Cyprus and the reality of banking: Deposit haircuts are both inevitable and the right thing to do

Euro notes being cut with scissors

Image by Pixomar

I, too, was shocked yesterday morning. Not so much by the news that depositors at Cypriot banks would face a haircut, or a ‘levy’ or a ‘tax’, on their deposits as a contribution to yet another Eurozone bailout package funded by taxpayers in other counties but by the reaction in the press. Here was, according to the majority of the international commentariat, yet another example of the ineptitude or outright meanspiritedness of the Eurozone policy elite, another example of imposing needless and counterproductive hardship and brutal ‘austerity’ on innocent citizens in small and troubled countries. The Daily Telegraph on its front page spoke in usual hyperbole of a ‘EU raid on savings’ and, naturally, of another ‘threat to the recovery’. What agitated most commentators was that the ‘sanctity’ of deposit insurance had been carelessly violated as even deposits of less than €100,000 were, at first at least, supposed to be subjected to a reduced haircut as well. Those types of deposits are supposed to enjoy a ‘guarantee’ that magically shields them from the harsh reality of bankrupt banks and bankrupt states. Undermining this ‘guarantee’ could have wide-reaching consequences beyond tiny Cyprus as it has the potential to undermine the trust in banking systems in Greece, Spain and Portugal.

I agree that this move is risky. The international banking system is highly levered and in large parts has been teetering on the brink of disaster for many years. Anything that affects depositors can have grave consequences. But given the state of affairs, any meaningful attempt to deal with the banking systems’ problems must inevitably entail risks. The questions are the following: Are the right type of risks being taken? And what would the alternative be?

Banking is a risky business because banks are highly leveraged enterprises. (Sorry to break that news to you.) In a fractional-reserve banking system ‘deposits’ are not deposits (i.e. contracts for safe-keeping) but loans to banks and thus loans to highly leveraged businesses.

Most people in developed countries have become used to not worrying about the health of individual banks. They have, over the course of decades, been conditioned to believe that all banks are regulated by the state and ultimately protected by the state. – Yes, but only so that the banks can take even more risks and become even more leveraged. State ‘protection’ has now created a banking monster that is swallowing up the resources of the state itself. And this can hardly come as a shock surprise in early 2013!

The naïve believe that bank deposits are always ‘money good’ because they are backed by the state and the state, after all, is an endless cornucopia, was maybe understandable, or at least excusable, until about 2008, when then Prime Minister of Ireland, Brian Cowen, in the middle of the Irish banking crisis, had the genius idea to simply declare a state guarantee for all deposits at Irish banks. Hey, problem solved! Obviously, Cowen didn’t do the math and didn’t realize how big that guarantee was going to be. Well, he was found out by the markets – and Ireland, the country, went bankrupt.

After Lehman, after Ireland and Iceland, and after Greece, I think you must have lived in a cave for the past 5 years to really think that banks are safe because they are guaranteed by their governments. Come on! Please get real.

Excuse me but my sympathies for Cypriot depositors is somewhat limited. If you are a depositor in a Cypriot bank, whether of deposits of more or less than €100,000, who did you think was guaranteeing your deposit? The Blue Fairy? Did you really think that in such a small place with such a bizarrely bloated banking system – one that for years and, by now, very publicly had been investing in Greek government bonds! – your government had the resources to protect all depositors? The bailout of Cyprus’ two largest banks will cost the equivalent of 60% of GDP! And after what happened in Greece, did you really think that the Germans were willing to cover the whole bill?

I am a free market guy. I am in favor of laissez faire so I always like to see placards that read “Hands off”. One could see such placards at demonstrations in Cyprus yesterday: “Hands off Cyprus”. That is great. But be careful what you wish for. A proper hands-off policy means letting the chips fall where they may. That would certainly mean no bailout and thus total collapse of the Cypriot banking system and the Cypriot economy. Don’t forget that Cyprus and its banks and its depositors are still being bailed out with other people’s money here.

That is also what some of my libertarian friends don’t seem to get when they speak, as some of them did yesterday, of another incident of the ‘the state stealing from its citizens’ or of confiscating their property. As much sympathy as I usually have with these views, in this instance they are simply mistaken. If this were expropriation it would mean that the act of abstaining from this expropriation – of the expropriator simply doing nothing – would mean that the ‘victim’ keeps his property. But if the EU did nothing in this situation – “hands off”, laissez faire – it would mean that most depositors, including those under €100,000, got wiped out completely. The choice is not between keeping everything and paying a ‘levy’, but between paying a ‘levy’ and losing almost everything.

Some commentators will object here and say that, for the sake of a more cheerful public sentiment and for the sake of the nascent recovery, the bailout should be more generous and protect more Cypriots to a larger degree. But that would mean either more expropriation (and now the word is indeed appropriate) of taxpayers in Nordic countries, or more money-printing by the ECB. And this is where many commentators are either short-sighted or indeed hypocritical.

Using the printing press to cover any excess committed by banks and governments, no matter how outrageous, must mean inflation and this certainly hurts all savers, including those with savings of less than €100,000. I found it particularly galling that many of the commentators who are now posing as defenders of the small saver are usually among the loudest proponents of exiting the euro, issuing new and weaker currencies and using debasement to gain short-lived competitiveness – all measures that defraud the domestic saver. All those who persistently argue against ‘austerity’ and for more stimulus, more debt, weaker currencies, higher inflation, do not care at all for savers. As Keynes famously suggested, they want to kill the rentier class, whether the rentiers are big or small. And now they claim to be the advocates of savers?

Of course, there are notable exceptions. In today’s Telegraph, Jeremy Warner does a good job explaining how costly the bailout of British banks has been – and still is – to British savers, not least via higher inflation, zero interest rates and endless quantitative easing.  I also thought that Simon Nixon’s piece in the Wall Street Journal yesterday was informative and balanced. But they are the exception.

I am no friend of the EU and I feel uncomfortable finding myself in a position in which I have to defend their policies but I feel that those elements for which the EU gets most viciously attacked in the media – ‘austerity’, letting Greece default, at least partially, bailing in depositors – are most sensible to me as these policies are, in principle at least, based on an acknowledgement of the underlying problems and as they do not seek near-tem comfort in the deceptive and damaging policies of endless fiscal transfers and money-printing.



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Good riddance to deposit ‘insurance’
Debt addiction, USA: How much debt reduction has the crisis caused?


  1. Darcy Neal says

    I understand your view of reducing the people’s pain and misery that shall be experienced with a complete collapse of the banking system. The people must pay some cost of keeping the existing financial banking system alive as a little pain. I disagree. The bail outs need to stop and let the global banking system die out. Our world and our generation needs to swallow our losses. Delaying our pains and transferring our losses upon our next generations is criminal. The market must be free to implement brutal honest consequences to its bad decisions.

  2. Chris Mackay says

    A good read Detlev. All makes sense.

    I particularly liked your point re. certain Eurosceptics advocating leaving the Euro and devauling national currencies in order to export their way back to growth. Yet they lambast the UK’s inflationary monetary policy. I guess when the policy supports your desired end then such inconsistencies don’t really matter!!!

    • John Archer says

      I particularly liked your point re. certain Eurosceptics advocating leaving the Euro and devauling national currencies in order to export their way back to growth.

      I think you’re right on that but only because I doubt they’ll ever export much of anything whatever happens. Their current lifestyle is probably unsustainable and clearly has no proper foundations.

      I guess when the policy supports your desired end then such inconsistencies don’t really matter!!!

      I think many eurosceptics are very wrong about a lot of things and from my point of view they harbour many inconsistencies, but if you’re looking for the masters of that art then you’d be better off casting your eyes in the direction of the europhiliacs.

      The euro was always strictly a political project, just dressed up in economic terms for sale to the bozo on the street. It was a Trojan Horse introduced with the sole aim of eventually forcing political union on the peoples of Europe which was the ultimate aim of the ‘founding fathers’, Jean Monnet and Arthur Salter, back in the 1920s — yes, the 1920s. That’s exactly how long this leftard totalitarian power grab has been in the scheming.

      Incidentally, democracy never had any place in the grand plan. There can be no EU democracy because there is no EU demos. Indeed, it is the very existence of national demoi in Europe which was seen as the problem. They were the great obstacle to the fulfilment of the dream (nightmare, in fact) which was therefore recognised as attainable only by stealth. The EU parliament, in particular, is therefore necessarily a complete sham and to label it democratic is one of history’s most outrageous lies. Its only purpose is to fool the sheep and get them to play along in the charade by holding elections and having a voting system because they don’t know any better.

      But back to the euro. Economics 101 says a single (fiat) currency implies fiscal union which in turn implies political union. And THAT sequence is the outline of the game plan here. The modus operandi? That’s an easy one. All that is needed is a beneficial crisis or two, to which the answer will ALWAYS be “more Europe”.

      We’re watching the game — and its potentially bloody consequences — in full swing right now.

      On a broader take, there are two basic threads to this sorry business. One is the global banking/financial crisis whose foundations were laid many decades ago, as Detlev has kindly pointed out. Its festering pustules have been breaking out for a few years now and it was, I’m sure, largely unforeseen by the europhiliacs. The second is the current EU power-grab crisis.

      The confluence of the two is unfortunate from the point of view of the europhiliacs who clearly would have preferred their beneficial crises to come in more manageable chunks so that they could employ their standard underhand salami-slicing technique. Whether they’ll succeed this time is hard to tell. They’re hell bent on it though that’s for sure so heaven knows to what lengths they’ll go? But then they’re totalitarians so nothing should surprise us.

      The euro should never have been born. It is a bastard currency with no legitimate parentage. Indeed, it’s worse — it’s a teratoma with a pulse and will grow into a full-blown nation-destroying monster unless some kindly medics perform a post-natal abortion fairly soon and give it a Christian burial.

      Cyprus is in the mess it’s in for a number of reasons. The euro is only one of them and maintaining it as that island’s currency is no long-term solution. I can’t see any proper solutions, long-term or otherwise, that have any realistic chance of allowing the Cypriots to continue to live the lifestyle they’ve become accustomed to. I understand there are questions hanging over the propriety of the practices of their relatively GIGANTIC (indeed, island-sustaining, up to now) banking ‘industry’ and those of its clients, many of whom appear to be Russian oligarchs using Cyprus as a tax haven and perhaps for less salubrious purposes too.

      The German tit must be getting pretty sore by now with so many parasites chomping down hard on its nipple already and many more queueing up outside. I don’t understand why the Germans continue to let them. Actually I do. You see, as everywhere else in the West, it’s not the peoples of the nations that count any longer or have any say — if they ever really did, that is — but the leftard claque of wasters and thieves that have wormed their way into government and its NGO proxies etc. Now THEY are the real heart of our problems.

      By the way, I’m not a eurosceptic.

      I’m an EU hater.

  3. Tiago RC says

    You have some good points.

    But taking money out of depositors to save banksters is still way too unfair.
    If the current bank owners were being removed of all their ownership, and the new ownership was being transferred proportionally to those who suffered the cuts, then I could agree that the situation was dealt with correctly.
    But taking money from the bank’s clients to save the bank and not punishing the bank owners nor giving anything in return to such clients is just plain unfair. Maybe less unfair than passing the bill to taxpayers or, even worse, paying it out via inflation. But unfair nevertheless.

    • says

      I cannot believe that the shareholders of these banks will not be wiped out. Some people commented that supposedly bondholders in Cypriot banks are not incurring losses as part of the bailout. If that is indeed the case it would, of course, be highly problematic and difficult to understand. What is the rationale? Normally, shareholders pay first, then bondholders, then depositors. That would, in my view, be the normal path of seniority. But Cypriot banks have a very large deposit base and very little external debt in the form of bonds. I doubt that depositors could be protected by only having bondholders pay. But please remember that my point is not that the present bailout is fair and recommendable, but simply that the notion that in highly geared banking systems large groups of deposit-holders can somehow still be guaranteed to not suffer losses is simply an illusion. Where is the money supposed to come from? – It is high time that the public wake up to the true risks of highly leveraged fractional-reserve banking systems and are no longer deluding themselves with the hope that their governments will – and even can – protect them. I thought that this lesson had been learned by now.

      • Joseph says

        Well, the question I wanted to ask has already been answered. I have to agree with you, it amazes me that people think deposit insurance will actually pay out in the event of a default though. I know the derivative exposure isn’t very relevant, but the FDIC funds to actual deposits illustrates what you’ve been saying pretty well.

      • HG says

        “What is the rationale? Normally, shareholders pay first, then bondholders, then depositors. That would, in my view, be the normal path of seniority.”

        Absolutely, that would be rule-of-law. But that will never ever happen and here is why: The core of the european bond market is financed by federal approved pension fonds, obligatory for european workers. If those would take a cut, european pensioners will soon figure out, in what kind of ponzi scheme they had been forced into by law. That is the detail politicians are scared of, when people find out.
        Gruß, AD

  4. David Gibson says

    How many people really understand fractional reserve banking? As anyone done a survey to test people’s understanding of what putting money in a bank really means? I’m from the UK and I was never taught anything at school about how the world’s financial system worked. Post-2008 has been my education. What about readers in other countries? Were you given such lessons? Too many people have been kept in the dark for too long. Taking money from ordinary folk through a so-called “deposit tax” is in many ways more honest than eroding people’s savings through money printing, devaluation, inflation etc. Yes, most people probably have an awareness that banks can (and do) collapse but how can ordinary folk properly assess risk? That is why we have deposit guarantee insurance. In my country at least, our Government is pushing people towards having bank accounts for a multitude of reasons – banks with the potential to go bust. Take away the deposit guarantee and banking becomes a lottery for ordinary folk, who by and large don’t have the expertise to assess whether it is safer to put money in this or that bank. As to whether the general population should have “leaned lessons” since 2008; I suspect that many people see the subject as far too complex to understand and that many of those who are capable of understanding are far too busy trying to hold onto their jobs etc. to really look closely at what is happening.

  5. didier says

    This is a different take and an interesting one!
    It’s true: letting a few more banks go bust would do much good to responsabilse the public. And that, in the end, is very important. Having a welfare state taking care of too much kills vitality.

  6. Andy Harrison says

    It’s a very strange world indeed where the government is on the one hand offering deposit insurance and then with the other giving depositors a haircut! You have a point Detlev, but since government pretty much forces all commerce into its jurisdiction by way of fiat money and fractional reserves, the issue of how to safely break it up is a difficult one. All things being equal the depositors should bear risks, but the problem is that things are so stacked against ordinary folks and the system so leveraged and laced with fraud… I wouldn’t take your position at all. If anything we should break up these banks and hand the whole damned lot – buildings and other assets to the depositors. Let the depositors be first in line. Demand deposits are the common law property of the depositor and the banker commits fraud by lending demand deposits. I look at it this way: the system is a fraud upon the people. I don’t care that the lawyers already concluded that deposits are the property of the bank, that simply defies logic and reason. Fractional reserves is a fraud and its victims are the prudent people of this world: the savers.

  7. Olivier Massin says

    Very nice, again. I disagree however with : “If this were expropriation it would mean that the act of abstaining from this expropriation – of the expropriator simply doing nothing – would mean that the ‘victim’ keeps his property.”
    –> as a conceptual point about expropriation, this seems wrong. Having one’s house confiscated by the State before an earthquake, is a genuine expropriation –even if the overall tort caused to the owner by be weaker in that case. Owning something does not entail having any guarantee about its persistence (only against any kind of confiscation, if property rights are respected).

  8. Snorri Godhi says

    The dig at “conservatives” who turn Keynesian to score points against the EU is appreciated, but the point about deposit insurance is off the mark. Obviously, this insurance is only as strong as the finances of the State behind it; but this is not the issue here: the issue is that the deal involves taking money from insured deposits, while 90% of the money in uninsured deposits is left untouched.

    • says

      From what we know, the first proposal from the IMF was to only take money from uninsured deposits, i.e. those larger than €100,000. That would have meant a hit to those deposits of up to 30% or 40% of their value (although according to one report, the Central Bank of Cyprus could not provide a clear break down of the size of the various deposits). This solution would have fleeced all the foreign depositors (including those from Russia) that the Cypriot banking system had been eagerly attracting for years. It was probably deemed that the fallout for markets and for the Cypriot banking system would be smaller if the cost was spread more evenly. — Now that the deal has been rejected it is up to the government in Nicosia to come up with a counter-proposal. Why are they not suggesting to make bondholders pay? My guess: there are not enough of them. Cypriot banks have deposits of 4 times GDP (!) and very little bond market debt. It doesn’t add up.

      • Snorri Godhi says

        Thank you for your reply … but doesn’t it conflict with the title of this post? How can raiding deposits the government has vowed to protect be “inevitable and the right thing to do”, when it is sufficient to raid deposits that the government has NOT vowed to protect?
        What if the Cypriot government decided to confiscate 7% of all gold in Cypriot safe deposit boxes?
        What if it decided to impose a one-off 7% tax on the value of real estate?

        • says

          OK, the title was a bit provocative…and it worked! But seriously, if these developments in Cyprus undermine the public’s trust in deposit insurance schemes, not only in Cyprus but everywhere, and if this is the first step to abandoning such schemes, and if it furthermore leads to the realization that bank deposits are LIABILITIES of the banks and that they always come with risks, then all of this is to be encouraged as steps towards reintroducing market forces (capitalism) into banking. The banks themselves will ultimately have to care about the safety of their depositors again, and earn the public’s trust through prudent policies, rather than take depositors for granted as those are being deceptively appeased by government promises. The justified fickleness and nervousness of depositors (who fund the banks) will then discipline the banks more than any government regulation ever can. This is my main point.
          Besides, your analogies are misplaced. The government is not confiscating (or raiding) the savings to fill other fiscal holes or to repay debt. The situation is very different from the Greek situation. The banks that hold these deposits are bust and the market solution would be to let them collapse. A bank failure in Cyprus would also bankrupt the government (the Cypriot banks hold deposits that are 4 times GDP!) The depositors contracted with the bank. The owners of gold or real estate did not. A bank collapse would wipe out the depositors but not the owners of gold and real estate. Without a bailout the banks would fall over and the government would be broke. As a depositor you may then sue for your deposit guarantee but that would not get you anywhere as your guarantors just went out of business. – “Insurance” is a great concept but you have to make sure that in a crisis your insurance company stays solvent. Those people who did the math bought gold and real estate instead.

  9. Mary Contrary says


    Surely, the depositors are being expropriated to protect the seniority of the ECB’s loans? If the ECB was wiped out first, surely there would be no need to touch the retail depositors?

    Am I wrong in this?

    Your points about risk are well taken, but when ordinary retail depositors are told, by the insurance scheme, that their deposits are fully protected by government, it is surely not unreasonable that they understand by this that they are the most and best protected, and that government will not make itself whole out of their deposits.

    Of course, the political consequences of wiping out the ECB would be substantial, which is why it is not being done, but that’s another matter entirely.

    • says

      Losses at the ECB will have to be swallowed by the ECB’s shareholders, which means by other governments which means by taxpayers in other countries which means by many of the “ordinary, hard-working people” that many commentators seem to be so worried about. “Ordinary, hard-working people” do not exit in Cyprus alone. Your proposal to hit the ECB is just another scheme to socialize the costs of this mess, and to make people pay who haven’t even set foot in Cyprus. – I think the take-away for everybody should be quite simple: If you put money into a bank you incur counterparty-risk. That has always been the case and it is the case today. There are two mitigating factors: 1) your bank may be safe; 2) your government may bail out the bank. Sometimes that rationale may work; sometimes it won’t (Ireland, Iceland). It is your risk. End of story. That is the lesson of 2007/2008, and I am surprised it took so long to take hold. — If your bank sits on a little island in the Mediterranean Sea and has a balance sheet that is 7 to 8 times the island’s GDP your chances of 1) and 2) above holding are slim, indeed. – Let’s not forget, the Cypriots are still being bailed out (with the money from “ordinary, hard working people” in other countries). They are just being asked to contribute to the bill.

      • Mary Contrary says

        When you say hitting the ECB is “just another scheme to socialize the costs of this mess” you are of course correct. But that’s exactly what deposit insurance is.

        Now, if you’re saying that the State shouldn’t be insuring deposits in the first place I might agree with you, but that’s some way from saying that it’s right for the State to whip away the insurance protection the moment it is called upon.

        Your original post argued that it was morally correct for Cypriot depositors to bear the loss because they ought to have realised they bore the counter-party risk, and because the bank is bust and there’s no way of making them whole without additional State subsidy.

        I am challenging both heads of that argument: As to the first, depositors were (effectively) promised by the State that they were the most and best protected of the bank’s creditors. It seems harsh to allow the party offering the insurance to renege on its its promise on the grounds “well you should have realised we wouldn’t honour it”. I know this is just taxpayer’s money, but suggesting that entitles the State to renege absolves the State of all responsibility to honour its monetary commitments to individuals. Do you really want to go there?

        As to the second part of the argument, I am challenging the idea that bailing out insured retail depositors amounts to a new State subsidy. The subsidy was granted when the insurance was offered. Failing to honour that insurance because it puts at risk a political project (EMU) amounts to expropriating those who relied on the insurance in order to subsidise the newly preferred political project.

        • says

          Mary, can I ask a simple question?: Who do you suggest should pay for this, the deposit guarantee? Whose money do you use to make good on that promise? – If you say ‘the state’, do you mean Cyprus or any other state? Or, should deposits above €100,000 by skinned to the tune of 30% or 40% to protect the ones that are smaller than €100,000? What do you suggest? – I assume the following to be correct but am happy to learn otherwise: To run a bank in Cyprus you need a license from the Cyprus government, you have to open an account with the Central Bank of Cyprus, and you will be under the supervision of whatever financial and banking regulator Cyprus has. Bank supervision is, to my knowledge, not centralized in Europe. I agree that as a depositor you have (probably) a moral and legal claim against the Cyprus government to protect you up to €100,000 because that is what they promised. I am not denying this. I do not think you have a claim against other states, other governments or their taxpayers, in particular as, upon joining the euro, your government signed a ‘no bailout clause’ that has – probably unlawfully – been scrapped by now but which your government signed nevertheless. – For whatever reason, the banking system in Cyprus was allowed to assume bizarre proportions. Deposits (as I mentioned a couple of times already, although not in the body of my original essay) are approximately 4 times GDP in Cyprus. If the state of Cyprus could deal with its own banking problems, nobody in Europe would poke their noses into their affairs. But Cyprus cannot. – These banks are only presently functioning (and functioning only barely) on the basis of massive ECB emergency funding. They are bust. And – this is my assumption from all I am reading – they are too big for the Cyprus government to save them – or even to make good on deposit insurance. I think Cyprus could have chosen to only take from deposits above €100,000 (as an early proposal from the IMF, supposedly, suggested) but it was probably felt that it was better to spread the cost evenly. You can complain all day about how unfair all of this is but the question is ultimately not whether the state “should” pay but whether it “can” pay! – ‘Default’ always means not being able to meet your ‘promises’. We have seen a couple of sovereign defaults already and I am sure it is just the beginning. On present trends, the UK government will one day default (or renege) on its promises regarding the NHS or state pensions. The US will most certainly renege on Medicare and Medicaid and Social Security. I could name many others (including Germany!) The fact is, these states are on the path to default unless they change their ways radically. Yet, when states begin to break their promises, all we hear is ‘how unfair!’ and ‘others should pay!’ – I was not having a go at ‘ordinary Cypriot depositors’ but at economic commentators who tell their readers that all of the hardship (debt restructurings; defaults; ‘austerity’) was quite unnecessary and what we needed was ‘stimulus’, which means easy money (i.e. more debt and even bigger banks) and larger deficits (more public debt).

          • Lyonwiss says

            You need to distinguish between explicit promises and implicit promises. Deposit guarantee is explicit promise for stability of the banking system. Bond obligations, pensions, social security etc. are implicit promises, which are never guaranteed. Your argument is invalid because it treats all promises as the same.

          • Mary Contrary says

            Lyonwiss is correct. Detlev, I’m afraid you’re confusing legal obligations with political aspirations.

            You’re also mistaking my claim that the State should be a less preferred creditor than those whose deposits the State itself said it would guarantee, with a proposal for additional State funds.

            To answer your point directly: who should pay? All I have said so far was that retail depositors with guaranteed deposits should rank above the existing loans to the banks from the State, including the ECB. If that’s not enough to make them whole, then we will have to consider whether the Cypriot government is obliged and – as you point out – is able to make up the difference.

            Calling on the Cypriot Treasury should only matter if wiping out *existing* loans from the ECB is insufficient. Don’t confuse this with new funding from the ECB, which is quite a separate issue. The question of requiring more funds from the ECB (and hence more from the German taxpayer) simply doesn’t arise until the unsecured depositors and the Cypriot Treasury are exhausted. However for the sake of completeness (I wouldn’t want you to think I’m dodging the question), I will make my own view plain: Yes, I do think the Cypriot Treasury should be available to honour its guarantee, if it is able; if it is not, then No, I don’t think the ECB should be obliged to add new funds to make up any shortfall. But before either of those occur, the ECB as an existing creditor should forfeit the loans it has made already before the insured depositors do. If it does, on my limited understanding, I don’t believe even the Cypriot Treasury need be touched.

            Moving on to the broader points you mention, you try to compare this situation with major social welfare programmes, like US Medicare and Medicaid and Social Security, the British NHS and pensions. I view these programmes as unlike each other in type.
            Medicare, Medicaid and the NHS I regard as simply government spending programmes, which can be cancelled at will without breaking any morally binding obligation. Individuals neither build up a fund to pay for their future benefits in these programmes nor act as though they do.

            With Social Security and the British State pension, individuals do act as though they had paid into a fund, and most believe there is a pot that exists that is “theirs” (at least in the case of the latter, with which I am more familiar). They are being misled, but I think the better analogy is to say that the State is a pension fund manager that has looted the fund, or the operator of a Ponzi scheme. So ask yourself, if the British State pension were really a Ponzi scheme, what would be done?

      • John Archer says

        I’d like to butt into this conversation if I may. :)

        Your exchange is interesting because in my view you are both right. It also illustrates a great truth.

        Oh really?

        OK then, to be more precise, both arguments are valid.

        Without getting too hung up on precision here, in each case the conclusions follow from the premisses. Yet the two contradict each other. So how can that be?

        Simple. The problem here is that the system, i.e. the totality of the premisses on which the arguments are based, is inconsistent. The salient point (indeed the ONLY point) about any and every inconsistent system, i.e. even one that apparently initially harbours only a single contradiction, is that anything, and everything, no matter how ludicrous can be proved within it, and quite rigorously too. In plain language, such a system is totally #@*!#&g USELESS. Actually it’s even worse than that — it’s very bad.

        Now, this delightful circumstance of the particular system we find ourselves in today is down to the witless, venal, hubristic, nasty, doctrinaire, dunderhead politicos who dreamt it up, a similar bunch who perpetuate it, and finally by those of somewhat related dispositions who voted for them.

        And the great truth? In short, this exchange beautifully outlines the body of an argument proving precisely that those despicable ‘movers & shakers’ should never be let anywhere near the reigns of power and why the sooner they are all hacked down to size and then strung up on lampposts the better.

        I’m not sure that I wouldn’t extend that treatment to the people who voted for them too, but I’m inclined to mercy in their case as I might find I’m related to a few of them.

        “No more boom and bust” — Gordon Brown

        • John Archer says


          For the sake of completeness, I should have added that although I am very sympathetic to Mary’s argument I side with Detlev as he takes in the larger picture.

          Also the main feature of these despicable politicos, and the one thing above all that I should have mentioned, is that they are completely out of control, that in no way do they ever represent us (they represent only themselves and, in one way or another, those in whose pockets they are, not least those of the EU) and that general elections every five years or so are wholly inadequate in holding them to account. As a class they have placed themselves beyond control by the people and indeed now consider themselves to be the masters and not the servants they were hired to be. This cannot be tolerated. There’s no difference between a dictator and dictatorship by a claque of demagogues.

          Economics is extremely important but our fundamental problem is political, of which the current perverse economics is a symptom.

  10. Lee Moore says

    This “tax” is just a sham – any pre-existing legal right could be taken away by a “tax” of this nature. It is effectively retrospective, ie it taxes the act of having made a deposit prior to last Friday – it is in reality a forfeiture of part of the deposit, imposed by the state, contrary to pre-existing legal rights.

    I agree with Olivier Massin. It may well be that the depositors will be better off as a result of the state having enforced this forfeiture, but from a libertarian point of view, that’s irrelevant. You may be better off if the state stops you smoking, but that doesn’t make it right that they should do so. Libertarians believe that everyone should get their legal rights, including whatever accrues through the pre-existing insolvency process when one party is unable to keep his part of a bargain. If the pre-existing insolvency process favors those with deposits under 50,000; or whose surnames begin with O; then depositors can make their plans accordingly. What is unjust is changing the rules in the middle of the game. The rules as of Friday were that the depositors with less than 100,000 were guaranteed. Sure, maybe the guarantor was liable to default on the guarantees, but that doesn’t mean it’s right that the guarantor can welsh on his guarantee just by passing a law.

    As for bondholders taking their medicine, fine if that’s where the pre-existing legal rights lay. But some bondholders in banks are preferred (as against depositors) and some are subordinated. We certainly don’t want any GM/Chrysler style business of preferred creditors being subordinated to ordinary creditors, because the latter have more political clout.

    • David Goldstone says

      Sorry Lee but you are deeply confused. The position is that the banks in question are insolvent. Furthermore, the Cyprus Government which provided the deposit guarantees is also insolvent. Libertarian rights have nothing to do with it. No depositer in a Cypriot bank has a libertarian right to be bailed out by German taxpayers just because their bank and their government are insolvent.

      • Lee Moore says

        I think you may the one that is confused. Where on Earth did you escape with the idea that I advocated depositors being bailed out by German taxpayers, or indeed by anyone at all ?
        If the banks are insolvent they can go bust and the assets can be distributed to the creditors in accordance with the priority that their pre-existing rights allow. If some lose out in this process they can weep. If some have a guarantee for their losses, they can sue the guarantor. If the guarantor is bust, they can weep too. What has this to do with the Germans ?

        • David Goldstone says

          Your argument was that the proposed 10% haircut was an infringement of legal rights. My point (and Detlev’s point) is that it is nothing of the sort. It is (or was) a proposed 90% subsidy from the EU – for which read German Taxpayers – to support an otherwise insolvent guarantee scheme. The only rights being infringed are those of the long-suffering taxpayers who will end up paying for the bail out.

          Yes I do feel sympathy for depositers who thought that their deposits were protected by Cypriot Government guarantees. But nobody so far has explained how it is right and proper or libertarian for German (or Dutch) taxpayers to be required to bail out small Cyprus depositers because their own Government cannot make good its deposit guarantees.

          • Lee Moore says

            You seem to be struggling with the concept of a legal right. The existence of a legal right is not the same thing as its value. If you have a legal right to be paid $100, that right may be worth $100, $10, $1 or nothing, depending on the solvency of the debtor. If someone confiscates your legal right, they have confiscated your legal right, whatever it may be worth.

  11. andrew cullen says

    As regards depositor insurance, the public generally – in Cyprus and other EU countries – believed (until this event) that their money in the bank was sacrosant (yp to the insured limit). Yes, money in bank deposits is loaned to the bank but probably no more than 1% of the public understood that. So, the reaction that this is a heist, a theft of savings is fully understandable. It will have HUGE and sustained repercussions going forwards for the public’s perception and confidence of the banking system. All the headlines about banking since 2008 have been perceived imo by most as “out there” and not “my savings deposit”. All of which can be summarissed as the moral hazard created by deposit insurance for individuals.

    The second strike at confidence is this: the EU decision did NOT follow the rule of law. It look like an arbitrary decision as it in one stroke destoyed the rationale for deposit insurance. This is potentially a hugely positive development for free market advocares as it is a wake up call to us all that the action of even ostensibly democratic states can be arbitrary, coercive and punitive.

    Last but not least it is interesting that the prime movers for the EU decision were the EU countries most in favour of “austerity”, including Germany, Austria and the Netherlands. While they have a strong case for the need to address national budget debts and deficits, they are now creating an intensifying political crisis within the EU. The ethos of “solidarity” is crumbling. The PIIGS’ economies are falling apart under the combined pressures of te euro straightjacket, fiscal austerity, unprecedented unemployment and bankrupt banks.

    • David Goldstone says

      “The second strike at confidence is this: the EU decision did NOT follow the rule of law. It look like an arbitrary decision as it in one stroke destoyed the rationale for deposit insurance.”

      This is incorrect. The deposit guarantees (I do not like the use of the word “insurance” – it is nothing of the sort) were provided by the Cyprus Government. As it turns out, the Cyprus government is insolvent and thus cannot make good those guarantees. This has nothing to do with the rule of law. It is not a legal issue; it is a solvency issue. As Detlev has ably pointed out,the EU has offered to provide (essentially) German taxpayer funds to fill 90% of the gap. But apparently that is not good enough and the Germans must pay 100% !!!

      • Lee Moore says

        No, this is quite wrong. The guarantees have not been called yet. The rule of law way to deal with this is to allow everyone’s existing legal rights to work through pre-existing insolvency procedures. Stepping in and confiscating depositors money, in advance, in order to prevent bankruptcy is the arbitrary government way.

        If you are keeping up your mortgage payments, out of your small store of savings, but have no job and no way of keeping the payments going beyond next August, you are entitled to stay in your home until you are foreclosed on next September. If the government steps in to “solve” the problem of your insolvency by chucking you out of your home now, it has cheated you of your rights.

        • David Goldstone says

          A better analogy would be if I were to complain that my long-suffering elder brother has refused to give me 100% of the money I need to meet my future mortgage payments, but is only prepared to offer 90% !

  12. says

    Whatever the rights and wrongs, this has been a PR disaster of the worst proportions has it not for the IMF, the E.U and the German and Netherlands politicians who wanted to show a tough stance to their home electorate? Above all, the difficulty they are having with this depositor levy is further evidence to me that they will never, as some have suggested, adopt higher taxes rather than money printing to pay the bills and therefore bring on deflation. If they want to keep the Euro going, they will have to print the money to bail out the insolvent. They will never achieve it via direct taxes or levies, only the stealth levy of inflation.

    • says

      It is a PR disaster for the state, yes. But that is not a bad thing. This disaster is the truth, all the rest is just a big show to hide it. if you have a problem, the first step to solve it is to acknowledge and understand it rather then to try to hide it. Because of this I even finally got my father to see that his money is not save in a bank. And I have been trying to explain that to him for many years now. So it is a good wake up call for people. Of course ideally the bank would just have declared bankruptcy instead of this political charade. The fact that now politicians are allocating who is losing how much is of course bad.

  13. Greta says

    As I understand, not all banks in Cyprus are insolvent – a lot of Russian money is actually in Cyprus branches of SOLVENT Russian banks, at least one bank owed by the Russian state. There are also branches of British banks. These banks are not insolvent and don’t need to be bailed out. Yet the attempt was made to confiscate part of ALL banks deposits in Cyprus, not just deposits in insolvent banks. How can it be right?

    If a bank is insolvent, let it fall, wiping out shareholders, bondholders and depositors (in that order). Deposit guarantees by the state should be respected, unless the state is insolvent too, in which can it should default on its guarantee, as well as on other debt.

    If a bank is solvent, the state should keep their hands off their deposits.

    • David Goldstone says

      Greta makes a very fair point. There is no infringement of anybody’s rights if an insolvent bank is not bailed out (or is only bailed out as to some percentage of deposits). But it is a different story if the deposits of solvent banks are “taxed”. That is indeed a case of robbing Peter to pay Paul and is quite wrong.

    • Lyonwiss says

      Greta, Absolutely right. Rules and laws, long established and understood, should not be abandoned lightly, simply for the expediency of unelected bureaucrats. There is too much at stake.

  14. says

    Interesting to observe how the Brussels crowd are now denying any input into the depositor levy plan, basically saying it was all the Cypriot governments idea! I do very much agree that in the long term the loss of confidence is a good thing. People had no business having that confidence in the first place. One can only hope that over time this lack of confidence spreads to all areas of government and you never know, one day people may start saying, “lets give the free market a try”. It may yet happen!

  15. Laird says

    I’m afraid that I have to agree with Mary Contrary and other commenters here that imposing the “levy” on small depositors is entirely the wrong thing to do. In answer to the question Detlev last posed, yes the uninsured depositors should bear all of the shortfall (after wiping out shareholders and bondholders, of course, and I would also add that executive management and the boards of these banks should be booted out, too; this needs to be made personal to them). The moral hazard of deposit insurance is great enough without unilaterally extending it to all depositors. Frankly, I think that a deposit guarantee limit of €100,000 is too high, but if that’s what the government promised it should honor that promise. But it made no such promise with respect to deposits greater than €100,000, and those depositors should just take their medicine without complaint.

    In the not-so-long run this whole fiasco should be a boon to libertarians and other free-market types, as it provides a number of salutary lessons: the inherent weakness of the global financial system, the perfidy of politicians (and, especially, unelected technocrats in Brussels and elsewhere), and the risk of basing a substantial portion on your national economy on finance (a largely zero-sum game) rather than manufacturing or actual productive enterprise. Perhaps US citizens will even notice and learn from this episode (although admittedly that does seem a bit far-fetched).

  16. says

    I think what is being missed here is that when you put your money in a bank, you have lent it to them and you become an unsecured creditor. The money is not yours, it is a liability of the bank.

    On a purely technical basis you could argue about the pecking order of the creditors and why the depositors at are the very bottom. The bailouts have never been about protecting the people, it’s always and everywhere been about preventing the creditors of the insolvent banks from taking a loss. That is the crime.

    But in general, if you lend your money to a bank and the bank goes bust, you lose your money. The problem is that most depositors have no idea that is the case. The fact they get paid interest and in Britain at least, receive free banking facilities, is the obvious proof but still, no-one thinks along those lines. You need only listen to the current discussion in the media and even in the alternative media by people who are supposed to understand our monetary system but still consider deposits as belonging to them. That ended in 1811 (Carr vs Carr).

    A lot of media outlets both mainstream and alternative media are saying it’s theft. That makes the average person see it as a worrying thing, but less likely to affect them because it’s a one-off crime that may or may not happen and is unlikely to happen in their own country.

    What they should be saying is… “it is not theft at all, sure… the deposit insurance hasn’t been honoured but don’t you realise that money in a bank account is not legally yours – maybe you should go away and have a good think about that and what you can do about it?”

    This theft line is, in a perverse way, protecting the system.

    • says

      I would like to reiterate that last line of your comment, Paul. I think it hits the nail on the head: “This theft line is, in a perverse way, protecting the system.” Spot on. Thanks.

      • Lyonwiss says

        If you think the system is wrong, then propose to change it, but the right way. Changes through unethical actions are not justified and rarely endure when there are ethical alternatives.

    • Lee Moore says

      What relevance does the fact that a bank deposit is a debt due from the bank rather than an ownership right in the notes and coin you originally deposited have on whether the confiscation of your deposit is theft or not ? Is absconding with someone else’s cash theft, but absconding with other property not theft ?

      • David Goldstone says

        The arbitrary confiscation of a deposit is indeed wrong, whether the deposit takes the form of coins or a debt. But in this case, the deposits are already gone. There are no coins and the banks cannot pay the debts due to the depositers. The vault, whether physically or fiscally, is already empty. The proposed “haircut” (misleadingly so described) is therefore not a taking of something that is there. It is simply a bail-out at the expense of other taxpayers in other countries.

  17. says

    Detlev… I have an interesting question about this Cyprus situation you may be able to answer.

    I have no idea what the ratio requirements are in Cyprus – they may not even have any like us in the UK. But let’s imagine the banks in Cyprus are fully loaned up and have a fractional reserve ratio of 10%. Wouldn’t taking 10% of the deposits collapse the bank. Surely the 10% “tax” or “levy” is going to end up coming from the deposits they actually have. Wouldn’t the bank immediately have to shrink it’s loan book to almost nothing to be compliant with the reserve ratio, once 10% of those “deposits” have been taken?

  18. says

    I agree with Mr King that ignorance of the banking system and the monetary system in general is the root cause of a lot of problems, and I include myself in that statement! I have made a point this morning of putting the simple point in Mr Kings post regarding bank deposits being the property of the bank by law etc to everyone I have met on my travels (11 people). The responses I got ranged from puzzlement (How does that work?) to anger (Robbin’ B******), but not one knew and understood this principal point. They just believe the politicians when they say their money is safe. Ultimately, untill people become educated about how the system actually works (or fails to work!) nothing will change, for people will always cry for the government to do something not realising that it is the government that is doing the damage.

    • says

      I too have canvassed people… no-one knows. 74% of people according to a Cobden centre study believe it is theirs…

      My own anecdotal evidence tells me that percentage is more. You only have to look at how people are acting and how the media is reporting on it, both mainstream and alternative to see that.

      The people have unwittingly been conned or wilfully allowed to believe that fiction. I hate the whole system – I’d let the whole thing collapse and the only money printing I would be prepared to compromise on is a one-off deposit insurance (which would be an enormous and painful amount) for previously agreed amounts. Shareholders and bond holders lose out. Larger depositors are likely to be more diversified and in some ways have less excuse for their ignorance.

      We shouldn’t have to honour deposit insurance at all but the people would not stand for any solution where they lose out and they will remove any government who tried such an arrangement. Perhaps this is the only way to cleanse the system and start again and at least people will finally understand how our system works and will be willing to abolish the central bank, deposit insurance, capital gains and legal tender laws and when they finally realise there is no such thing as a free lunch we can have a real conversation on what we want government to do and how we can afford it.

  19. Dr James Thompson says

    Excellent posting, Detlev. The reactions show just what a mountain you have to climb. The phrase “insolvent bank” just doesn’t compute anymore. The response seems to be “If the bank is insolvent, then I want my money back”. One cannot insure bank deposits without insuring (either through regulatory means or through free market competition)that banks are operated prudently. Otherwise, deposit insurance becomes a licence to print money, either by the bank or the State, and often both. I was reminded of a quaint old banking insolvency in 1995, that of Barings Bank, after over two centuries of successful banking. They were broken by their own rotten management, who did not have a basic understanding about what one of their traders was doing in Singapore. He kept telling them he was making money by a particular futures contract strategy, and they did not have the wit to see that the reported profits were virtually impossible. Neither did they suspect something was wrong when he kept asking for more and more money. Nonetheless, the Bank of England was willing to bail them out until, guess what happened? The managers asked that the bail out should include money for their bonuses. At that point the Governor Eddie George walked away from the deal. Barings went down. What is happening now is that he poor Cyprus depositors are paying the price for a system which was paying them higher interest rates (bonuses) than could be sustained

    • Greta says

      “The phrase “insolvent bank” just doesn’t compute anymore. The response seems to be “If the bank is insolvent, then I want my money back”.”

      The coverage has been muddled, with very little mention of the fact that deposits in solvent banks were to be used to bailout the insolvent ones. In my opinion this is theft. It is for this theft that new legislation is needed, and the whole banking system in Cyprus is shut down to enable this theft.

      If all they wanted to do is let insolvent banks fail, no new laws would have been required and other – solvent – banks and their customers could have gone on with their daily lives as usual, instead of standing in line at ATMs for hours just to get some money to buy food.

      My own position is “if another bank is insolvent, I want my money in my solvent bank to be mine, and I want access to it. If my bank is insolvent, I want my money back up to the state-promised guarantee, everything else is my loss.” The idea that I choose a bank prudently, it remains solvent but I am then robbed to bailout another bank, and somehow this is the right thing to do, is just wrong.

  20. karol zimmer says

    The article is spot on. From an Austrian point of view, cutting Cypriot “deposits” is the only way. But here comes the BUT.

    BUT the proposed deposit tax was drafted by mainstream economists. Who believe bank deposits are deposits, not loans. Who believe current monetary and banking set-up is sustainable and beneficial. Who believe deposit insurance works and should be at 100 000€ minimum. Who believe debt of 500% GDP should keep growing. Who believe more money means more wealth.

    It was not accompanied by announcement of “deposit insurance laws” overhaul by the EC. It was not followed by press releases explaining loans and deposits difference by Merkel. Nor by standstill of ECB printing press. no, no.
    Therefore, I cannot make other conclusion: In their believe system and under current system of laws (though the laws contradict economics), they suggested plain, illegal expropriation. Sinister intentions. Absolutely anti liberal and malign IN THEIR OWN BELIEVE SYSTEM.
    So I am more than happy they are getting a bad coverage from press. And from bunch of us, libertarians and Austrians, too.

  21. Duplex says

    Forget all this logic, how does it feel for ordinary people?
    Who simply trust the banks to hold their savings, is this too much to ask?
    What use is a bank if it steals your savings?!
    10% haircut? OK.
    Can I have my money back now?
    Not so fast! we can’t give everyone their money back.
    Why not? it’s my money!
    You see we invested it in some real estate.
    What? well sell the real estate and then give me my money back.
    We can’t because the markets down and we’d loose money.
    However we will allow you a little of your savings to get by on.
    Thanks a lot! last time I’m putting my money in the bank!

  22. Snorri Godhi says

    Oddly the more this is discussed, the less sure i am of where the disagreement lies.
    Please let me lay down a few propositions:
    1. If a bank goes bankrupt, then shareholders lose all their money, then bondholders lose all their money, and what is left goes to depositors.
    2. If there is not enough money, then the government is contractually obliged to compensate the insured amounts of all the deposits, as long as that is feasible.
    3. In the case of Cyprus, the Cypriot government did not have enough money, so even the insured amounts could not be refunded.
    4. But now a bailout of 10bn euros has been agreed, so — an this is where the disagreement seems to start and end — the legal and moral obligation of the Cypriot government is resumed: all the depositors ought to be compensated up to the insured amounts, if possible; only if & when that is done can the government legitimately begin to compensate the uninsured amounts.
    Where’s the problem with that?

    • Lyonwiss says

      No problem. They are long established solutions. As Greta said solvent banks do not need the bailouts so why should their depositors suffer? Allowing for free market principles, depositors of solvent banks have made sound decisions, why should they be subject to government tyranny?

      Assuming the Cyprus government has no money to honour deposit guarantees, then insolvent banks must be allowed to fail taking all stakeholders, including depositors, with them. This is consistent with free market principles and the established rules should not be changed without proper democratic processes.

      Most likely German bondholders are taking advantage of the weak and ignorant Cypriot government to save their own bacon. But this short-sighted action could have unforeseeable consequences which could be devastating for all, including the Germans.

  23. David Goldstone says

    It is increasingly clear that the proposed “tax” or “haircut” or “levy” will be applied across the board to deposits in all banks in Cyprus, whether solvent or not. See:
    That would indeed be theft on a grand scale. It is one thing for depositers in insolvent banks within the jurisdiction of an insolvent state to lose some of their deposits. It is another thing entirely to transfer some of the losses to depositers in solvent banks! Unfortunately the mainstream media has failed to draw any distinction between the two. But from a liberal property rights perspective, the distinction is crucial.

  24. Laird says

    Snorri, David Goldstone has partially replied to your question: some of the losses were to have been transferred to depositors in solvent banks, who properly should suffer no losses at all (whether insured or uninsured). The other part of the answer is that the original proposal was to take a “haircut” from the insured deposits as well as the uninsured ones (without a formal government default). Both are wrong.

    However, from the news this morning it appears that both problems are now fixed: only the two insolvent Cyprus banks will be closed, and only their uninsured depositors will take losses (40% of the uninsured balances, from what I hear). Painful, but the correct decision.

    • Snorri Godhi says

      Laird: i agree but please note that when i wrote my last comment i did not know what the final terms of the bailout would be. (Obviously, given the date.) I was discussing what OUGHT to be done, not what IS being done.

  25. Carax says

    So after 38 years of working hard, scrimping and sacrificing to build up 140,000 euros for my retirement, stealing 40 percent of my money is “the right thing to do”. Sorry, free market to me doesn’t mean someone has the freedom to take money I’ve worked hard for all my life so the EU can pay off a frigging bank.

    • says

      If you decide to put your money in a bank you assume counter-party risk. If the bank goes bust, you lose money. Sorry, but this is indeed how it works. You picked a business partner – let’s say one of the big Cypriot banks – and your choice turned out to be a poor one. – The bank pays you interest on your deposit. How do you think the bank earns that interest? By lending “your” money to other people (in the case of the big Cypriot banks, that means they put “your” money into Greek government bonds or the Cypriot real estate market – sadly, two additional poor choices!). It turns out that it would have been better if you had put your savings into a safety box at a bank but then you would not have collected interest, you would have had to pay a fee for the safety box. But still, you would now keep all your money. Of course, hindsight is easy but there is no escaping the fact that you made choices and you have to accept the consequences of these choices. Who do you propose should cover for your choice of bank and the bad decisions of your banker? – Of course, you may claim that you only put the money there because the Cypriot government protected you up to €100,000. In this case you should accept to lose the other €40,000. Nobody promised you that those €40,000 would be protected. From your comment I still conclude that you expect somebody else to cover for you. Who should that be – and why? – Also, as to the guarantee for the first €100,000: how does the Cypriot government cover that? Are they sitting on a big pile of cash that was set aside for such emergencies? – No, they will just turn around tax some poor, ordinary Cypriots to make good on your deposit. Those Cypriots may say: “…After many years of working hard I now face ever higher taxes to pay for these deposits. They are stealing my money…”Although it now turns out that deposits in Cypriot banks are 4 times GDP (!) and that there is simply not enough money in Cyprus to protect your deposit. So now taxpayers in other countries are forced to contribute to the Cypriot deposit guarantee. As it it turns out you can now keep the first €100,000 of your deposit and you lose (worst case) €16,000 on the further €40,000. Although you picked the wrong bank – one that was bizarrely leveraged and made very bad investment choices – in the wrong country – one that failed to regulate its banks -, and although your bank went belly up, you only lose €16,000 and you keep €124,000. Although you were invested in a bust bank you kept 89% of your money, thanks to the fact that other governments stole from their taxpayers to make those payments that Cyprus promised to make but in the end couldn’t make. To be honest, I think you should count yourself lucky and stop talking about free market principles.

      • karol zimmer says

        again, though economically correct, the complexity of reality may bite here, too.

        It may not be the case of Cyprus, but in many EU jurisdictions there certainly are legal limits for the size of cash transactions. In here it is 10 000€. Above that, you are obliged to go through financial system. That is mostly banks.
        I believe in most EU countries laws oblige or nudge enterpreneurs to have a bank account (tax laws, anti money laundering laws) and execute their transactions via that account.

        I assume (so as to make the choice you blame them for not making) businessmen can keep on depositing and withdrawing cash from their accounts to keep the balance under “insured amount”. yet that would be costly both in bank fees and other costs, e.g. in repeated declarations the cash deposit is legal according to money laundering legislation. but most importantly, you would be probably constantly harrassed by financial police and tax authorities thanks to your cash transactions.

        So, unfortunatelly, if you make financial transactions, you are forced by regulators to choose a bank and keep your money balance there.

        Add to that that the regulators never tell you a bank is in trouble unless too late. Just teh opposite: they keep screaming we supervise, we know, it is safe. and add that the bigger a bank is the better is its service in terms of costs and speed of transaction execution (a lot of your business partners have an account in the same bank).

        So in reality you were given no real choice by the state but to have a bank account. they tell you it is safe. we know and protect you. and then they tell you ooops, it is your fault and we take 80% of your money, ’cause you should’ve known better.

        It takes a hypocrite to enforce mainstream economics upon society when regulating, taxing and spending, and a rational (i.e. austrian) economics when bills come due. Or shall I use the word “robber”?

        • says

          This only goes to show that once the state regulates one part of the economy it has to regulate others, simply because of the unintended (and sometimes intended) consequences. Intervention always begets more intervention. The present system is unsustainable. It will either drift towards complete socialism (everybody has a bank account at a state-protected and thus state-owned and state-managed bank; nobody uses cash; the state monitors all economic activity and intervenes at its discretion; the state ‘sells’ this to the public as a guarantee of complete safety and justice; the banks are tools for economic policy), or toward a free market (state and banking are separated; banks are capitalist enterprises; depositors are creditors of banks; as such they take risk but they are also empowered because they will demand prudent management of the banks; market incentives work). There is no halfway house. There is no middle way. – I want us to move to free banking and sound money because it is the only viable option but I fear that we are moving towards finance socialism and thus into complete chaos. — If we dissect the mess in Cyprus and cut through all the noise we see elements that should be great PR for the free market case but they are drowned by the shrill anti-EU and anti-Germany rhetoric: state regulation failed; state guarantees were not worth the paper they were printed on; under state protection banks got unduly big and made stupid and careless decisions (even through the worst of the Greek crisis, the big Cypriot banks kept buying Greek government bonds en masse!); the public still foots the bill because the state has no money and the banks are bust!. — I take no joy in people losing money on bank accounts but can they not see that it was that anti-free-market bank-state alliance, this particular brand of crony-finance capitalism, that got them into that pickle?!?!

          • karol zimmer says

            if the authorities at least acknowledge there is something wrong with their current thinking, I would applaud them. yet, when the current head of the eurozone (dutch finance minister) said something like “cypriot solution is really THE only solution”, he was booed by everybody else. it went something like “cyprus is special, there they laundered money for bad, bad Russians, those putin loving mafiosos with guns, ugly manners and laughable english accent”.

      • says

        Spot on!

        I genuinely feel sorry for everyone in this situation. We are in a right mess and we’re watching the collapse of our monetary system. Collapse is built into its DNA. The question is… who eats the loss? It’s sad to say that most people are happy for someone else to take the loss to save their own skin. And the more abstract the method the more sanitary they find it. People would rather lose money through inflation than default – perhaps because they can convince themselves they’re not being as robbed. I had a conversation with someone only today who said as much.

        I tell as many people as I can about what money really is, genuinely believing that when people know they will be amazed, outraged and take action to protect themselves. How wrong was I? Even when they are finally convinced you are not making it up, do they do anything about it? Very few do.. But the truth is, it’s tough. For a start, most people know nothing about finance or investing – and they shouldn’t have to really. A free market would provide a safe and reasonable store of value so a day’s pay earned today can be spent later… roughly. When you understand the system, you realise your local financial advisor’s clients, in a lot of case, are really the owners of the products they sell. They know little else. Even the independents who genuinely try hard to do well for people, often don’t understand the system themselves and/or are regulated into oblivion and only allowed to recommend “safe”, government approved investments. At this point in the game, they are anything but safe. They are reckless.

        Also, when you fix the price of something, it is the value that is subject to fluctuation and vice versa. People see £1000 today, £1000 the month after… that is stable to them. They buy an ounce of gold and it is hard for them to not feel aggrieved when it bounces around and can go down in nominal terms!

        It’s hard for people to find an alternative. Deposit insurance removes the main motivating factor for them to overcome that dilemma and actually take action… fear!

        Of all the horrors of our monetary system, deposit insurance is one of my main pet hates. A large group of people may decide that they will socialise the losses of any smaller subset who suffer at the hands of a reckless bank. It’s a little like health insurance… you pay but hope to never use it, and you don’t mind so much if other people less fortunate using it. I understand the motivation, but it didn’t evolve that way… so any sort of understanding of the risks of banking and the roles we as customers of banks play in it is totally absent. But once you have it, you’d be crazy not to put your money in an insured bank, it destroys the only thing that has ever regulated anyone to at least some degree… failure. Again, ask someone where deposit insurance is… I’ve had three common answers.

        1. The government… as if they have lots of cash.
        2. Taxes.. as if funnelling them through a government collection agency somehow means the people in your country are not paying for it.
        3. A fund banks that pay into.. a fund of tens of billions to insure trillion. Come on… wake up!

        We live in a world where in the UK, the average person thinks high house prices are a good thing, even when the likes of Bernanke et al are out and about telling people how the “wealth effect” is the plan and is based on a total of illusion of people thinking they are wealthy. I know I’m going off topic here but the juices are flowing… And they think financial repression is something that happens in countries prefixed with “Democratic Republic of…”.

        This fiasco in Cyprus will wake many people up but the way it is being mischaracterised is dangerous because it perpetuates the system (see other post).

        But, that system is failing, the losses are coming to bank near you… You can have it taken off you nominally because they lost it, or you can have it taken off you in real terms because government keeps tranferring your wealth to themselved via money printing and then shovelling down an enormous sink hole. The choice is yours. It’s a tragedy. But… critically, instead of looking around for someone else to take the loss we have to face up to the truth of the situation. Most of what people believe is money is a fiction. How on earth do we reconcile that?

        Here’s a thing you can do….

        1. Ask someone what inflation is… wait for the higher prices answer.
        2. Ask what causes higher prices… after a bit of musing and circular reasoning wait for the “it’s because of tensions in the middle east and/or population growth pushing up the oil price”.
        3. Show them the following graph…

        4. Listen to cogs grinding in their head
        5. Repeat

    • Snorri Godhi says

      Actually Carax’ comment is interesting in that it lays bare a misconception shared, i suspect, by socialists and “conservative” EUphobes: that the EU is taking money from depositors and giving it to the banks.
      The reality, of course, is that the depositors themselves gave their money to the banks, are now getting money from EU taxpayers, and find a need to rationalize that they deserve it … in fact that they deserve even more!

  26. danilooux libertarian says

    Hello Detlev.I get your point about the perils of stocking savings in a current account and I agree with your view but this monstruosity is not destroyng money that is clearly what we need ( a sharp decline in the money supply). This robbery consists just on the fact that the same amount of money changes “property”: from private holders to the government.

    We have no deflation, we have just a robbery.

    Am i wrong?

  27. says

    All this discussion, is entirely predictable but to keep things simple it is often useful to draw an analogy to the present condition. I like to imagine the childhood game of musical chairs. We have had music continuing for years, so much so that the dreadful “Brown” creature envisioned a world where the music ran forever. Well it stopped and there were insufficient chairs to go round! Tough, Cyprus, Greece, Iceland, Ireland et al. The politicos who operate the game have cranked up the music again, who will be the victim the next time it stops? How long before the UK is left standing, with no chair, and also the USA? Really the only solution is to destroy the game-meisters, and return to sound principals. Remember the game removes a chair each time the music restarts! This will end badly!

  28. says

    Euro fin min head Dijsselbloem is being reported as saying that “in future, the currency bloc should first ask banks to recapitalize themselves, then look to shareholders and bondholders and then if necessary to uninsured deposit holders”.
    Gunnar Hokmark, EU parliament member, is also reported as saying “If you put your money in Royal Bank of Scotland or Deutsche Bank, depending on how that bank is working you are taking a risk,You need to be aware that you are taking a risk”
    If they are making statements like that to the mainstream media then we can safely say Cyprus is the future. At least it is a clear and honest position, and no one can say they do not know where they stand. Buyer beware!

  29. Alan Wolan says

    Fantastic essay. Razor sharp analysis. You completely changed my mind about what is really going on in Cyprus. I hate to use the word “genius” to describe someone still alive, but I may just have to in your case. Your ability to express your ideas is astounded powerful as well. Keep thinking and keep writing!

  30. David Gibson says

    I take my hat off to you Detlev. You’ve really made me think! Do you agree that the problems with EMU have made Germany more prosperous than she would otherwise have been under the DMark? Her bond yields keep falling in response to EMU stress and her exchange rate is more competitive, leading to inflated export earnings. Are the bailouts not just evening out the imbalances created by a dysfunctional system, rather than being a drain on German taxpayers? Or are those taxpayers worse off under the Euro, in spite of the above? In my view, Germany is not helping by holding herself up as a role model. It is impossible for every country to run a surplus. The Euro has distorted the free market by mispricing risk in the member countries.

    • says

      David, apologies for the slow response. – Around 2003- 2005 Germany was ‘the sick man’ of Europe and started to violate the European treaties. That was bad. Also, at the time the ECB ran a fairly easy monetary policy to help Germany (and France). That was bad, too. Because of this easy policy, Spain and other countries looked stronger for a long time than they really were and they started to live seriously beyond their means. I wouldn’t say these countries ‘benefited’ from the mess elsewhere (Germany, France) as the ultra-low rates caused tremendous domestic problems that have now come to the fore (bursting real estate bubbles). Now the roles have somewhat reversed. ECB policy is super-easy not for Germany but for Spain (and others), and now Germany looks stronger than it really is (again, the ‘benefits’ of easy money are short-lived; in Germany easy money will also cause problems for the future; I am quite bearish on Germany structurally.). This is, however, not the entire story as it has to be said that after 2002 Germany did enact some modest reforms of their labor market that made it more competitive. Other governments (including notably France) have been asleep at the wheel and now need to play catch-up. — Can different countries with different levels of productivity and different economic ‘models’ share the same currency? – Definitely, yes. They do not (and should not) emulate Germany, or any other country for that matter, but whatever they do just has to be ‘sustainable’ economically, it has to make sense economically, and it cannot be built on endless cheap money or fiscal transfers. You have to allow your citizens to compete with what they are good at (or relatively good at), or the specific nature-given resources they have. You have to allow market prices to reflect scarcity and preferences. And you have to live within your means. Then the benefits of sharing the same currency are substantial. — Those who claim to defend the interests of the ‘weaker’ EMU members often seem to imply with their proposals that these regions can only be meaningfully integrated into the global economy and the global division of labor if we allow them to constantly resort to the trickery of currency devaluation, big deficits, and transfers from richer countries. That is not very respectful of these countries nor is it economically correct. — There are many things that are dysfunctional about EMU, most importantly that it is an elastic fiat currency and thus a tool of politics. I argue for a global gold standard. In such a system money would not be a plaything of politicians, bankers would have to be honest, budgets would have to be balanced, and the market would be a level playing field. That would be to the great benefit of everybody: Cypriots, Italians, Germans, Spaniards.


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