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TMFPostOfTheDay (< 20)

What Happens in Cyprus Now?



March 20, 2013 – Comments (4)

Board: Berkshire Hathaway

Author: Goofyhoofy

The overspending by Greece created a ripple effect to Cyprus.

Well, if you're going to blame the Cyprus situation on "overspending by Greece", which required a bailout, which encouraged Cyprus banks to look for higher returns, which made them invest in high-risk Greek bonds, which encouraged the banks offer world-high interest rates to attract deposits ...

... then you might as well blame the Lehman bankruptcy on me, because I'm sure I was buying something somewhere that had something to do with something they did.

This is not complicated. Cyprus banks took in 800% of Cyprus GDP by offering ridiculously high interest rates which they could not pay. Looking to the Cyprus government for a bailout they were rebuffed. Looking to the EU for a bailout they were rebuffed unless they dipped into depositors' accounts. I'm sure it started slowly, as it usually does, with some banks looking around for high yields and finding them on the risky Greek isle. Getting hooked on the juice (like the US mortgage market a few years back) they kept going back to the table for more, more, more until it became unsustainable.

This was stupid on many levels, but "Cyprus government spending" was not one of them. "Greek government spending" was not one of them. The bankers' assumption of "TBTF" might have been one of them, and greed in pushing a banking business model that had no chance of surviving a hiccup was one of them, and regulatory failure was one of them, but not "government spending."

(Yes, I think was was handled about as hamfistedly as possible. Announcing a confiscation the way they did was idiotic. Maybe a "forfeiture of the last years' interest" for small savers would have been better, and perhaps a wipeout of bondholders coupled with a "forced" bond equity conversion for large account holders, or maybe there are other things.)

But the violation of the FDIC-like guarantees is unconscionable, and if there isn't a bank run Friday, I am sure there will be - in many countries - at the first sign of a belch at some point in the future. As it is, they have vaporized any concept of "trust" in a government protection scheme for banking account holders, angered everyone in Cyprus, pissed off the Russian mafia, demonstrated (again) how banks are really money launderers, shown the world how feckless the EU Commission really is, and likely destroyed the Cypriot banking industry anyway. It's hard to envision a worse outcome on so many levels at once.

4 Comments – Post Your Own

#1) On March 20, 2013 at 12:24 PM, constructive (99.96) wrote:

"Greek government spending" was not one of them.

Cypriot banks have written down over $6B in Greek government bonds, as a result of the deficit crisis and rolling defaults. So it seems to me that this opinion is nonsense.

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#2) On March 20, 2013 at 3:54 PM, Goofyhoofy (< 20) wrote:

Did someone make the Cyprus banks invest in Greek bonds? No? Or did they do that because they were chasing high returns and paid no attention to that little thing called "risk." Blaming the greed and stupidity of Cyprus bankers on 'government spending' makes as much sense as blaming your own bankruptcy on your neighbor's new BMW because you thought you had to buy one too.

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#3) On March 20, 2013 at 4:24 PM, constructive (99.96) wrote:

Your BMW analogy is inane.

Imagine you lost money on Enron. Do you deserve all of the blame for the loss, or does management deserve a little bit of blame too?

Keep in mind that the Greek government has been grossly negligent in fulfilling their obligations, and have also deliberately deceived their creditors.

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#4) On March 20, 2013 at 4:53 PM, Goofyhoofy (< 20) wrote:

OK, imagine I lost money on Enron. So what? If I lost money is it the fault of my stock advisor? My bank because they didn't stop me? My wife because she wasn't paying attention? My neighbor? No, it is *my* fault because I bought the stock. Nobody at Enron forced me to buy the stock.

Imagine you invested with Bernie Madoff. Did you do due diligence? Or did you 'trust him' because other people did? Did his "too good to be true" profits not cause you to think it over?

Did the Cypriot banks offering 4% interest not look odd in the face of worldwide rates of 1%? Did the fact that they had 800% of Cyprus GDP mean that they were vulnerable to any little hiccup? Did they not disclose that they were heavily invested in the worst possible quality bonds from Greece?

Seriously. Who made you invest in Cyprus banks? Who made those banks invest in Greece? If your neighbor comes to you with a 'too good to be true' investment and you lose your money, it is his fault - or yours?

PS: The Greek government may have deceived their creditors years ago, but since their bailout their books have been widely opened and audited by the EU. No secrets there, which is why their bond rates were so absurdly high, because they knew that they would not attract inflows because of the inherent risk - which the Cyprus bank managements ignored. You don't offer 8% bonds unless you have to, and you don't get 8% coupons for no reason - you get it because you know you are taking a big gamble. Oops, Cyprus banks played and lost. 

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