Do you think it's fair for the people of Cyprus to lose part of their savings, in order to help save the country's economy?

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2 Answers

Tim O'Shea Profile
Tim O'Shea , Investor, answered

It’s a matter of personal opinion, but no doubt the savers of Cyprus will feel aggrieved. However, it's interesting to look at the way banks work, and how this affects savers when banks are subjected to economic pressure.

A bank deposit is simply a loan note from you to the bank, so if the bank goes down so does your loan note and your money is gone!

When a bank goes bust, the bank's owners (the equity owners) are the first to lose. Then the depositors lose (and any other debt holders of the bank) if the bank's assets are less than its liabilities. In the first ten months of 1930 744 banks failed in the in the US leaving savers high and dry.

Therefore banks are not safe places to put money (unless any government guarantee covers your deposit, then you have to trust the government instead!). 

When you put your money in the bank, you are loaning it to them to do with as they wish, there is no guarantee that they will give it back to you. You have no control of what they decide to invest in, loan out or pay to the staff. Some countries such as the UK guarantee a certain level of deposit and, in that case, it is safer.

So, if you deposit in a bank which isn't government-guaranteed, well-run and aggressively capitalised, then you are at risk of losing your money. Choosing a well-run, sensible bank that pays a sustainable level of interest is a good way to offset this risk.


Cyprus Banks and The EU

However I do think the EU forcing Cyprus to raise capital from the savers/account holders is risky for the sake of 6 billion euros which is small change in the scheme of the EU debt problems.

It sends the message to depositors that their money isn't safe which may lead to runs in many banks across the weaker nations of the EU. They have gone to great lengths to avoid bank runs over the last three years, and this move seems to undermine it. Unless you stop the bank run queue immediately it will only ever get longer.

Update 25 March 2013 

The discussion prior to the final recovery agreement in Cyprus shows that even if a government guarantees deposits the guarantee is only good if the country doesn't need bailing out too!

3 People thanked the writer.
John Swindells
John Swindells commented
Runs on bank deposits aren't just a risk for weaker countries; just look at the Northern Rock debacle in the UK a few years ago. Destabilising financial institutions during a financial crisis strikes me as a very dangerous thing to do.
Yusuf Yassin Profile
Yusuf Yassin answered

The problem with Cyprus is that it relies heavily on depositors for money as it issues little government debt. The only way to sustainably reduce its debt - other than writing it off - is to place a levy on depositors. 

In my view, the European Stability Mechanism, a bailout fund, should step in and recapitalise the banks directly, sparing the government and its citizens any pain. 

Cyprus's banking sector is nine or ten times the size of the economy in GDP terms, thus forcing depositors to foot the bill is unlikely to solve the banks' funding gap. Best let them restructure independently and maintain pledge to insure deposits.

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Tim O'Shea
Tim O'Shea commented
Good answer. Can you explain in more detail how the depositors provide the capital for Cyprus rather than the government please?
Yusuf Yassin
Yusuf Yassin commented
Sorry. What I meant to say is corporate, not government debt. The banks' liabilities are largely made up of deposits rather than long term corporate debt, which makes them too reliant on bank deposits and susceptible to bank runs.

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