The Meaning of Cyprus

Marc To Market's picture

European officials reached an agreement to support Cyprus, which initially sought aid in June 2012. Cyprus will become the fifth euro zone country to receive assistance. This count includes Spain, even though it got funds for a bank recapitalization program, rather than a broader package that the others are receiving.

The general condition of Cyprus must be understood.  It shapes the aid package. It also must be recognized as the crisis in Europe has evolved, the German Bundestag has a greater role, and its approval, not just support of the Chancellor or Finance Minister.

Cyprus is a terribly small country.  At less than 0.25% of the euro zone's GDP, there was an argument advanced, especially by some German officials initially, that it was too small to pose a systemic challenge and, therefore, may not qualify for joint assistance.  

There are two important elements of Cypriot banks that need to be stated.  First, Cypriot banks, which relative to the small domestic economy, were as large as Ireland's.  It was their exposure to Greece and the restructuring of its private sector debt that was the tipping point.  

Second, Cypriot banks are widely thought to hold large sums of legally questionable funds--a true tax haven--especially by Russian nationals.   Estimates suggest more than half the deposits in Cyprus belong to non-residents. 

Almost a year ago, Cyprus projected its needs at 17 bln euros, which is nearly the value of the country's annual output (~18 bln euros).  However, the deal worked out is for only 10 bln euros and even that will be largely paid by domestic parties.  Therein lies the most controversial elements.  

There will be an immediate tax on depositors in Cyprus.  Large deposits, which are defined as in excess of 100k euros, will lose 9.9%.  The government will take 6.75% from small depositors.    This is expected to raise 5.8 bln euros.  

Electronic transfers have been frozen and reports suggest ATMs have run out of cash within hours of the announcement.  Cyprus is on holiday on Monday and when the banks re-open on Tuesday the tax will have been collected; the funds confiscated. 

This is the most controversial aspect of the concessions.  It is unprecedented in terms of euro area aid programs.  It is not though unprecedented in modern times in Europe.  Italy, it may be recalled, taxed (confiscated) 5% of savings to ensure it would be able to join the monetary union in the first place.  Moreover, what is generally not appreciated is that in the EU, unlike in America, depositors do not have preferred status over bond holders.  This makes them significantly more vulnerable.  

Russia, not a member of the EU, has a vested interested Cyprus.  It is thought that the tax on small savers was required so Russia did not think that its citizens were being singled out.  In exchange, Russia will ease the terms of the 2.5 bln euro loan it extended to Cyprus two years ago.  In the coming weeks, a lower rate and longer repayment schedule is expected to be announced.  

To soften the blow of the confiscation of savings, depositors will be given shares in the lenders--a type of forced debt-for-equity swap.  The precise terms are not clear, but it does have the makings of a prisoners' dilemma in terms of what one does with the shares when they are available.  

As part of the conditions for assistance, Cyprus is also being forced to raise its EU-low corporate tax schedule rate of 10% to 12.5%, which matches Ireland (and means that it remains very low).  Many of creditor nations in Europe complain about the low corporate tax rates in some countries. Yet, as we know, tax schedule rates and the rate companies actually pay are two different things.  The Irish argue that when the effective tax rate, which in Ireland also includes various fees, is calculated, it is actually higher than in a country such as France, which often harangue against low Irish taxes.  

Cyprus is also required to privatize 1.4 bln of state assets.  Recall this was one of the stumbling blocks under the previous president.  Christofias, the former president and Communist, balked at the EU privatization demands.  In response, it was as if the EU waited for regime change (though the ballot box).  The new president, Anastasiades is considerably more pliant.  

It appears that EU officials have agreed to ring fence Greek depositors in Cypriot banks, two of which has notable presence in Greece.  To the extent that Cypriot banks have a presence elsewhere in Europe, those depositors may also be ring fenced, though it is not immediately clear. There are a number of legal issues that it may turn on.  

When haircuts were forced upon investors in Greek bonds, European officials argued the uniqueness of the circumstance.  Head of the Eurogroup of euro area finance ministers Dijsselbloem talked about the "exceptional nature" of the challenges facing Cyprus.  However, he did not rule out bailing in depositors elsewhere, though quickly added that there were no plans to do so.  

Some have argued that quantitative easing is financial repression because interest rates are arguably lower than they otherwise would be.  Others have argued that the repression lies in the negative real interest rate.  We have been skeptical of the claims and remain so.  

The returns to the factors of production (land, labor and capital)  are not guaranteed.  A guarantee of a positive return is associated with rent-seeking behavior or monopolistic position, but not with modern capitalism.  When farmers cannot get enough money for their crop or herd to cover their costs, none cry "repression".  When wages do not keep pace with inflation, none cry "repression".  

Low interest rates to fixed income earners has been offset by the appreciation of assets, including stocks, bonds and real estate.  In addition, the lower rates helped foster stronger economic activity than may have otherwise been the case spurred growth in profits.  Capital is not repressed in the United States and investors from around the world continue bring their savings to America. 

If a central bank buying government bonds and forcing investors to change the portfolio allocation, is financial repression, then what is one to call the confiscation of savings?  Clearly, there is a profound difference between the two. Just ask a Cypriot depositor!

Although the details of aid package for Cyprus are unexpected, the spill over into the capital markets on Monday is likely to be minimum.  Cyprus asset markets are too small for large pools of capital such as mutual and hedge funds, as well as insurance companies.  We do not expect savers in other European countries to be fearful of a confiscation of their savings and spark a run on banks. 


One general principle that the EU continues to pursue is tightening the linkage between solvency and sovereignty.  This is vital and the basis upon which a more integrated Europe will be built.    To the extent one becomes less solvent, one must surrender greater sovereignty.  Cyprus was insolvent.  A large swath of its sovereignty has been ceded to the EU.  

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zarjad's picture

So disappointed in Marc! He's fully capable of a much more insightful analysis than this. Almost feels like he was forced to toe a party line here.

To equate central banks' machinations to forces of nature or free markets, that's just central bankers' party line. To say that it's OK to set negative real interest rates because, in return, we get this wonderful bubble in equities, real estate, bonds... I just don't know what to think about Marc anymore. Toeing TBTF line is the first think that comes to mind.   

Marc To Market's picture

zarjad--the point is that you are not to think of me, but the arguments I present.  I was not forced to toe a party line.  I do not say it is ok to set negative interest rates, though you will find that often in recessions, the real Fed funds rate was below zero before the economy recovered.  I only said that it is not financial repression.   I made no reference too big to fail.  I even noted how small Cyprus is.  

zarjad's picture

Negative real interest rates not "financial repression"?

Financial repression -- "Explicit or indirect capping of, or control over, interest rates, such as on government debt and deposit rates"


akak's picture


Second, Cypriot banks are widely thought to hold large sums of legally questionable funds--a true tax haven--especially by Russian nationals. Estimates suggest more than half the deposits in Cyprus belong to non-residents.

I must take Marc to task for this paragraph as well.

Apparently, in true collectivistic fashion, he implicitly approves of ALL Cypriot bank account holders paying for the (supposed, and unproven) crimes of some of them.  To catch the big fish, we have to kill all the little fish along with them, eh Marc?  A morally and intellectually contemptible proposition.

Marc To Market's picture

akak--why did I mention the role of foreign depositors in Cyprus ?  I do so in the part of the comment that I tried to explain two unique circumstances of Cyprus.  Not to defend any action, but to understand it.  I do not say it is ok to confiscate savings.  I say that doing is financial repression in a way that forcing private investors to change what they invest in is not.   

akak's picture

Fair enough, Marc, although I believe the (purposeful or accidental) implication of your statement still stands.

To use the supposed illicit funds of non-Cypriot account holders as an excuse to confiscate funds from ALL bank account holders in Cyprus is a specious and ridiculous argument, although I realize now that you were perhaps only voicing the rationalizations of those who confiscated those funds rather than actually approving of their actions.

shovelhead's picture

"Boris Jaccinov is here for his money, boss."

"Did you tell him about his 9.9% loss?"

"Umm, no, I told him you would see him shortly.

I'm going to lunch, bye."

Orly's picture

"Say, is there a back door to this place?"

nonclaim's picture

It is apparently ok to steal from the little ones... no one hears them.

What a shameful article, Sir.

Marc To Market's picture

nonclaim--did I even once defend the confiscation?  The answer is no.  Your angst, my friend, is misplaced.  

nonclaim's picture

"Did I even once defend the confiscation?"

Not openly, no.

You didn't condemn it either.

You are just /ok/ with it because it happened before to someone else and you hope it will have little to no effect on the bigger market where you operate since they are just a tiny speck. It is not *your* money... if you were you would flip your stance in a blink.

Marc To Market's picture

"Not openly no".  You are projected that which is not here.  

The purpose of my analysis is the analysis.  Did I not say that the confiscation was financial repression?  Does not that express my view of it?  The question at hand is whether there will be a bank run in Europe on Monday when depositors can react to the confiscation in Cyprus.  I say no.   That statement is not about the global markets, it is specifically about what madre and padre will do in Spain.    

nonclaim's picture

Ok, you spent time with us to clarify what was questioned and that is much appreciated. One could drive a truck through some of the holes in your article but if you say that was not meant to be then I'll take you word for it. Consider it closed.

As to what will happen in Spain? A "contained" run as long as ATMs are well fed. If some run out of notes word could quickly spread and get distorted by agitators (there are many; don't discount this) with stones and shattered glasses to follow. But this still won't be it, I agree, as people _still_ have things to care/worry about.

Orly's picture

The world is scratching at the tinderbox, Marc.  The angst isn't derived from us.  The people can feel it; in general, I mean.

Jamie Dimon is before Congress with no good answers and his underlings are blaming their underlings and Europe is being financed through the back-door with US funds and they are taking away people's savings in Cyprus and giving them "bank stock" in stead.  Italy has no government and the countryside is about to go on lock-down.

Perhaps you are correct in that this is not the spark to ignite it all but you certainly must admit that this move, in the dead of an holiday week-end, smacks of more criminal than justified, more taking than giving and more divisive than uniting.  The question then becomes, "And who benefits?"

Each day, we move closer to the edge and there doesn't seem to be much consideration as to what will happen when we get there.  History is replete with instances of the ruling classes messing with people's money and I can't think of a single time that it has turned out for the better.

Granted, most of the deposits in Cyprus were of the criminal ilk in search of greater return but the word-of-mouth on the street will not be so kind as to say they were only spoiled Russians, so who cares?  The angst here is going to be who gets it next time?  Is everyone fair game?  Am I next?

This attitude is what makes communities curl up into a ball and sharpen their knives, constantly honing down their monkey-sphere until it is just family- and maybe less than that.  This is the attitude that puts people at each other's throats and that cannot be good.

All in all, you're probably right that this is no big deal but the seeds have been planted that bring on social paranoia and defensiveness that was not necessary in the first place.  The situation could have been handled so much better than it was, for all it has done is awaken a protective spirit across Europe and into the UK that could get more militant before it gets beneficient.

I'll be looking over my shoulder even more, I can tell you that.


Orly's picture

Something tells me that Mr. Putin will not find this very amusing...

Got NatGas, Frau Merkel?


shovelhead's picture

There's something about Al that makes me think he knows many different ways to skin a cat.

rlouis's picture

Taking from the small savers  just so the Russian oligarchs don't feel targeted?  That is only acceptable to the [banking] EU/Cypriot elite and does anyone think they didn't get theirs out before the taking?  Who among them was sacrificed?

Orly's picture

Errrrm..all of them.

Spaseeba on the ten percent, boyz!  Catch you on the flip!

LeisureSmith's picture

I'm curious what assets "Cyprus is also required to privatize 1.4 bln of state assets" and who gets to buy cheap.

Orly's picture

My bet is Mr. Buffett is already aboard MicroSoft One.


"To the extent one becomes less solvent, one must surrender greater sovereignty"

According to our all powerful central planners however, debt doesn't matter.  To see someone put that quote above into writing, is terrifying.  How anyone who is decent, or has compassion for their common man could see this EU move as anything but absolute tyranny, is dumbfounding to me.

These are scary, scary times people.

Marc To Market's picture

Gold and Silver....I am simply describing a process that I think helps explain the evolving European response to the crisis.   I also argue that tax on deposits is not unprcedented in Europe and I cite Italy as an example.  Even though I am clearly in the minority here at ZH, those who see it as a turning point generally implicitly accept my other argument in the note that what Cyprus did is a act of financial repression.  Forcing invvestors to change their portfolio allocation such as QE does is a different.   

falak pema's picture

"one for all all for one", on the mound of Bastion of Saint GErvais; where you have lunch looking on to the front line of your enemies...immortal scene of "the three musketeers" now being played out by the EU bureaucrats!

Can you see their Musketeer hats?

Lol, now that is bollywoodian in its bad choice of ham actors!  

Fuh Querada's picture

"Hotelier de malheur ! une lèchefrite tout de suite, que je ne perde pas une goutte de la graisse de cette estimable volaille ...."

Racer's picture

I think any depositor in any bank anywhere ought to be scared %h1tle%s

Either the banksters are too stupid to think that the headline Cyprus gets bailout will pacify all and is all that is needed or they want to cause a bank run because they want an even bigger bailout europe wide along the lines of TARP and Hanky Panky and the 'world will end if we don't get one' scenario is behind the scenes in waiting and this sets the scene nicely for them to do it

Dareconomics's picture

The politicians are attempting to conserve their power.  The eurozone must remain intact, and therefore these bailouts must happen.  Whatever is necessary to execute the bailout is what will occur whether it's legal or not. Deposits will be confiscated, governments financed and of course everything will work out in the end as long the proper forecast is used.

Orly's picture

The shot heard 'round the world?

Tinky's picture

How about this, Marc: you fly to Italy or Spain, position yourself in front of an ATM in a major city on Monday, and calmly explain that status quo bullshit to the customers who might prefer to relieve the bank of some (or all) of their savings.

Marc To Market's picture

Tinky--there is no doubt what is at stake here.  You and many readers of ZH apparently think there is going to be a general run on banks, especially in the perihpery of Europe, come Monday.  I say there will not be.  It does not mean that no one will seek to take cash out of ATMs, buut that there will not a drain of deposits.  Where, pray tell are they, going to go ?  

Tinky's picture

Marc –

I appreciate, and give you credit for engaging critics of your post. So that there is no misunderstanding, I am not expecting huge, immediate run on banks throughout Europe as a result the Cypriot development. At the same time, however, I expect that development to trigger increased anxiety amongst many Europeans who keep money in banks, as well it should. Some will undoubtedly be anxious enough to withdraw their money immediately, though I have no idea how many, nor precisely where the most activity will take place. In any case, I wouldn't bet against some serious activity at Spanish banks in particular when they next open.

The reason for my sharp response to your piece is that it is a defense for what I, and many others consider to be an indefensible action. Your parsing of the fine print, and "what is at stake", reflects the perspective of those in power who have consistently acted in the interests of the banks and their bondholders, and at the direct expense of average citizens who had nothing directly to do with the building of, or the predicable ongoing collapse of the untenable system that is currently in place.

What I, most ZH readers, and an increasing number of ordinary citizens of both the U.S. and Europe believe, is that the system is not only badly broken, but outrageously (and increasingly) stacked against all but the wealthy. It is bad enough that savers have been devastated due to artificially surpressed interest rates, and forced into manipulated and unstable "markets" in search of yield, but they have now reached the point at which their savings have been, in essence, confiscated from the very places (banks) that have long been considered safe havens.

Marc To Market's picture

Tinky, I agree that the system is stacked against all but the wealthy. I too think that the system is broken.   I am not defending what is happening.  The drive to express moral outrage here often prevents a clear understanding of what is happening. My work tries to begin to fill that gap.   My work, only some of which is posted on ZH, has empahsized the disparity of power and wealth and income.   

It is one thing, however, to say "no", but in order not to be sucked into some nihilistic dead end, one needs to figure out how we go from here to there.   To say eat the rich is not sufficient.  There simply is not enough to go around.  And isn't that the point ? 

akak's picture


Where, pray tell are they, going to go? 

Physical cash, for starters, followed by physical gold.

Or are officially-approved, conventional, pro-financial establishment options the only ones that you can consider?

hooligan2009's picture

marc is not spartacus

more like pompei

i expect he has a forest that he would like to convert to crucifixes

Joebloinvestor's picture

Safety deposit boxes are next.

wattie's picture

The argument is that Cyprus launders Russian money and should therefore pay. Ok, well if that's the case;

1. Why was it allowed into the EU?
2. Why is not one banker in Cyprus facing a court case or Jail for money laundering.....cause according to the bailout it's irrefutable?
3. What incentive is there to hold money in any bank, as an honest saver, if you will pay for their bad decisions and mis-demeanours with no reproach whatsoever?

This situation is seriously f***** and sets dangerous precedents for all to heed. Your hard earned assets are at someone else's whim in a bank!

hooligan2009's picture

this is theft, nothing more nothing less

the troika has no legal power to steal money, any more than you or i do

it can do it illegally, but cyrpiot mps will likely be shot dead if they vote for these measures on monday and, if "real" cypriots (the greek ones, not the turkish ones or the russian ones) are protected, the cypriot polticians will be shot dead by the russian mafia..

your points are all valid. 

i expect that people will soon realize that the money has been laundered throughout europe into the largest banks using the cypriot banks as a conduit

if the banks have matching assets (deposits with major banks) to liabilities (laundered money "borrowed") where is the loss? the depositors in a sound bank are blown up the same as in an unsound bank?

tar that brush and get the feathers ready

falak pema's picture

bottom line today : You either get robbed straight by the banks or you get robbed by those who rob the banks who then rob you! 

The first is the Jamie Dimon and private banksta Consorts way the second the EU statist way! 

AvenoSativo's picture

>> A guarantee of a positive return is associated with rent-seeking behavior or monopolistic position, but not with modern capitalism.<<


Good, then, the same goes for the banks/capitalists. Will the banks be asked to submit 9.9% of their assets to contribute to the rescue of themselves?

Oddly enough, the British Telegraph site still does not mention anything about the cyprus "rescue" plan. All German newspapers are having it as the headline and some already provide their editorial views.

outofideas's picture

Keep calm and carry on


I think the cypriots have just been told to lay back and think of Cyprus.

AvenoSativo's picture

Alright. But, there are only this one about UK savers and the other about the UK troop's savinggs in Cyprus; nothing general and macroeconomical, as would be expected from any major newspaper such as Telegraph.

Zombies On Toast's picture

So, if I am a Cypriot and have saved my entire life I am just to accept that some unelected EU bureaucrats in Brussels are going to take 9.9% of my money?!#@? I would take the rest of it out of the bank Tuesday morning as I would never trust any bank again. What do you think the Russians will do? Maybe the same? This will just gaurantee the collapse of the banking system in Cyprus, not save it. The dominos will start to fall very soon.

enloe creek's picture

How would a bank run in europe affect the rest of the worlds banks. very badly I guess, so how and when do the strong banks take over the weak europeon banks

bank guy in Brussels's picture

Marc Chandler is missing it, and shilling for the system too much in his article above

He jumps too quickly from the fact that in a free market, a rate of return is not guaranteed ... to claim that therefore it is okay for governments to manipulate rates, destroy savers, and comprehensively pervert and create mis-allocations throughout the entire marketplace ... nothing was 'guaranteed' in life, so stuff it, says Marc

Marc seems to say that since life doesn't come with 'guarantees', it is okay for the government to be crony fascist and running the economy to benefit the banksters they prefer ... Who guaranteed your government wouldn't betray you, huh? says Marc

And then Marc Chandler feels confident that "spill over into the capital markets on Monday is likely to be minimum ..."

Well maybe on Monday amid the 'capital markets' crowd, i.e., as far as Marc's friends are thinking at the moment ...

But blowback will follow from this Cyprus depositor confiscation, big-time ... whether this week or just shortly down the road

My Italian and Spanish friends in Brussels are already hitting the ATMs

This is a major turning point in the break-up of the euro-zone ... a break-up which will arrive much sooner than Marc expects

JOYFUL's picture

From what I can gather, both you and the author are "bank guys"...let's posit that as a neutral here: neither of you are Jamie(I Like to Hurt People)Dimon...there's nothing intrinsically 'evil' about working for a there?

But maybe there is something that comes with that territory!

For all of your apparent willingness to eviserate the guy for 'shillin for the system' your critique slides over the most significant statement of intent he provides...

Low interest rates to fixed income earners has been offset by the appreciation of assets, including stocks, bonds and real estate. In addition, the lower rates helped foster stronger economic activity than may have otherwise been the case spurred growth in profits. Capital is not repressed in the United States and investors from around the world continue bring their savings to America.

Offset? Appreciation of investor assets? Stronger economic activity due to 'lower rates'???? Look, if this article is actually talking about somewhere, like, say...the Planet Of the Apes...or wherever, and I failed to read that disclosure, I apologize for missing it\but if it's supposed to be centered on a reality not dissimilar to that of Planet Earth, I just don't know where Marc is finding his market to mark...what the hay? That's one big bale of b.s.

Maybe you don't think that's much of a problem, cause you like his reassuring position about the inner workings of 'modern capitalism| "The returns to the factors of production (land, labor and capital)  are not guaranteed.  A guarantee of a positive return is associated with rent-seeking behavior or monopolistic position, but not with modern capitalism."[but not to where he leaps from there?]

I believe that Marc has been incredibly, if inadvertently, revealing in his analysis...modern capitalism is 'rent seeking' and 'monopolistic position' writ large...his ideologic blinkers make it possible for him to invert that reality in his apologia here in such a way that even fellow 'bank guys' get airsickness from the high altitude rhetorical bungee jumping...

here at this moment, on the cusp of 'modern capitalisms' dissolution, we are witness to the collapse of the myth of financial capital as a factor of production. For many it will be a painful revelation.

Marc To Market's picture

Thank you bank guy in Brussels-- outside of the resort to name calling you--you say there will be a run on the banks as mom and pop take their money out.  I say no.  You say in if not immediately, shortly there after.  I say if the risk is contained early on, a bank run will need another spark.  Your friends hitting the ATM in Spain and Italy is a self-selection group, no ?  Representative of the millions of people in Europe?  Color me skeptical.  And you say EMU is going to break up sooner than I expect.  I am already collecting money from those who said the euro zone would have broken up by now or that a country will leave.   Again, I do not see this a a major turning point, in part because European countries have done similar things in the past without triggering a bank run or a major crisis.  I note that when Italy taaxed all savers 5% when it was preparing to join EMU.  Did it trigger a bank run ?  Was it a major turning point ?   

disabledvet's picture

these Cypriot banks were paying 12% interest rates on deposits. that says to me "you have bankrupt bank." am i missing something here? it's not like they don't advertise the rate. besides "who gives a phuck"? you want to be in the euro club prepared to have "zero percent interest on your savings account." we've had that here in the USA going on 5 years now...although some have argued "been true for thirty actually." needless to say "there's an industrial capacity of unlimited" in the USA as well. only Germany can match that....and indeed both are now at the forefront of expanding "unlimited" industrial capacity to "to infinity and beyond." so there it is then! "just a question of price" it is...hence "those Cyprus banks have been declared over priced." stick with your Too Big to Jail banks in the West...throw in some royalty... and everything should be fine.

Fuh Querada's picture

This is a post from the banking elite to the ignorant public.

Marc To Market's picture

a small correction  Fuh Querada, I do work for a bank, and I voluntarily share institutional quality analysis widely.  You don't have to be ignorant.  You, my friend, are chosing to be needlessly.   Some how your put down is meant to dismiss my arguments, but they attack the very way I earn money to put food on my family's table.  Relevancy ?  Zilch.  

Orly's picture

And may I say, without a </sycophant> tag, I greatly appreciate what you bring to ZeroHedge and I hope our arguments do not dissuade you from further contributions.