Our financial system is crumbling this week.

[letsgocards89]

Why the Cyprus Bail In Is a Bigger Deal Than You Think

The eurozone powers-that-be (mainly Germany) gave Cyprus a bailout and insisted that the depositors in Cyprus's banks pay part of the tab — a startling condition that has never before been imposed on any major banking system since the start of the global financial crisis in 2008.

The deal did not touch the bondholders. Why the depositors? These are folks who had their money in the banks for safe-keeping.

When Cyprus's banks reopen on Tuesday morning, every depositor will have some of his or her money seized. The current plan is that accounts under 100,000 euros will have 6.75% of the funds seized. Accounts over 100,000 euros will have 9.9% seized. And then the eurozone's emergency lending facility and the International Monetary Fund will inject 10 billion euros into the banks to allow them to keep operating.

[IMADreamer]

I would hope there are riots in the streets.

[heyzeus]

What a hilarious joke. Unregulated trading arms of banks make idiotic multi-billion dollar bets on subprime instruments that they were too dumb or lazy to understand, lost on those bets, and now normal individuals will pay their losses. Christ. This world is rigged.

[AWvsCBsteeeerike3]

I always wonder when [expletive] like this comes out if it's just the powers that be [expletive] with everyone to move markets so they can gain.

[Joe Shlabotnik]

The rest of the story...

Cyprus banks have been used as a tax dodge, mostly by Russians wanting to launder money for many many years. To the point where Cypriot banks' foreign accounts are holding many times the number of assets in local accounts. Cypriot banks then ballooned with shady lending and all the other practices that got our banks to the brink.

Those banks are now in such a state that they should be liquidated for pennies on the dollar. If they are worth anything.

So the European Union is actually doing the common Cypriot a favor by trying to get the account holders to pony up the cost of bailing them out. The plan is to have the huge foreign accounts foot most of the bill while having the smaller locals' accounts take less of a hit.

The way I understand it, the alternative is they get nothing as the banks collapse.

Why the Cyprus Bail In Is a Bigger Deal Than You Think

The eurozone powers-that-be (mainly Germany) gave Cyprus a bailout and insisted that the depositors in Cyprus's banks pay part of the tab — a startling condition that has never before been imposed on any major banking system since the start of the global financial crisis in 2008.

The deal did not touch the bondholders. Why the depositors? These are folks who had their money in the banks for safe-keeping.

When Cyprus's banks reopen on Tuesday morning, every depositor will have some of his or her money seized. The current plan is that accounts under 100,000 euros will have 6.75% of the funds seized. Accounts over 100,000 euros will have 9.9% seized. And then the eurozone's emergency lending facility and the International Monetary Fund will inject 10 billion euros into the banks to allow them to keep operating.

[TheoSqua]

That makes a lot more sense. And Russsians hiding money in a cypress account aren't going to withdrawal all of it and move it back to Russia, because it'll cost a lot more than 10% of the account to do that.

[Joe Shlabotnik]

The rest of the rest of the story...

Foreigners don't own a majority of assets in Cypriot banks as I said - they own about 40%:

"Foreign holdings made up €26.8 billion of a total of €64.8 billion in deposits as of December, according to the Cyprus central bank. Russians held €15.4 billion of the total, according to the Regional Banking Association of Russia. Cypriot banks have been a Russian haven because it is a way to covert rubles to euros, the taxes are low and, according to critics, few hard questions are asked about the source of the funds."

[Arthur Dent]

While Cypress banks are used money laundering, it sounds like the plan here very explicitly chooses to make normal bank account holders collateral damage. Further, announcing that authorities may decide to seize bank deposits is a great way to generate bank runs. There's a good reason why bank deposits are generally fully guaranteed. To make the system work, this needs to be paired with tight regulations on lending, but that's pretty much fallen apart, especially when you can evade such regulation by putting you money in places like Cyprus.

[Joe Shlabotnik]

While Cypress banks are used money laundering, it sounds like the plan here very explicitly chooses to make normal bank account holders collateral damage. Further, announcing that authorities may decide to seize bank deposits is a great way to generate bank runs. There's a good reason why bank deposits are generally fully guaranteed. To make the system work, this needs to be paired with tight regulations on lending, but that's pretty much fallen apart, especially when you can evade such regulation by putting you money in places like Cyprus.

Well, looks like EU wants the word out that those days are over. May be a clumsy way to do it, but it is getting everyone's attention. I'm long term bullish on this. I'll be buying if panic sets in.

[greenback44]

The rest of the rest of the story...

Foreigners don't own a majority of assets in Cypriot banks as I said - they own about 40%:

"Foreign holdings made up €26.8 billion of a total of €64.8 billion in deposits as of December, according to the Cyprus central bank. Russians held €15.4 billion of the total, according to the Regional Banking Association of Russia. Cypriot banks have been a Russian haven because it is a way to covert rubles to euros, the taxes are low and, according to critics, few hard questions are asked about the source of the funds."

Calculated Risk pointed out that Cyprian banks also have been paying some lucrative rates, which in effect have been paying for the haircut. Because their deposits are denominated in euros, some of these folks must have been getting a pretty nice ride.

The amazing thing to me is that it's taken this long for drastic action. The Eurozone looks like it was built for games of regulatory Frogger.