The Cyprus Option. Which Way Will Australia Go? Worth Reading.

[icyfroth]

From the CEC newsletter 26 March 2013

The Cyprus “solution” sets a precedent for future IMF-dictated banking rescues—deposits will be stolen to prop up banks.

A Glass-Steagall-style banking separation will protect deposits, and therefore the solvency of banks, by splitting banks with deposits away from the high-stakes gambling of investment banking, and the investment banks will be allowed to fail without any blowback on depositors. Glass-Steagall will thus altogether eliminate the need for bailouts, all of which ultimately fall at the feet of the taxpayer, and, as we have seen, solve nothing.

Now, as we witness what are potentially the initial rumblings of an avalanche of bank collapses, the question is, which way will Australia go?

For those who love graphs, click through below link...

It’s pointless consoling yourself with the illusion that Australia’s banks are bulletproof. In December, the experts in Europe consoled themselves by declaring the eurozone crisis over, and now look at what’s happened in Cyprus.

Cyprus banks made bad bets on Greece’s debt, which effectively bankrupted them, and again raised the prospect that a nation might be forced to withdraw from the European Monetary Union and the euro.

To prop up the euro, the Troika—IMF, European Central Bank and EU—demanded Cyprus confiscate money from the banks’ customers, the depositors: 6.75 per cent on accounts under 100,000 euros, and 9.9 per cent on accounts over 100,000.

This cure was worse than the disease, because it shredded the Europe-wide guarantee announced by German Chancellor Angela Merkel at the height of the eurozone crisis that bank deposits up to 100,000 euros would be protected; Merkel herself signed off on the Troika’s demands to Cyprus, so depositors all over Europe are now in a panic, because they fear their guarantee is worthless.

Only the Cyprus parliament has done anything to preserve the guarantee, by emphatically rejecting the Troika’s demands; however, deposits above the guaranteed threshold of 100,000 are at risk—the Cyprus parliamentarians agreed to massively tax deposits over 100,000 euros, and the Dutch chairman of the eurozone has sparked panic by announcing the Cyprus arrangement would be the template for future crises.

So, which way will Australia go?

The CEC is leading the fight for Australia to go with a Glass-Steagall banking separation. A petition to federal Parliament is circulating nation-wide, and delegations of CEC activists and supporters are meeting MPs.

Have a good Easter everyone, I'll be away til Tuesday after. Might pop in if I'm in range.

[cherry*135]

The following gives more info on the Cyprus situation rather than the stock claim  that deposits will be stolen to prop up banks.

Cyprus is unique. Besides being tiny, its banking system looks different from those in most other countries. Much of the big money deposited in its banks is from foreign investors, including Russians who have long been suspected of money laundering. Those investors had fair warning that Cypriot banks were troubled. The issue has been simmering for six months. But those investors left their money in the bank, in part because they were gambling that the banks would be bailed out at no cost to them. If the current plan is approved, depositors will have lost that bet.

Worse, the strategy employed in the bailout of Greece — in which bondholders of its sovereign debt were paid less than face value — will not work in Cyprus. Cyprus’s banks own much of the country’s debt, so any effort to reduce that debt by forcing debt holders to accept less would only make the banks more troubled.

Given the brutal history between Russia and so much of Europe — and speculation that so much of the money is ill gotten — it is clear why it would be so politically unpalatable to countries in the euro zone, Germany in particular, to bail out Russian depositors. And even if the move were to create a run on the banks in Cyprus, the contagion would be limited.

There is very little chance that politicians would ever choose to use the model they developed in Cyprus in a country like Italy or Spain, where a run on the banks would have such profound implications.

By the way, if you’re wondering why investors left so much money in troubled Cypriot banks, here’s a trivia question: 

Would you have been better off leaving your money in a bank in the United States or in Cyprus over the last five years?

The answer: You would have been better off in Cyprus, even after the bailout, when your money was “confiscated.” If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit — 12,760 euros — you would be left with 114,840 euros.

The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year.

http://dealbook.nytimes.com/2013/03/18/a-bank-levy-in-cyprus-and-why/

[freakiness]

Just another day in the let's link Aussie to all the troubles in the world campaign.

[icyfroth]

yes but how do you feel about the Glass-Steagall banking separation?

makes sense doesn't it?

[freakiness]

yes but how do you feel about the Glass-Steagall banking separation?

makes sense doesn't it?

It sounds ok on the surface but I have not read enough about it to form an opinion.

How does it differ from our current system?

[icyfroth]

In a nutshell and as I understand it, our current system banks can use private and commercial funds to invest in often risky and speculative deals leaving the private depositors funds vulnerable when it all goes bad as in the GFC crisis.

Glass-Steagall would regulate to keep speculative bank separate from private sector banking so if there's a blow-out, private funds would be safe.

gotta go, have a good Easter.

[cherry*135]

I don't think it makes sense for Australia. What may suit the US or European countries banking system doesn't necessarily mean it would be good for Australia banking system.

Private funds were safe in Australian banks in the last GFC weren't they?

[cut*glass*amethyst]

The following gives more info on the Cyprus situation rather than the stock claim  that deposits will be stolen to prop up banks.

Cyprus is unique. Besides being tiny, its banking system looks different from those in most other countries. Much of the big money deposited in its banks is from foreign investors, including Russians who have long been suspected of money laundering. Those investors had fair warning that Cypriot banks were troubled. The issue has been simmering for six months. But those investors left their money in the bank, in part because they were gambling that the banks would be bailed out at no cost to them. If the current plan is approved, depositors will have lost that bet.

Worse, the strategy employed in the bailout of Greece — in which bondholders of its sovereign debt were paid less than face value — will not work in Cyprus. Cyprus’s banks own much of the country’s debt, so any effort to reduce that debt by forcing debt holders to accept less would only make the banks more troubled.

Given the brutal history between Russia and so much of Europe — and speculation that so much of the money is ill gotten — it is clear why it would be so politically unpalatable to countries in the euro zone, Germany in particular, to bail out Russian depositors. And even if the move were to create a run on the banks in Cyprus, the contagion would be limited.

There is very little chance that politicians would ever choose to use the model they developed in Cyprus in a country like Italy or Spain, where a run on the banks would have such profound implications.

By the way, if you’re wondering why investors left so much money in troubled Cypriot banks, here’s a trivia question: 

Would you have been better off leaving your money in a bank in the United States or in Cyprus over the last five years?

The answer: You would have been better off in Cyprus, even after the bailout, when your money was “confiscated.” If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit — 12,760 euros — you would be left with 114,840 euros.

The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year.

http://dealbook.nytimes.com/2013/03/18/a-bank-levy-in-cyprus-and-why/

A cut and paste from amethyst? I'm shocked! 😮