Cyprus continues

The Cyprus drama continues behind the scenes. Today’s the big day depositors find out what will happen to their money.

Here’s the breakdown: Deposits greater than €100,000 will lose 37.5%, with another 22.5% frozen in case more is needed later. The remaining 40% of the cash will be released today.

A little-reported fact is the linchpin of the deal. The government isn’t taking the deposits. They’re being converted into bank shares to re-establish the amount of equity needed under international bank law.

Nobody seems to know whether you can sell the shares, or what they’ll be worth. But here’s what we do know: Cyprus just sold a huge proportion of its banks to a bunch of Russian oligarchs who had deposited cash in Cyprus to evade taxes. Russian oligarchs owning your banking system...that doesn’t seem like a great idea.

The cash for shares deal also doesn’t actually fix the Cypriot government’s  financial status.

Cyprus’ economy is in deep trouble, so the temporary bank fix is likely to be...temporary.

Thoughts to ponder:

*banks only keep a small proportion of the cash you ‘deposit’. They lend out the rest

*When a bank goes bankrupt, depositors stand alongside creditors to get some fraction of their deposits back. 

*Depositors are in reality lenders to the bank, not depositors of money.

Of course, it’s not supposed to happen like this. Governments guarantee deposits in most countries, explicitly or implicitly. But what happens when the government itself is the source of the financial instability? Who will bail out your deposits then?

Its time to wake up and realise that depositing money into your bank account is lending, not safekeeping