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Generational Dynamics Web Log for 17-Mar-2013
17-Mar-13 World View -- Cyprus bailout threatens international bank runs

Web Log - March, 2013

17-Mar-13 World View -- Cyprus bailout threatens international bank runs

Will politicians convince everyone that there's no worry?

Cyprus bailout threatens international bank runs

Bank of Cyprus

Bank of Cyprus

Shocked and angry residents of Cyprus on Saturday morning rushed to their banks and ATMs to withdraw their savings, but it was too late. The ones who had been lucky enough or smart enough or frightened enough to have withdrawn their money earlier in the week lost nothing, but the ones who believed the Cypriot and European politicians who said that all bank deposits are safe were screwed.

In the wee hours of the night, the Eurogroup of eurozone finance ministers agreed to bail out Cyprus, after a year of negotiations. Cyprus needed a 17 billion euro bailout loan for its banking system, but the Eurogroup was only willing to come up with about 10 billion euros, so the difference had to be made up by penalizing depositors: 9.9% on deposits above 100,000 euros, and 6.75% on smaller deposits.

There were harsh disagreements in the euro zone whether Cyprus should be bailed out at all. The problem is that Cyprus's banks have been used as vehicles for laundering billions of dollars by Russian oligarchs who don't want to pay Russia's taxes. Thus, bailing out Cyprus's banks would be bailing out Russia's oligarchs. Many MPs in Germany's Bundestag refused to consider a bailout. The final settlement punishes ordinary Cyprus citizens as well as the Russian oligarchs.

The fear is that now that a precedent has been set, the same method will be used with other countries, including Spain, Portugal and Greece. It might be used again in Cyprus, if another bailout is needed. Politicians are insisting that this was a one-time situation that will never happen again, but those are the same politicians that promised that depositors' life savings would be protected. They're also the same politicians that said that each bailout of Greece and each new austerity plan in the last three years would be the last.

Could the same thing happen in the United States? Think back over the last six years, and think about all the "things that could never happen here" that now have happened. And we have a President whose announced intention last week is to spend as many trillions of dollars as he can.

There actually have been bank panics in recent times. In 2007, there was a bank run in California, and another bank run in Britain. (See "Anxious investors mob Countrywide Bank to withdraw their deposits." and "Panic appears to be spreading in Britain, as depositors mob Northern Rock" from 2007.)

In those cases, politicians quelled the growing panic by announcing that all bank deposits would be safe, and then by following up with policies. Since then, North Americans and Europeans have felt confident that their life savings were safe, and there haven't been any major bank runs since 2007.

Politicians here and in Europe are now going to be scrambling to make new promises and pronouncements that everyone's bank deposits are safe. It remains to be seen whether those promises will be believed. Guardian (London) and Kathimerini

(Comments: For reader comments, questions and discussion, see the 17-Mar-13 World View -- Cyprus bailout threatens international bank runs thread of the Generational Dynamics forum. Comments may be posted anonymously.) (17-Mar-2013) Permanent Link
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Generational Dynamics Web Log for 17-Mar-2013 17-Mar-13 World View -- Cyprus bailout threatens international bank runs

Cyprus bailout threatens international bank runs

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Generational Dynamics Web Log for 17-Mar-2013
17-Mar-13 World View -- Cyprus bailout threatens international bank runs