Saturday, March 16, 2013

10% Haircut on Cyprus Bank Deposits

And you thought Sri Lanka's economy was bad.  So come Monday morning people who have deposits in Cyprus Banks are going to find out
a) 9.9 % deduction for Deposits over 100,000 EUR
b) 6.75% deduction for deposits less 100,000 EUR
c) Not being able make large withdrawals
d) Corporate Tax raised from 10% to 12.5%
Nothing new under the sun. In Sri Lanka we had the same by issuing new banknotes by NM Perera in 1970   Similarly Gold was confiscated in 1933 in the US

So one may well ask, why do you/we care.
To quote from a commenter
As an EU citizen, you must now believe that any lending exposure you have to a bank whether as a bond lender (i.e. you own corporate bonds) or deposit lender (i.e. you have a deposit in a bank) can be seized and confiscated by government, no matter how small the exposure. 

i.e. If you have a deposit in Bank in a country EU where Corporate Capital is mainly raised by  Bank Debt (loans) expect to see part of your Bank Deposits be confiscated.
If you own Bonds in a EU country where Corporate Lending is mainly thru Bonds expect a Haircut on your Bond Notional.

If you want understand some of the economics this is good reading.  (Note the date, last year)
Basic summary:
Money for Business can be raised by Bonds or from Bank Loans.
So when business/economy go bad, some or many of the loans will default.

If the Business money was mainly from Bank deposits (i.e Bank Loans) as in Cyprus
a) The Govt (or some Insurance) will step in to cover the bad loan losses so that depositors will get their money back (bail out).
b) Deposoitors will have to take a reduction (Haircut) to cover to loan loss. You need to do it at once or the smart guys will quickly withdraw their money and the old ladies will be left holding the bag.

If the Business money was mainly from Bonds as in Greece
a) Bond holder will have to bear losses.
b) Applied across all bonds

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