THE BASIS POINT

The Opposite of a Bank Bailout Happened Today in Cyprus

 

Cyprus is a small country which for the size of its economy has a lot of bank deposit liabilities or which a large part, according to the media, are held by wealthy Russians.

Cyprus, like may countries in the Eurozone is having fiscal problems.  IMF refused a bailout and instead suggested a seizure of bank deposits – 6.75% for everyone and 9.9% for depositors unfortunate to have more that 1000,000 Euros.

Over the past few years I have read a thousand articles about bank bailouts.  The people complaining about what happened in the U.S. with TARP and the Fed’s liquidity interventions missed the point that the bailouts we had here were of depositors.  The other liability holders were those who owned bank equity (stock) and they took heavy losses.

When banks open in Europe on Monday and in Cyprus on Tuesday, depositors in all Eurozone banks will face the new reality of precedent being established for seizure of deposits in countries with fiscal problems.

 

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Comments [ 4 ]
  1. oi says:

    I think what you are missing is that there are many entities other than depositors that got bailed out in the U.S. Depositors were guaranteed a contractually obligated bailout (up to a limit by account (although subsequently made unlimited). The other entities that were bailed out (100% recovery) were a) junior subordinated debt holders, b) preferred debtholders, c) trust preferred debtholders, d) subordinated debtholders, e) senior unseecured debtholders and secured debtholders. In fact, equity holders were bailed out also to the extent that their mark-to-market didn’t go to zero and they didn’t realize permanent capital loss – they only got diluted. Not to mention that executives in these banks, who had no skin in the game, came out completely unscathed unless you consider the inconvenience of lower bonuses. Who bailed them out? Taxpayers and savers and those reliant on fair market interest rates who are now financially repressed. But this injustice won’t happen again next time right? Because they aren’t oo big too fail anymore. And I got some nice swamp land in Florida I would like to sell you. BTW…it is likely that the depositors in other banks in Europe will realize that the idea to “tax” depositors is payback on the billionaire/oligarch ruskies and this was just a fair fee to pay for using Cyprus as their illigitimate tax haven. Only to the degree that this tax-haven depository is practiced should this worry be widespread.

    1. Dick Lepre says:

      Indeed bond debt holders were also bailed out but, as you point out, depositors were bailed out beyond their contractual obligations. No one else was. Equity holders were hurt to the extent that the value of their equities declined through a combination of the market trading down the value of their positions and dilution. To shareholders of an entity such as Washington Mutual the loss was near total. I sincerely doubt that bank executives had “no skin in the game.”

      My post was to point out that unlike what is happening in Cyprus (the deal is not yet sealed) what was most important about the bailout here is that depositors were made whole even beyond what they were guaranteed by deposit insurance. I am by no means implying that was a bad idea. I am stating that the story about who was bailed out generally misses this most important point.

    2. [posting this reply for DL…]

      Indeed bond debt holders were also bailed out but, as you point out, depositors were bailed out beyond their contractual obligations. No one else was. Equity holders were hurt to the extent that the value of their equities declined through a combination of the market trading down the value of their positions and then dilution. To shareholders of an entity such as Washington Mutual the loss was near total. I sincerely doubt that bank executives had “no skin in the game.”

      My post was to point out that unlike what is happening in Cyprus (the deal is not yet sealed) what was most important about the bailout here is that depositors were made whole even beyond what they were guaranteed by deposit insurance. I am by no means implying that was a bad idea. I am stating that the story about who was bailed out generally misses this most important point that depositors were bailed out beyond what was legally obligated. The Cypriot asset seizure is an instance of precisely the opposite.

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