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View Diary: Krugman suggests Cyprus could be the start of something positive (74 comments)

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  •  And that is a good thing in general (6+ / 0-)

    (not so much for Cyprus).

    Fractional reserve banking is a communal endeavor by nature.  Our deposits are loaned to others to build community wealth and is compounded over and over again.

    To work there must be strict supervision or financial panics occur and evaporate wealth.  Canada is comprised of TBTF banks that are properly regulated and they escaped the financial disaster of 2008 altogether.

    The Mitt Romneys of the world give their countries a big FU when they move their money offshore.

    "The way to see by faith is to shut the eye of reason." - Thomas Paine

    by shrike on Mon Mar 25, 2013 at 06:20:11 AM PDT

    [ Parent ]

    •  How much communal pooling of wealth (1+ / 0-)
      Recommended by:
      ratzo

      will there be when govts have decided that arbitrarily raiding the pool of deposits is acceptable?

      Would you ever invest or save money in Cyprus after this?

      •  that's not the proposal at all (6+ / 0-)

        The current proposal is basically the following:

        1. Split the bank into a "good bank" and a "bad bank".

        2. Bad assets and uninsured deposits (over $130k) go to the "bad bank".

        3. Good assets and insured deposits go to the "good bank."

        4. Bond-holders wiped out.

        When the "bad bank" sells its assets, the uninsured deposits get paid. The estimate is a 30% loss, but no one really knows.

        That's not the government raiding anything; it's a managed liquidation of the bank.

        The Irish should have done something similar.

        •  The original proposal (2+ / 0-)
          Recommended by:
          limpidglass, mkor7

          (what someone thought was a good enough idea to go public) was that all depositors (insured or otherwise) would take a 6-10% loss.

          After public outcry, they've come up with plan 2.0 which is basically that large depositors eat all of the losses. While all of these machinations are going on, everyone (even those with insured deposits) is locked out of access to their funds in Cypriot banks.

          The damage has already been done, regardless of what plan they adopt. Money is not safe in Cyprus and anyone that has any sense is going to move all of their funds out of the country.

          •  this deal effectively breaks Cyprus off (3+ / 0-)
            Recommended by:
            VictorLHKOS, Remove Kebab, mkor7

            of the eurozone. Whatever the troika may say about preserving the EZ's integrity, the currency union is functionally severed. Thanks to the capital controls, euro in Cyprus is no longer worth the same as a euro in France.

            No one will put money into Cyprus because you're no longer allowed to take it out. So the flow both ways is restricted. Those Cypriots of means will find a way to smuggle it out against the prohibitions. Everyone else will have to pay a huge premium to have euros smuggled in, or start using alternative currencies. So we will soon have a thriving black market of currencies, encouraging criminality to flourish. And people were so pissed about "Russian oligarchs" using Cyprus as a "tax haven"!

            The economy will be shot because the banks comprised so much of it. On top of that you'll have deflation because euros won't be coming into Cyprus and there won't be enough euros for people to use for their daily needs, and I don't expect the ECB will be too keen on expanding the supply of euros in Cyprus.

            No one will be keen to put any money in any banks in Cyprus, so banks will stop lending, and credit will get tight. The economy will tank thanks to the austerity that's part of the deal, and Cyprus will need a second bailout in maybe a year or so.

            Because people will have a strong incentive to use alternative currencies, and Cypriot taxes are collected in euros, tax revenue will decrease. This means the deficit will rise and so the debt will never have a chance of being repaid.

            Of course the deal authorizes:

            Any other measure which the Finance Minister or the Governor of Cyprus Central Bank see necessary for reasons of public order and safety
            In other words, Cyprus is now under dictatorship, to make sure  this truly horrendous deal is enforced. Then when unrest breaks out, we'll be told that it's just those unruly Cypriots, who can't possibly be trusted to govern themselves.

            When the time comes for the next bailout, what incentive will Cyprus possibly have to cut a deal with the troika? Better for them to leave the eurozone than have to endure this, they may reason. They came damn near leaving it this time.

            The troika had to destroy the euro in order to save it. And whether they're willing to admit it or not, they have destroyed it.

            "In America, the law is king." --Thomas Paine

            by limpidglass on Mon Mar 25, 2013 at 08:30:30 AM PDT

            [ Parent ]

        •  Uninsured deposits of Laika are likely to be (2+ / 0-)
          Recommended by:
          ferg, Remove Kebab

          a total loss.  The uninsured deposits of the major bank will get a 30-40% haircut, from the estimates I've seen.

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