On Saturday 16th March the people of Cyprus woke up to discover that a percentage of the money they had deposited in their banks was to be taken by their government, as a condition of a bailout deal by the European Union. Though this deal was rejected by the Cyprus parliament over the next week, the possibility of losing what should be money safely in the bank is still sending shockwaves through the financial system.
Cyprus is just a small island country in the Mediterranean, but the implications are huge.
Here’s the short version of what’s happening:
Cyprus’s banks, like many banks in Europe, are bankrupt.
Cyprus went to the Eurozone to get a bailout, the same way Ireland, Greece, and other European countries have.
The Eurozone powers-that-be gave Cyprus a bailout–but with a startling condition that has never before been imposed on any major banking system since the start of the global financial crisis in 2008.
The Eurozone powers-that-be (mainly, Germany) insisted that the depositors in Cyprus’s banks pay part of the tab.
Not the bondholders.
The depositors. The folks who had their money in the banks for safe-keeping.
Though the original demands from the EU and the IMF have now been modified to protect smaller depositors (deposits under 100,000 euros, which are supposed to be insured, will not be touched), accounts of over 100,000 will be subjected to a levy, as yet undecided. And though it’s not as bad as the original deal, it’s still sending ripples through the financial system in Europe, and the rest of the world too:
Cyprus bailout deal is approved
The main reason that Cyprus depositors will lose their cash is because it has become politically difficult (impossible?) for leaders in Germany and other rich European countries to bail out their brethren in the “periphery” without taking many pounds of flesh.
And it is that precedent, in addition to the fate of big depositors in Cyprus, that should spook Europe’s big bank depositors and lenders.
If Germany is done bailing out countries and banks without having those countries and banks cover some of the cost, it’s not clear why Germany will relent next time Spain, Italy, Greece, and other countries in near-desperately bad financial shape come rushing to the EU with their hands out.
Unlike Cyprus, the banking systems in these countries do have bondholders that can get haircut before the depositors get haircut, but the effect will be the same.
For the first time since the collapse of Lehman Brothers, those who lend their money to banks or keep their money in banks are at risk.
Read the rest of this update of 26 March: IT’S OFFICIAL: Banks In Europe May Now Have To Seize Deposits To Cover Their Idiotic Gambling Losses
Think it can’t happen here?
In New Zealand the RBNZ is working to implement the so-called Open Bank Resolution policy which is intended to facilitate a “rapid and orderly resolution of a collapsed bank”. The rules of this policy allow the Reserve Bank of New Zealand to freeze a portion of depositors’ funds in the event of a bank failure.
Under the policy—one option the government could enact—the first losses in the event of a bank failure would be borne by the bank’s shareholders. In in addition, a portion of depositors’ and other unsecured creditors’ funds would be frozen to make up for any remaining losses.
According to the Reserve Bank, the move would help depositors because it allows the bank to reopen the next working day, and customers would be able to get full or partial access to their accounts and other banking services.
But there are other ways that governments confiscate your money when they are short of funds.
Governments are essentially instruments by which the insiders take advantage of the outsiders. Those who control the government (insiders) use its police power for their own purposes. That does not mean that they can get away with anything they want.
Ultimately, they depend on the sheep-like complacency and credulity of the masses in order to maintain their authority. Modern democracies, for example, hold periodic ballots to give the masses the impression that they are in control. And sometimes, voters really do ‘throw the bums out’.
Usually, though, the insiders have the voters under control, buying the support of important groups — with tax breaks, social programmes, contracts, jobs — giving them enough to keep them in line.
Will they try to cut their liabilities by inflating the currency? Yes. Will they impose heavy taxes to protect their credit? Yes. Will they stiff savers…if they need to? Definitely. They are already doing it.
Yes, it might be worse in Europe, where governments have centuries of experience of feeling entitled to lord it over the serfs. But governments all over the world, like big corporations, are governed by the principles of self-survival before anything else. Don’t expect them to look after YOUR interests in a crisis.