Friday, March 29, 2013
Managing Financial Risk:Why Cyprus is Important
In case you haven't been paying attention, EU banking authorities as part of a rescue package of the insolvent Cypriot banking system, a subset of the insolvent Greek banking system, has seized a portion of depositor assets in those banks above a certain level. The level and the proportion varies from day to day but everything above a 100,000 or 200,000 Euros will be subject to a levy of a variable amount from 30 to 90 %. The banks were closed to prevent a run and capital controls instituted. Now a pensioner can just get a few hundred Euros a day to buy a herring and a bottle of Retsina, or whatever it is that Cypriots drink. It is a very confusing and malreported story and to say that this so called rescue package has been bungled is putting it mildly. We were initially told that most of the money was Russian hot money from the mob, or wealthy oligarchs hiding it from tax authorities in Moscow. They were just getting what they deserved. The true story is of course a lot more nuanced but I would like to not get into the details, however interesting. An expat oligarch losing some spare change is not what gave me the shiver. What gave me the shiver was the connection I made to a report that went viral in the New Zealand blogosphere a week or so back as reported by Mish Shedlock in his blog. A reader in NZ had written Mish that the Reserve Bank of NZ had announced that depositors could be tapped to bail out the banking system. What was unique was that the NZ Central bank laid it out in clear language to the public. Here is a portion of the text:
"The OBR policy is designed to ensure that first losses are borne by the bank’s existing shareholders. In addition, a portion of depositors’ and other unsecured creditors’ funds will be frozen to bear any remaining losses." BTW, the Bank of NZ does not have so called deposit insurance.