Cyprus Banking Crisis for Dummies!

• Cyprus Banking Crisis for Dummies! 
  by WashingtonsBlog 
  Ground Zero of Financial Repression
  You’ve heard that the tiny European country Cyprus is threatening to grab between 3 and 13% of bank depositors’ funds in return for a bailout of the country by the European Union.
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  Zero Hedge reports that Germany’s Finance Minister and the IMF originally demanded that 40% of bank deposits be looted. Sajiyat Das notes:
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  Irrespective of the fate of Cyprus, the solution adopted will exacerbate the European debt crisis.
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  Many commentators note that the deposit grab may cause panic among bank depositors in Spain and other vulnerable countries as well.  Indeed, many are asking whether this could be a modern Creditanstalt situation. Another common analogy is that this could be “worse than Lehman” failing.
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  On the other hand – given that the entire economy of Cyprus is smaller than that of Shreveport, Louisiana, and that Cyprus is mainly a parking spot for hot money from Russian oligarchs and mafia – some say that the whole crisis will quickly blow over.
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  What’s the bigger picture?  Bank deposit grabs may spread to other vulnerable European countries.  The New York Times reports:
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  Jeroen Dijsselbloem, the president of the group of euro area ministers, declined early Saturday to rule out taxes on depositors in countries beyond Cyprus.
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  And the chief economist of the German Commerzbank has called for private savings accounts in Italy to be similarly plundered:
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  A tax rate of 15 percent on financial assets would probably be enough to push the Italian government debt to below the critical level of 100 percent of gross domestic product.
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  Indeed, Zero Hedge has been warning about this kind of scenario for years. Why are they doing it? The Financial Times notes:
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  Cyprus’s new president Nicos Anastasiades did not like the idea of forcing any losses on ordinary account holders….But after receiving what Cypriot officials said were reassurances from Angela Merkel…Mr Anastasiades agreed to a deal that he thought would include relatively modest “haircuts” – a 7 per cent levy on deposits above €100,000 and a 3.5 per cent hit on those below.
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  With the principle of haircuts agreed, Mr Anastasiades decided to stay for the finance ministers meeting, which was just getting under way. All he asked was that the rates be tweaked: raise the levy on the bigger deposits in order to lower the hit taken by the less well off. Both sides believed a deal was at hand….
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  However, Mr Anastasiades was left reeling by the response to his request for modest adjustments, according to Cypriot officials. Wolfgang Schäuble, the German finance minister, said Nicosia would immediately have to raise as much as €7bn from depositor haircuts. A stunned Mr Anastasiades decided to walk out…
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  But Mr Anastasiades soon learnt storming out was not an option. The European Central Bank had another shock for him: the island’s second-largest bank, Laiki, was in such bad shape that it no longer qualified for the eurosystem’s emergency liquidity assistance – the cheap central bank loans that teetering eurozone banks need to run their day-to-day operations.
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  The message, delivered by the ECB’s chief negotiator, Jörg Asmussen, meant that if no deal was reached, Laiki would collapse, probably bringing the island’s largest bank down with it, and saddling Nicosia with a €30bn bill to reimburse accounts covered by the country’s deposit guarantee scheme. It was money Nicosia did not have. All of the island’s account holders would be wiped out.
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  Mr Schäuble was not alone. Several officials involved in the talks said he not only had backing from the Finns, Slovaks and to a lesser extent the Dutch. The International Monetary Fund, which had been urging depositor haircuts for months, had won the argument over the skittish European Commission, which had long worried that seizing depositor assets could spark a bank run in Cyprus and, potentially, elsewhere in the eurozone.
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  read more!

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