Background and summary (forgive me if some details need correcting):
Cyprus is a tiny country with a GDP not much higher than Tim Hortons. Yet, it had something like 150 billion in private funds stored in two of its banks: the Bank of Cyprus and Lakie. Why? Because the majority of the funds (I am generalizing) belongs/belonged to Russians who took advantage of the people on the conversion out of communism (dirty money). As North Americans have Swiss bank accounts, the Russians have Cyprus. Obviously, other people have their money in here too.
Greek's insolvency impacted Cyprus greatly, because a large portion of the Cyprus population are of Greek descent. Thus, when the banks were figuring out where to invest, a large portion of the funds went to Greece. As a result, the banks lost a ton of money, and are on the verge of making the country insolvent. The IMF said the government needed to come up with a large amount of money.
At first they tried to pass a bill that would skim 10% off all Cyprus bank accounts that had over 10k Euros. There was unimaginable outrage, because as you can guess, that affects a good portion of the population. In response, they changed the bill to only affect those with over 100k Euros. Interestingly, this time, mostly the Russian dirty money was affected, and there was not as much public outrage (stealing stolen money). As a result, now 30% of all bank accounts over 100k Euros are being seized.
All the North Americans probably don't realize why this is such a big deal. In North America, we have money in companies, hedge funds, etc. In Europe, from what I've been told, banks are the major (almost exclusive) depository. Thus, you can imagine that this is a much bigger deal.
> Interestingly, this time, mostly the Russian dirty money was affected, and there was not as much public outrage (stealing stolen money).
Huh? Sorry, do you assume that all savings above 100k euros were from the Russian Mafia ? That's a very serious claim to make. And even if it was indeed true there is due process to follow before confiscating the funds. You need tracability, trials and so on. And in case you do not seem to know that, bank savings should be protected by the law against confiscation - that is one of the most basic agreements in the property laws in every country. If that principle is violated, the consequences can be serious (bank run, more banks going bankrupt, lack of funds for private companies investment, etc...).
And there is still public outcry anyway because even people with savings less than 100k euros can only withdraw about 300 euros a day, cannot take their savings out, cannot transfer them anywhere. There is serious economic disruption going on because of this mess. If you think it only impacts the Russian Mafia you should travel to Cyprus and see for yourself.
At the end of January, some 40 percent of all savings held in Cypriot accounts were on the books of those two banks. Since then, however, much of it has been transferred elsewhere, despite orders from the central bank that accounts at the two institutions be frozen.
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Transfers for humanitarian aid were permitted which, while certainly an acceptable exception, opened a loophole for abuse. Many are also furious that the bank allowed "special payments," the definition of which was never adequately established.
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Much of the money was withdrawn from overseas, where Cyprus had no authority. Branches of Cypriot banks in non-euro-zone countries such as Russia and Britain do not answer to the European Central Bank. Their liquidity is controlled by central banks in those countries.
I haven't been following this too closely, but the impression I've got from the news media is that the vast majority of accounts with >100k Euros are there for tax avoidance and other shady purposes like you mention. It sucks that this guy's business lost money, but I have a hard time feeling too bad for him, if he (probably) only had the account there for tax avoidance purposes.
I'm curious what percentage of the accounts with >100k Euros actually belong to Cypriots. Those are the people who are really getting screwed.
It's true that the majority of these accounts are from foreign people, but that doesn't mean there is anything illegal with putting your money on a Cyprus bank account. Please note that Cyprus is part of the EU for a long time, and this way of tax avoiding (not evasion) is completely legal.
As of December 2012 62% of deposits in Cyprus were by domestic residents. Removing the €5,3 billion in non-Cypriot euro-deposits and we find about 31% of the mostly Russian and British deposits [1]. The political problem were the foreign deposits. The financial problem were 2011 foreign deposits at 82% of GDP, total deposits 2011 nearly 3x GDP, and bank assets 5-7x GDP.
A lot of the British deposits were made by the UK MOD in order to pay staff at the two British airbases in Cyprus. Understandably, many of these staff had deposits in local banks.
Cyprus's banks are more than just dumps for dirty Russian money. is a banking hub for a variety of entities who want to do business with Europe. They help western Europe and Russia (and, more recently, emerging markets) invest in each other, get stocks listed on each others' exchanges, comply with the applicable financial regulations, and things like that. They do lots of "financial services" and consulting.
Or they did, anyway.
Wikipedia:
"As a result of the reforms in the past decade Cyprus has developed into one of the world's more important international business centers. In the years following perestroika it gained great popularity as a portal for investment from the West into Russia and Central and Eastern Europe."
> Greek's insolvency impacted Cyprus greatly, because a large portion of the Cyprus population are of Greek descent.
Just to add a little context to this. Cyprus is a divided country, as a result of a conflict in 1973 between Turkish Cypriots (and Turkey) and Greek Cypriots (and Greece). The Greek Cypriots favoured unification with Greece (Enosis) whereas the Turkish minority felt threatened by this (due to various times in which sectarian violence had spread on the Island, and also due to fears of reprisals for anti-greek pogroms in mainland Turkey). The whole thing is really complicated and basically no-one wins.
Fast forward to 2004 and a referendum is held on whether Cyprus should unify. The Turkish north votes yes, the Greek south votes no and Cyprus enters the Euro leaving Northern Cyprus out in the cold.
The people with over 100k Euros that are being affected the most aren't the Russian depositors but older Cypriots who rode the tourist property boom. There was a vote on this and it was turned down, and then the Troika (of the Eurozone countries, ECB and IMF) decided they'd sidestep the whole thing and re-arrange the country's banking system for them.
The amount the troika were looking for was not a great deal of money to the EU or IMF, about €6 billion. This represents less than the amount spent on administration or internal policies in the last budget, and would be less than a fifth of the Common Agricultural Policy (CAP) budget. This figure was also arbitrarily decided by the troika not based on what Cyprus could actually afford (given the size of it's collapsing economy) but for political reasons because it's politically unacceptable for Germany to be seen by Germans to provide no strings bailouts to another Greece, and the IMF wanted to restructure Cyprus' banking system.
The big problem is that with this intervention it sets two extremely dangerous precedents. The first is that exiting the Euro (which would've been better for Cyprus) is not an option for bankrupt Eurozone countries. It's not even on the table. The second is that what's happened in Cyprus this week can happen in Greece, Italy, Spain, Portugal, Luxembourg (where the real Russian money is) or Ireland next week or at any point in the future, and as Shenglong said, banks are the major savings depository for most of Europe. If that doesn't scare my American friends then nothing will.
You forget that Cyprus' banks are bankrupt because the did bad investments; it's not as if "the IMF wanted to restructure Cyprus' banking system" because they woke up one morning and just felt like that.
I didn't mention it because the previous poster made a very valid point about ethnic Greeks speaking Greek next to Greece investing in Greek assets.
However there was no reason as to why a country with such a small economy should come up with an arbitrary 6 billion euro for a 10 billion euro bailout beyond forcing political will over a small country to send a signal to others. If you need 10 billion euros, you're not going to be able to find a quarter of your peak GDP at a time that your banks are screwed by yourself.
Unless there are very very big deposits in your banks relative to your GDP...
I'm not saying that this solution is ideal or "really fair", but when you deposit your money in a bank that gives very high interests compared to other banks in the same currency, you should know you're assuming higher risks. And it isn't fair that if everything goes well you keep the interests, if it goes bad someone else pays for the risk.
> And it isn't fair that if everything goes well you keep the interests, if it goes bad someone else pays for the risk.
If you sincerely think that Cyprus doesn't set a precedent putting everyone in the Eurozone at stake you're wrong. My issue isn't that Cyprus should or shouldn't receive a bailout, it's the undemocratic way the Troika have gone about it and the punitive requirements foisted on them for a bailout when they knew full well that Cyprus didn't have the money.
I'm bookmarking this in the hope that Italy never gets screwed over the same way.
Not undemocratic at all, because Cyprus has had the democratic option not to accept EU/IMF bailout money (which is being withdrawn from others bank accounts, typically others, who receive much lower interest rates on their savings than Cypriots did in the past, and who's government finances have been eroded by the dodgy money laundering that was Cyprus' main business model). The parliament of Cyprus has democratically decided to accept that money. Nothing undemocratic about it.
Cyprus is historically a part of Greece but on a map it is closer to Turkey, Syria, Lebanon, Jordan, Israel and even Egypt.
It is just like the Falklands in that respect, an outpost of one nation that is going to be geographically contested and eventually (just like the Falklands) it will probably be annexed by one of the countries above (most likely Turkey).
The only reason these situations persist is because the nations involved are still able to wage war at a distance, if Greece should go bankrupt (or even if the Greek-Cypriot part of Cyprus would go under) there would likely be a re-alignment of interests such that the cost of maintaining the outpost by force no longer outweighed the benefits.
Cyprus is also one of the reasons why Turkey has not been added to the EU, and why their relations with Greece are as poor as they are.
If Greece and/or Cyprus would end up being unable to maintain the status of the Greek portion of Cyprus Turkey would have to weigh the advantages of going all in on Cyprus versus the disadvantages of cutting a lot of ties with the EU, which arguably has been stringing along Turkey with the promise of membership without the intention of actually following through on that promise for a very long time now.
Turkey is a very important country in the sense that it is the European gateway to the middle east, it has been instrumental as an ally in many military operations over the last two decades and there are large numbers of Turkish emigrants living all over Europe, which means any decision going against Turkish interests has the possibility of mobilizing a substantial number of people in other member states. But there are a large number of member states that do not actually wish Turkey to join the EU on equal terms, at the same time they don't want to see Turkey join the middle-East.
> Cyprus is historically a part of Greece but on a map it is closer to Turkey, Syria, Lebanon, Jordan, Israel and even Egypt.
Actually aside from a small part of the Bronze Age, Cyprus was never a part of Greece. It had been Ptolemaic Egyptian, Byzantine and changed hands between Knights Templar and various others before becoming Venetian then finally succumbing to Ottoman invasion in the 1570s. The Ottomans leased Cyprus to the British in exchange for guarantees of support against Russian invasions of the Ottoman Empire, but the successor state of the Republic of Turkey relinquished all claims to Cyprus, leaving it a British Crown Colony. Many of the Turkish Cypriots originally came in the Ottoman period and the idea of Enosis was formed under Greek nationalism (Hellenism had been promoted throughout Cyprus long before modern Greece's existence) during this period before and just after the Greek independence war. It is this, the subsequent neglect and the approach taken under British rule (and subsequent independence) that led to the problems of a divided Cyprus today.
In this respect, it is absolutely nothing like the Falklands whatsoever. If anything, the situation between Greece, Turkey and Cyprus is more like the situation between the UK and Ireland with respect to Northern Ireland. Modern Turkey has no interest whatsoever in annexing Cyprus, only protecting ethnic Turks (which it is bound to do by it's constitution).
> The only reason these situations persist is because the nations involved are still able to wage war at a distance, if Greece should go bankrupt (or even if the Greek-Cypriot part of Cyprus would go under) there would likely be a re-alignment of interests such that the cost of maintaining the outpost by force no longer outweighed the benefits.
You're really off the mark here. Greece in general has no interest in enosis. It's generally been something pushed by Greek nationalists both in Cyprus and Greece but both countries have their own problems at the moment that wouldn't be solved by unification with each other. To be clear, Greece and Turkey were both dragged into conflict because of the Treaty of Guarantee agreed in Zurich, making Turkey, Greece and Britain the guarantors of certain elements of Cyprus' status as an independent country.
> If Greece and/or Cyprus would end up being unable to maintain the status of the Greek portion of Cyprus Turkey would have to weigh the advantages of going all in on Cyprus versus the disadvantages of cutting a lot of ties with the EU, which arguably has been stringing along Turkey with the promise of membership without the intention of actually following through on that promise for a very long time now.
Turkey would not go all in on Cyprus. They don't want a war. To be honest if TRNC told Turkey they wanted to join Cyprus, I'm sure Turkey would welcome it with open arms. Turkey wants whatever the people of TRNC want, just as the UK would support whatever decision Northern Ireland would make on self determination.
As for EU membership, I go to Turkey quite often and I've seen no interest in EU membership for a very long time at the political and street level. Most Turkish businesses like the common market but don't see why Turkey should join the Euro (and think they've dodged a bullet), and resent France's anti-Turkish posturing.
>Fast forward to 2004 and a referendum is held on whether Cyprus should unify. The Turkish north votes yes, the Greek south votes no and Cyprus enters the Euro leaving Northern Cyprus out in the cold.
This sounds like a mysterious outcome, given what you said above, but one can add that the "unification plan" was to create an old-style colonial protectorate, which, besides giving foreign powers the power to meddle with the new "state" affairs, gave equal political power to the Turkish minority (the majority of which came post-invasion in order to take control of the Turkish side) and to the Greek majority (instead of using legitimate elections). And of course it didn't address any of the violations of lots of UN rulings by the occupying force.
So mainly it was just perpetuating the occupation and the injecting, and saying "ok, now you both have half-half stakes at a new country".
> Because the majority of the funds (I am generalizing) belongs/belonged to Russians who took advantage of the people on the conversion out of communism (dirty money).
You are not generalizing, you are just making this up. Only about 20% of the deposits in Cyprus belong to Russians.
> Greek's insolvency impacted Cyprus greatly, because a large portion of the Cyprus population are of Greek descent.
Nope. It impacted Cyprus because it participated in the Greece bailout and lost 4.5 bil to the haircut that followed.
> You are not generalizing, you are just making this up.
Calm down. Firstly, one number states that 30% of deposits are foreign owned [1]. Secondly, the accurate description of Shenglong's error would be "exaggerating."
> Nope. It impacted Cyprus because it participated in the Greece bailout and lost 4.5 bil to the haircut that followed.
You just attacked a straw man by quoting Shenglong out of context.
About 37% of deposits are owned by foreigners, according to Barclays, and nearly 60% of that belongs to Russians, numbers compiled by Danske Bank (...) indicate.
> In North America, we have money in companies, hedge funds, etc. In Europe, banks are the major depository.
But then, banks put those deposits to work in companies, hedge funds etc., so it amounts to the same, with an intermediate which mitigates risks (not perfectly as illustrated here) and takes a fee.
>because a large portion of the Cyprus population are of Greek descent. Thus, when the banks were figuring out where to invest, a large portion of the funds went to Greece
What a responsible investment strategy.
'What should we invest all this Russian gangster money in?'
So, if some country (and as you say Europe) where still primary mode of parking your earnings is banks what are other options to play safe in case such a seizure happens? Real estate is one I can see. What else? Gold, you will have to keep in a bank in the end. What about shares, aren't they somehow related to sth deposited in a bank? I mean, how do you safeguard your savings then?
The idea of "safeguarded savings" is a conceptual abstraction. Think of a barter economy. I trade you a loaf of bread I baked for a haircut. Where did we get the idea that I should be able to bank that haircut, and come to you 10, 20 years later and still get that haircut? It's a view that comes from seeing money as something of intrinsic value, rather than what it really is: a proxy that decouples transactions in what would otherwise be a barter economy.
In nature, "savings" are subject to loss and decay. You "save" by building a house to live in or storing away grain--all those things are subject to deterioration, disaster, etc. Financializing it doesn't change that underlying fact.
you can put it more simply by just realizing that money is essentially a promise for some goods or services made by somebody, to be delivered at some point in the future. I.e., keeping money is a liability.
If a society (or a large number of individuals/institutes, incl gov'ts) fails to deliver on their promise of goods and services, then the money looses its value. And this is what seems to be happening a lot more everywhere - more and more money is promised (or printed), but the amount of goods and services hasn't really grown in proportion, and so at some point this is gonna have to fail somewhere...
There seems to be some confusion as to what a bank is on this board.
Every time you deposit say $1 with a bank, they lend out $.90 of it at interest for mortgages, payrolls, etc. It's these investments the bank makes that can (and do) wreck money. The government of the US and EU recognize this risk for most people is detrimental and offer insurance on the first 100,000 deposited.
The phrase "seized account" does not appear to be correct, more correct would be "The Cypriot banks lost something like 40% of all deposits and all depositors over the 100,000 insured mark have lost their investment."
Any deposit in a bank is still an investment, even if they don't pay interest, because banks don't just put all your coins and bills in a vault, they just mark you down as a number in their books. The risk you take is that government backing the deposit insurance AND the bank don't do something dumb. Banks are usually much more highly regulated than hedge funds, but a quick look at how often banks fail (the US has something like 800+ banks on the unnoficial FDIC watch list) should sober anyone up.
Hold physical money is the only not to be at risk of losing a deposit, and then you have to provide for security, and you sure aren't going to earn interest.
I'm not really enthusasiastic about bitcoins, but one could argue they solve the problem of trying to keep a bunch of wealth out of the risk of banks, without having to have a huge pile of physical currency/valuables.
Most of the talk I've heard on Bitcoin is BS. I'm enthusiastic on Bitcoins and their uses, but I don't see it replacing other investments on a large scale soon. I don't even want to see that.
From an investment point of you, all deposits are investments, so putting 700k into some undercapitalized bank is almost as stupid at converting it to BTC...
Only almost as stupid because these banks have historically had less risk than BTC, surprisingly...
"Every time you deposit say $1 with a bank, they lend out $.90 of it at interest for mortgages, payrolls, etc."
Actually, when you deposit $1, they loan out about $9 (maybe a bit less nowadays, but still a multiple of the $1 being put in). That's what the 'fractional' in 'fractional reserve banking' comes from.
That doesn't make any sense. You've mixed up macroeconomics and microeconomics. A single bank cannot lend more than it has in deposits. However, in an economy with many lenders and borrowers, a deposit (or really any kind of expenditure) can be reinvested fractionally many times, enlarging the money supply by more than its nominal value. Also, the multiplier "rule" of taking the reciprocal of the reserve rate is more of a rough estimate, since individual borrowers may not spend all of the money they have borrowed.
You can always hold cash... of course, that's got its own risks (theft), and you're not immune from inflation...
Using something a store of value is essentially anticipating that someone will give you something valuable in the future. This holds whether that store of value is a promise from a bank (in your deposit account), or a government bond, or a commodity.
You can never be completely sure of the future. But some entities are much better about it than others.
If your savings are legal, and you don't mind paying taxes on them, you have many obvious choices.
If your savings are not legal, or if you want to escape paying taxes, then you have different choices and greater risk.
Finance is about one thing: risk versus reward, and in this case, the tradeoff was very clear. Any non-Cypriots who lost money in Cyprus are not as naïve as they would have us believe.
Cyprus is a tiny country with a GDP not much higher than Tim Hortons. Yet, it had something like 150 billion in private funds stored in two of its banks: the Bank of Cyprus and Lakie. Why? Because the majority of the funds (I am generalizing) belongs/belonged to Russians who took advantage of the people on the conversion out of communism (dirty money). As North Americans have Swiss bank accounts, the Russians have Cyprus. Obviously, other people have their money in here too.
Greek's insolvency impacted Cyprus greatly, because a large portion of the Cyprus population are of Greek descent. Thus, when the banks were figuring out where to invest, a large portion of the funds went to Greece. As a result, the banks lost a ton of money, and are on the verge of making the country insolvent. The IMF said the government needed to come up with a large amount of money.
At first they tried to pass a bill that would skim 10% off all Cyprus bank accounts that had over 10k Euros. There was unimaginable outrage, because as you can guess, that affects a good portion of the population. In response, they changed the bill to only affect those with over 100k Euros. Interestingly, this time, mostly the Russian dirty money was affected, and there was not as much public outrage (stealing stolen money). As a result, now 30% of all bank accounts over 100k Euros are being seized.
All the North Americans probably don't realize why this is such a big deal. In North America, we have money in companies, hedge funds, etc. In Europe, from what I've been told, banks are the major (almost exclusive) depository. Thus, you can imagine that this is a much bigger deal.