PATHOS – While bureaucrats and technocrats in Nicosia have been busy trying agree on an even horrible haircut than the each of the previous Troika proposals, the EU’s deadly pathogen has begun to spread to the far corners of the country, hitting the southern seaside tourist town of Pathos.Cyprus managed to avoid the initial danger of an all out bank run and the potential for mass rioting this week, which is probably down to the fact that no Cypriot wants to see their country become a lawless banana republic in the Mediterranean.
But that calm will not last for long if banking oligarchs continue to pressurize this economy.
Capital controls and frozen bank deposits mean that thousands of businesses are now being strangled of operating funds. It’s a very bad scene. One successful Pathos bar owner, named Nicolas, is being hit particularly hard, and told us that his story is the same as every local trader he knows.
He explained, “Our credit card merchant account was with Laiki Bank and we cannot access it anymore, so we cannot take cards. People aren’t spending money. All my suppliers are demanding cash for deliveries, and we just haven’t got enough. They’ve got our cheques in the bank but we don’t have the funds to cover them. Staff need to be paid in cash daily now. My emergency funds are frozen in another bank account and cannot be accessed for 45 days. On top of that, tourism is down, and there’s no foreign money coming in anymore. We’ll be lucky if we’re still here in 4 or 6 months time.
“The only thing which might remedy the situation is if the government impose austerity cuts on government spending”.
Patrick Henningsen 21st Century Wire
It Can Happen Here: The Bank Confiscation Scheme for US and UK Depositors
The National Government [is] pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts . . . .
Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.
An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution.
US depositors worse off than Cyprus
In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike their Cypriot confreres, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders.