I always thought that when you got into trouble, as a country, the deal was something like this: tighten your belt, screw your economy for the next few years, and the international community will see you good, rearrange your terms, stop you from defaulting, and maybe start lending to you on something like acceptable terms one day in the indefinable future. You won’t have to devalue your currency and you won’t lose any actual assets.
If you stick two fingers up and default, you’ll devalue, savers will lose assets, and no one will trust you again.
Which is why the news that the bail-out of Cyprus comes with such horrible strings attached – a levy of up to 10% on savers – is pretty shocking. Choose austerity, they said. Everything’ll be OK. Now it turns out you get your savings cut anyway. Who’s going to choose austerity now?
They’re spinning this, the Eurocrats, spinning it nicely through Peston, but come on, is anyone really going to believe that Cyprus is a special case, that it’s all about Russian gangsters and money laundering? This is real life, real people, losing their money overnight, not some implausible spy thriller. In due course the Italians and the Spanish and the Portuguese will go to the polls and see this, see what might just happen to them, even if they’ve been assured it won’t.
Maybe the result will be those two fingers that the financial community so fears. And maybe that wouldn’t be such a bad thing.
update check out the first extract from my novel here, a gripping tale of banking, fraud and death.
Inner Organs 
Russians laundering money in Cyprus might feel the pinch of the clothes peg, but it’s the few decent local savers and retired ex-pats who have been hung out to dry. Thankfully, it was another sunny day in Nicosia, but saturation point cannot be far away for the average Cypriot. This weekend’s Carnival, what with the ATMs already empty, will be quite the riot, I expect…
The irony is that the banks need recapitalisation because non-performing loans are NEVER chased in what is a Godfather culture in almost every way, while those few, decent folk, propping up the fractional reserve scam by keeping meagre savings in the bank, will be punished while Pambos styles it on the strip in a Mercedes bought on generous credit terms.
Personally, I see this as a trial of the most austere measures imaginable, just to see how it goes down. I expect anyone with cash in any bank, anywhere, will suffer something similar, eventually. For it is but a collapsing Ponzi Scheme to me, and history show all fiat currencies go to zero in the end.
Thanks for your thoughts, Jay. Is it local non-performers that have brought the banks down, or more international ventures?
(Oh, relevant bondholdings are unscathed, by the way.)
Hang on – is it really just depositors, not institutional holders of bank debt? That’s the opposite of common sense.
Cypriots of Greek extraction have an irrational bond to Athens, which took Cypriot banks up on very generous loan offers when no one else would lend. If you define inter-Hellenic lending as ‘international’, go ahead, but the lenders don’t. Such exposure makes up the bulk of the non-performing ‘portfolio’, although Cypriots themselves are often incredibly blasé about taking on debt for nothing more than keeping up with appearances by having the latest Merc or a bigger house.
I suspect that this was also a poke at Moscow, whose favourite little bureau de change has been shut down for Limossograd’s biggest night of the year. Punishment, too, for Cyprus sipping white Russians instead of suckling to Brussels’ bosom sooner.
Of course, Mother Russia herself defaulted on her sovereign loans not 15 years ago. Sitting as she now does atop the world’s second-largest dollar reserves, I imagine she’d say that worked out quite well. Of course, she needs to find somewhere else to change them out of dollars now.
As with China, the Great Dragon next door, The Great Bear is also hoarding gold.
And that elephant is still in the corner of the room, you know?
The elephant in the room is the fact that from bail-out one to bail-out ten thousand, the one constant is that it’s German institutional investors being bailed out.