Cyprus bail-out: savers will be raided to save euro in future crises, says eurozone chief

Daily News Article — Posted on March 27, 2013

Note: This article is from the British newspaper The Daily Telegraph.

[*the euro zone = the countries belonging to the European Union that use the euro as their unit of money]

(by Bruno Waterfield, London’s Daily Telegraph) BRUSSELS – Savings accounts in Spain, Italy and other European countries will be raided if needed to preserve Europe’s single currency [the Euro] by propping up failing banks, a senior eurozone official has announced.

The new policy will alarm hundreds of thousands of British expatriates who live and have transferred their savings, proceeds from house sales and other assets to eurozone bank accounts in countries such as France, Spain and Italy.

The euro fell on global markets after Jeroen Dijsselbloem, the Dutch chairman of the eurozone, announced that the heavy losses inflicted on depositors in Cyprus would be the template [model for dealing with] future banking crises across Europe.

“If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?'” he said.

“If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders.”

Ditching a three-year-old policy of protecting senior bondholders and large depositors, who have over €100,000 [$129,000] in banks, Mr. Dijsselbloem argued that the lack of market contagion surrounding Cyprus showed that private investors could now be hit to pay for bad banking debts.

“If we want to have a healthy, sound financial sector, the only way is to say, ‘Look, there where you take on the risks, you must deal with them, and if you can’t deal with them, then you shouldn’t have taken them on,'” he said. …

The announcement is highly significant as it signals the mothballing of the euro’s €700bn ($900 billion) bailout fund, the European Stability Mechanism (ESM), which Spain and Ireland want to be used to recapitalize their troubled banks.

“We should aim at a situation where we will never need to even consider direct recapitalization,” he said. “If we have even more instruments in terms of bail-in and how far we can go on bail-in, the need for direct recap will become smaller and smaller.”

The eurozone had been planning to roll out the ESM (bailout fund) as a “big bazooka” in mid-2014 that could help save banks and prevent financial turmoil in countries such Spain or Italy, a development that has been delayed by German resistance.

Mr. Dijesselbloem’s comments will alarm countries like Ireland and Spain that had been hoping to access the ESM in order to restructure banks without killing off their financial sector by inflicting huge losses on investors.
………..

Last night, Mr. Dijesselbloem tried to row back from his comments by insisting that “Cyprus is a specific case.”

“Macro-economic adjustment programs are tailor-made to the situation of the country concerned and no models or templates are used,” he said.

Cypriot President Nicos Anastasiades admitted the eurozone bailout deal he struck in Brussels on Monday was painful but said Cyprus could now make a fresh start after having come a “breath away” from collapse. He also said there would be a criminal investigation into the crisis.

Banks in Cyprus will remain closed until Thursday, the nation’s central bank announced. It had said earlier that banks would reopen Wednesday after a week-long shutdown, except for Laiki and Bank of Cyprus.

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Questions

NOTE: Cyprus is an island about half the size of Connecticut, with a population of about 1.1 million, located in the Eastern Mediterranean south of Turkey.

1. Define the following words as used in the article:

Euro (para. 1)
eurozone (para. 1)
recapitalize (para. 4)
contagion (para. 6)
mothballing (para. 8)

2. a) Who is Jeroen Dijsselbloem?
b) How will the eurozone bail out any banks of member countries that are in danger of collapsing in the future, according to an announcement made by Mr. Dijsselbloem?

3. a) How do you think most Europeans who have savings accounts or bonds will react to this news?
b) Ask a parent how he/she would react to this news.

4. Most news reports did not state clearly that the government of Cyprus, in order to secure a bailout from the eurozone, has agreed to forcibly take money from people's bank accounts that have more than $130,000 in them.
Mr. Dijsselbloem has stated:
"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself? If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders."
In other words, if the bank can't solve its own money problem, we will forcibly take the money from people who have bank accounts there.
Why do you think no one is plainly stating that the eurozone and Cyprus' government are confiscating private funds, and have said they will do so anytime a bank needs a bailout in the future?

5. Why do you think Mr. Dijsselbloem later in the day tried to backtrack from his comment that the way the eurozone handled the Cyprus bank crisis (taking money from people who had savings accounts with more than $130,000 in them to secure a loan from the eurozone) would be the model for dealing with future banking crises across Europe?

6. What do you think: should it be the responsibility of individuals who open bank accounts or purchase bonds to bail out their bank? Explain your answer.

Background

THE EUROZONE:

The eurozone is an economic and monetary union (EMU) of 17 [of the 27] European Union (EU) member states that have adopted the euro (€) as their common currency and sole legal tender.
The eurozone currently consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
Most other EU states are obliged to join once they meet the criteria to do so.
No state has left and there are no provisions to do so or to be expelled.
Since the late-2000s financial crisis, the eurozone has established and used provisions for granting emergency loans to member states in return for the enactment of economic reforms. (from wikipedia)

ON THE ECONOMY OF CYPRUS:

Cyprus has close ties with Greece and had invested heavily in Greek bonds. Unfortunately for Cyprus, foreign investors in Greek debt were forced, in 2011, to take a voluntary [cut] of up to 50 percent of the value of those bonds.
With an economy as thin as Cyprus a loss of that magnitude in the funds it had, essentially, parked for safety sake was more than just a jolt. It threw the economy into a tailspin.
...The big guns in the European Union – in this case Germany – wanted to structure a $13 billion bailout, in which individuals who have deposits of at least $130,000 (equivalent) in Cypriot banks will pay what the New York Times called a “one-time tax” of 9.9 percent of their deposits.
They dropped the requirement that smaller depositors would have 6.75% of their funds confiscated.
The Times reported that many of the higher-value depositors are “Russians who have put vast sums into Cyprus’s banks in recent years” but it wouldn’t matter if it they were North Korean generals. A deposit is a deposit for the use of the depositor, not for [German leader] Angela Merkel.
Naturally as soon as word hit that this “tax” was going to be imposed last week, there was a run on the banks to get money out of bank vaults and into mattresses where it would be safe.
The ATM networks were shut down to prevent the good people of Cyprus (or Russia) from getting to their money before the government could take it away.
Germany’s Chancellor Angela Merkel said that making the depositors help pay for the bailout is the right thing to do. “That way,” she said, “those responsible will contribute in it, not only the taxpayers of other countries.” …
My fear is this becomes a standard mechanism for helping to reduce what is known as the “sovereign debt” – the money countries owe.
...I can [believe that with our national debt in the U.S., the federal government could produce] talking points explaining why rich people with deposits of over, say $50,000 should be willing to do their fair share in paying down the national debt.
Maybe to the tune of a “one-time tax” of, say, 15 percent. That’s not 15 percent of $50,000, it would be 15 percent of whatever you’ve got in the bank – in all your accounts. Maybe throw in those greedy 401(k)s and brokerage accounts that have swollen with the sudden rise in the U.S. stock market.
Sample Talking Point: If you can afford a 401(k) and $4/gallon gasoline, you’re making too much. (from Rich Galen’s commentary at mullings.com)

U.S. bank accounts up to $250,000 are insured by the FDIC:

The Federal Deposit Insurance Corporation (FDIC) is a United States government corporation operating as an independent agency created by the Banking Act of 1933.
As of January 2013, it provides deposit insurance guaranteeing the safety of a depositor's accounts in member banks up to $250,000 for each deposit ownership category in each insured bank.
The FDIC also examines and supervises certain financial institutions for safety and soundness, performs certain consumer-protection functions, and manages banks in receiverships (failed banks).
The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.
Insured institutions are required to place signs at their place of business stating that "deposits are backed by the full faith and credit of the United States Government."
Since the start of FDIC insurance on January 1, 1934, no depositor has lost any insured funds as a result of a failure. (from wikipedia)