The Cyprus Contagion Spreads


At the time of the banking crisis in Cyprus I wrote about the risk of governments falling in love with the deal they had hammered out then and making it general policy in other countries.And how this can spell disaster to savers.Link

My worst fears stand confirmed.Remember governments tend to copy each other.Here is a news article I found buried in the back pages of the Economic Times yesterday:

EU strikes deal to push cost of bank failure on investors BRUSSELS: The European Union agreed on Thursday to force investors and wealthy savers to share the costs of future bank failures, moving closer to drawing a line under years of taxpayer-funded bailouts that have prompted public outrage. After seven hours of late night talks, finance ministers from the bloc’s 27 countries emerged with a blueprint to close or salvagebanks in trouble. The plan stipulates that shareholders, bondholders and depositors with more than 100,000 euros ($132,000) should share the burden of saving a bank. The deal is a boost for EU leaders, who meet later on Thursday in Brussels, and can show that they are finally getting to grips with the financial crisis that began in mid-2007 with the near collapse of Germany’s IKB. “For the first time, we agreed on a significant bail-in to shield taxpayers,” said Dutch finance minister Jeroen Dijsselbloem, referring to the process in which shareholders and bondholders must bear the costs of restructuring first. The rules break a taboo in Europe that savers should never lose their deposits, although countries will have some flexibility to decide when and how to impose losses on a failing bank’s creditors. “They can affect German savers just as well as they can affect any other investor in the world,” German finance minister Wolfgang Schaeuble said after the meeting. Taxpayers across much of Europe have had to pay for a series of deeply unpopular bank rescues since the financial crisis that spread across the bloc to threaten the future of the euro. The European Union spent the equivalent of a third of its economic output on saving its banks between 2008 and 2011.

In effect when you are depositing money in a bank you are actually lending money to it.This is why banks classify your deposits as liabilities in their books.As all lenders, when you lend to parties who are bad credit risks you stand to lose you money.So be careful to whom you lend and how much.Diversify and be damned sure to demand an appropriate rate of interest and other terms to adequately compensate you for your risk.

About Keerthika Singaravel

9 Responses to The Cyprus Contagion Spreads

  1. Pingback: My Thoughts | wealthymatters

  2. percy says:

    It’s not my first time to pay a visit to this site,I am visiting this web site daily and get good information from here every day.

  3. Haricharana says:

    Good article.Well worth reading.

  4. Alex Jones says:

    I have no problems with the new rules as longs as they are known before I deal with banks, thus as you advise I can diversify and avoid bad banks. Taxpayers should never again be used to bail out greed and stupidity of the banks, a process that in the end did nothing to change the bankers ways and hurt the poor the most.

    • What happens in the West will soon be fashionable in India too.
      In India some banks were nationalized, supposedly to ensure the common person’s welfare. All banks are closely monitored by the RBI.Deposit insurance in India is very low,less than $2000,something that is not so well known.A lot of people repose faith in nationalized banks as they are seen as extensions of the government and unlikely to endanger receipts.The RBI oversight and deposit insurance provide solace to a most depositors.A lot of very ordinary people have their lifesavings,totaling over $2000 in these banks.By rescuing banks with such funds we will not be doing anything that’s so different from expecting the taxpayers to bail out banks.In fact the distress is likely to be concentrated unduly on savers and conservative investors.For too long society has propagated the myth that bank deposits are safe.The social contract was-park your money in banks,even if rates are low,in return enjoy safety and the good of the community. Now the rules are beginning to change and people need to see the old myth for what it was.

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