Triple dip? You aint seen nothin’ yet

In economics, everybody is in the same boat. Everybody has an oar, rowing in a different direction. Everybody’s oar is a different size. Oh, and there’s a wind. And strong currents. And the odd waterfall.

So it is in Cyprus this morning, as people rise to the knowledge that some of their savings are about to be taken to bail out their sinking banks. I feel sorry for the people of Cyprus, which include a large number of British service personnel. But the big danger is that this bailout (or rather, “bail-in”) will do just the opposite of what it intends: plunge Europe back into financial crisis. This is how…

So what just happened?

In a nutshell, Cypriot banks went bankrupt because they lent money to Greece – eight times the value of everything made in Cyprus in a year – and Greece couldn’t pay it back.  They weren’t alone. Britain’s banks also lent way too much money in the 90’s and 00’s. A few of them also went bankrupt – the government effectively bought chunks of Royal Bank of Scotland, HBOS and Lloyds TSB in 2008.

Cyprus (and the British government) could just let its banks fail, but by doing so people who lent a failed bank money would lose it. Who lends money to banks….? Other banks, who then become too afraid to lend to anybody else, stalling the economy. That’s what we call a “credit crunch”. Obviously, the Cypriot government can’t (or at least shouldn’t) let that happen.

The only option is to ask for help from places with money – the European Central Bank, International Monetary Fund and European Union. They have to make a deal which will involve these organisations giving them the money they need in exchange for a plan to sort out their debt. Greece has done this before, as has Ireland, Portugal and Spain. But this is different. This time, the ECB, IMF and EU (acronym hell) spied rich Russians, who have a habit of saving money in Cypriot banks. This time, everyone with money in a bank account in Cyprus will have to help pay for their banks’ mistakes: 6.75 per cent of all deposits under €100,000 (£87,000) and 9.9 per cent for those above €100,000.

Understandably, Cypriots are unimpressed.

Is Britain next?

Yes and no. First off, don’t panic – whether or not you’re an austerity fan, Britain’s government is dealing with its debt and the banks are more or less out of trouble for the time being. Your bank accounts will not be raided.

But…anyone remember Northern Rock? In 2008 the bank got into trouble and everyone rushed to withdraw their money because they feared they would lose it, just making the problem worse. This was a key moment starting a general loss of economic confidence. Investors (rich people), stopped giving their money to companies and banks. It spooked banks, who stopped lending so much (including to each other), which meant that people couldn’t buy homes, for example. The vicious spiral got us where we are today – a spluttering economy and lacklustre recovery.

Cyprus is like Northern Rock. If you knew that a percentage of your savings would be taken away from you, what would you do? Withdraw it! That’s exactly what the people of Cyprus are trying to do, and the government has forced the banks to stay closed until at least Tuesday. But if Cypriot savers can be made to stump the bill for their banks’ mistakes, why not, say the Portuguese? Or the Italians, Irish, Greeks or Spanish, none of which are out of economic danger yet. If people in those countries think they could be next, they’ll take out their money and banks won’t be able to pay their debts. Banks won’t lend and investors (rich people, again) won’t invest as evidence from Asia shows. This kind of Europe-wide calamity may not occur at once, and Cyprus is an unusual case, but the erosion on confidence is inevitable and the impact on Britain certain.

Bottom line: Cyprus could be the start of the next financial crisis.

UPDATE (20 March 2013): Spare change, anyone?

It’s not over yet. The Cypriot parliament yesterday voted unanimously (19 people abstained) against the plan to take money from savers in the country, which means that somehow it needs to find €5.8bn (£5bn) from somewhere else. It also means that the third smallest Eurozone country just stuck two fingers up to all the rest, setting a precedent that could undermine the ability of the other countries in the Eurozone to enforce bailout conditions. Why is this important? Well if investors (yes, rich people) don’t believe that the ECB can do “whatever it takes” to save the Euro (because countries won’t listen to them), then they’ll spend less than a miser in prison, further throttling the global economy.

In an attempt to plug the money gap, the Cypriot finance minister flew all the way to Moscow today to try to persuade the Russians to help out. After all, rich Russians account for around $31bn (€24bn / £20.5bn) of all deposits in Cypriot banks. Maybe Putin will cough up. Maybe not. Maybe a certain Russian energy company thought that rights to explore gas fields of Cyprus’s coastline might be worth a bit….say….€5.8bn?

Keep an eye on this one.

33 thoughts on “Triple dip? You aint seen nothin’ yet

  1. akhenkhan

    It’s just been announced that the Cypriot government has voted against the idea of levying ordinary people’s bank accounts. Merkle and co are said to be furious that in this David and Goliath episode, they (Goliath) have lost.

    Reply
    1. lexborgia

      They haven’t lost mate, they’re taking another angle. But at least their actions demonstrate that the well isn’t bottomless. Time to make the bankers pay up or cut their losses, after which they will still have more than enough left over. We need a revolution.

      Reply
  2. lexborgia

    We keep hearing “the government has bailed them out.” ‘The Government’ has no money, it’s the people’s money they are using to pay off bankers and investors, who then lend that money back to the people they got it from, at a higher rate. Does any of this make any sense? Why aren’t we the people(Governments) taking from the bankers? I’m a man of satire, all the way, and I’ve also just taken a shot at them in my blog, but I wish someone would take a real shot, and finally take away everything they have i.e acquired through dishonest means.

    Reply
    1. elroyjones

      We need a revolution here in the States but the people cannot see what they’re looking at. Greed and financial devastation is a world wide pandemic and no one will be immune to it.

      Reply
  3. matthewcro

    All these ‘new’ methods of attempting to prevent a country from defaulting on its debts sets a worrying tone, it looks like the EU are prototyping economic solutions, without worrying so much of the consequences. If this does work, and as you said, who’s next? Spain, Italy, Britain? We are far from out of this mess.

    On a cheerier note, very well written and explains the situation very well!

    Reply
  4. whatafoolishness

    Totally agree. I hate more and more each time the decisions taken by European governments, to the point of stopping following the news. Europe is sinking by dint of trying to take a breath wih such wrong measures. The situation in Spain, for instance, is getting worse each month, but the worst of all is the atmosphere which you can find there since a time ago. It’s really horrible.

    Reply
  5. Jessica

    Wow. Thanks for that really good explanation of a complex situation. I don’t follow economics much, but I know I should. I hope your last statement proves false. Guess we’ll see!

    Reply
  6. bhuwanchand

    Well the common people seems to be winning and hopefully the Govt. there will not be able to touch there money.

    Came across an interesting news item here in India last week was how a huge amount of unclaimed money (~5bn US$) lying with the Banks in India
    http://timesofindia.indiatimes.com/business/india-business/Rs-2500cr-lying-unclaimed-in-bank-accounts/articleshow/18981034.cms

    What should be done about such unclaimed money? a) Used for clearing out Indian Govt. debt. b) Invested in social sector/ infrastructure development or c) Spread the happiness by distributing it equally among all Indians 🙂

    Reply
  7. Jnana Hodson

    At the time the Euro was created, I questioned the long-term viability of a multinational currency — one that lacked the decision-making clout of a single government. Just who, or what, would ultimately stand behind it? When the need came, would all of the constituent countries enforce the decisions, or would a few try to begger their neighbor?
    The inability to select images of people or places for its printed money symbolized some much deeper tensions and distrust.
    Of course, in boom times nobody waves a red flag. But now that the unsupported debts are coming due, so too are the structural defects appearing.
    The real worries, as you point out, is whether the European Union can contain the damage.
    Where will it all end?

    Reply
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  9. John Hayden

    And then the U.S. and Canada? Where is the end of the line? (I mean the line I stand in to withdraw my money. Oh wait! Never mind. I just remembered. I don’t have any money. 🙂

    Reply
  10. panattoni

    Cypriot savers were getting 5 or 6 percent interest on there savings when everyone else in the euro zone was getting next to nothing. I think its fair they take a chunk of the pain, overall they havn’t lost anything.

    Reply
  11. reviewcentrall

    I’m not all that savvy with economics in general, but have been trying to keep abreast of this stuff, it’s quite interesting and could prove to be an important event in the Eurozone crisis. Great post 🙂

    Reply
    1. jinxedgeneration Post author

      Unfortunately I can’t give you investment advice, being a journalist not a banker. If it was my money, I would probably do a very similar thing to other people – put the majority of it in the safest place I can find, like US treasury bonds.

      Reply

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