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Hope no one has money in a Cypriot bank

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March 16, 2013 – Comments (8)

The Wall St. Journal, Marketwatch and probably others are reporting that Cyprus is hitting bank deposits with a one-time tax as part of a bailout package.  The tax will be imposed over the weekend, no chance for account owners to withdraw money before the tax hits.

From the WSJ article (subscription required):
Depositors in Cypriot banks will be hit with a one-off tax on their savings, as part of a €10 billion ($12.96 billion) bailout for the Mediterranean island from the euro zone and the International Monetary Fund.

From Marketwatch (no subscription needed):
Depositors with more than 100,000 euros will be taxed at 9.9%, while those with less at 6.75% to raise a total of about 6 billion euros for the island nation that’s near bankruptcy, The Wall Street Journal reported.

Should make for an interesting day - and not a good interesting - on Tues (Monday's a holiday) when Cypriot banks reopen.

I wonder if there were any big withdrawals on Friday.  Also curious how big a haircut bank shareholders, bond holders and executives took in the process.

 

 

 

8 Comments – Post Your Own

#1) On March 17, 2013 at 6:16 AM, robotclo (72.30) wrote:

Won't this actually cause a bank run?  People see that their money is not actually insured.  

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#2) On March 17, 2013 at 6:19 AM, robotclo (72.30) wrote:

Won't this cause a bank run?  People see that their money is not really insured, kind defeating the purpose of keeping money in a bank.

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#3) On March 17, 2013 at 10:28 AM, lquadland10 (< 20) wrote:

 Will it happen here? Oh and their Gold was not touched.

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#4) On March 17, 2013 at 11:12 AM, HarryCaraysGhost (99.59) wrote:

From Forbes contributor Tim Worstall-

"Think through why we have deposit insurance? Banks, simply because of fractional reserve lending, are vulnerable to bank runs. If all the depositors turn up at the same time looking for their money back they cannot have it: it’s out in the loans to businesses and mortgages to consumers. This is a known fragility of the system. The only possible solutions are either to have full reserve banking (a bad idea for other reasons) or to have deposit insurance. In that insurance the government stops bank runs stone dead. By promising that depositors (up to some level) cannot lose money. Thus a run does not form and become self-fulfilling.

The point isn’t to make the depositors whole: it’s to stop a bank run forming in the first place. But, what if the government then reneges on a promise to insure depositors? Then the insurance isn’t going to stop bank runs, is it?

How important this is will clearly depend on how many people take note of it. Imagine that, say, the Italian banking system gets into trouble. If we all knew, or all depositors in Italian banks knew, that deposit insurance was inviolable then there might be a way to deal with a troubled Italian banking system. But if word gets around that, whatever people have actually said, deposit insurance isn’t inviolable, that if there are serious problems then government will not live up to their promises (or perhaps, that the EU will not allow them to do so) then what use is the insurance in stopping bank runs? Why won’t all the money flee to Germany thus creating that very bank run everyone is trying to avoid?

Perhaps I am over-emphasising this. But it looks like an extremely dangerous decision for the future to me. Even when Iceland and all its banks went bankrupt the Icelandic government did keep its promises under the deposit insurance scheme that it had. And breaching that principle just seems to be obviating the whole point of having deposit insurance in the first place.

I certainly wouldn’t want to be a central banker trying to deal with a banking liquidity crisis now that it’s been shown that government promises aren’t worth the paper they’re written on, that’s for sure.

It really does strike me as an extraordinary decision, one that will have unpredictable long-term effects."

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#5) On March 17, 2013 at 4:47 PM, rd80 (97.31) wrote:

Thanks for the comments.

@robotclo - Looks like a run started at ATMs over the weekend.  I haven't seen anything covering how deposit insurance would play in this.  My guess is it wouldn't be covered since that would pretty much defeat the purpose of the tax.

@lquadland - I don't think this could happen in the US, at least not the way it went down in Cyprus.  The process for creating and passing taxes would pretty much guarantee it couldn't be done entirely behind closed doors.  'course, our elected leaders have been known to ignore that pesky constitution before.

@HCG - Thanks for sharing the Tim Worstall comments.  The last sentence wraps it up nicely, "unpredictable long term effects."  I'm guessing this won't be good my SAN pick in the FF5 contest, or any other European banks.

More from the Fool's AP feed
Lines formed at many ATMs as people scrambled to pull as much of their money out as they could, a development that Cypriot and European officials feared would happen.

Sounds like a bank run is on.

And, forex trading just reopened.  EUR/USD closed Fri about 1.308, currently down to 1.293.  Big fall at the open and it's been trending a little lower over the first few minutes of trading.

More from CNBC.

 

 

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#6) On March 18, 2013 at 12:44 AM, awallejr (76.71) wrote:

Well I can't imagine how a puny island like Cyprus should have any major impact in the world, but I have no doubt that the media will blow things out of proportion just for the hell of it.  Go ahead people dump everything because the world is ending as a result of Cyprus.

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#7) On March 18, 2013 at 1:39 AM, starpark88 (85.23) wrote:

A lot of these stories are leaving out the compensation the depositors are getting. I'm not saying the compensation would stop a bank run. That's all based on perception and who knows how badly this event will be perceived. But this seems more like eminant domain used on capitol, rather than pure theft. I wish they'd have only applied this above the 100,000 euro mark so there wouldn't be a breach of any depositor insurance. That's the bigger issue imo and the one that could lead to a PIIGS-wide run on banks. 

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#8) On March 18, 2013 at 1:40 AM, starpark88 (85.23) wrote:

*capital

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