New monetary controls in Cyprus

http://www.guardian.co.uk/world/2013/mar/25/cyprus-bailout-deal-eu-closes-bank

Laiki, or Cyprus Popular Bank, is to be closed. Its €4.2bn in deposits over €100,000 will be placed in a "bad bank" and could be wiped out entirely. Those with smaller deposits will see their accounts transferred to Bank of Cyprus.

The Cypriot government reportedly fought hard for Bank of Cyprus to be spared, but the island's biggest bank will face huge restructuring. No bailout money will be used to the recapitalise it; instead shareholders and bondholders will be hit. It is thought depositors with more than €100,000 at the bank will also be involved in the recapitalisation, and are expected to face losses of around 30%....

The new bailout deal will hit foreign investors, particularly Russians, hard. Russian nationals are estimated to hold more than €20bn of the €68bn deposited in Cypriot banks....

There were signs of panic over the weekend as a €100 limit was imposed on ATM withdrawals in Cyprus. Officials said they believed the country would now need strict controls on money transfers in and out of the economy in the coming weeks or possibly months, cutting off its citizens and companies from much of the rest of the eurozone's financial system....

In Cyprus, the mood is grim. Cypriots realise that their economy will take a huge hit and there are worries of long-term unemployment as big foreign investors are expected to seek ways to flee from the country. Anger remains directed at the EU, and Germany in particular.

Comment:

Cyprus has allowed its second largest bank to fail. Its assets will be divided. Those accounts having 100,000 euros or less are insured, and those accounts to will be given to the Bank of Cyprus to make it stronger, since it too was in danger of bankruptcy.

If an account has 150,000 euros, the owner will lose the top 50,000, because that money will be given to a "bad bank" to keep it from going bankrupt.

They are hoping that this will save the other banks, so that Cyprus will lose only the one bank. In the process, the banking system there will be cut down to about three times the size of the nation's GDP, rather than seven times (as it was previously).

It is apparent now to everyone that the people had more faith in their banks than they ought to have had. Few foresaw what would happen, and for this reason many had accounts holding more than the insured 100,000 euro limit. No doubt they now wish they had done their homework.

The crisis has undermined the people's faith in the banking system, and so they know that there is bound to be a run on the banks when they open tomorrow (Tuesday). Many are cash-starved after ten days of frozen bank accounts. The government knows this and are reacting by limiting ATM withdrawals to 100 euros per day. They are also planning to curtail wire transfers so that people cannot send their money to safer havens elsewhere. The banks are trying to defend themselves from the wrath of the depositors--especially Russian depositors, who stand to lose the most.

This situation shows how a banking crisis can have a domino effect. We all need to learn from this, so that we take steps ahead of any crisis. Up to now, most people have thought that their money is safer in the bank than at home where it might be stolen by thieves. That belief is now in doubt, seeing how a bank crisis may empower the government to steal accounts with immunity. All they have to do is pass a bill making their theft legal. And if the people fight back by taking their money out of the banks, the government can stop this by limiting withdrawals and by not allowing foreign wire transfers.

It might be prudent, then, to have an emergency cash fund at home that would last a few weeks in case of emergency. The banking system works well until it doesn't.