Cypriot Haircuts

So Cypriot banks are broke, big-time. They took tons of money from Russian mafiosi and let it to Greece, which has since melted down. I get that.

And the banks were so large compared to the Cypriot economy that the locals can’t possibly pay (the way the Irish are being forced to pay for the misdeeds of their banksters).

Therefore, whatever doesn’t come from other sources in Europe has to come out of the hides of depositors. Check.

And the Germans, partly for domestic political reasons, want to make sure that someone suffers. Right.

Deposits are insured up to €100,000. And the current plan (or what was the current plan until the Cypriot parliament rejected it decisively) is to pay off insured deposits less a “haircut” of a few percent, and uninsured deposits less a somewhat larger haircut. Haggling is now going on about the numbers.

That’s what I don’t get. Why not give insured depositors all of their money back (that’s what “insured” means) and tell people that all deposits over €100,000 that they’re out of luck. If the bank’s assets, plus the bailout money, allow them to get 75% of their money back, that’s what they get. That’s what “uninsured” means.

I’m sure there’s some reason to violate some people’s contractual rights in order to give other (richer) people more than they’re contractually due, but I can’t figure out what it is.

Can someone enlighten me?

Footnote Yes, I like the idea of selling the whole island to Turkey for enough money to save the banks. But since that’s na ga happa’, why not let nature take its course?

[Originally posted at The Reality-based Community]

Mark Kleiman

Mark Kleiman is a professor of public policy at the New York University Marron Institute.