By: The Citizen
The story of the March 2013 EU bailout of Cyprus continues to unfold and the devil is in the details. This case is a benchmark in US financial history because the status of shareholders of bank stock and bonds and of bank depositors has changed. By now, most of us know that the banks in several European nations are insolvent, that is, they do not have sufficient funds on hand to accommodate even one-fourth of their depositors should those depositors show up demanding their cash.
Several European nations are broke, their banks insolvent, so what’s a nation to do? In many circles it has been discussed whether various nations should leave the European monetary union and return to their own currency. The European Union does not want Cyprus to be the first in what might be a long series of dominoes falling, countries leaving the EU, the Euro currency, with the result a two-country European Union. Should that happen, the EU leaders believe political and financial chaos will result. After all, if it behooves Cyprus to leave, will other nations see that the party is over and decide to go home?
To keep Cyprus in the Union, the EU Parliament and Commission, along with the IMF and some powerful Russian depositors, came up with a solution whereby the shareholders and bondholders in the failing Cypriot banks along with some depositors would have to “donate” all or part of their funds to restore bank liquidity.
The EU Finance Minister, Joroen Dijsselbloem, said the largest uninsured deposit holders at the second-biggest Cyprus Popular Bank PCL, might only see one-fifth of their money returned and could wait several years before being paid back.” Wow! Depositors might lose up to eighty percent of their deposits? Mr. Dijsselbloem went on to say, “Banks should primarily be rescued by imposing losses on shareholders, bondholders, and, if necessary, uninsured depositors” (vanTartwijk and Dalton, Wall Street Journal, Mar 27, A10).
It turns out, these ideas are not the sole perspective of the EU Finance Minister. In, “Resolving Globally Active, Systemically Important Financial Institutions,” the Federal Deposit Insurance Corporation (FDIC) and the Bank of England discuss a new strategy for resolution of large insolvent financial institutions. (Link below) On page 1, new ideas are mentioned and the document says, “They should also assign losses to shareholders and unsecured creditors in the group, thereby avoiding the need for a bailout by taxpayers.” This is the process unfolding in Cyprus now and beginning in Italian banks as well.
Bank of America, Citigroup, and other large banks are included in the above named category of global banks. Although they passed recent Federal Reserve “stress tests” they probably have about 10-15 percent of depositors’ funds on hand. After a 12-day closure, banks in Cyprus opened March 28 and depositors were allowed to remove a small amount of funds, roughly $400 while the managers and EU handlers decide how to take the “donations.”
At the top of the FDIC website it says depositors’ accounts are insured up to $250,000 but the above document and EU situation certainly gives pause for thought about one’s finances.
Link to document on FDIC website: http://www.fdic.gov/about/srac/2012/gsifi.pdf