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IM, the problem is that the victims in Cyprus had almost no agency in creating the problem. That was done by a political elite who probably had little understanding of what they were doing, but those who voted for them mostly had none. My understanding is the reason the bond holders are being exempt is that they are largely banks in core EMU countries, chiefly Germany. It is for that reason that I would like to see Cyprus reject the bailout. If Russia wants to make German and French bankers whole in return for sparing the Cypriots misery and if the Cypriots agree that would seem fair.

My own preference would be for Russia to not only give tax avoiders hiding in Cypriot banks a huge haircut but also to wipe out the bond holders. If the ECB objected, Russia could offer Cyprus solvency in rubles as a stepping stone to reintroduction of their own currency. But if the ECB isn't coming up with any money what authority do they have to dictate how the banking insolvency is resolved. Converting bond holders to stock holders is traditional. Perhaps Russia could offer the new stock holders rubles for their stock.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 18th, 2013 at 05:54:21 PM EST
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The reason bondholders are exempt is that senior bondholders represent such a small amount (0.5 bn) so "burning" them would have brought little money and (another) worrying precedent. Given the amount, that seems like a plausible argument, even if the overall package makes it an appallingly bad-looking one.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Mon Mar 18th, 2013 at 06:19:28 PM EST
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Are there any bondholders other than 'senior' bondholders?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Mar 18th, 2013 at 08:10:29 PM EST
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From the story linked by Jerome in a top-level comment: Levy plan `bleak day for banking union' (FT.com, March 18, 2013)
There is an added irony to the situation in the fact that, to the casual observer, the Cypriot banking system looked like a model for others to follow in the wake of the financial crisis. The island's banks have about €68bn of deposits, which they use to fund their lending, with only minimal reliance - less than €3bn - on so-called wholesale funding in the bond markets.

People who defend the Cypriot plan say the funding structure was the reason why there was no alternative to hitting depositors - junior bonds, which are being wiped out, amounted to just €2.5bn, while the €0.2bn of senior unsecured bonds have been left alone, on the grounds that to give them a haircut would generate a negligible economic contribution but undermine investor sentiment.

Since Lehman Brothers collapsed more than four years ago, deposit-funded balance sheets like Cyprus's have been the envy of many banks around the world. Burnt by the realisation that in times of crisis bond markets dry up, leaving long-term lending commitments potentially unfunded, banks have frantically shrunk non-essential lending and tried to boost deposits as their core funding mechanism.



guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Mon Mar 18th, 2013 at 08:17:44 PM EST
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Er - how did the banks lose €68bn in deposits?

Is there a breakdown of lending and other payments anywhere?

And I suppose it's worth pointing out that only two banks are in trouble, but the Troika appear to have decided that for some reason this means the entire economy of Cyprus is in danger of total collapse.

It would be a bit like the Bank of England taking money from all domestic British depositors because Northern Rock was in trouble.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Mar 19th, 2013 at 08:42:18 AM EST
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Er - how did the banks lose €68bn in deposits?
Just because the banks have €68bn in deposit liabilities doesn't mean they have €68bn in cash assets on their balance sheet.

The main cause of the current troubles is the large losses sustained by the Cypriot banks on their large stock of Greek sovereign bonds. Which, by the way, makes sense if you have a large number of Greek nonresident depositors. You owe the Greek citizens and the Greek government owes you.

eKathimerini: Cyprus deposits yielded more than German ones (March 18, 2013)

"Banks in countries like Cyprus and Greece can pay higher interest rates as they also earn more on loans," Dirk Becker, head of banking industry research at Kepler Capital Markets in Frankfurt, said by phone. "In addition, Cyprus banks invested a lot in high-yielding Greek debt in the past."


guaranteed to evoke a violent reaction from police is to challenge their right to "define the situation." --- David Graeber citing Marc Cooper
by Migeru (migeru at eurotrib dot com) on Tue Mar 19th, 2013 at 10:11:28 AM EST
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Yes, there are usually unsecured bondholders. Not sure how much they amount to in this case.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Mar 18th, 2013 at 08:27:30 PM EST
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