Sowing the wind

The terms of Cyprus's bank bailout have shocked the world. For the first time, small bank depositors will take a hit.

Small depositors have long been regarded as sacrosanct. Although in theory they rank alongside bondholders and large depositors in the queue for funds, in practice they have always been protected - usually by taxpayers.  There is a widespread belief that because small deposits are insured in nearly every developed nation, therefore they should not take losses when banks are bailed out instead of being allowed to fail. Depositors losing money when banks are kept afloat, when they would have escaped unscathed if the banks failed, seems both unfair and illogical.

Hence the reason for the "shock and awe" response to the Cyprus bailout terms. A 6.75% one-off "stability levy" will be imposed on deposits covered by deposit insurance (under 100,000 Euros). The levy on larger deposits will be 9.99% - not a great difference, really, and much less than might have been expected: after all, depositors could lose 100% of deposit value above 100,000 Euros. Additionally, there will be higher withholding taxes on interest. These penalties will be applied to all deposits, including those in well-managed banks that don't require bailout.

The description of this as a "tax" or levy is a bit of a fudge. Under what type of taxation scheme are people provided with shares to compensate them for the taxes they have paid? But that is what is happening here. Depositors will be provided with bank shares to the value of their losses. They are being "bailed in" in the same way as junior bond holders: a percentage of their deposits are being converted to equity. The money taken from the depositors will go to the sovereign to compensate it for the cost of bailing out the banks. At the end of the process, the sovereign will be left with a manageable amount of debt, and the banks will be owned by their depositors and junior bondholders. In effect they will have become mutuals.

When I explain it like that, it doesn't sound so bad, does it? The problem for depositors is twofold, really:
  • their liquid assets (cash deposits) will have been replaced with illiquid ones (shares in banks that currently have little market value)
  • they are forced to take the risk that the future value of those banks will not compensate them for the money surrendered to the sovereign.
So depositors have an immediate liquidity problem, and the possibility of future real losses. They are not suffering a real immediate loss of capital at all. The sovereign is providing them with shares to the value of their losses. Yes, I know those shares look like duds, but there is no market for them so it is impossible to obtain a real market price. The sovereign is valuing the shares as it sees fit. It remains to be seen whether the sovereign's valuation is correct. I have considerable doubts about this, but that is for reasons that have nothing to do with the current bailout and everything to do with the real economic issues in Cyprus and the utterly inept and counterproductive measures being taken to deal with them.

Plenty of people have questioned why small depositors had to be hit at all. The German financial minister, Wolfgang Schäuble, who appears to have masterminded the bailout plan, wanted large depositors to take a much larger hit so that small depositors could be protected. The IMF took a similar view. It seems that the Cypriot government did not agree. There is considerable speculation as to why the Cypriot government preferred to see small depositors hit. To me it seems most likely that it has to do with the Cypriot government's wish to avoid upsetting Russia, given Nicosia's hope that Russia will contribute to the bailout by softening the terms of its existing sovereign loan, and the considerable amount of money (some of it undoubtedly dirty) from Russian oligarchs that is held in Cypriot banks. But it is also possible that Nicosia is still hoping to maintain its foothold in the international tax haven network. Even with the 2.5% increase imposed as part of this bailout, corporation tax is a very competitive 12.5%, and the Cypriot government has encouraged growth of the financial sector by attracting deposits from overseas investors.  Frankly I think this is pie in the sky. A 10% loss may be all in a day's work for corrupt depositors, but that doesn't mean they will continue to deposit funds in a country that imposes losses like that when there are others that don't. The large depositor haircut is a mortal blow to Cyprus's ambitions to be an international financial centre - and that has serious implications for its economy. 

Cyprus's economy is dwarfed by its financial sector, whose total assets are 8 times its GDP. It's uncannily like Ireland without the property bubble but with a much larger neighbour and trading partner in a horrible mess. And like Ireland, the sovereign cannot afford to bail out its banks. A taxpayer bailout like that done in Ireland would leave the sovereign with estimated debt of 145% of GDP. The IMF considers this unsustainable, and under its own rules would therefore be unable to contribute to the bailout fund. As the Eurogroup is expecting the IMF to contribute, clearly a taxpayer bailout of Cyprus banks would be out of the question, unless it was immediately followed by Greek-style PSI restructuring of sovereign debt. No-one wants to go there....

Except that they will go there, eventually. Although I have explained above why this is perhaps not such a terrible deal for depositors as it seems, that is not how they will see it. The run on Cypriot banks started as soon as the deal was made public. Cyprus was forced to introduce temporary restrictions on the movement of capital to prevent depositors removing their funds to avoid the levy. And although this choked off an immediate acute bank run prior to the levy being imposed, I do not think depositors will want to keep funds in banks any more. After all, it's not very long since the Cypriot President announced that there would be no deposit if the Government can break that promise, why should depositors believe the description of this levy as a "one-off"?  Large depositors will eschew Cyprus in favour of non-Eurozone countries such as Latvia. Small depositors will withdraw funds in cash and stuff their mattresses, or they might buy gold.  In fact there has been a slow run on Cypriot banks for some time now, as international depositors withdrew funds due to bailout fears: I expect this run to increase to a flood once banks re-open after the bank holiday. 

The effect of large and small depositors removing funds on that scale will be a brutal economic downturn as the money supply collapses. In particular, the dominant financial sector will suffer a severe contraction, putting thousands of jobs at risk and paralysing lending to Cypriot households and businesses. And that is IN ADDITION to the estimated 4.5% economic contraction that is already happening due to austerity measures imposed on Cyprus in 2012 to reduce its fiscal deficit, and the further measures required in this bailout. "Deep recession" is already forecast for Cyprus. A major bank run will be economically catastrophic. And the effect of that economic disaster will be to increase both the fiscal deficit and the public debt as a proportion of GDP. After all, even if the government doesn't increase borrowing, a collapse in GDP immediately raises the debt burden to unsustainable proportions, spooking investors and causing unaffordable rises in yields on sovereign debt. 

Cypriot banks may or may not become insolvent. They will become completely dependent on central bank funding, of course, just like their Greek counterparts. But a second bank bailout is not a complete certainty. What in my view is a racing certainty is a SOVEREIGN bailout due to GDP collapse some time in the next two years. This bailout may have averted the immediate risk of disorderly default and Euro exit, but economically it is completely insane. And it is dangerous, not just for Cyprus but for other countries too.

For the fact is that deposit insurance everywhere in the EU has now been undermined. The precedent has been set for insured depositors to suffer losses in order to protect Russian oligarchs and reckless banks. If the Eurogroup can impose this on Cyprus, it can do so elsewhere too. Yes, Olli Rehn says they have no current plans to do so, and insists that the Cyprus bailout is unique. But haven't we heard this before? Wasn't the Greek bailout "unique", and the Irish bailout, and the Portuguese bailout, and the Spanish bailout? It is only "unique" until the next domino falls. I would not be surprised now to see bank runs across the entire Eurozone periphery, and perhaps in other EU countries too. 

They have sown the wind

UPDATE: It appears that Cyprus came very close to actual default. This tweet from Yiannis Mouzakis shows that the ECB was preparing for collapse of Cyprus's two main banks:
The timing of this is exquisite and it is hard not to conclude, as Mouzakis does, that it was done to put pressure on the Cypriot government in order to obtain a deal at any price, regardless of the consequences for the Cypriot economy and for its people. If that is true then it exposes the European Union for what it is rapidly becoming - a nascent totalitarian state. 

UPDATE 2 - The FT confirms the ECB's role in forcing through the deal. It says the ECB threatened to stop providing liquidity to Laiki, Cyprus's second-biggest bank, which would have caused an immediate disorderly collapse. I have written previously about the ECB's disgraceful behaviour. This is the worst example yet. 

Related links:

Statement by the Eurogroup
Statement by the President of Cyprus
Cyprus's savers bear brunt of unexpected bailout - Reuters
Bailout terms prompt run on Cyprus banks - Al Jazeera English
Shock in Cyprus as bailout brings bank account haircut - Ekathimerini
EU's Rehn says Cypriot haircut on deposits will not be repeated elsewhere - Ekathimerini
Eurozone targets Cyprus bailout deal this month - News Tribe (Mar 5th)
First memorandum deal makes a second memorandum almost a certainty - Alex Apostolaides
Cyprus: A Brutal Lesson in Realpolitik - Pawel Morski
Unfair, short-sighted and self-defeating - The Economist
Cyprus bailout: A suboptimal and unjust agreement of the Eurogroup - Protestilaos Stavrou
Why Cyprus's rescue matters to us - Peston (BBC)
A stupid idea whose time had come - FT Alphaville


ECB presses Cyprus to impose bank levy - FT
A central bank crisis - Coppola Comment


  1. Yes and I saw this one too. New Zealand is setting in place depositor bailout of banks, to be ready by June 30. Called Open Bank Resolution, all depositors will find a fraction of their balance has disappeared one morning. Govt will guarantee rest. All on our Reserve Bank site We don't want either depositor bailout or taxpayer bailout. We want a Parliamentary Enquiry into the best methods of making banks stable. See

  2. (Reposted by Frances Coppola from previous post.)

    Frances_Coppola The Cyprus bail-out: Unfair, short-sighted and self-defeating | The Economist

    Recent History on the Matter:

    Was this a False (Insider?) Prediction that possibly Cost People Money According Following Link?:

    "The government has managed to avert a haircut on bank deposits and the issue is no more on the table, according to a close associate of President Anastasiades.

    DISY part deputy chairman Averof Neophytou said that the government's efforts are now centred on keeping the corportate tax at its present 10 percent level."

    Does This Fit?:

    "Mr. Averof Neophytou, Deputy President of DISY has supported the campaign to save the Cyprus Grass Snake..."

    Does he have a sense of humor?

  3. If you were living in an EU country right now and think that your country might need a bailout at some point, would you leave your cash in the bank?

    I fear that this move has raised the stakes by quite some way, as any EU country heading towards a bailout is likely to be hit by a run on its banks.

    1. Exactly the point. I don't know what will happen next but I fear this will not end well.

    2. I live in an EU country, although not in the Eurozone. I do not seriously expect my country to need a bail-out. Nevertheless, this event still has me having second thoughts about keeping my cash in the bank.

      Just saying this to point out the extent to which public confidence can be affected. I do not even want to think about how savers in Greece and Portugal might be feeling right now.

  4. Excellent excellent analysis. Thank you for taking the time to write this.

  5. What a delight to see the massed ranks of incompetents (politicians, economists, commentators, etc etc) all getting their knickers in a twist.

    The Cypriot shambles is of course unfair on depositors in that the Cypriot government and banks broke the terms on which depositors originally lodged their money in banks. However, there is no excuse whatever for letting people deposit money in banks in the full knowledge that their money is loaned on or invested in ways that are not 100% safe, and then bailing those depositors out when the risk doesn’t pay off. Or to put it more bluntly, s*d depositors, large and small: if they want to act in a commercial manner, then fine: they can accept the normal risks involved in commerce. And if they don’t accept those risks, then someone else does: the taxpayer, and that means bank subsidies.

    In short, anyone who complains about bank subsidies at the same time as expecting a taxpayer funded bail out when their bank is in trouble can get stuffed, far as I’m concerned. They are hypocrites.

    This whole mess is dealt with very neatly by full reserve banking. Under full reserve, depositors have a CHOICE. They can opt for 100% safety, in which case their money is not put at risk, but that means they get no interest (not that anyone gets interest anyway at the moment on current accounts). Alternatively, they can act like shareholders or act in a commercial manner: let their bank lend on their money. But in that case they carry the risk.

    That way, bank subsidies disappear. Plus it’s near impossible for banks as such to go bust.

    1. Rubbish. Even depositors that had done their research and found a cautious bank for their deposit still get haircut under these measures.

      Good post, by the way Frances.

    2. The system is not subsidising banks. It is subsidising private sector borrowers - because that is the only way money gets into circulation when the government sector's hands are tied.

      Banks are a margin business. They don't care about the cost of funds. They care about the level of loan demand.

    3. Rasph,

      I admire your commitment to full reserve banking but it is not remotely relevant this time. The Cyprus deal applies to insured deposit accounts, including current accounts. These people DID choose safety. They were told that their money was 100% safe. That promise has been broken, and some of their money is being taken by the government that told them their money was safe. As Rebel Economist points out, that could happen under full reserve banking too. Expropriation of funds is no respecter of banking models.

      This episode demonstrates the gaping hole in the argument that banks should fund lending from deposits. Cypriot depositors are hit because Cypriot banks don't have enough equity or bonds. It is disgraceful that senior bondholders have been left intact while retail depositors are burned, but bailing-in senior bondholders wouldn't have solved the problem: there simply isn't enough senior debt to meet the capital shortfall. There is in my view a strong argument that uninsured depositors should take a larger hit so that insured depositors can be left intact. Undermining deposit insurance is potentially fatal to the banking system.

    4. I don't think you know much about ordinary small depositors. We don't know anything about what the bank is doing with our money. We are depositing money in our savings accounts because it is safer from thieves than in the mattress and once upon a time, we made a little interest on it, though that seems to have disappeared. Plus, our deposit was secure. We were told if anything went wrong our little savings was safe.

      This has upended the world for the ordinary person.

  6. Ralph,

    Most people do not understand double entry bookkeeping. Therefore, most people cannot even begin to evaluate their bank, nor do they understand how banks work.

    "Let them eat cake" didn't fly the last time.

    1. Ordinary depositors don’t need to “evaluate their bank”. If they want to do no “evaluating” at all, they can put their money into a 100% safe no interest account, which government advertises as being government backed. That’s much the same as existing bank accounts where government guarantees up to £80k (or whatever the current figure is). Or they can put their money into National Savings. About 20 million people already have accounts at NS.

      But if depositors want to be the least bit commercial, i.e. have their bank lend their money on to mortgagors or businesses, they’re on their own. If you invest in the stock exchange you risk making a loss. But if you invest in the stock exchange via a bank, any losses you make are born by the taxpayers. Why should taxpayers, many of whom earn much less than the average wage, subsidise people with loads of money stashed away in banks?

      Even where depositors want to be "commercial" amount of “evaluating” they need to do is no more than they need to do in choosing a mortgage, private pension scheme, car insurance, house insurance, etc.

      There is ALWAYS a problem with ordinary people getting ripped off. They got ripped off big time by PPI. But I don’t see the amount of “ripping off” being excessive under full reserve relative to what we already experience.

    2. We used to do that. We used to have constant bank runs that constricted credit. When we began insuring depositors, bank runs became almost a thing of the past. Frankly, your wild west mentality would ruin hundreds of millions of lives, and I'm glad more forward looking individuals than yourself (which say very little) are in charge.

    3. Ralph,

      Thank you for your reply. Good to see some other ideas with the aim of addressing some of the current problems. Even, though we might have some doubts about immediately implementing it in the prototype.

      Maybe you will come up with some thing good.

      Ralph and Anonymous of 16:16 o-clock,

      We have much higher inflation now. That produces loss of the value of deposits of a different sort.

      The time of the more bank runs was near the gold standard days, I'm thinking. Of course, a deposit insurance does not require gold redeemable currency and deposits.

      Considering what Ralph mentioned. For the honest bank that doesn't risk or loan the deposits a run would return nearly every ones money? Reason being that the money is still in house. But, the deposit, loan, and investment house might have more run risk to peoples principle?

    4. "Why should taxpayers, many of whom earn much less than the average wage, subsidise people with loads of money stashed away in banks?"

      Because otherwise a mortgage would be too expensive and there would be no lending for businesses.

      Remember that under the EU treaty the government is banned from accessing the central bank, and Eurozone governments are just the town councils of Europe.

      Guaranteeing deposits reduces loan costs. It's not banks that are subsidised. It is borrowers. Because without them, in the current setup, there wouldn't be enough money in circulation for economic growth.

      Banks don't really care about the cost of funds. They just make a turn on the top. What they care about is loan demand. Lots it better from their point of view.

      So if deposit guarantees stop being seen as secure, people will start to run to cash (or National Savings if they have such a thing). When that happens, loan costs automatically start to go up.

      I'm not sure the discount windows across the EU are wide enough or cheap enough to handle any large deposit runs.

    5. Neil,

      Ralph is missing the point. Among the accounts that are being partially bailed-in are insured deposits and current accounts, which would be full reserve accounts in his model. The principle of 100% safety is being undermined - which would be a major breach of trust in a full reserve model just as it is in the current insured model. Ralph is assuming that in a full reserve model, the only depositors that would be burned would be those that in the current model are uninsured. There is no basis for this assumption.


  7. @Anonymous, full reserve banking does not require much customer intelligence, most people will be able to get the difference between having a current/savings account and owning shares of Barclays, so it's fine if you just ban/make it hard to have unsecured accounts that look like secured ones.

    @Adam, if people were rational optimising agents, PIGS banks would have had zero retail deposits for some years now. Will there be a bank run this time? I don't know, but the same reason that made it a trickle to now may persist. In any case a bank run can't be that fast, cross-border transfers work very well in the eurozone, but opening accounts cross border is still a major hassle, so it'd be surprising for something to happen fast given that only Southerners who already have functional Northern accounts, and have not already moved their holdings North, can do something quick.

    @Frances, I don't understand why there would be much need for temporary capital controls. Banks are closed (in the sense that you cannot make transactions until next business day, even online), the tax is backdated, apart from the petty cash in ATMs, is there anything interesting to control? That Cyprus banks might end up with no deposit and fully ECB-funded doesn't seem to change much. As for the impact on the Cypriot economy, deal or no deal they are broke anyway so supposedly not making any new material lending in any scenario.

    @All, why all the fuss about a deposit tax when we're in company that generally understands the equivalence between monetary and fiscal policy and the fungibility of money? Economically, this is not that different from the Irish case where the cost was booked to general taxation, or the UK case with the BoE keeping cash rates below inflation for a similar if more linear loss to cash holders. Had the deal instead been expressed as a one off "window tax" (or any other wealth-based tax) of the same aggregate amount, would everybody be up in arms?

    That said psychologically, it could obviously cock up, and the appearance of a deposit haircut on insured deposits is indeed an audacious/crazy move that could backfire. It could be positive though, maybe we'll have full banking union and a proper ECB-backed zonewide deposit guarantee by the end of the week, rather than the ten years it would take in cruise mode (when will people finally understand that EU politics needs crisis to progress?).

    Also, there's still a escape hatch: the Monday bank holiday trick, if intended, is brilliant. Basically you can watch what happens on the other markets and in other countries' banks on Monday, and still reverse the measure by Monday PM or evening. In the process you can collect invaluable data on how the live system reacts to such things.

    1. cig

      Capital controls are on electronic transfers, which can of course be done when banks are closed.

      The issue is not what it actually is, but how it appears. The Cypriot people were always going to pay whatever route was taken. But this route - direct confiscation of savings - raises the possibility of bank runs and collapse, which more indirect routes do not. That's why it's insane.

    2. It may be semantics, but I don't think you can do electronic transfers at weekends in any of the banking systems I'm familiar with. If don't think it is possible in the UK: if I had sent you £1000 yesterday (Saturday) via Faster Payments, or even if we had accounts with the same bank, I expect that you wouldn't be able able to buy a laptop with it today on your debit card despite some stores being open on Sunday. You can only spend Friday's close balance. The value date and the actual transfer will be on Monday and I don't think it would show up at all in your account before Monday at the earliest. All you can do at weekends is book future payments but there is no execution. Maybe I'm wrong but I would be very surprised if so.

    3. Cig

      You are wrong. I know this because I regularly transfer money around my accounts and make Faster Payments late at night and at weekends. The money is always transferred immediately and I can always draw against it, as can people like my son (whose allowance I pay by Faster Payment).

  8. I find this interesting, especially how English commentators are being selective with their quotes. Take the example of Russia and how it is helping. You are missing what was also said.

    "Auch Russland bindet bilaterale Finanzhilfen für das klamme Land an Bedingungen. So sollten die Banken des EU-Mitglieds Informationen über russische Geldanlagen und Unternehmen herausgeben, sagte Moskaus Finanzminister Anton Siluanow. Der Kreml stört sich zunehmend daran, dass Kapital in Milliardenhöhe aus Russland abfließt und will erreichen, dass russische Unternehmen ihr Geld in der Heimat anlegen."

    The first sentence was said in the english news like Reuters. The second and thereafter sentences were missed. Namely it is saying, "Russia is willing to help so long as Cyprus opens all of its books. The Krelim is disturbed by the fact that large amounts of capital is leaving Russia and that it is not being invested in Russia."

    Simply put folks, Russia ain't gonna be mad at the EU zone because they are trying to get the same thing out of Cyprus as the EU. But heaven forbid the English folks talk about this for it would change the entire picture. One of where Cyprus is being used to launder money, and avoid taxes.

    1. Christian Re Russia and EU zone i would be surprised if this will not happen through Cyprus or Direct - EU can attack Russian deposits direct if they so wish like last time when there was an issue when funds left Cyprus and were moved to Lux and London. Be sure if this goes ahead the rest of the russian funds will move and everyone will be happy. I am not saying Cyprus did not make mistakes do not take me wrong but every one knows where this is coming from.

    2. Small depositors do not launder Russian money. If the aim was to confiscate Russian inflows, then large depositors should have borne the brunt of this bail-in. That they did not indicates clearly that this has nothing to do with Russian money laundering and everything to do with ensuring that the Cypriot people pay rather than the burden falling on German taxpayers.

    3. Cyprus state broadcaster CyBC reported on Saturday that German Finance Minister actually entered the Eurogroup meeting on Friday proposing a 40 percent haircut on Cypriot bank accounts. Sarris stated on Saturday that this had also been the proposal of the International Monetary Fund.


  9. Excellent analysis with which I agree. The repercussions of such levies will reverberate for the medium to longer term. Depositors will likely flee Cyprus and equivalently strained banking systems and sovereigns without independent central banks willing to print and bail out all depositors.

    Cyprus will lose its safe heaven offshore status and will in all likelihood, as a result, witness a collapse of its financially dependent GDP thus turning a banking crisis to a sovereign one. Clearly the EC and IMF in favour of punishing Russian offshore money with the Cypriot government trying to minimise its effects by spreading collateral damage.

    However, as you quite rightly suggest, confidence has been lost and money will likely flee to more secure anchorage.

    Which proves that you cannot have an offshore banking centre within a currency union unless you run a very tight ship and even so doubtful it can stand the test of time.

  10. I wonder if Cypress just increases the personal income tax rates by a certain percentage just like they did with corporate taxes would have been a better choice. In this way, they could have kept their insurance coverage, but still exert their pound of flesh.

    In the end, this is about efficiency of tax collection. Take the required amount now, so you can't hide it.

  11. excellent blog, thank you.

    This is another example of countries damaging each other because of the EU.

    a Cypriot pound currency depreciation with a nice bounce-back in tourism is not on the table.

  12. This is in accordance with a view proffered some years ago by a Central Banker. The euro is set up perfectly to usher in Gold as a free trading reserve.

    We the people will suffer if we keep our blinders on.

  13. A few weeks ago, we decided to move back to the UK at the end of June, for family reasons. He moved the bulk of our money, and left a nest-egg in our Cypriot account. I am now sitting surrounded by boxes, thinking, 'thank goodness we made the decisions we did.'

    Saturday morning was a shock for us all, and we are being given shares in a bank we will no longer use. Today is a a Bank Holiday, normally one filled with family joy, however, I feel the joy will be in the hearts of the children only.

    Now Tuesday has been declared a Bank Holiday. No matter how many they make, folk will still pull out their cash! Trust has gone.

  14. I have to say this is scary and they are doing this small scale ready for the big one when they do this in the US. this is just a trail run so they can iron out the problems and get people use to devilish ideas. I am serious.

    The guy over at who is insanely accurate is saying this will be the next catalyst for a market sell off. IT will be interesting to see what happpens.

    1. This won't need to happen in the usa- they have their own printer. They can just print the stuff up (it is the reserve currency) need for this type of mess.

  15. Good article and comment stream.

    Two thoughts on this..

    The fact that the Cyprus government wanted the percentage on large depositors to be < 10% shows how much they value being a money laundering center.

    To the extent that the rest of the world seems to have got over the confiscation and is back in risk on mode we should all be more worried about the primary blogger's key concern that a significant precedent has been set and appears not to be of great concern. Highlights the level of complacency in a TBTF financial system.

  16. Uh, oh Francie. Looks like this might lead to more evil gold hoarding!

  17. How would we see if there was a bank run in Italy or Spain? Options:
    (a) on TV with lines of people outside their branches. As the above discussions of on-line transfers indicate, this doesn't seem very likely for large depositors in a modern financial system.

    (b) through usage of ECB facilities. I guess funding lost would be replaced at the ECB, either in the MROs, if the timing works out, or through the ELA. If the latter, then it doesn't really get reported (at least not cleanly).

    (c) some other way?

    Any help with this one, folks?

    1. By far the easiest way of detecting a Eurozone bank run is through the Target2 balances.

  18. Coca-Cola executives once changed the formula and ruined the taste of Coke. Every one complained and wanted their old coke back. Every one said the executives were idiots. "We want our beloved Coke back!" "We loved it why did you take it a way? Give us our Coke back!"

    There was a run on Coke at the grocery store. The shelves emptied. The stores ordered more! People bought all they could to savor the last of the good Coke or have some until the company got smart. After a while they finally brought the old Coke back. And, people were ecstatic.

    Afterward, people said the executives might have done the whole cycle on purpose, as a brilliant manipulative marketing plan. The executives' answer to that was, "Were not that smart."

    Cypriots and Europeans: You want your currency back!

    The last sentence is vague, you get to choose how you think about it.

  19. RE: Coca-Cola History

    The point above is that their legislature and or the sources of this thing could reverse the whole thing. They could return the goods.

    1. It's not necessarily that easy, Cypriots may keep on using euros (e.g. keep export/tourism income in euros in overseas accounts, and trade similarly in euros with their local suppliers) even if their government issues a worthless new currency. In the electronic era, absent extreme exchange controls (hardly compatible with the financial centre and tourism businesses) you don't need to operate in the locally issued currency. You can end up with only people on state benefits/salaries forced to use it (and even these, if there's strong new currency inflation and private sector euro acceptance, they might convert it to euros as soon as it's paid, vicious circle).

    2. "Cypriots and Europeans: You want your currency back!

      The last sentence is vague, you get to choose how you [want to] think about it."

      When I first wrote this I used the word money instead of currency. It was, "Cypriots and Europeans: You want your money back!" And I should have used want to think about it."

      The revision was made for accuracy and to differentiate from what money was historically to what we use today.

      So, unfortunately my writing was unclear. Every one who is threatened with loosing their money wants it back or maybe some thing better? If they let their wants be known and there is some communication with management, management can change course. Especially if they realize their customers are unhappy. They should be thinking about their citizens.

      I was hopping that what sounded vague would be interpreted by what people wanted themselves. I didn't figure that any one would read into it based on what they were worried about. My mistake.

      Basically, I should have said what do you want? Now is the time to make sure you are heard.

      Some may or may not want a different currency. But, what is immediately at hand is: Most may want their assets back, that are denominated in the currency that they are using. It is possible that they may like the plan if there is no deception on the real condition of the bank. I, myself, had thought owning a solvent bank could be a good thing.

      What do the Cypriot people want? And, do they have enough time to decide?

  20. Have you seen any good data on the demographics of the depositors?

  21. Behind all the economic brinkmanship there's a play for control of gas and oil resources from the Levant Basin south east of Cyprus going on. This of course involves the US and Russia, along with all the other countries in the region.

    At the same time, the promotion of the Nabucco and South Stream gas pipelines by their various supporters complicates the issue.

    My guess is, this is where you will find the clues and answers to the Cypriot crisis.

  22. "So depositors have an immediate liquidity problem, and the possibility of future real losses. They are not suffering a real immediate loss of capital at all. The sovereign is providing them with shares to the value of their losses. Yes, I know those shares look like duds, but there is no market for them so it is impossible to obtain a real market price. The sovereign is valuing the shares as it sees fit. It remains to be seen whether the sovereign's valuation is correct. I have considerable doubts about this, but that is for reasons that have nothing to do with the current bailout and everything to do with the real economic issues in Cyprus and the utterly inept and counterproductive measures being taken to deal with them."

    Actually, that is a capital loss:

    1) Beforehand, one had a capital asset, liquid and priceable in the market.
    2) The capital asset is replaced with another asset, at a notional price determined by a party who profits from overstating that price.
    3) The replacement asset is not liquid, has high risk, and to the extent it is tradeable, will trade at a steep discount to its notional value.

    If you were auditing the books of such a party, would you consider it a capital loss?
    If you had bought a party, and found that the accounts did not write it as a capital loss, would you be on the phone to your lawyers?

  23. It is not a realised capital loss. It may be an unrealised one. Whether that is reflected in the accounts depends on the accounting standard adopted regarding fair value accounting.

  24. How soon will it be possible to bypass the banks completely using peer to peer transactions such as Bitcoin? I want electronic cash in my electronic mattress now!

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  26. Most people do not understand double entry bookkeeping. Therefore, most people cannot even begin to evaluate their bank, nor do they understand how banks work...!!!

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