Cyprus - devil in the detail

Those depositors were the uninsured creditors of insolvent banks that did not have sufficient capital to make good on their liabilities, even after their shareholders and their bond holders had been wiped out. Calling that "looting" does not add any light to the situation. Maybe (and hopefully) depositors will now start to pay more attention to the creditworthiness of the institutions with whom they do business.

IMO the manner of treatment of those Cypriot banks was a better method than the taxpayer bail-outs of Northern Rock, RBS, etc.

Stewart, who do you believe should have paid off the debts of those banks and why?

What pisses me off is the way our Guv seems eager to promise compensation to people who stash their loot in risky overseas investments.

We must remember that the only real money is in deposits, and someone has to pay for the bankers'obscene salaries and bonuses. :-(

Well, seeing as you ask, my opinion is: Germany should have paid off the debt as a cash gift. (It was not a huge amount of money - and Germany has benefited enormously over the past 10 years in sales of BMWs, Mercs, etc.) BUT, then said: Effective tomorrow you are out of the Euro. Go get De La Rue to print you some bank notes; and quick. That way, nobody is wiped out and situation sorted, with a prospect of Cyprus recovering, which there is currently little hope of. My concern and posting was about businesses and people in the middle of a transaction, for example a company about to pay payroll and suppliers.

I agree that people need to be much more careful about choosing who they deposit money with. Hence a run on Spanish, Greek banks can now be expected. Banking can only work with trust.

I also agree that the taxpayer bailout of RBS, Lloyds was wrong. And if it did have to happen, why didn't the government have caretaker control over the boardroom bringing about a slashing of salaries and an end to bonuses ?

If you don't like the term looting, how about expropriate ?

It's not that I don't like the term, I don't believe it is accurate. Who did this looting? And who looted Comet or HMV or any other business that became insolvent because of poor trading decisions? The Cypriot banks became insolvent because of poor investments in Greek bank and sovereign debt and not because anyone stole their capital.

Leaving the Euro just begs the problem of what would then happen to Cyprus sovereign debt that is denominated in Euros. Care to explain? Does Mercedes and BMW pay that because of all those Cypriot farmers, hotel workers and shop keepers that you believe drive around in fleets of German limousines?

I agree with everything you say - but let's have consistency here. How about the rubbish investement decisions of Irish, Greek, Spanish banks who also thought that any Euro sovereign debt was safe, similarly AAA rated US sub-prime mortgages, also home-grown rubbish mortgages? (BTW isn't AAA and sub-prime an oxymoron?)

Regarding Cypriot sovereign debt from Greece, etc, I would suggest they demand payment as soon as maturity, or put on the market NOW at knock down prices. And when Greece, etc can't pay, force insolvency. Wouldn't that make bond rates from Spain, Portugal, Greece, Italy 40% ? I think Cyprus played a poor poker game.

Why do you want Cyprus treated differently ?

Let's throw everything in the air, and see how the chips fall.

Regarding Comet and HMV, their business model had long passed its sell-by date.

That's quite a mixture of very different issues from Ireland and Spain with good governance and balance of payments but where their domestic industries and banks were hit by housing bubbles on one side and Greece and Italy with chronic deficits and which used fraudulent financial reports to enter into a monetary union they were never qualified to join. Cyprus was much like Iceland but are locked out of an Icelandic solution by not having their own currency they can devalue. So now they must rely on "internal devaluation" which requires a long period of stagnation and suffering or else bail out of the Euro and then maybe look for growth in agriculture and tourism.

But does the suffering of losses by creditors prove there was looting?

The point of bargains is that both sides consider them fair at the time. The price can always be fine-tuned to ensure it is so.

I'm sure if you struck a bargain with someone to sell something to them at a price you and they both agreed as fair, you'd be a bit hacked off at having to give a proportion of the money back later, on the grounds that you over-benefitted.

I agree that Greece, Cyprus, and to a slightly lesser extent the Southern countries and Ireland were never qualified to join the Euro. But Germany and their Eu friends welcomed them in, knowing the books were cooked and eventually there would be tears. You can only live high on borrowed money for so long. Why were they allowed to borrow so much ?

As I suggested, I feel Cyprus has the power to send the bond rates of those countries sky-high. Hence my comment re poor poker game.

As for the UK taxpayer bailing out savers in IceSave, etc, I too question how much IceSave had paid the FSA/FSCS to get their saver guarantees. We were too easy on those foreign banks. I wonder if the same applies to the Indian banks which seem to have the best saver rates.

This thread has digressed from my initial point about businesses and people being expropriated in the middle of a transaction.

and how do they do that - please?

I'm a (reasonably) sophisticated investor and I wouldn't know where to start

How is the normal MITS supposed to tell?

It's not like I get a choice about how the bank invests its money after I have lent mine to it.

It's all well and good to say that the money in the Cyprus banks was dirty Russian money, but that wasn't why the bank took poor investment decisions. Whilst I don't know the full story of the Cyprus bank it appears that a large chunk of the money was lost by investing the the (local) unsustainable housing boom (hasn't almost every bank, and almost every government, in the EU, done this?) and by investing money in the "home" county of Greece which the EU forced them to take a hair-cut on when Greece was bailed out.

Why are the Cypriots being punished because their banks (a) did the same stupid thing that ever other bank was doing (and that OUR government is still doing) and (b) lost money because of an EU bail out of a previous indebted country's bank's which was structured in a way that didn't steal their customer's money?

I really don't get it. As a disinterested party this doesn't seem to be the slightest bit "fair" and is punishing completely the wrong people

tim

If you are unable to judge the creditworthiness of a bank then keep your deposits within the level that is insured by the state.

But you do get a choice of whether to exceed the levels covered by deposit insurance. If you have more money than you can find insured deposits to accommodate then use gilts or your own mattress.

Calling a default a punishment does not make it so. The creditors of Jessops, HMV and Comet were not punished or victimised, they engaged in potentially profitable transactions that subsequently failed. Same with bank depositors. Turning failed business dealings into morality tales in IMO not useful in helping to understand what happened and how to avoid it in future.

1) The original proposal was that even that would not be honoured. And it was also reported to be based upon aggregated (cash) wealth not deposits per bank. 2) AIUI the actual rule is that everyone has the first XX protected not that only deposits below XX are 100% protected. I don't know whether there is a reporting error here but they don't seem to be honouring that. If you have a sum considerably in excess of XX it is hard enough splitting it into portions less than XX without having to split it into portions below XX after n years of interest have been added. I see no reason (under the current protection scheme) why and investor should lose 40% of the fits XX just because you are over XX by tuppence-ha'penny

But in any case I wasn't answering the point about how people can avoid having their money stolen because they haven't invested in "protected" accounts. The point I was answering was one about the "morality" of people lending to banks that are going to misuse their funds and the implication that if they are (stupid) enough to do that then they shouldn't complain if that legal protection is ignored when the time comes...

I know, but that wasn't the point that was made

It is when banks in other countries, in exactly the same position, have been "rescued" and you alone have been singled out not to be rescued, for reasons which have nothing at all to do with your choice to invests in this bank rather rather that one.

It would be if previous failed companies had been rescued by government but this one hadn't

tim

If you are unable to judge the extent of the state's guarantee, perhaps you shouldn't comment here either.

The 'guarantee' is only a guarantee if the bank defaults. There is no 'guarantee' at all against the imposition of a tax by the government, which is what it was in Cyprus. If it wants to take your money, you are not protected in the slightest, and you can do nothing about it.

Similarly in Britain under the Financial Services Compensation Scheme.

This is a simple case of bank insolvency and not one of taxation. This is the proposed treatment:

and no funds flow to the government of Cyprus.

Avoiding a repetition is highly desirable, but IMO one has to also understand the consequences for society, and attempt to minimise the damage. The scenario mentioned before, where a medium-sized enterprise suddenly finds that it can't pay its wage bill because most of the money has been seized from its account, is a recipe for a widespread disaster. And if that happens it's a chain reaction.

I don't think it's useful to insist on the one hand that business rules, business morality if you like, must prevail, but on the other hand to say in effect 'tough luck, but you should have known better' to those left unable to support themselves.

Social upheaval can lead to revolution, which is seldom good for the ordinary man. (Why did 100,000 Americans move to what became Canada in and around 1776?)

Since the government strongarmed a 'good' bank (LLoyds) into taking over a bottomless pit (HBOS), they didn't have much choice in that instance.

Now it's been unveiled that Lloyds didn't do 'due diligence' and their accountants told them what they wanted to hear rather than anything resembling economic reality, it's a mega-cesspit.

And the losers are the taxpayers and the Lloyds shareholders.

Adrian

The underlying businesses at Comet and HMV were profitable. However previous owners loaded them with unsupportable amounts of debt. Plenty of bad managers and vulture capitalists made money as Comet and HMV were sinking.

How was Comet different from Dixons and other white goods sheds, many of which are still trading successfully? HMV was trading profitably when it went into receivership, and the demise of its principal competitors should have given it a fillip.

Adrian