Habemus Referendum: The sad case of Cyprus
We are witnessing finance history ladies and gentlemen: It is the first time in history where risk-free assets (i.e. cash) will be traded with risk-bearing ones (i.e. shares); and this appears to be a good deal! According to some sources, the German Finance Minister, Wolfgang Schäuble, entered the negotiations demanding a 40% deposit haircut and threatening to cut all ECB funding to the Cyprus Popular Bank (which amounts to about €6 billion) at once if Cyprus returned to the pound.That Pawel Morski link leads to a solid post: "Cyprus: A Brutal Lesson in RealPolitik".
It appears that Germany has assumed the role of "The Master and Commander" of the EU without notifying anyone else. Why else would they support a plan which would promote such an issue? The same leaders who promoted a plan which has taken away €4-5 billion from Cypriot banks through the Greek PSI are now planning to re-capitalize them by taking money from people who have been working all their lives to save some. Where is the democratic accountability in that?The rationale behind decisions of this kind is: your banks are in a bad position, we mess-up in Brussels, the banks are now in deep trouble, we delay things to make the markets uncertain and thus making the economy contract and as a consequence every citizen with more than €1 has to pay.Pawel Morski has already published an excellent article stating the alternatives and most of the outcomes of the Cyprus case. Now, let's have a look at the numbers:Total Deposits in Cyprus: €104 billion.Total Foreign Deposits: €32 billion.Who exactly is this measure supposed to be punishing and who is exactly is it protecting? Because it appears that the people who are about to be worse-off are Cypriots and not the "Russian Oligarchs". From what Pawel states it appears that they are promoting this to set the Russians at ease that it is not just their money that are going to get the haircut. Well, I am sure that Cypriots are thrilled by this!As with the Greek case, the only ones who benefited from these kind of solutions are hedge-fund managers who have gambled excessively with the probability of a Cyprus default. Ah, the grandeur of capitalism. The rich and the risk-lovers will get their rewards while those who have been saving small amounts of money will lose. Why isn't their a limit in the deposit cuts? Will the "oligarchs" feel the injustice if people with less than €10,000 or €20,000 in the bank do not have to pay? Do you really believe that the "billionaires" would care for such trivial amounts? Yet the average Joe or Jane, who earns €1000 euros a month and saves €50 for a rainy day does. I have already explained why a deposits haircut is a terrible idea. What makes this deal even worse is that it also hits lower income people; everybody has to pay.....MORE
Earlier:
What the Hell Just Happened In Cyprus
The Economic Knock-on Effects of the Cyprus Bailout
