credit with collateral their deposits, and the high interest rates which covered their expenses.

    You should not forget that all the eurozone banks would be bankrupt if it were not for the liquidity offered by the central european bank

    . Cyprus banks became unsustainably bankrupt due to the reasons given above. The rest of the european banks, during the three years of the Greek fiasco managed to get rid of their greek bonds and were not massively affected by the 40% cut in the greek bonds.

  37. Hi Bernd, I just think that all this chatter is nonsense. Their problems have nothing to do with the EU.

    The EU institutions just happen to be among entities that are/were the last ones who were willing to help - Russia has already written them off as a worthless island that will be a better partner (...) when they're bust and broke. But that doesn't matter that it's the EU, ECB, or IMF that are helping. If China were the country that would be offering the lifeline under some conditions, it would be pretty much the same thing.

    Whether the EU or China is internally democratic – and the answers are Not quite and No – has nothing to do with the questions Cyprus is solving. For Cyprus, the lenders and helpers are just entities whose inner structure is completely immaterial for the character of the reasoning in Cyprus.

    Also, whether Cyprus uses or will be using the euro is irrelevant, too. Many countries are using the U.S. dollar or dollar-pegged currencies although everyone knows that they're not controlled by the White House. China is a half-legitimate but major example of that. In the same sense, Cyprus is paying with the euros. What a big deal. It's just an irrelevant currency. If it were paying with Cypriot pounds or whatever the name would be, savers could still have accounts in other currencies and they would probably have. It doesn't mean that the countries printing these currencies are politically controlling Cyprus. It's just a damn unit of wealth. One may convert it to another unit and the logic is still the same. None of these things would materially affect the debt issues of the banks or Cyprus as a whole because the debt would be mostly denominated in more reliable currencies such as the euro and the dollar whose exchange rate won't "dramatically" change, anyway.

    So all this focusing on whether or not they are in the eurozone is just fog that tries to mask the main fact here, namely that they will run of cash on Tuesday.

  38. p.s. They chose Cyprus ( though we do not know if they also have as much in the other offshore havens of the EU) because of the climate and the similar culture ( Russians are orthodox and there have always been cultural ties)

  39. Thanks for the data and historical reminder, Anna.

  40. Think of it this way.

    A private bank is a private company. You deposit your funds with them so that they can invest your money and pay you a bonus (interest). When they take a loss on investments they will charge you fees and such to make up the loss, Hopefully the loss on the investments will be less than the actual total of the deposits from all others like yourself.

    A depositor is a bondholder in the bank.

    You place your hard earned in the bank because of the misunderstood word "Trust".

    The Cyprus crisis has bought home to the general population that they are "Shareholders" in a private entity. The world has now learned that private banks are an investment vehicle - not a funds safety deposit.

    Government or EU guarantees protecting the minor shareholders (depositors) have been shown to be so much fluff.
    The only governments able to do this print their own money and run their own banks. (Government owned bank as opposed to private owned bank).

    The Cypriot situation is not without precedence in the Western world. Australia had Government owned banks set up 100 years ago to protect the savings of the working people over 100 years ago after a number of private banks went belly up.

    If you have a mortgage with a private bank and this bank gets into financial strife, the bank can call in your loan even though you have been up to date and non delinquent on your payments.

    A mistake has been made by all parties in this Cypriot crisis.

    (a) The Cypriot private banks have over extended their credit.
    (b) Depositors are under the misapprehension that their funds are safe in a private bank.
    (c) The EU had no right in guaranteeing private bank deposits.

    (d) The word "Trust" has been very loosely applied and misunderstood.

    (e) The loss of Confidence and bad reputation can kill your business. your banks and your country at lightning speed.

  41. Yes, mainland Greece has involved Cyprus in its fall. I just learned that the Greek bonds Cyprus banks are holding were gotten in 2010, to help Greece out. I suppose this guilt made Greece help, by arranging the buy off of the mainland part of the banks, which will lighten the total debt of Cyprus.

    You are a bit unfair about the coup in that it was the junta that instigated it, and Greece was in shambles for a long time after the disaster.

  42. The first hand description by Malta's minister of finance is very enlightening on how the Eurogroup accord was forged ( the one that was rejected by the first vote):

    "All this was “agreed” to by the Cypriot government representative who,
    with a pistol to the head, was naturally unusually co- operative. But it
    took nearly 10 long hours before the Cypriot minister’s body and soul
    became exhausted enough for him to assent to this accord. As soon as
    that happened Schauble demanded that all wire transfers to and from the
    Cypriot banks would cease forthwith."

    Just so to understand what the "day of complete control" has ahead for all of us.

  43. Your view, Anna, is much more sensible than that of James Gallagher.

  44. Now, that’s a stretch, Lubos. Nuclear war with China would utterly destroy China; it’s not going to happen. We have the world’s strongest strategic nuclear force (Russia has a more powerful tactical nuclear force).
    In a non-nuclear confrontation it is inconceivable that China could invade the US. Ships and aircraft are totally vulnerable in a modern war and a non-nuclear missile exchange would be survivable but pointless.
    Regarding your dire prediction of our fiscal future, the piper will be paid but the US is in the best long-term position overall. We have been described as the best house in a bad neighborhood. Inflation is inevitable, of course, but the resulting wealth redistribution is survivable, too.

  45. Gene: China could declare all out cyberwar with the US and destroy it financially. It doesn't need to use its nuclear capability.

  46. I think what will save the world from China is that they do not consider us "devils" a terrain for conquer. They have historically invaded to occupy only mongolic race regions. In contrast to Europeans who from the time of Alexander the Great invaded wherever they could, and Islam, ditto.

  47. Do you really think China could win a cyber-war? The problem with a cyber-war is the same as with a conventional war, economic disruption and the resulting privation and human suffering. China is much more vulnerable to economic catastrophe than the US. The PRC leaders are obsessed with social instability already, for pretty good reasons.

  48. Neglecting the short-lived Mongol Empire, China has never been an empire in the western sense but I don’t think it is race-based. China has always had a defensive posture and still does. Tibet, Taiwan and the South China Sea are considered part of China, of course.

  49. You might show a little more respect, Mike, for Lubos’ well thought-out position. He clearly dislikes the idea of a government raking in people’s deposits but just feels that all the alternatives in Cyprus are even worse. I agree with him.

  50. I agree with Anna. I have seen that Cyprus gave higher interest rates than most other banks in Europe. But also that this was funded by charging higher rates to borrowers. The "money laundering" accusations thrown around by the French and the Germans are simply being used to justify the haircut on depositors, and while it may be true in part, the same accusations could also be made about Luxembourg.

    Cyprus's problem is largely due to its investment of the depositor money in Greek bonds at a time when Greece was rated A1 which according to Moody's means

    A1 = High quality; STRONG capacity to meet financial obligations

    This debt was restructured in 2012 resulting in massive losses for the bond holders including the cypriot banks.

  51. AIG was not a bank but an insurance company.

  52. A depositor is and never has been a shareholder in a bank. They are senior creditors.

  53. If you live in France you will discover that many taxes can be retrospective. It is one of its less pleasant charms.

  54. ""cleverly" invested" is a simplification of what actually happened.

  55. "Incidentally, Bundesbank has concluded that the German households are vastly poorer (several times!) than the households in PIGS countries. I find this fact stunning. Germans are hard-working, disciplined, and modest. I feel that the world is sort of wrong because of this anomaly, too."

    Well, if you look at the PIGS it means that they never got a government that wanted to please the masses by distributing largesse.

    I just read in a newspaper that out of the crisis Germany is in the positive by over 350 billion euro. I do not know who has this bundle, but obviously not the hard working disciplined and modest lower class.

    Maybe Germany also has oligarchs?

  56. See the map at

    to notice that Germany's inequality is low, it's a rather egalitarian society. Those are not the issues and your attempt to try to divide people to classes and treat them separately is just a sign of your hardwired incurable Marxism.

    The average is what already says a clear story. The resolution to these profits etc. is that Germany has been simply donating lots of money to others for many decades, through the EU etc.

  57. What will be the next European tax heaven in need of finances.... Malta ?

  58. I am not a marxist Lubos, and have been voting conservative the past thirty years. You are the one type casting me.

    Germany donating money? Certainly it was given money after the war and also supported in the unification. Do you have a link that shows where the money it has accumulated with the careful finance system ( I heard about 3 trillion euros) is being donated?

    Just curious.

  59. Yes, Anna, they are more interested in their historical lands, but they are also, for example, buying up all the resource companies and mining permits in Africa.

  60. Gene---really? The solution that involved seizing a percentage of all depositors' bank deposits is confiscation and is a horrible "solution". You live in California. Imagine if Gerry Brown or Obama said, in order to pay back some of California's deficit, we are going to take 10% of the money everyone has in banks.
    We will close the banks until this is done and limit ATM payments to a $100 max.
    1. There would be a run on the banks when they tried to reopen.

    2. People would demand that they be impeached.
    3. Businesses etc would abandon the state.

  61. Well said, Gordon. Let me also add that this is NOT a tax on the wealthy, per se, it’s a
    tax on those who are rich in liquidity. Wealthy people don’t keep large
    sums of money deposited at the bank. They invest in real estate,
    equities, bonds, derivatives, futures, options, and swaps. They have
    financial advisers who advise them not to let their money sit in a
    savings account.

    Who has large amounts of money in savings accounts? Risk-averse
    retirees. Small businesses. A person or business saving up to make a
    large capital purchase without taking out a loan. The middle class – the
    financially conservative middle class. This seizure of wealth is aimed
    straight at the middle class.

    What you are witnessing in Cyprus is liquid assets being confiscated
    in order to bailout more filthy banksters. A true wealth tax is
    assessed on ALL assets and collected annually like an income tax and is
    used to punish rentier behavior and incentivize the productive
    allocation of assets. It is usually 1-2% and is done in lieu of capital
    gains and gift taxes. Instead of letting wealth build-up and languish in
    offshore bank accounts accruing interest, a true wealth tax encourages
    productive investment. The Cyprus saga is nothing of the sort,
    especially since it is supposedly a “one-off” phenomenon. It is just a
    blatant heist of people’s money to avoid giving banksters a much-needed

  62. The people of Cyprus are losing, Gordon, and the bankers are winning. And the markets went up, which means that the markets do not
    reflect the economy, and the markets do not reflect civilization. It means the markets are owned and operated by the bankers. They are banker markets


    Fortunately, that is not a permanent situation. That is a last chapter situation. All the people of Europe are not going to sink. It’s going to be the political system that sinks.

    The people are now aware they have for too long been out of touch with their political leaders; they need to force it. This is a sea change.

    Regardless of what the deal is, the fact that the markets go up explains it. It was a banker market, a bank crisis, a banker solution and the bankers punished the innocent people because of it.

    It doesn’t mean things are getting worse, it means things are getting closer to breaking.

    The IMF and the contributions that the US taxpayers made, to foreign nations, have nothing to do with the US except they were leverage for the bankers. US taxpayers are giving the bankers leverage for their foreign operations and look how they used it. Lagarde is applying the screws to Cyprus because she is able to do so, because she has the US taxpayers behind her.

  63. The people of Cyprus are losing, Gordon, and the bankers are winning.

    Most of the people of Cyprus *are* either bankers or people who don't work much and who get money mostly from the work of their fellow citizens bankers via redistribution. At least that's how it was up to the last week. This whole "people vs bankers" dichotomy is a complete lie, a piece of a shitty communist propaganda.

  64. Speaking of Jesus, one thing that Cyprus is most famous for is being the final home of
    Lazarus. After the death of Jesus he was forced there as many wanted to
    kill him. With that history there is no wonder they really do believe
    in coming back from the dead. Just call it the European Lazarus effect.
    Damn thing won't die. Oh, but Lazarus did finally die in Cyprus.

  65. I recommend reading up on the collapse of the banking system in medieval Florence and Venice. There are many parallels to today's problems. Their banks and corporations were, for that time, global. The system failed for the same reasons ours is.

    Many such parallels in history. They all boil down to some very fundamental principals having to do with real value, trust, and counter-party risk. Many of us continue to watch the supply lines and
    perception. Most sheep still have not figured out that they are working
    harder to maintain a decreasing standard of living. All hell breaks
    loose when 7+ billion start to believe their "lying eyes." Just like Venice then, the financialization of everything under the sun has only enriched the paper-pushers (moneychangers). Now remind us, what do these folks actually produce that is of real value again?

  66. Well, it is not a one off phenomenon but a blue print for the future bank problems resolution.

    "Jeroen Dijsselbloem, the Dutch Finance Minister who as head of the
    Eurogroup played a key role in the Cyprus negotiations, said the deal
    represented a new template for resolving future eurozone banking
    problems." . The markets fell after that comment.

  67. You are being sweepingly unfair to the Cypriots. I can guarantee you that they are very hard working and earnest people.

    They had to be: they built up their economy from zero after a disastrous invasion by Turkey and a cut of 40% of the island ( the most fertile lands) appropriated by the Turkish Cypriots, Greeks were expelled from there and they lost their properties.

    Up to six years ago Cyprus had no problems, their economy based on tourism, shipping, and banking. The communist last president started spending more than the income from taxes and that was the down turn that is partly responsible for the bankruptcy.

    They will recover faster than Greece too, just because they have a tough work ethic that has not been destroyed by these six years. ( in Greece the damage happened over 40 years, two generations).

  68. Lubos -- The current situation in Cyprus reminds me of Shakespeare's
    The Merchant of Venice. The ECB (Shylock) is demanding its "pound of
    flesh" from the people of Cyprus (Antonio). The Bank of Cypress
    (Bassanio) courts Russia (Portia) in order to pay off the evil moneylender, who out of spite, declines the repayment of a loan and insists on his pound of flesh, as a warning to other borrowers.

    "There I have another bad match: a bankrupt, a prodigal, who dare scarce show his head on the Rialto; a beggar, that was used to come so
    smug upon the mart; let him look to his bond. he was wont to call me
    usurer; let him look to his bond." -- Shylock

    If only this could happen in Switzerland, The City of London, Tel Aviv and New York, all would be well in the world. We could have real elections to elect real leaders, get rid of the banker scum running the world and have free markets and productive economies (instead of the fraud financialized farce).

    Gotta progagate that mathematically impossible growth paradigm in a world of rent-seeking parasites, NOT!

  69. I
    watched a neat program last night, Lubos, where they smashed two protons together at light speed, and out popped a Higgs Boson.

    Made me wonder what would happen if you slammed two banker's heads together at 186,282 MPH. Maybe you would find the elusive "Evil Boson." ;~)

  70. Anna V,

    Cyprus would be wise to give up on the Euro and go back to the Russian sphere. They need Russia as a bulwark against Turkey which took over
    part of the island in the 1970s. If you need a bad big brother to
    protect you, who would you choose, the EU or Russia? Russia could bail
    out Cyprus in exchange for some ports. But there is the pesky issue
    of the British air base in at Akrotiri. Nothing is simple.

  71. The common peasantry will get their insured deposits, Anna, but there won't be
    much to do with them now that the Cypriot economy will be plunging into
    an abyss of depression for the next decade at least.

  72. Russia, over centuries, is an unreliable friend. In the end, like all big countries, it looks after its own interests. That is the lesson of history. There is no Russian Sphere in reality.

    It was always the west that allowed modern Greece to unfold, also the west looking after its own interests, though romantics helped. The interests of the west in the region are stronger than the interests of Russia, is the pragmatic conclusion. So Cyprus has to stick with the west if she does not want to be eaten up by Turkey at the next imperial step of the former Ottoman.

  73. And now the ECB and Central Bank of Cyprus are helping the Russians out of Cyprus but shhhh... nobody must know.