{"id":1713,"date":"2013-03-26T13:47:27","date_gmt":"2013-03-26T08:17:27","guid":{"rendered":"http:\/\/teekhapan.wordpress.com\/?p=1713"},"modified":"2013-03-26T13:47:27","modified_gmt":"2013-03-26T08:17:27","slug":"does-the-cyprus-rescue-suggest-the-beginning-of-a-financial-repression","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2013\/03\/26\/does-the-cyprus-rescue-suggest-the-beginning-of-a-financial-repression\/","title":{"rendered":"Question after Cyprus: Will govts loot depositors again?"},"content":{"rendered":"

\"A<\/a>
\nVivek Kaul<\/strong>\u00a0<\/span><\/span><\/span>
\nSo why is the world worried about the Cyprus? A country of less than a million people, which accounts for just 0.2% of the euro zone economy. Euro Zone is a term used in reference to the seventeen countries that have adopted the euro as their currency.
\nThe answer lies in the fact that what is happening in Cyprus might just play itself out in other parts of continental Europe, sooner rather than later. Allow me to explain.
\nCyprus has been given a bailout amounting to\u00a0\u20ac 10 billion (or around $13billion) by the International Monetary Fund and the European Union. As\u00a0
The New York Times\u00a0<\/a>reports \u201cThe money is supposed to help the country cope with the severe recession by financing government programs and refinancing debt held by private investors.\u201d
\nHence, a part of the bailout money will be used to repay government debt that is maturing. Governments all over the world typically spend more than they earn. The difference is made up for by borrowing. The Cyprian government has been no different on this account. An estimate made by Satyajit Das, a derivatives expert and the author of\u00a0<\/span><\/span><\/span>Extreme Money,\u00a0<\/i><\/span><\/span><\/span>in a note titled\u00a0<\/span><\/span><\/span>The Cyprus File<\/i><\/span><\/span><\/span>\u00a0suggests that the country might require around \u20ac7-8billion \u201cfor general government operations including debt servicing\u201d.
\nBut there is a twist in this tale. In return for the bailout IMF and the European Union want Cyprus to make its share of sacrifice as well. The Popular Bank of Cyprus (better known as the Laiki Bank), the second largest bank in the country, will shut down operations. Deposits of up to\u00a0\u20ac 100,000 will be protected.\u00a0These deposits will be shifted to the Bank of Cyprus, the largest bank in the country.
\nDeposits greater than \u20ac 100,000 will be frozen, seized by the government and used to partly pay for the deal. This move is expected to generate \u20ac4.2 billion. The remaining money is expected to come from privatisation and tax increases.
\nAs\u00a0
The Huffington Post<\/a>\u00a0writes \u201cThe country of about 800,000 people has a banking sector eight times larger than its gross domestic product, with nearly a third of the roughly 68 billion euros in the country’s banks believed to be held by Russians.\u201d Hence, it is widely believed that most deposits of greater than \u20ac 100,000 in Cyprian banks are held by Russians. And the move to seize these deposits thus cannot impact the local population.
\nThis move is line with the German belief that any bailout money shouldn’t be rescuing the Russians, who are not a part of the European Union. \u201cGermany wants to prevent any bailout fund flowing to Russian depositors, such as oligarchs or organised criminals who have used Cypriot banks to launder money. Carsten Schneider, a SPD politician, spoke gleefully about burning \u201c<\/span><\/span><\/span>Russian black money,\u201d\u201d<\/i><\/span><\/span><\/span>\u00a0writes Das.
\nIt need not be said that this move will have a big impact on the Cyprian economy given that the country has evolved into an offshore banking centre over the years. The move to seize deposits will keep foreign money way from Cyprus and thus impact incomes as well as jobs.
\n
The New York Times DealBook<\/a>\u00a0writes \u201cExotix, the brokerage firm, is predicting a 10 percent slump in gross domestic product this year followed by 8 percent next year and a total 23 percent decline before nadir is reached.\u00a0Using Okun\u2019s Law, which translates every one percentage point fall in G.D.P. (gross domestic product) to half a percentage point increase in unemployment, such a depression would push the unemployment rate up 11.5 percentage points, taking it to about 26 percent.\u201d
\nBut then that is not something that the world at large is worried about. The world at large is worried about the fact \u201cwhat if\u201dwhat has happened in Cyprus starts to happen in other parts of Europe?
\nThe modus operandi being resorted to in Cyprus can be termed as an extreme form of financial repression. Russell Napier, a consultant with CLSA,\u00a0
defines this term\u00a0<\/a>as \u201c<\/span><\/span><\/span>There is a thing called financial repression which is effectively forcing people to lend money to the…government.\u201d In case of Cyprus the government has simply decided to seize the money from the depositors in order to fund itself, albeit under outside pressure.\u00a0<\/span><\/span><\/span>
\nThe question is will this become a model for other parts of the European Union where banks and governments are in trouble. Take the case of Spain, a country which forms 12% of the total GDP of the European Union. L<\/span><\/span><\/span>oans given to real estate developers and construction companies by Spanish banks amount to nearly $700 billion, or nearly 50 percent of the Spain\u2019s current GDP of nearly $1.4 trillion. With homes lying unsold developers are in no position to repay. Spain\u00a0<\/span><\/span><\/span>built nearly 30 percent of all the homes in the EU since 2000. The country has as many unsold homes as the United States of America which is many times bigger than Spain.
\n<\/span><\/span><\/span>And Spain\u2019s biggest three banks have assets worth $2.7trillion, which is two times Spain\u2019s GDP. Estimates suggest that troubled Spanish banks are supposed to require anywhere between\u00a0<\/span><\/span><\/span>\u20ac75 billion and \u20ac100 billion to continue operating. This is many times the size of the crisis in Cyprus which is currently being dealt with.
\nThe fear is \u201cwhat if\u201d a Cyprus like plan is implemented in Spain, or other countries in Europe, like Greece, Portugal, Ireland or Italy, for that matter, where both governments as well as banks are in trouble. \u201cFor Spain, Italy and other troubled euro zone countries, Cyprus is an unnerving example. Individuals and businesses in those countries will probably split up their savings into smaller accounts or move some of their money to another country. If a lot of depositors withdraw cash from the weakest banks in those countries, Europe could have another crisis on its hands,\u201d\u00a0<\/span><\/span><\/span>The New York Times<\/i><\/span><\/span><\/span>\u00a0points out.
\nGiven this there can be several repercussions in the future. \u201cThe Cyprus package highlights the increasing reluctance of countries like Germany, Finland and the Netherlands to support weaker Euro-Zone members,\u201d writes Das. The German public has never been in great favour of bailing out the weaker countries. But their politicians have been going against this till now simply because they did not want to be seen responsible for the failure of the euro as a currency. Hence, they have cleared bailout packages for countries like Ireland, Greece etc in the past. Nevertheless that may not continue to happen given that Parliamentary elections are due in September later this year. So deposit holders in other countries which are likely to get bailout packages in the future maybe asked to share a part of the burden or even fully finance themselves.
\nThis becomes clear\u00a0
with the statement\u00a0<\/a>made by Jeroen Dijsselbloem, the Dutch finance minister who heads the Eurogroup of euro-zone finance ministers “when failing banks need rescuing, euro-zone officials would turn to the bank’s shareholders, bondholders and uninsured depositors to contribute to their recapitalization.”
\n\u201cHe also said that Cyprus was a template for handling the region’s other debt-strapped countries,\u201d reports\u00a0<\/span><\/span><\/span>Reuters<\/i><\/span><\/span><\/span>. In the Euro Zone deposits above\u00a0\u20ac100,000 are uninsured.
\nGiven this likely possibility, even a hint of financial trouble will lead to people withdrawing their deposits. As Steve Forbes\u00a0
writes in The Forbes<\/a>\u00a0\u201cAfter this, all it will take is just a hint of a financial crisis to send Spaniards, Italians, the French and others scurrying to ATMs and banks to pull out their cash.\u201d Even the most well capitalised bank cannot hold onto a sustained bank run beyond a point.
\nIt could also mean that people would look at parking their money outside the banking system.
\n\u201cEven in the absence of a disaster individuals and companies will be looking to park at least a portion of their money outside the banking system,\u201d writes Forbes. Does that imply more money flowing into gold, or simply more money under the pillow? That time will tell.
\nAlso this could lead to more rescues and further bailouts in the days to come. As Das writes \u201cIf depositors withdraw funds in significant size and capital flight accelerates, then the European Central Bank, national central banks and governments will have intervene, funding affected banks and potentially restricting withdrawals, electronic funds transfers and imposing cross-border capital controls.\u201d And this can’t be a good sign for the world economy.
\nThe question being asked in Cyprus as\u00a0
The Forbes magazine<\/a>\u00a0puts it is \u201c<\/span><\/span><\/span>if\u00a0<\/i><\/span><\/span><\/span>something goes wrong again, what\u2019s stopping the government from dipping back into their deposits?\u201d\u00a0<\/span><\/span><\/span><\/em>To deal with this government has closed the banks until Thursday morning, in order to stop people from withdrawing money. Also the two largest banks in the country, the Bank of Cyprus and the Laiki Bank have imposed a daily withdrawal limit of\u00a0\u20ac100 (or $130).
\nIt will be interesting to see how the situation plays out once the banks open. Will depositors make a run for their deposits? Or will they continue to keep their money in banks? That might very well decide how the rest of the Europe behaves in the days to come.<\/span><\/span><\/span>
\n<\/span><\/span><\/span><\/em>Watch this space.
\nThis
article<\/a> originally appeared on www.firstpost.com on March 26, 2013.<\/span><\/span><\/span>
\n(Vivek Kaul is a writer. He tweets @kaul_vivek)<\/b><\/span><\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Vivek Kaul\u00a0 So why is the world worried about the Cyprus? A country of less than a million people, which accounts for just 0.2% of the euro zone economy. Euro Zone is a term used in reference to the seventeen countries that have adopted the euro as their currency. The answer lies in the fact … <\/p>\n

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