Cyprus And The Eurozone Bank Bailout Hypocrisy

Wolf Richter's picture

Wolf Richter

Cyprus didn’t prick the Eurozone bailout bubble, the notion that bank investors who took enormous risks to gain financial rewards would always be made whole by taxpayers. That bubble had been pricked in February. But it was the first time that the international bailout cabal, the Troika, stuck its needle into it—while Germany quietly bailed out all investors in one of its own rotten banks.

The bailout deal was pretty slick; it dodged the Cypriot parliament which had demolished the prior package. Well-honed Eurozone tactics: don’t allow voting to mess up the plans. Uninsured depositors would eat €4.2 billion—much of it Russian money. Junior and senior bondholders would kiss their €1.7 billion goodbye. That even senior debt, albeit only €200 million, was destroyed was a first in Eurozone history. Eurozone taxpayers would pick up the remaining €10 billion—still a lot for such a tiny country, but at least it wouldn’t be pocketed by some hedge funds, or worse apparently, Russian depositors.

In return, the country won’t go bankrupt. Not for the moment, at least. But no one knows how Cyprus can rebuild its economy without its outsized banking sector. The Russian money—what’s left of it—will be leaving. Years down the road, production of natural gas might kick in. Until then, Cyprus will be force-fed the Troika’s sacred medicine of “structural reforms,” so austerity, and privatizations of state-owned enterprises.

Markets soared when the deal was announced. But then a new reality interfered: Jeroen Dijsselbloem, Dutch Finance Minister and since January, President of the Eurogroup, said in an interview what should have been said years ago. Markets tanked.

“If there is a risk in a bank,” he said, “our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?’ If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders.”

He was extrapolating the Cyprus deal to banks elsewhere. Everyone who’d taken risks for financial gain would get whacked by the very risk they’d taken, before taxpayers, who hadn’t taken any risks, would get whacked. The process of bleeding the taxpayers for the benefit of investors had to stop, he said. And risks would have to be risks again.

What about other smaller countries with disproportionately large, highly leveraged banking sectors, like Luxembourg or Malta? They’d have to trim and strengthen their banks and fix their balance sheets before they get in trouble, he said. Investors should know that the ESM bailout fund would no longer “automatically” swoop in and make them whole.

“Now we’re going down the bail-in track,” he said. “It will force all financial institutions, as well as investors, to think about the risks they are taking.”

A sea change from Jean-Claude Juncker, his predecessor at the Eurogroup and Prime Minister of Luxembourg—the very country that Dijsselbloem had warned would need to strengthen its banks before they got in trouble.

But in his own back yard, Dijsselbloem did make whole certain investors when SNS Reaal, fourth largest bank and insurance group in the Netherlands was sinking into a morass of real-estate loans left over from a housing bubble. Under his direction, the bank was bailed out and nationalized in February, after already having been bailed out in 2008. It cost Dutch taxpayers €3.7 billion. A bankruptcy “would have unacceptably large and undesirable consequences,” Dijsselbloem explained at the time.

But stockholders were wiped out. And so were holders of junior debt! It sent tremors through the system. The needle that pricked the Eurozone bailout bubble.

Anecdotes were bandied about of mom-and-pop investors who’d lost their life savings because they’d bought these crappy junior bonds that had been touted as safe. They would have been worthless anyway in a bankruptcy, retorted Dijsselbloem and stuck to his semi-hard line—semi-hard because all depositors, insured or not, as well as holders of senior debt and covered bonds were still bailed out by taxpayers.

But the unwritten government guarantee on bank debt was off for the first time. Instead of flagellating his arms to justify why taxpayers had to bail out investors, he signaled that he wouldn’t tolerate a situation where the capital “at risk” wasn’t at risk. It would become the new way.

Or so you’d think. But last week, it was Germany’s turn to bail out a bank, mercifully obscured by the furor over Cyprus: HSH Nordbank, the world’s top ship-financing bank. The shipping-industry bubble that had turned into a crisis was sinking the bank. Due to overcapacity and low freight rates, ship owners could no longer service their loans. So HSH got bailed out by the states of Hamburg and Schleswig-Holstein that together own 90.69% of the bank. They’d raise state guarantees by €3 billion to €10 billion. Additional bailout aid would be considered. No haircuts for anyone. Except taxpayers. And like SNS Reaal, HSH had already been bailed out in 2008.

But when Dijsselbloem saw the markets swoon after his refreshing statements, he half-recanted—no one is allowed to prick the stock market bubble that central banks are blowing with such ardor, not even he. “Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday,” he backpedaled hours later. “Programs are tailor-made to the situation of the country concerned, and no models or templates are used.”

Indeed. As the bank bailouts in the Netherlands and Germany have shown, every country will bail out its own banks however it sees fit—and taxpayers will continue to bear the brunt of the losses. But if the country isn’t big enough to bail out its own banks and requests an international rescue, the new model will be applied. These banks have now been marked. Of course, when the next megabank craters, when it isn’t a matter of a few billion, but a few trillion, all bets are off.

The bailout of the Cypriot banks centered on how to sock it to Russian depositors. But in Moscow there are many people who are jubilating right now. Their wildest dreams have come true. Read.... Cyprus Crisis: A Triumph For Russian Isolationists

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SWIFT 760's picture

Beer me up, Scotty. 


monad's picture

The Caymans are next. Then Switzerland.

hannah's picture


dunce's picture

THe two states own over 90% of the bank then the tax payers should get whacked as the owners. States should not be engaged in business. They do not need to own a bank to govern. After 9-11 we learned that the WTC was owned by the New York Port Authority, what the hell are they doing dabbling in giant office buildings? There is no shortage of private investors in that city. These things are designed to facilitate corruption.

Abrick's picture

I was of the understanding that the force feeding of austerity, privatization of state enterprise, and resources were just what was needed for everyone. What's all the fuss about? One way or another, we'll all pay the piper.

Paracelsus's picture

I logged on to the Cyprus News web today and the fellow was saying the Church was taking a Euro 100 million haircut. I guess this is the Greek Orthodox Church.

If the Germans through the ECB are confiscating Church wealth,does that mean they are doing God's work now? Centuries ago the various European churches kept their wealth in gold and silver plate and religious items. Easily hidden,transported and a good hedge against inflation.

Maybe those guys were on to something...

Lmo Mutton's picture

So to take over a country today you just cause a run on the banks, buy whats left and install Socialism?


And I thought you needed an army or something.

Sandmann's picture

How are the Banks in Iraq doing after Paul Bremner ?

Downtoolong's picture

I think I'm finally starting to get this whole Good Bank Bad Bank division:

Good Bank = The one I'm exposed to.

Bad Bank = The one you're exposed to.

Simple elegance, the EU way.

dondonsurvelo's picture

How much money will the 40% haircut garner if most of the Russian money left before the haircut?  I can't believe a bank manager would risk his life and lives of his family by telling a Russian mobster or x-KGB guy that he could not have his money.  Apparently one bank stayed open for major depositors the entire weekend.  I believe the Troika will have to come up with more billions.  More fun still to come.

ElvisDog's picture

To be honest, I'm really fucking bored about Europe. Liars, bailouts, troika, blah, blah, blah. I'm not surprised or offended or appalled by anything they do. I just don't fucking care anymore.

GoldIsMoney's picture

Do you think the US are better of.

Let me see liars? "Read my lips we'll close Guantanamo", 
bailouts? TARP
Troika: Well FED, IMF and Krugman, do you need more?
blah blah blah. Killing is fine, drones are good, and needing 25 ¢ for every spend $ is fine also.

You are not suprised? Not offendes, by anything the US administration does?

I do care.... 

SWIFT 760's picture

I appreciate your sentiment. 

What do you plan to differently for a new 'hope & change' campaign, write letters to politicians, stage a protest...?

Or, buy precious medals, dont pay taxes, dump nearly all your US holdings and move (family) out of country? 

Perhaps caring is different than action or reaction...yea, thats gotta be it. 

GoldIsMoney's picture

The plans I had were taken int reality after the decision  for TARP (that's now 4 years or so ago). Yes I try to vote differently (but that will not do any good, but I'm aware of that), I have written more then one letter to the politicians. I guess it does not need much from your imagination what the answer is.. in short: "Everything is fine and we know what we're doing" and that was kindly expressed. 

I do have bough a lot of precious metals as you can conclude from my Pseudonym ;-). I try to avoid paying taxes but I do not really have found a way which may keep me out of the diverse jails. I've no US holding  but indeed I sold a lot of things which can not move out of my Country. And I send the money I got for that out of the EURo zone. 

I wanted to move out of this country also but my wife and childrens were against it. So I tried my best to get at leat my money out of this doomed country. 

So no I do care and I do have acted and reacted. 

Have you?

hooligan2009's picture be clear

in cyprus, everyone gets wiped out (in the bank that crashes) but the taxpayers incur no cost now, but the true cost later, after the ecoomy has crashed (6 weeks?)

in holland, the equity and junior debt get wiped out (of the bank that crashes), but the senior bank holders are made whole by the tax payers

in germany, the bank gets bailed out by tax payers via the device of an entity that can raise taxes directly from tax payers (presumably, local tax payer base that has to pay taxes in addition to federal taxes). how does anyone know if the states are solvent? and....i thought that european rules expressly forbid tax payer ownership of banks, either at the state or goverment level, since this represents a subsidy and unfair competition across the eurozone?

GoldIsMoney's picture

"taxpayers incur no cost now,"

Which parf ot 11 billions new debts gives you trouble?

HpDeskjet's picture

In the SNS case, cutting Senior bonds was considered by Dijsselbloem, but the ECB overruled him... The German case i dont know the details, but since Germany isnt doing austerity at all (they dont need to after years of very low wage growth, no housing bubble etc.) nobody is complaining (yet) about wasting tax payers money on its own banks. Foreign banks is already more difficult (read the German limit to ESM bank bailout money of 80 bln).

In this crisis (or maybe any crisis) its very simple => as long as the (political or financial) costs are smaller than the gains, tax payer money is wasted. But in Cyprus we seem to have hit the solidarity-wall.

assistedliving's picture

oligarch money left CYPRUS months ago and whover was left, the 'commission' just increased.  as usual TPTB are whole and the remaining cockaroaches are crushed.

List of ALL WIRE TRANSFERS ex CYPRUS from 01/2013 thru "a long enough timeline..." 

how do u say 'clawback' in russian?

Vegetius's picture

The Brave New World of the EU Kleptocrats,  as the desperate attempt is made to stop the ending of Social Sercurity and Free Health. Problem is no money and as the Germans learned on the Eastern Front the key to a successful retreat is space, time and material, the EU has no money no time and less and less space.

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be maintained only for such time as the State can shield the people from the political, economic and/or military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the greatest enemy of the State.”

- Goebbels

Radical Marijuana's picture

"Of course, when the next megabank craters, when it isn’t a matter of a few billion, but a few trillion, all bets are off."

Indeed, since literally quadrillions of units of funny money have been created to gamble with, it is practically impossible to imagine the magnitude of the bets which have been made!

While billions of flesh and blood human beings have to buy food and fuel with the same fiat money, the bankskters running the casino have been able to create trillions, upon trillions, of more fiat money for them to use to gamble with. The overall consequences of those kind of bets is impossible to estimate, since the REAL system is electronic fiat money frauds, backed by atomic bombs, in which both the "money," and the threats of murders to back that "money" up, are measured in obscured amounts of hundreds of trillions, adding up to quadrillions, in which that funny money is orders of magnitude more than the real economy, while the threatened murders to back that "money" up are similarly an order of magnitude greater than the actual size of the human population.

After the global system has been force backed frauds long enough to amplify those to astronomical sizes, nobody can imagine anymore how to return to something which is remotely realistic! Our whole civilization is based on organizing itself through the means of legalized lies, backed by legalized violence, which was enabled by the prolonged triumphs of the biggest gangsters, the banksters, being able to effectively take over governments, in order to accomplish that! Through those means, both the frauds, and the force to back those frauds up, now total something in the order of magnitude of quadrillions, which no longer has anything able to be comprehended by ordinary common sense.

The "laws of physics" of the "power to control" have enabled a hypercomplicated Gordian knot of psychology, due to the ways that coercion was able to back up bullshit, which has enabled the creation of a society totally dominated by fraudulent accounting, to the degree that there can be trillions upon trillions of units of funny money, gambled with, by the biggest banksters, in ways which are backed up by governments, despite all the ordinary flesh and blood people, who need to buy food, and pay their other bills, being stuck inside of that cybercasino, and thus being required to use the same fiat money in order to live!

LawsofPhysics's picture

I'd argue the laws of Nature and Physics have not really been impacted at all, they really don't give a shit.  The environmental response will simply be what it is and that which is not sustainable will not be sustained.  Sort of makes you wonder what those paper-pushers will taste like huh?

Radical Marijuana's picture

Of course, I agree that money magicians (or mathemagicians) do not change the "laws of Nature."

Human civilizations are energy systems, which continue to operate within the "laws of Nature." However, a basic idea in general systems theory is that the most labile component controls the system. In human terms, that has meant that the most dishonest and violent people have ended up controlling civilization. Energy naturally goes down the path of least resistance. In human terms, that means the path of least morality.

Nothing the banksters did has broken the laws of physics. The history of warfare, based on being the best at deceits, backed by destruction, has morphed to make the banksters the Fraud Kings, because they were able to take over control of the War Kings' systems, i.e., the powers of sovereign states, in order to legalize the banksters counterfeiting the national money supplies, and were furthermore able to intergrate that privatized fiat money supply into a globalized system of triumphant frauds, backed by the collective force of sovereignty of all the most powerful nations, which were all being effectively directed by the banksters.

The laws of physics continue to operate, in the sense that civilization continues to be an entropic pump, consistent with the ways that energy systems operate. However, we are a long, long, long way away from constructing better systems of social resistance to change what the path of least resistance actually is! At present, as you always repeat, LawsofPhysics, we are controlled by power, but, as power has more and more became information, the means of operating robberies have become through frauds. The REAL world is now controlled through a globalized system of financial frauds ... which means that we are increasingly behaving in more insane ways, which cannot be sustained.

However, when some of these fantastic bubbles of financial frauds finally pop, the consequences of having blown such astronomically sized bubbles goes utterly off the scale of anything before in known human history. We have no way of possibly predicting what happens when a megabank with trillions of units of funny money in play has its bubble popped: ALL BETS ARE OFF!

fancyfree's picture

Dear Friend Tyler,

There may be something which the 1% of the market that controls 40 percent of total wealth and 60 percent of global revenue knows that you don't, which is not just sleight of hands and mirrors.  What about improved governance, societal cohesion, and peace in the Middle East?

Bear's picture


"What about improved governance, societal cohesion, and peace in the Middle East?" Must be a joke! 

US Governance ... F 

UK Governance ... F

Societal cohesion ... where Europe? Russia? US? UK?

Middle East peace ... Syria, Egypt, Yemen, Bahrain, Palestine, Israel, Turkey, Iraq, Iran ... where is there peace? 


LawsofPhysics's picture

You would have to be a complete retard not to recognize that "money" has always been a distraction.  This is and has always been about power and control, period.  If you need to prepare a thesis to come to the same conclusion, you have wasted valuable time.  The "benefits" of the things you site will be no match for the true cost of all the resource mis-allocation and mal-investment when 7+, 9+, 15+ billion all start fighting for a decent quality of life. Hunger games doesn't even come close.  By the way, how do you see "improved governance" with guys like Joh Corzine not in fucking jail.  You paper gets a big "F" on many points.

ElvisDog's picture

I would suggest that money has always been an abstraction, even more in this digital age. The key point is who owns or controls the real, tangible assets in this world - farmland, oil wells, buildings, etc. The Fed and other dickwad central bankers around the world are really missing an opportunity to take control of every tangible asset in exchange for their fiat. They should bring me into the circle, and I would do it right away. Quantitative ease my way into owning every politician and every tangible asset on the planet. Me and my fellow central banker miscreants would own the world.

mjcOH1's picture

"Cyprus didn’t prick the Eurozone bailout bubble, the notion that bank investors who took enormous risks to gain financial rewards would always be made whole by taxpayers. That bubble had been pricked in February. But it was the first time that the international bailout cabal, the Troika, stuck its needle into it—while Germany quietly bailed out all investors in one of its own rotten banks."


Not seeing how German taxpayers bailing out German banks obliges German taxpayers to bail out anyone else's banks. 

If Cyprus doesn't want German tax dollars....don't take them.   Let Cypriot taxpayers bail out their own banks ... or not.    They should stop expecting a blank check and decide which of their taxpayers/depositers/bond holders/equity holders will eat the loss and to what degree.   If the choices get them locked out of credit with it!   Or make different choices.