Cyprus Games

Cyprus hit the news over the weekend. Its banks are grossly oversized at 800% of GDP, extreme even for the EU, and, of course, bust. They took a lot of hot money and bought Greek debt. That didn’t end well, so the only question was going to pay to recapitalize the banks. Of course, the banks should have been liquidated but that is unthinkable, like killing a sacred cow.

The banks have little bond debt so that wouldn’t help.

Ms. Merkel opted out on behalf of the German taxpayer, tired of being the patsy. Passing the hat didn’t yield much, so a deal was floated where the depositors would swap some of their deposits for bank shares. Initially all depositors were going to be “taxed,” but it now appears that only the uninsured depositors are going to pay. These are believed to be mostly wealthy Russians, which has got Vlad all upset. But really? This is what happens when you put money in a bank.

The message should be clear – uninsured depositors are at risk in the Eurozone banks (and so are the insured ones, although they look to escape this time the trial balloon was floated). These banks have little capital and are enormous, with assets totaling some 350% of GDP. This is not ending well.

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