Bank crisis in Cyprus: Should I care what happens?

I know very, very little about the banking system, and nothing about the system in Cyprus. Even in my position of ignorance, though, I can’t help but come across article after article about the current financial crisis that’s unfolding in Cyprus. Should I care about it?

Obviously, I care about (or at least feel badly for) any ‘little guy’ who takes a hit. Beyond that, though, will this have any global implication? Will it affect me in North America?

And, just to be clear: I am being intellectually curious, not callous., i.e. at the end of the day, whether I care or not has no effect on anything.

ETA: I am placing this in GQ, and not Great Debates, since I believe my question has a factual answer. I could have phrased my OP as, “What are the potential global effects of the Cypriot banking crisis?”, and that clearly (IMO) fits GQ.

Potentially, nobody knows at this point what is going to happen. But this banking crisis could spread to Greece, maybe spread to Europe. At that point it would effect you even if indirectly.

There is a wealth (ha!) of information and discussion out there regarding how this will play out but there is one thing certain.
No-one actually knows. We’ve never been in this position before. Let me stress that again for emphasis *No-one knows, the smartest people in the room simply do not know! *
So all the predictions being made by politicians and economists are all different and all pretty worthless.
Sure, in hindsight one of them will turn out to be correct but it’ll be more by luck than judgement.

So should you care? well seeing as one scenario sees a domino effect that unsettles a major economic bloc (Europe - with a big “E” ) then yes. Until such time as you have certainty on a benign outcome then you should be concerned.

Look the obvious solution is to send in the (Royal) Marines.

Why would it be bad? From what I can read osme Europids might get hurt and Mother Russia will find herself bent over table, but aside from that…

Should you care? Maybe. The world economy is still fragile, and large parts of the Eurozone in particular (which Cyprus is part of) have been teetering lately. If Cyprus falls into an economic crisis because of the banking situation, the knock-on effects might hit you and me and everyone else reading this. Or they might not. The big question is if this is going to be the bump that overturns the apple cart, and as other posters have already said, that is a question no one can answer right now.

It has potentially, effects that can indeed effect America. Rather oddly the “taxing” of bank accounts insisted on by the EEC (mainly Germany) seems guaranteed to smash the banking system. In any case when the banks re-open everyone will take all their cash out and they will fail. The “tax” seems squarely aimed at Russian cash hived away i Cyprus. Hence the Russian offer of aid and taking Cyprus into their sphere of influence. Right now UK has bases there but the Russians might quite like a base or two there too…

From articles and posts I’ve read (NYT yesterday and Krugman for the last several days), it looks like the major powers (European and Russia) will be jockeying for pieces of the carcass, or to gain (increased) influence in the region. One point mentioned: There is natural gas under the waters in the vicinity, and the powers-that-be will be angling to get a piece of that.

As for what will happen: Krugman, for one, had been rather straight-forward: He blogged on March 17: “OK, I didn’t see that one coming.”, and since then, he’s been saying he can’t see how it’s all going to end, except that one way or another, it won’t be pretty. There seems to be general agreement on that, at least.

Thanks to all who’ve contributed.

Sounds like the consensus is, ‘we don’t know what’s gonna happen, but it won’t be pretty’.

And a specific thanks to Senegoid for pointing out the Krugman pieces which I had missed.

Everyone understands and agrees that Cyprus is a special case inasmuch as it is used to launder money for the Russian mob. And if they had only put the penalty on very high value accounts, I think there is a chance that they may have gotten away with it. Where they fucked up was by also putting the penalty on acct under 100k.

Of course the very concept is anathema to the way a banking system is supposed to be run, so I don’t want in any way to minimize that. I’m just saying that if you have to fuck some people over, at least TRY to make sure that from an optics perspective you’re fucking the RIGHT people. They didn’t do that.

The other thing is that this really regarded in many quarters, and I think rightly so, as a line in the sand that you just don’t cross for any reason. It really DOES set a grievous precedent regardless of what the reasons are. The problem is that, at least as far as my limited understanding goes, there just aren’t any alternatives. There are no debt holders of sufficient worth to be raped and pillaged and the amount owed I think is some multiple of Cypriot GDP.

So the only alternative to the bank penalty or a Euro/Russo bailout is for Cyprus to leave the Euro. So as Krugman said - not pretty.

For what this is worth - says that the negotiators of the Eurozone claim they only wanted to tax deposits of 100k and more, since that is the limit of guaranteed deposits. They claim further that the Cypriot negotiators insisted on including all deposits, probably well knowing that this would kill the deal in the parliament of Cyprus. Apparently they thought they had to ask the ECB first, but would get a better deal from Rzussia once the European proposal fell through.

Personally, I don’t know what to think of it.

I can definitely see the negotiators doing what they could to scuttle the deal. That makes perfect sense. You don’t want to wake with the corpse of a giant sturgeon in your bed, right?

ok, that one is from the Hudson River, but I was in a hurry.

[SIZE=1]edit: does that analogy work? Horse hea[SIZE=1]d [SIZE=1]<–> sturgeon? I[SIZE=1]DK.[/SIZE][/SIZE][/SIZE]

Right. Important Nitpick Time: There is no longer any such thing as the European Economic Community. There was, but it was abolished years ago, to be replaced by the European Union, or EU.

There is also the EEA, European Economic Area, which was supposed to be the EU + EFTA (European Free Trade Agreement) nations, but since half of the former EFTA nations are now in the EU and Switzerland decided not to sign up, is really the EU + Norway + Iceland. And there is the Eurozone, an unofficial term for those EU members that use the euro as their currency.

As for Cyprus, as of this writing, a deal has been reached to bail out the banks, but Laiki Bank is going to be closed down and holders of bank accounts over €100,000 are going to take a hit. This is the EU’s attempt to simultaneously get at the accounts they suspect are being used for money laundering, and protect small accounts owned by ordinary Cypriots for day-to-day banking purposes. Link to a BBC article on the deal:

Please remain seated with your seat belt fastened, as there is a very good chance the ride ain’t over yet.

OK EU… The controlling power in the EU are the Germans and they hold a very dim view of banking pyramid schemes, hedge funds and banks gambling. Hence i think as mentioned earlier the draconian measures, well draconian to the very rich anyway, who may lose 40% , but you cant expect a easy to open account with a high return to be risk free can you…

I read Krugman on this on Friday. He contrasted it with what happened in Iceland. The Islanders simply let the banks go belly up and reimbursed citizens for their losses up to the limit of their guarantees and told non-citizens to get lost. (I have read that the UK is suing Iceland over that, but what are they going to do? Invade Iceland?) But, and this is the crucial thing. Iceland is not in the Eurozone. (Although I have heard that they are thinking of asking to join. Are they nuts?) The result is that, while Iceland’s banks went under the country as a whole has had a pretty good economic recovery, more than the US or Europe.

A friend of mine of Icelandic descent (he was born in Gimli, Manitoba, said to be the second largest Icelandic speaking community in the world) with many relatives in the old country told me (I cannot vouch for this, but have no reason to doubt it) that around the turn of the millenium, the government privatized and deregulated the banks. So they went hog-wild in the usual way and went under.

What Krugman claimed was that a lot of the foreign deposits in Cyprus were from Russian oligarchs hiding their money in a tax shelter. From the latest news it now sounds like all bank accounts under 100,000 euros will be saved, but up to 40% of the amounts over that will be “taxed”.

It’s happened before, sort of.

So, why should Cyprus matter? Well, because it will become the template - that’s right TEMPLATE - for future bailouts according to the chair of the 17 eurozone finance sinisters [sic]