Guest Post: The Good, The Bad, And The Extremely Ugly Of The Cyprus Deal

Tyler Durden's picture

Authored by Yanis Varoufakis, originally posted at,

There are some good features of the Cyprus deal and, of course, some bad aspects. However, its repercussions for the Eurozone as a whole are exceptionally ugly and will, I submit, mark a turning point for Europe; a point at which Europe took a nasty turn toward a set of mutually disagreeable outcomes.

The Good

  • Unlike the Eurogroup’s original decision, deposit insurance for accounts up to €100 thousand will be respected. The reversal of the decision to ‘tax’ insured depositors constitutes a last minute restoration of common sense.
  • Marfin-Laiki Bank’s bond and shareholders will be wiped out – as they ought to. The original Eurogroup decision to let them off the hook (especially the bond holders) while haircutting depositors (including those whose deposits were guaranteed by the state) would have been an indefensible re-ordering of a failed banking system’s creditors.
  • The new deal treats different banks differently, as it ought to. The earlier Eurogroup decision imposed blanket haircuts on all accounts irrespectively of the bank’s bottom line. At least now uninsured deposits will be haircut in proportion to the size of the bank’s black hole, thus restoring a degree of private responsibility on the part of depositors viz. their choice of banker.
  • By forcing losses on uninsured depositors and the banks’ bondholders, taxpayers have to bear a smaller burden of the bailout loans; and this is, ceteris paribus, a good thing.

The bad

  • The Memorandum of Understanding has not been written up yet and, thus, the deal is utterly incomplete. In particular, we have no idea what degree and type of austerity will be imposed upon a collapsing social economy. Given the troika’s track record, it is almost certain that yet again they will elect an austerian package bound to crush the weaker Cypriots with ever-increasing verve.
  • The effect of the complete wipe out of the foreign depositors will have a devastating effect not just on the banking sector but also on the hotel and tourist industry. As a Russian commentator noted: “Now that the Russians’ deposits have been all but confiscated, who will stay in the €500 per night five star hotel rooms on the island? Mrs Merkel?” It is highly doubtful that the troika will factor in the deflationary effects of this aspect in their fiscal consolidation and debt sustainability plans.
  • The transfer of €9 billion of ELA money from winding down of Marfin-Laiki to the Bank of Cyprus – it flies in the face of basic banking resolution principles, reflecting the ECB’s Taliban-like defence of what it considers to be its ‘realm’.
  • Capital controls have been touted, even though it is not clear how they will be implemented, creating a second-tier euro: Cypriot euros that are no longer exportable (nb. Imagine Vermont dollars that cannot be taken out of Vermont: a logical travesty within a currency union)

And the extremely ugly

Setting aside the Cyprus drama and the tragedy awaiting its people, the repercussions of the past week’s shenanigans for the Eurozone as a whole are exceptionally ugly. As I wrote the other day, in one short week Europe has managed to put in jeopardy the sacrosanct concept of state guaranteed deposit insurance (even if, in the end, they took this threat back), to bring back into question the integrity of the Euro-area and to sacrifice the European Union’s single market principle according to which capital controls are inadmissible.

However, the ugliest dimension that the new deal has introduced is the effective end of any hopes of a genuine Eurozone-wide banking union. Mr Dijsselbloem, the new Eurogroup head who seems terribly keen to be more amenable to German thinking than his predecessor, Mr Yuncker ever was, said so in no uncertain terms when rejoicing that the Cyprus deal paves the ground for new bailout arrangements such that the European Union “…will never need to even consider direct recapitalisation” of failing banks. This constitutes the death knell of both the direct recapitalisation agreement reached last in the EU’s June 2012 summit and, naturally, of any meaningful banking union. The message is thus clear: Each to his or her own! All plans to use the ESM in order to de-couple the banking from the public debt crisis are off the table.

The combination of (a) the denial of the need to effect public debt consolidation, (b) the derailing of a meaningful banking union and (c) the heavy-handedness with which Cyprus was treated over the past week, spell a new, uglier, state of affairs in Europe. Up to now, supporters of austerity and of the German approach to the Eurozone Crisis in the deficit countries (including France) have argued that we need to go along with Berlin and Frankfurt so as to inspire sufficient confidence in those who control the purse strings (in our willingness to ‘do our homework’) before they can yield to the inevitable eurobonds, to the logic of a banking union, to whatever it takes to bring about greater political and economic union.

Alas, the Cyprus deal reveals how wrong this view was: Even though peoples throughout the periphery (in Ireland, in Portugal, even in Greece and Italy) have, however grumpily, bowed their heads to severe austerity and the removal of labour protection laws, the powers that be in Berlin and Frankfurt are shifting away from unifying moves, adopting increasingly authoritarian, divisive policies that are pushing the Eurozone in precisely the opposite direction to that dictated by political and economic sustainability.

In short, while the bailing in of inane Cypriot bankers and risk-taking depositors is to be welcome, I would not be at all surprised if the Cyprus week-long episode does not register in history’s annals as a major turning point; as the moment in history when Europe moved beyond the pale.

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little buddy buys the dips's picture

dear europe,


you're welcome,


little buddy's picture

When is the next Cyrpus Shake video coming out on youtube?  You know the one that has the bankers dancing while holding the depositors upside down by the ankles and collecting all the change that falls out...

Ratscam's picture

Archduke Ferdinand moment with a delay!

Abraxas's picture

If these guys had ruled in 1914, they could have made it look like the archduke had committed suicide.

PUD's picture


Cognitive Dissonance's picture

"In short, while the bailing in of inane Cypriot bankers and risk-taking depositors is to be welcome, I would not be at all surprised if the Cyprus week-long episode does not register in history’s annals as a major turning point; as the moment in history when Europe moved beyond the pale."

May I suggest that this tipping point was reached two or more years ago? This week was simply the moment of the collective recognition of this past event.

<And yet the majority of the collective is still blind to their own denial. Such is the process of loss and grief.>

AlaricBalth's picture

CD. You are absolutely correct. In fact the bail-in plan was codified by the European Commission, June 2012, in a document called: Impact Assessment; establishing a framework for the recovery and resolution of credit institutions and investment firms.

Beginning on page 130 are complete procedures as to when a bail-in is appropriate and financial modeling to determine the amount of the bank levy or haircut.

"This section examines how the bail-in tool could absorb losses of defaulted banks (failed banks in the no recapitalisation scenario or failed and non-viable banks in the recapitalisation scenario) and (only in the recapitalisation scenario) allow banks to re-establish their Minimum Capital Requirements without recurring neither to ex-ante funded schemes (DGS/RF) nor to taxpayers' money."

defencev's picture

All the bullshit that you post here would make some sense if you were consistent in any shape or form. How this jerk can talk about banking union if Cypriot banks operated in a way that would be impossible in pretty much any other European country.

Essentially, the Cyprus became a money laundering mechanism for Russian mafia with full expectations that if something go wrong EU will bail them out. Add to that the alleged fly of Russian funds after "freeze" and you get the pefect picture of "Cypriot banking system". The banking union presuppose the same rules applied to all banks.

The crush of money-laundering operation was a good thing for Europe and that is the lesson of this (very small) episode.

akak's picture

You may collect your paycheck now, Tokyo Rose.

Cognitive Dissonance's picture

All my bullshit are belong to you.

Piranhanoia's picture

Hey Defencev;  You appear to be working on the idea that the banks in Europe proper don't launder money for anyone that asks.  Since you have just seen that they agreed to let Russia withdraw their money from Cyprus "pre haircut", and England, USA, France,  Italy and every other country or important person,  (to them and their definition of such a person)  you don't understand what you are talking about.   Money laundering is the major business of all banks everywhere.  Only the Banks of Lebanon and North Dakota seem to be solvent, and they probably launder money too.  Why do you think organized crime plays by any rules at all?  

OpenThePodBayDoorHAL's picture

Euro-Pacific Bank, founded by Peter Schiff. 100% reserves/deposit ratio. They do not lend, it's just a transactional bank. You can also choose to have your account held in gold, held by the Perth Mint.

BandGap's picture

Jeez, one blow job and now they're gay forever?

max2205's picture

Why would anyone leave cash in a bank that pays no interest. ..

williambanzai7's picture

I can imagine people trying to get their hands on Vermont Dollars on fiat judgement day.

One of We's picture

Senator: Oh, fellow Members of the Roman Senate, hear me! Shall we continue to build palace after palace for the rich? Or shall we aspire to a more noble purpose, and build decent housing for the poor? How does the Senate vote?
Senators: Fuck the poor!
Senator: Good.

Tinky's picture

Content: A-

Formatting: D

Iam Yue2's picture

Crooks, cons and capers......

Tinky's picture

Capers? De rigueur in any high-class salad Niçoise.



whisperin's picture

It is funny that there is no mention of the constipation (panic) in the CFO's offices of Large US multinationals with all that cash that is on deposit in Eurozone banks that hasn't been repatriated for tax reasons. Looks like damned if you do and damned if you don't. Imagine trying to calculate the the odds on a haircut or do I bring it back and pay taxes!

Ying-Yang's picture

Hmmmmmm.... scare the money back to the US

Yeah... Morgan Fairchild, that's the ticket.

snblitz's picture

The unrepatriated monies are in foreign branches of US banks.

WallowaMountainMan's picture

that works only when the parent banks in the u.s. of a. going insolvent, not when the foreign counrtry goes under.

(tip of the hat to a zh comment fella whose name i don't recall....)

AZLagun's picture

Pardon me but am I the only one scratching my head trying to figure out how any of this could be labeled as "Good"?  This can be difined as nothing more than THEFT.  Truly disgusting!

Citxmech's picture

The "good" part comes when the rule of law is respected.  If you invest in an enterprise destined for failure - "you get noting - you lose sir, good day!"

Bailing out losers rewards poor investment, encourages riskier investments, and undermines confidence in the system.

s2man's picture

Allowing an insolvent bank to fail is theft?  Given, the bank itself may be called guilty of theft for gambling with deposits, and loosing, but that's the risk of putting your money in a crappy bank.  What little I keep in the bank is in a 5-star rated one.

Disclosure: I started my bank run four years ago.

JR's picture

Let me explain, AZLagun. what Yanis means by "Good." Yanis is happy that risk-taking depositors” got there’s, in the rear, and equally happy, apparently, that the risk-taking bankers got there’s also, to the tune of +$63.5 billion in bailout money in the pocket, and are on the risk prowl again. 

It's true. Mark Gongloff tells us that “the White House Office of Management and Budget recently estimated that TARP will ultimately cost the government $63.5 billion.”

Yes, and as the stock market cruises record highs, led by skyrocketing banks stocks and Bernanke’s FRN helicopter, Gongloff warns us that the crisis still haunts us

And here’s another warning from Christy Romero, the Special Inspector General for the Troubled Asset Relief Program: “The biggest and most interconnected banks are bigger and more interconnected than ever before, and the government has no idea whether it will be able to safely wind down a too-big-to-fail bank in the event of another crisis.

“The people taking those risks are insulated from the consequences -- that's moral hazard” and “it continues to exist."

.“In fact,” writes Gongloff, “the bailout could arguably have made a future crisis more likely, by encouraging big banks to take on even more risks, in the widespread belief that they can always turn to the government for more cash in the event they crash the Hindenburg, again.”

“Government,” in this case, means you, taxpayers.

But “Government” is flush when it comes to banker handouts so in 2009, Congress approved another $108 billion credit line for another IMF crisis fund to help out these folks, and in the fall will be considering making permanent a $65 billion U.S. taxpayer contribution to an IMF crisis fund that Legarde et al., can use as a weapon to threaten “risk-taking depositors.” Never mind you taxpayers that U.S. taxpayers already are the biggest “contributors” to the Fed-owned IMF.

So, the bottom line is that Americans are facing austerity, loss of jobs, downsized living standards, lower wages, and zero rates on savings from their labors coupled with high inflation subtracting further purchasing power. But the “good news” is that USA Today reported Thursday that at least 10 CEOs took in $50 million apiece in 2012, largely as a result of cashing in stocks that have soared in value with the rising market. According to the newspaper,

“Early 2013 proxy filings detailing 2012 compensation show a growing number of CEOs reaping $50 million or more, gains that could prove unmatched in breadth and size since the Internet IPO craze enriched tech company executives more than a decade ago.”

And so fat cat Ford CEO Alan Mulally, whose take home pay increased an additional $61 million last year by cashing in shares that vested to bring his total paycheck for 2012 to $82 million, would like to thank all of you peons for his comfortable living conditions “made possible by downsizing and the slashing of wages for newly hired workers to $15 per hour.

Mulally’s pay is now more than 2,500 times that of a new auto worker.”

machineh's picture

Capital controls have been touted, even though it is not clear how they will be implemented, creating a second-tier euro.

THIS IS WHY the banks can't reopen till Thursday. 

Cyprus is writing comprehensive capital controls, to pen in tens of billions of would-be flight capital.

Their scope will shock you: limits on off-island wire transfers; limits on physical cash transfers; limits on off-island credit-card charges; strict review of import pricing; perhaps even import licensing and restraints on buying forex.

Argentina is the model: it now requires advance licensing, case by case, of every import. Many applications are simply refused, even for vital spare parts.

Wake up Cyprus: the correlón is coming, and it's going to last a long time.

ebworthen's picture

"Vermont Dollars"


How about "Detroit Dollars"?

JR's picture

Risk-taking depositors? What on earth are you talking about? Are you saying that money raised by individuals is a risk unless the bankers have it in their equity market to use in their own speculations?

Has the circle of lies come full circle to where sound money is money on the banker table and risk money is what you have in your pocket?

s2man's picture

Well put, Yanis.  Many have been calling for the end of bailing out banks with tax payer's money, my self included.  Now we finally get it and many cry out "confiscation" and "theft".  I've gotten sick of hearing it, this week.  This was not theft (except perhaps by the banks), it was a bank failure, clear and simple.  Those who were insured are intact.  Those who were not insured, "Aaaand, its gone".  

Urban Redneck's picture

Just in case anyone missed it above...

That 9 billion moving from bank A to bank B.. is 9 billion euros of BANK DEBT OWNED BY BANKERS TAKING SENIORITY OVER DEPOSITORS.

it should really be moved from the bad to the really ugly section


Cycle's picture

I would agree that the crude handling of the Cyprus banking crisis impairing savers is the spark for the next Great Global Depression, at least in the West.

MFLTucson's picture

Put it in US banks are you will be assured a complete loss when the dollar collapses, or when Dimon decides he wants it.

w00dmann's picture

I was chatting with my girlfriend (amateur investor) last week about global affairs.  She asked for my opinion; I said the world economies were on the skids.  Her response?  "They will fix everything.  They always do".  Yesterday, after the Cypress deal was reached, her reaction?  "See I told you they would fix it".

That, more than anything, shows you how difficult it is to get through to people.  Despite what I tell her, despite EVERYTHING going on, most people simply do not want to know the truth.



Signed, gobsmacked 


Tinky's picture

Try witholding sex. If you're any good, she'll begin to pay closer attention.

w00dmann's picture

Haha!  Awesome response.  Dirk Diggler to the rescue.

ebworthen's picture

Sold some games back to GameStop yesterday.

They won't buy unopened games because they might be "stolen".

If you sell them opened games, they want your license and a thumb print.  I said "wow, selling a $15 game and you get all my information and a thumb print when the bankers in Europe can steal money legally."

"Huh?" she said.

Neither her nor her young male co-worker had heard of Cyprus or the ECB stealing depositor money.

"Cyprus?  Where is that?" she said.

Rest easy J.P. Morgan, Citi, and the FED; the young sheeple of Amerika have no idea what you are doing.

NeoLuddite's picture

What's happening in Cyprus isn't a haircut - hair grows back.


It's an amputatio to feed the tribalist cannibals.

Diogenes's picture

"Haircut" = "shearing the sheep".

NoWayJose's picture

This article misses one CRITICAL point - the central bankers managed to find a way to completely bypass a country's elected legislators, and force a country to owe a 10 billion Euro debt that no one in Cyprus voted to approve.  That's the new template, as it goes even further than the previous self-inflicted central bank template created by Bernanke and Paulson and Geithner.

Tinky's picture

" goes even further than the previous self-inflicted central bank template created by Bernanke and Paulson and Geithner."

You say that as if the Congress actually supports the best interests of the broader American public.

worbsid's picture

When BOA moved all their derivative risk to the depositors bank from the investment bank, I changed banks, actually to a credit union.  Don't want the MF GLobal treatment, thank you.

NeoLuddite's picture

What's happening in Cyprus isn't a haircut - hair grows back.


It's an amputatio to feed the tribalist cannibals.

Diogenes's picture

Haircut=shearing the sheep