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CYPRUS savers take 10% hit


no_free_lunch
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People with Cyprus bank accounts will lose up to 10% of their savings as the price of a €10bn rescue package for the cash-strapped country from its European partners and the International Monetary Fund.

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People with less than €100,000 in their Cypriot bank accounts will have to pay a one-time tax of 6.75%, those with more will lose 9.9%.

 

The measure is expected to net €5.8bn in additional revenues, Mr Dijsselbloem said, greatly reducing the country's financing need.

 

http://www.irishexaminer.com/breakingnews/world/cyprus-savers-lose-10-of-money-after-shock-bailout-588134.html

 

Scary stuff.  Developed work governments are now raiding people's bank accounts.  One more reason I am scared to be in cash.

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Wow!  That's a quick way to cause capital markets to completely cease functioning.  Who the hell would ever save and invest in Cyprus after this overt expropriation of wealth?  Better to get your money out of the country or even put it under your mattress!

 

They have effed themselves!

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Wow!  That's a quick way to cause capital markets to completely cease functioning.  Who the hell would ever save and invest in Cyprus after this overt expropriation of wealth?  Better to get your money out of the country or even put it under your mattress!

 

They have effed themselves!

 

Somebody must have had a gun to their head during this negotiation.

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The problem is that it's not that weird.  The same thing is happening every day in every developed countries with interest rates so low.  My saving account pays, I think, 1.2% for instance.  With inflation at 2% and 40% income tax, let me do the math ... yep I'm getting hosed.  It's just happening at a glacial pace but this is becoming the new normal.  Make the savers pay for the recklessness of others.

 

Sure somebody had to pay but why the savers?  Why not steal a stake in the banks?  Why not stuff it to borrowers, everyone's debts are now increased by 10% for example.  Without the bank bailout if they stepped out of the EU, interest rates would jack up and the borrowers would be fubar'd no?  Why shouldn't the pay?

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You got that right no_free_lunch and your name represents exactly what I think about all these bailouts.

 

It is very sad that savers around the world are paying the cost for over-levered folks (some are dumb, some have abused the system, maybe that some are unlucky but, it has to be mainly because they lost their jobs because of the former two). Responsible people, not all rich, who have made sacrifices throughout their lives end up poorer because of the irresponsible. It is not the way things should work.

 

We need to go back to the old rules: 25% downpayments, 25% of your monthly income to service mortgages. Anything else is leading to trouble down the road or over-levered situations somewhere else. Hence No Free Lunch. People thought and keep thinking that government insured mortgages is a good idea. It just means that someone else in the system is absorbing the risk for folks who should not receive a loan in the first place. It is prone to blow-up and these organizations will come to the taxpayers to cover the gap that will inevitably come.

 

Now if someone in the private sector with no government backing or guarantee and properly supervised wants to do that, then fine. At least this way, you would get rid of unwanted incentives such as keeping mortgage rates low and premium below true cost to please the electorate.

 

Cardboard

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"The trigger for Greenlight was an unheralded item that came across the wire in late July: The largest bank in France, BNP Paribas, had frozen its depositors out of their money-market accounts, an event that caused barely a ripple of coverage in the United States. But at the Greenlight office, an alarm went off. “I was thinking to myself that these people are workers in France, they’ve got a money-market account that they’re earning no money on. Their only goal is to have that money available to them whenever they want it; that’s what a money-market account is. You can’t freeze the money market. "

 

That was July 2007. Cyprus might not be France, but the actions are unprecedented.

 

Cardboard

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Nice reminder, Cardboard.

 

http://nymag.com/nymag/features/47844/index3.html

 

The spread of the subprime crisis provided opportunities to recoup those losses. The trigger for Greenlight was an unheralded item that came across the wire in late July: The largest bank in France, BNP Paribas, had frozen its depositors out of their money-market accounts, an event that caused barely a ripple of coverage in the United States. But at the Greenlight office, an alarm went off. “I was thinking to myself that these people are workers in France, they’ve got a money-market account that they’re earning no money on. Their only goal is to have that money available to them whenever they want it; that’s what a money-market account is. You can’t freeze the money market. But when they did that, I was already studying the collateralized-debt obligations and all that other stuff because our short on bond insurer MBIA was beginning to work. The stock was going down. There was pressure building.”
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We need to go back to the old rules: 25% downpayments, 25% of your monthly income to service mortgages.

 

Apparently 10% downpayment is ok for Clayton Homes if there is income to back it up.  This is what I recall from one of Buffett's letters.  Of course Clayton may be different than everything else because manufactured housing doesn't receive the same financing subsidies as other forms of housing, manufactured housing is cheap, it's not a luxury like a bigger home, etc.

 

I do agree with you that this is not how things should work.

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They made a terrible mistake. Genie is now out of the bottle regarding confiscation of assets. Something that people other than gold bugs have never thought about before or even possible is now contemplated as a real practical solution by politicians. Markets around the world are now coming down. S&P futures are down 1.1%.

 

And remember that if you are on this board, you are the rich. You are the "enemy" of at least 90% of the people. You may not all be in the 1% yet, but close enough to be lumped in. Lots of people, an overwhelming majority that will not protest at all or drop a tear for you and could easily be persuaded to take over your assets by force if things get really out of hand.

 

I have warned about this before, especially concerning Obama who made a huge deal about taxing the rich more which provided next to nothing in terms of budget solution. I was not opposed to more taxation on the rich to ensure fairness, but I was opposed to making them THE target. His intention seemed almost entirely aligned to gain political points with the vast majority instead of resolving the issue. It has succeeded and now, the door is open for much nastier stuff. Highlighting a minority as the problem has led to terrible stuff in the not so distant past.

 

Cardboard

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They made a terrible mistake. Genie is now out of the bottle regarding confiscation of assets. Something that people other than gold bugs have never thought about before or even possible is now contemplated as a real practical solution by politicians. Markets around the world are now coming down. S&P futures are down 1.1%.

 

1.1% happens once every week!  I remember when markets were down 8% on consecutive days...now that's a shitstorm. 

 

Cyprus is the canary in a very small coalmine...investors should get concerned when Italy or Japan contemplate doing the same thing.  Cheers!

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They made a terrible mistake. Genie is now out of the bottle regarding confiscation of assets. Something that people other than gold bugs have never thought about before or even possible is now contemplated as a real practical solution by politicians. Markets around the world are now coming down. S&P futures are down 1.1%.

 

1.1% happens once every week!  I remember when markets were down 8% on consecutive days...now that's a shitstorm. 

 

Cyprus is the canary in a very small coalmine...investors should get concerned when Italy or Japan contemplate doing the same thing.  Cheers!

That is exactly what is going to spook the mkts.  What they have done to Cypriot depositors is going to change behaviour.. No thinking PIGGS depositor is going to sit still.
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Cyprus itself is small, but what's the psychological impact going to be on rich savers and corporations in the PIGS? If they decide to start moving money to saver countries shit will hit the fan, and it doesn't matter if politicians would never have considered a similar measure in those countries.

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They made a terrible mistake. Genie is now out of the bottle regarding confiscation of assets. Something that people other than gold bugs have never thought about before or even possible is now contemplated as a real practical solution by politicians. Markets around the world are now coming down. S&P futures are down 1.1%.

 

1.1% happens once every week!  I remember when markets were down 8% on consecutive days...now that's a shitstorm. 

 

Cyprus is the canary in a very small coalmine...investors should get concerned when Italy or Japan contemplate doing the same thing.  Cheers!

 

Am I missing something here, it seems like this is trying to be spun into something bigger than it is. Although I admit I am not aware of how it is all to be structured, as far shareholders of the banks. Wouldn't a person lose everything over the 100K CDIC guarantee here. Not sure what the limit is in the States. So I would think that anyone with large deposits would be thankful for only a 10% haircut in that instance. Or should it all just fall on the taxpayers like the US did.

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Yes, 1.1% normally is not a big deal, but it is on a market that exhibited very low volatility recently and now used to the DOW going up daily. I even heard the term "slump" regarding the tiny drop on the DOW Friday in a news outlet following the 10 up days!

 

It puts us down to 154 on the SPY and it certainly creates a big blip on the chart. Fear could re-emerge at any time with big profits not booked yet. I agree with you that what comes next is much more important in terms of direction. What happens with the banks in Southern Europe tomorrow could be crucial. Will people just brush it off as stuff only happening to a tiny island or they will see the writing on the wall and realize that their own country has no real solution to the problem?

 

Cardboard

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They made a terrible mistake. Genie is now out of the bottle regarding confiscation of assets. Something that people other than gold bugs have never thought about before or even possible is now contemplated as a real practical solution by politicians. Markets around the world are now coming down. S&P futures are down 1.1%.

 

1.1% happens once every week!  I remember when markets were down 8% on consecutive days...now that's a shitstorm. 

 

Cyprus is the canary in a very small coalmine...investors should get concerned when Italy or Japan contemplate doing the same thing.  Cheers!

 

Am I missing something here, it seems like this is trying to be spun into something bigger than it is. Although I admit I am not aware of how it is all to be structured, as far shareholders of the banks. Wouldn't a person lose everything over the 100K CDIC guarantee here. Not sure what the limit is in the States. So I would think that anyone with large deposits would be thankful for only a 10% haircut in that instance. Or should it all just fall on the taxpayers like the US did.

From what I read, depositors with less than 100k are getting a 6.75% haircut also. Sets a pretty scary precedent.

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A country with 1+ million of people.. requires 10 billions bailout..that's a lot of money per person...

 

 

http://en.wikipedia.org/wiki/Demographics_of_Cyprus

http://www.usatoday.com/story/money/2013/03/17/cyprus-president-bailout-plan/1995415/

 

 

In Cyprus, the levy — which also would hit wealthy Russian depositors who have put vast sums into Cyprus's banks in recent years — is expected to raise €5.8 billion to recapitalize the nation's banks and service the country's debt.

 

Cypriot banks got into trouble after losing some €4.5 billion on their Greek government bond holdings after eurozone leaders decided to write down Greece's debt last year.

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We need to go back to the old rules: 25% downpayments, 25% of your monthly income to service mortgages. Anything else is leading to trouble down the road or over-levered situations somewhere else. Hence No Free Lunch. People thought and keep thinking that government insured mortgages is a good idea. It just means that someone else in the system is absorbing the risk for folks who should not receive a loan in the first place. It is prone to blow-up and these organizations will come to the taxpayers to cover the gap that will inevitably come.

 

I find it amazing that a person can put their last penny into their 20% down payment, walk out with a 30 yr mortgage based on their income, and be 65 years old.  Are they going to work until they are 95?

 

 

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If you lived, or currently live in PIIGS or Cyprus, would you empty your bank account?

 

I never really thought it was possible to make such poor economic decisions. With what is happened in Cyprus, would you keep any more than a tiny minimum bank balance necessary to function if you lived there?  Greece?  Italy, Ireland, Spain?

 

Considering interest rates are nil, it seems there is little incentive to keep money at a bank.  If I were in Cyprus or Greece, I think I would buy a combo lock, hide my cash in a box, and call it a day.  It seems you'd be taking a bigger risk of theft in a bank account than hidden in a locked box.  If I were an Oligarch, I'd be transferring my cash to a more friendly nation like Switzerland.

 

I never thought such pro bank run policy choices could be made...

 

With that said, I'm long EWI, EWP, EIRL, GREK  :)  Maybe I'll scoop up some more if they crater.

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We need to go back to the old rules: 25% downpayments, 25% of your monthly income to service mortgages. Anything else is leading to trouble down the road or over-levered situations somewhere else. Hence No Free Lunch. People thought and keep thinking that government insured mortgages is a good idea. It just means that someone else in the system is absorbing the risk for folks who should not receive a loan in the first place. It is prone to blow-up and these organizations will come to the taxpayers to cover the gap that will inevitably come.

 

I find it amazing that a person can put their last penny into their 20% down payment, walk out with a 30 yr mortgage based on their income, and be 65 years old.  Are they going to work until they are 95?

 

I work in the mortgage business in the US and feel it best to clean up some misconceptions.

 

Eric's scenario is not wholly correct. Yes, someone who is 65 can get a 30 year loan provided the income/credit profile is acceptable. The irony is that a lender cannot use common sense that the borrower will almost certainly NOT be earning the same income 15 years hence, let alone 30, as that would be age discrimination. The part I will take issue with is that they would be hard pressed to get this loan using their last penny as reserves (assets AFTER the loan closes) are required. Now, if this same person wanted to only put down 10% thereby holding the remaining 10% in reserves, and they were OK with paying for mortgage insurance, then they would be golden.

 

The key term is "common sense" or the relative lack thereof employed by the mortgage industry. We have had loans which we've needed to decline for nonsensical reasons. Example, borrower A has a credit score of 660, is putting down 3.5% and will be paying in excess of 40% of his monthly income towards his housing payment. Borrower B has a credit score of 740, is putting down 25% and will be paying 20% of his monthly payment towards his housing payment. Borrower B also has liquid reserves such that he could make his housing payment from savings for 110 consecutive months. Borrower A is approved, Borrower B is not. Why? Borrower A has multiple credit lines (mortgage, credit cards, car payments, etc). Borrower B has only a mortgage and one other credit line. Fannie Mae states that the borrower needs 3 credit lines. So, the solid credit score, substantive down payment, high income, excellent asset (reserves) quality and the fact that he has not had a late loan payment in 10 years was not enough for Fannie Mae to approve this loan. It is nothing short of insanity. Common sense is discarded in favor of guidelines...it is maddening.

 

Now, I will say that the vast majority of loans we've done...make that vast VAST majority of loans we've done in the past 4 years, are going to perform. And, the vast majority of lenders out there can say the same thing. Individuals getting loans now are ready, willing and able to repay...I have little doubt.  But, the collateral damage is that there are well qualified folks out there who, for whatever reason, do not fit into the neat little box that has been designed by the industry, are either unable to get a loan or have to go through paperwork-hell to get one.

 

-Crip

 

 

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