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cyprus "haircut"

Jeanne Boyarsky
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I'm reading about the 6-10% being taken out of all Cyprus bank accounts. The whole point of leaving money in the bank is that it is guaranteed by the government against lost. It pays less interest but is safe. And now it isn't safe. I'm just floored.

Note to others mods: if this gets too political, please feel free to delete it.


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chris webster
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Joined: Mar 01, 2009
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  16

Agree it seems pretty harsh, but given the depth of the crisis in the southern Eurozone countries, and the astronomical amounts of (mainly German) money already thrown into the pit, maybe it's understandable as a desperate measure.

Here in the UK, we're outside the Euro and things are nowhere near as bad as in Greece/Spain, but our heavy dependence on the financial services sector and the widespread failure of our banks to manage risk properly have left the UK taxpayer paying billions to support failed banks (which continue to pay themselves massive bonuses even as they make further losses and enjoy continuing subsidies), and a government committed to such harsh "austerity measures" that our economy is now claimed to be stuck in the longest recession since the Great Depression, not because of the banking bail-out but because of government policies. The net effect is that many ordinary citizens have been paying for the continuing economic crisis through reduced incomes, lost jobs (which further reduces tax revenues), cuts in vital public services etc. The UK recession has cost me a year out of proper employment, when I have been earning very little, so personally I'd have been happier to take a one-off 10% hit on my savings a year ago, if it helped re-start the economy, than see all those savings evaporate due to a year of recession-induced unemployment. And UK banks are paying virtually no interest on savings these days anyway.

But I guess Cypriots will judge this unusual action on whether it succeeds or not. Like The Economist, I have my doubts.


No more Blub for me, thank you, Vicar.
Jeanne Boyarsky
author & internet detective
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Chris,
To be honest, this doesn't worry me so much for people like you. It worries me for people who saved all their lives to be able to pay the bills in retirement. It's a lot harder to replace the money at that point. Interest has been so low for so long now that retired people are already seeing their assets shrinking. But that seems less hostile than actually taking the money away. It also bothers me that it is a seizure of assets and not a tax because a tax wouldn't target retired people more than others.

along with an increase in corporate tax and a doubling of the tax on interest earned from savings.

quote from here - now granted interest is low so double tax is still very low. But apparently the message is that investment is bad?

The move is expected to raise €5.8 billion for which depositors would receive bank equity in return.

quote from here - I don't understand this. Bank equity doesn't just materialize out of nowhere. Implying all bank stockholders have their stock devalued including the new ones.
chris webster
Bartender

Joined: Mar 01, 2009
Posts: 1876
    
  16

Fair comment, Jeanne. I agree that it would be better to spare Cypriot pensioners with modest savings by having a reasonable threshold at which to apply this policy and target wealthy foreign investors instead. But as the article points out:
The Economist wrote:The most plausible explanation is that the Cypriot government itself preferred to spread the pain rather than wipe out non-resident depositors and jeopardise its long-term prospects as an offshore financial centre for Russian and other money.

Cypriot voters will have to decide how they feel about that at their next election. But "haircut" aside, this is pretty much the same approach the UK government has been using - and shamelessly pushing in Europe - to avoid curtailing the City of London's alleged value to the UK economy (which many of us doubt) as a financial centre for foreign investors. The result is that UK pensioners are seeing their savings shrinking in real terms as inflation is rising, their public services are being cut or privatised (which imposes more costs on individuals), and their investment earnings reduced by the continuing austerity-induced recession. Life is even tougher for those who never earned enough to have that level of savings in the first place - in many areas of the UK an ordinary wage will never allow you to save significant amounts for your retirement so you will be dependent on the very basic state pension and whatever other public benefits/services survive the current wave of cuts.

The real - apparently global - problem is that the interests of ordinary people with modest earnings/savings count for nothing if they are in conflict with the interests of the people in charge of the financial industry and their political puppets. Cypriot widows, UK widows, US savers and millions of other ordinary people are simply paying the price for a corrupt and self-destructive global economic system that relentlessly privatises profits - concentrating them into the hands of an ever-smaller global elite - while leaving the ordinary citizen to pay the price for losses on a truly astronomical scale.

There - reckon that's "political" enough to get me moderated With Extreme Prejudice? If not, try this.
Jeanne Boyarsky
author & internet detective
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Hmm. That's an interesting point. Do you know if they are planning on taking that X percent from businesses too? They do have accounts in the bank. Or is this just for human depositors?

Also, I just read that this isn't definite yet. The vote from today was deferred to tomorrow.

I was also surprised that this hasn't been in the news more in the US.
Ulf Dittmer
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Joined: Mar 22, 2005
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  73
Jeanne Boyarsky wrote:I was also surprised that this hasn't been in the news more in the US.

<rhetorical question>Do you generally see in-depth coverage of Cypriotic affairs in US news?</rhetorical question>
Jeanne Boyarsky
author & internet detective
Marshal

Joined: May 26, 2003
Posts: 31118
    
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Ulf Dittmer wrote:
Jeanne Boyarsky wrote:I was also surprised that this hasn't been in the news more in the US.

<rhetorical question>Do you generally see in-depth coverage of Cypriotic affairs in US news?</rhetorical question>

Of course not. In fact I had to look at a map to find out exactly where in Europe Cyrus is. But this has the potential to cause bank runs in other places. It also gives other government ideas. So I worry that this is the beginning of something significantly larger.

In all fairness, I found out because there was a short story on the front pages of nytimes.com. It was when I look for more coverage that I noticed the lack.
Jeanne Boyarsky
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Ok. I've now moved on from being completely floored to have read an hour worth of comments on articles about this.

It's a complex problem, I certainly don't have a good solution in mind. But what strikes me the most is the point of deposit insurance is to avoid bank runs by making people feel comfortable they will get their money back even in the event of a bank failure. Cyprus took away that guarantee. The question is whether the rest of Europe still feels it has that guarantee. And other countries for that matter. I also came across an article about what the percentage would need to do the same in the US. It was 25%; significantly more than 10%. And the second thing is still my gut feeling - people have accepted less interest for their whole lives knowing their capital was guaranteed and now it isn't.

And yes, I realize this is happening "all the way in Europe" but I fear it will affect the US more than our ongoing budget arguments. Which are constantly in the news.

It could be that this isn't in the news much because nothing much is happening right now beyond speculation. The initial mini-bank runs are over because the ATMs are out of cash and electronic transfers are blocked. And it hasn't been approved yet. I'm starting to see it creep into more US news sources though. And I'd be disappointed if coverage didn't jump tomorrow and Tuesday.
Steve Fahlbusch
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Joined: Sep 18, 2000
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    7

Jeanne,

Just to let you know, there has been a back door proposal that has been floated in our congress (USA) for years and has the tacit approval of a majority, but has yet to be implemented yet as it is deemed too painful (to congress) to be implemented. That proposal is that "income" tax is to be eliminated (or be part of) yearly estate tax (i.e.: one will be taxed on what their entire estate is worth: real property, investments, retirement accts (dont know what the plan is for pensions, but they are not almost gone), tax sheltered investments - everything.

One of the big PROs they will push is that this eliminates the death (or inheritance) tax.

So they will eliminate a one time hit with yearly hits.

Please remember that the sequester was deemed too painful that any rational congress would not let that happen.


Steve Fahlbusch
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Joined: Sep 18, 2000
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    7

Oh and we are still seeing 2-3 bank take overs per week (as of beginning of this month)
Jeanne Boyarsky
author & internet detective
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Steve Fahlbusch wrote:Just to let you know, there has been a back door proposal that has been floated in our congress (USA) for years and has the tacit approval of a majority, but has yet to be implemented yet as it is deemed too painful (to congress) to be implemented.

Link? "estate tax" is too common a term so I'm not seeing anything.

One difference is that if this happens, it would be announced in advance. Or rather more than 48 hours in advance. I'll leave out my opinion that proposal though - this thread is about Cyprus.
Steve Fahlbusch
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Joined: Sep 18, 2000
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    7

sorry - trying to give examples that are similar here -- but yes what was done in cyprus is unconscionable but it is what governments will do.

Martin Vajsar
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  60

Jeanne Boyarsky wrote:It worries me for people who saved all their lives to be able to pay the bills in retirement.

I believe (but I may be wrong) that these people get most of their income from a state pension system and from their savings in pension funds which (as, again, I believe) are not subject to the haircut. So it is possible that pensioners won't be that much affected, unless they kept a lot of money on their regular bank accounts.

(I'm probably pretty ignorant here, but is there a state/federal public pension system in the US at all? I know there are pension schemes provided by big employers (which face problems of their own), and that perhaps state employees are covered, but don't know whether there is a compulsory pension insurance which is common in Europe.)
Jeanne Boyarsky
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In the US, we have:
1) Social security - you pay a tax as you work and then get a monthly stipend each month. It isn't enough to live on
2) A pension if you are really lucky. It's mostly unions and government workers who get this.
3) 401K savings plan where you invest your own money: often matched my an employer
4) IRA/savings where you invest your own money.
5) Your own supplemental savings
Greg Charles
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  11

From what I understand, the banking industry in Cyprus is very large compared with the size of the total economy, mostly because they accept deposits from dubious sources without asking too many questions. Now they don't have enough money to pay back all the depositors, and their options are limited. The economy just isn't big enough to absorb the loss, whether through a government bailout or loans from outside. In the U.S., we'd rightly consider the bank taking part of our deposited money to be theft, plain and simple, but in Cyprus, it's more complicated. It's probably not Mom and Pop Grocer taking a haircut, but Boris the Drug Dealer / Money Launderer.

@Steve -- I'm extremely skeptical that the plan you outline has the support of the majority of the U.S. Congress, tacit or otherwise. It would discourage saving, and encourage people to hide the money they did save in their mattresses instead of in banks. I'd personally be against this plan, though I'm very much in favor of the estate tax. (This is America my little princes and princesses. If you want to be rich, you have to work for it yourselves.) I'll look at a cite though, if you have one.
Martin Vajsar
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  60

Greg Charles wrote:In the U.S., we'd rightly consider the bank taking part of our deposited money to be theft, plain and simple, but in Cyprus, it's more complicated. It's probably not Mom and Pop Grocer taking a haircut, but Boris the Drug Dealer / Money Launderer.

Boris may be the intended target, but Mom and Pop will take a hit too. For them, it is theft, plain and simple. There may be some good intentions behind the plan, but we all know what kind of stuff paves the way to hell. I fail to see how this whole business could not evolve into Cypriot bank runs.
Greg Charles
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  11

Martin Vajsar wrote:
Boris may be the intended target, but Mom and Pop will take a hit too. For them, it is theft, plain and simple. There may be some good intentions behind the plan, but we all know what kind of stuff paves the way to hell. I fail to see how this whole business could not evolve into Cypriot bank runs.


The tax only affects depositors with more than €100,000, which would be a lot for Mom and Pop to keep in a bank account. It's undeniably scary though, and probably born more of desperation than good intentions.

ETA: No, I'm wrong. The linked article says ordinary depositors will get taxed at the lesser, but still significant, rate of 6.75%. They'll be compensated with equity in the bank, but I'd find that cold comfort if it happened to me. I definitely consider that a bad move.
Martin Vajsar
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  60

I didn't notice the change. Just now I've read about it: the levy of 6.75% is proposed on accounts between €20,000 and €100,000. Above €100,000 it's 9.9%.

No tax below €20,000, so the really poor won't be affected. Even so - I don't know how about Cyprus, but in my country "savings" bank accounts are quite popular, for they offer at least some interest and (unlike investment funds or shares) are insured - up to €100,000. But so are Cypriot accounts, in theory.

The parliament still hasn't ratified the measure, though.

Edit: I expect the foreign investors to flee the country - and take whatever will remain from their billions of dollars with them - thus the bank run.
Martin Vajsar
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  60

I should have waited a few more minutes. Apparently, there's no deal: Cyprus MPs reject EU-IMF bailout tax on bank depositors.
Greg Charles
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  11

Wow, I don't know how they can prevent a run on the banks now. The government has said the banks are on the verge of collapse, and the fear that they'd again consider levying this tax has to be still out there. Are people just going to say, "OK, crisis averted. Let's get back to normal?"

It's interesting that the woman in that picture is holding a protest sign in English. I think of Cyprus as half Greek and half Turkish. Maybe they use English to communicate with each other? (I think they do that as little as possible though.)
Martin Vajsar
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  60

Greg Charles wrote:It's interesting that the woman in that picture is holding a protest sign in English.

I believe the message is intended for Brussels, or perhaps Germans. Cypriot government has successfully spread the rumor that the levy was requested by EU, but in reality Germans wanted to impose the tax only to accounts over €100,000; to tax account below this amount was a domestic invention. It is an European custom to say that all unpopular measures came from Brussels, it helps to divert voters' anger.

(There are some idiotic disputable measures emanating from Brussels, but local politicians usually manage to produce worse ones easily.)
Frank Silbermann
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It's a dangerous tactic, as distrust of the banks can cripple an economy. I mean, just imagine if people decided to just keep cash at home (which becomes more viable with today's negligible interest rates). Then you get more problems with theft, which leads to acceptance of vigilantism.

When America's founders were designing the government, one principle they learned from history was that experiments in self-government tended to last only until voters realized they could vote themselves wealth from the treasury. The result was _eventual_ economic collapse followed by the imposition of a "tyrant" (not necessarily a cruel leader -- just one who did not have to answer to the People). That's why America's founders tried to limit the powers of the Federal government -- to prevent this from happening. (You cannot vote yourself money if the Constitution denies the government authority to engage in income redistribution.) In America, their safeguards lasted until the 1930s.
Greg Charles
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  11

Whoosh, I was with you until the second paragraph. Can you cite an example of a democracy that collapsed because the people voted themselves money from their own treasury? Or a democracy that was supplanted by a non-cruel tyrant? Or that the framers worried about this possibility when constructing the Constitution? I'd also be interested by what safeguards specifically you think the Constitution had and how they were dismantled in the 1930s. I'm not trying to be confrontational here. I'm genuinely confused.
Frank Silbermann
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Greg Charles wrote:Whoosh, I was with you until the second paragraph. Can you cite an example of a democracy that collapsed because the people voted themselves money from their own treasury? Or a democracy that was supplanted by a non-cruel tyrant? Or that the framers worried about this possibility when constructing the Constitution? I'd also be interested by what safeguards specifically you think the Constitution had and how they were dismantled in the 1930s. I'm not trying to be confrontational here. I'm genuinely confused.


Apparently, this is folklore with no clear original source. See: http://en.wikipedia.org/wiki/Alexander_Fraser_Tytler

The earliest mention is of a book that seems to have been lost.

I cannot think off-hand of democracies supplanted by non-cruel tyrants, but certainly dictatorships and monarchies have varied as regard to the cruelty of rule -- so I cannot rule out the possibility.

The safeguards put into the Constitution by its founders was the limitation of the federal government to the powers enumerated in the document. Beginning in the 1930s the Constitution was reinterpreted to permit the federal government to do things not enumerated if doing so was "for the sake of the welfare" of the People, nation, or whatever.

For example, one of the enumerated powers was the regulation of interstate commerce. Beginning in the 1930s the meaning of "interstate commerce" was broadened to include any act that could potentially have an effect on interstate commerce (such as a farmer growing grain for his own personal use).
Pat Farrell
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    5

Ulf Dittmer wrote:<rhetorical question>Do you generally see in-depth coverage of Cypriotic affairs in US news?</rhetorical question>

I see lots of in-depth coverage of economic affairs all over the world here in Virginia. I just open my copy of The Economist that shows up every Saturday.
Pat Farrell
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    5

Frank Silbermann wrote:I cannot think off-hand of democracies supplanted by non-cruel tyrants, but certainly dictatorships and monarchies have varied as regard to the cruelty of rule -- so I cannot rule out the possibility.


A fairly large number of democracies have been supplanted by one-man rule, and after some number of years, the one-man was labeled a cruel tyrant by some of his people, and a hero to others. It quickly gets very messy and subjective. The US caused the elected government of Iran to be overthrown in the early 1950s by the man who claimed to be the Shaw. Hugo Chavez won the first election in Venezuela in an election that was essentially free and open the first time. Later elections were less free and Chavez acted more as a tyrant as time went on.

Back to Cyprus, the government is broke, they need money. There is a fundamental question of how they can raise it. Their citizens have long been expert at not paying taxes.
Mike Simmons
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  10
Pat Farrell wrote:
Ulf Dittmer wrote:<rhetorical question>Do you generally see in-depth coverage of Cypriotic affairs in US news?</rhetorical question>

I see lots of in-depth coverage of economic affairs all over the world here in Virginia. I just open my copy of The Economist that shows up every Saturday.

Sure, but The Economist is based in London, with its headquarters and two thirds of its staff there. Not quite what I'd call "US news".
Frank Silbermann
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Pat Farrell wrote:
Back to Cyprus, the government is broke, they need money. There is a fundamental question of how they can raise it. Their citizens have long been expert at not paying taxes.
That is very serious. Refusal to pay taxes can be viewed as a kind of rebellion -- i.e. that the government does not have the support of the people. On the other hand, imposing more taxes than the people are willing to pay can be seen as a kind of oppression.

Democracy requires the loyalty of people whose candidates lose the election. A government that is too intrusive -- one in which the person elected matters too much to the average person -- might in the long run be incompatible with democracy.

The U.S. is about 225 years old, but until fifty years ago the federal government really didn't do much that affected the average citizen (except for drafting them into the army). I wonder the extent to which the Swiss federal government was involved in the daily life of its people for most of its 500 year old history.
Pat Farrell
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    5

Mike Simmons wrote:Not quite what I'd call "US news".

then never mind
Frank Silbermann
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Posts: 1390
Mike Simmons wrote:
Pat Farrell wrote:
Ulf Dittmer wrote:<rhetorical question>Do you generally see in-depth coverage of Cypriotic affairs in US news?</rhetorical question>

I see lots of in-depth coverage of economic affairs all over the world here in Virginia. I just open my copy of The Economist that shows up every Saturday.

Sure, but The Economist is based in London, with its headquarters and two thirds of its staff there. Not quite what I'd call "US news".
The last time I saw much U.S. news about Cypress was when the Turkish Army invaded and occupied it.
Pat Farrell
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    5

Frank Silbermann wrote:The U.S. is about 225 years old, but until fifty years ago the federal government really didn't do much that affected the average citizen (except for drafting them into the army).

I would argue that its been more like 70 years and maybe 80.

It is true that until FDR and The New Deal, the federal government did very little that the average citizen cared about. The ICC (Interstate Commerce Commission) and the BLM (Bureau of Land Management) were probably the agencies with the most impact on the average citizen.

One can argue that The New Deal was not really that big an impact, it was really planning for, and later executing World War 2 where Washington actually did stuff.
Jeanne Boyarsky
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Guardian.co.uk has a good live blog going on today's talks. Keeping it open in a tab all day.
Pat Farrell
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    5

Details are sketchy in US media, but it seems that Cyprus' Banks will take a tax from the large accounts, those over the insurance limit, leaving the small depositors whole.

Jeanne Boyarsky
author & internet detective
Marshal

Joined: May 26, 2003
Posts: 31118
    
166

Pat Farrell wrote:Details are sketchy in US media, but it seems that Cyprus' Banks will take a tax from the large accounts, those over the insurance limit, leaving the small depositors whole.

And that Laiki bank is closing with "good" deposits under 100K moving over to another bank. And capital controls to prevent a bank run when the banks the two troubled banks reopen Thursday. And ATM limits of 100 euros. And lots of confusion on what the banks opening tomorrow should do.

I stopped reading about this in the US press and moved over to the guardian.co.uk.
Pat Farrell
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    5

The original EU plan to hit the small depositor's accounts was an idiotic, terrible idea. It would have caused bank runs in every country with marginal numbers, including Ireland, Spain, Italy, etc. etc.
Martin Vajsar
Sheriff

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  60

Pat Farrell wrote:The original EU plan to hit the small depositor's accounts was an idiotic, terrible idea. It would have caused bank runs in every country with marginal numbers, including Ireland, Spain, Italy, etc. etc.

It wasn't the EU plan. EU (Germany, I believe) insisted on shaving off the accounts over €100,000 - as it is happening now. To rip off the small accounts too was local (Cypriot government's) invention. I presume they were trying to placate the foreigners (mostly Russians), who hold the majority of the big accounts.

This move saves other countries, but Cyprus is in for a though ride anyway. Its economy was based on it being the EU tax heaven, which clearly ended.
chris webster
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Posts: 1876
    
  16

Jeanne Boyarsky wrote:I stopped reading about this in the US press and moved over to the guardian.co.uk.

Welcome to our world!
 
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subject: cyprus "haircut"