Like most of Europe, Cyprus and it’s banks are in trouble.
In a bailout deal with the Eurozone Cyprus’s bank account holders are being forced to pay the bill…not troubled bank bond holders, depositors. “The illusion that depositors don’t need to yank their money out of threatened banks because they’ll be protected has been shattered.”
Come Tuesday morning Cyprus’s bank account holders could see their balance shrink as much as 10%.
From the Business Insider:
The Eurozone powers-that-be gave Cyprus a bailout — but with a startling condition that has never before been imposed on any major banking system since the start of the global financial crisis in 2008.
The Eurozone powers-that-be (mainly, Germany) insisted that the depositors in Cyprus’s banks pay part of the tab.
Not the bondholders.
The depositors. The folks who had their money in the banks for safe-keeping.
When Cyprus’s banks reopen on Tuesday morning, every depositor will have some of his or her money seized. Accounts under 100,000 euros will have 6.75% of the funds seized. Accounts over 100,000 euros will have 9.9% seized. And then the Eurozone’s emergency lending facility and the International Monetary Fund will inject 10 billion euros into the banks to allow them to keep operating.
Cyprus’s government tried to explain this deal by observing that it was better than the alternative: Immediate bankruptcy and closure of the major banks. In that scenario, depositors would lose a lot more of their money. Businesses would go bankrupt. And tens of thousands of people would be instantly thrown out of work.But, still, not surprisingly, news that deposits in Cyprus’s banks would be seized triggered an immediate run on the banks.
Depositors rushed to ATMs and tried to withdraw their money before it could be seized. But the ATMs weren’t working. And the government has now made it impossible to transfer money out of the country.So, assuming Cyprus’s government approves the deal (still pending), depositors will have some of their money seized on Tuesday morning.
But ever since the Great Depression wiped out a big percentage of the world’s banks, vaporizing the bank depositors’ savings in the process, banking system regulators have tried to do everything they can to protect bank depositors.And they are smart to do so. Because the moment depositors think that there is risk to their savings, they rush to banks to yank their money out.
That’s called a run on the bank.
And since no bank anywhere has enough cash on hand to pay off all its depositors at once, runs on the bank cause banks to go bust.
That’s what happened to hundreds of banks in the Great Depression.
But now, thanks to Eurozone’s bizarre decision in Cyprus, the illusion that depositors don’t need to yank their money out of threatened banks because they’ll be protected has been shattered.Depositors in Cyprus banks will lose some of their deposits.
They will be furious about this.
And they will, rightly, feel that it is grossly unfair — because depositors in the bailed-out banks in Ireland, Greece, etc. didn’t lose their money.
And they will feel like fools for not having taken their money out.
And … here’s the important part …
Other depositors at weak banks all over Europe, in places like Spain, Italy, and Greece, will rightly wonder whether this is the beginning of a new era of bank bailouts, an era in which bank depositors are going lose some of their money.
What do you think those other depositors in Spain, Italy, Greece, etc., are going to feel like doing when they realize that, if their banks ever need a bailout, they might have their deposits seized?
That’s right. They’re going to feel like yanking their money out of their banks.
And if some of them yank their money out of their banks, well — then the financial condition of those banks will go from weak to insolvent.
Update: Cyprus parliament rejects bank deposit tax, putting bailout in disarray.
