10 lessons from the Cyprus bailout

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Niccolo and Donkey
10 lessons from the Cyprus bailout

Guardian UK

Patrick Collinson

March 29, 2013

1 Capital controls are back

Throughout the 1960s, with Harold Wilson's Britain dogged by sterling crises and balance of payments woes, holidaymakers were banned from taking more than £50 with them when heading abroad.

The "foreign travel allowance" was not lifted until the early 1970s, although it was already widely flouted. The Daily Mail reported in 1968 that four out of five Brits questioned on holiday on the Greek islands had stuffed extra sterling in their socks before leaving home. Now Cypriots face the same kind of controls – and possibly for months or even years to come. Expect customs officers at Larnaca airport to be on the look-out for oversized shoes and well-padded thighs.

Capital controls are an extraordinary breach of basic EU rules, which allow freedom of labour and capital movement. Indeed, article 63 of Europe 's internal market rules explicitly states that "all restrictions on the movement of capital between member states and between member states and third countries shall be prohibited" unless there is an issue of "public security". But there are few signs of the EU enforcing article 63 when it comes to Cyprus .

Cypriot politicians declare that the capital controls will last only briefly (without giving dates) – and, of course, no one believes for a moment that they will ever be reimposed in the UK. Of course no one believed interest rates would fall to 0.5% or that the banks would collapse …

2 Some euros are more equal than others

Think of a Russian with €1m locked away in a Cypriot bank account, now inaccessible due to capital controls, possibly for a very long time. If he's offered €900,000 for that €1m, with the money put into, say, a Slovakian euro account without controls, he'd probably bite your arm off. In that case, a Cypriot euro would be worth 0.9 of a Slovakian euro. Equally, a freely tradeable euro in Frankfurt is worth a lot more than an untradeable euro in Paphos. By imposing capital controls, Cyprus is in effect partially leaving the eurozone.

3 All deposit accounts are at risk

No one wants to take responsibility for the first botched bailout, which would have snatched at least 6.7% from every savings account in Cyprus, but it came with the tacit approval of the "troika" (the EU, the IMF and European Central Bank). Even the latest plan, which will see accounts with less than €100,000 (£85,000) protected, has established a new template for future bank bailouts: that depositors' cash above the "insured" amount can and will be raided.

4 Never put more than £85,000 in a bank account

This won't be a worry for the vast majority of Brits; the average savings account here has just £6,654 in it, according to data company CACI. But if you are lucky enough to have £85,000 or more in savings, spread it across several account providers, as anything above that sum is not insured by the Financial Services Compensation Scheme (FSCS).

Beware placing money in differently branded savings accounts that actually come under the same bank's licence, where one £85,000 protection limit applies. For example, you could have £85,000 in a Saga savings account, £85,000 in an AA savings account, £85,000 in Birmingham Midshires and £85,000 in Halifax, but in effect only one of them will be FSCS protected as they are all part of Bank of Scotland for compensation purposes. Check our interactive tool to see how safe your savings are .

5 Hiding money in tax havens can turn into hide-and-seek

German chancellor Angela Merkel declared the Cyprus financial services business model, in which banks were eight times the size of the country's GDP, as "dead" – unusually blunt language for a world leader. But it is a warning shot to rich tax-dodgers everywhere: if you park your money in offshore havens, it's at risk.

Some Russians will lose 40% of their cash, but will find little sympathy from German taxpayers suffering bailout fatigue, who regard it as dirty money laundered into the EU through the back door.

However, Cyprus is not the only country to run a business model where bank assets are a large multiple of GDP. Luxembourg has bank assets that are 22.5 times the size of its economy – greater than Cyprus. Both Malta and Ireland have banking sectors that, relative to their economies, are bigger than the banks in Cyprus.

The Channel Islands must be asking if running an economy based on offshore banking is the one-way ticket to prosperity it seemed in the past.

6 Ringfencing is working … for now

Among north London's large Cypriot community there is relative calm. Bank of Cyprus UK is a separately incorporated entity to the one in Cyprus, so it is a UK bank and subject to UK financial regulation (however, serious question marks hang over the UK arm of Cyprus's second largest bank, Laiki, which operates as a "branch" in this country). Even if the Bank of Cyprus group collapses completely, the 50,000 accounts in the UK are ringfenced and up to £85,000 is protected by the UK's FSCS.

Why is this important, apart from the obvious immediate concerns of Britain's Cypriot community? The reason is Santander. It has a vast presence in the UK, having acquired Abbey National and the savings balances of Alliance & Leicester and Bradford & Bingley. Should Spain's banking system collapse, savers in the UK won't have to rely on a bailout from Madrid, as Santander has ringfenced its UK business. It even has an agreement with the Financial Services Authority (FSA) not to transfer any cash back to its Spanish parent without its permission.

Bank of Ireland in the UK, which operates around 2m savings accounts at the Post Office, has also distanced itself from its Dublin parent, with a separate UK subsidiary protected by the FSCS and regulated by the FSA.

Overseas banks that operate savings accounts in the UK but are not protected by the FSCS include ethical bank Triodos (savers must rely on the Netherlands for protection) and AgriBank, which currently offers British savers some of the best fixed-rate savings accounts, paying up to 3.6%. If it goes bust, savers will be dependent on Malta for payouts.

7 Consider putting cash into non-conventional institutions

The principle that savings accounts can be raided to prop up a failing financial system has now been established, even if Cyprus rowed back from taxing every account. So what are the alternatives for keeping your cash earning interest, but outside traditional banks?

First, there are premium bonds from National Savings & Investments, which are 100% capital protected by the Treasury, making them, on paper, more secure than bank deposits under the FSCS. But you have to deposit lots of cash – about £20,000 – to be sure of a regular supply of prizes, and even then the rate of return translates to about £15 a year for every £1,000 "invested".

Second, savers can put their cash into the mushrooming "peer-to-peer" sector. These companies cut out the banks and connect savers directly with borrowers. Zopa is the biggest, but there's also Funding Circle , which specialises in lending to businesses.

Interest rates for depositors are much higher than traditional banks, but they carry the risk that borrowers may default, and there's zero FSCS protection. Still, Vince Cable has bunged £110m their way , which is an endorsement of sorts.

8 "Too big to fail" still holds

Some will argue that as big savers in the Bank of Cyprus and Laiki, the island's two biggest banks, are taking such a haircut, the "too big to fail" mantra no longer works. But in truth the banks were minnows within the eurozone. Their near-collapse tells you that the ECB will do all it can to protect banks it regards as "systemic", but will let the others go hang.

9 EU bank "stress tests" are rubbish

The European Banking Authority's annual healthcheck on eurozone banks at the height of the euro crisis in July 2011 revealed significant concerns about just eight banks – five Spanish, one Greek and two Austrian. The Cypriot banks – Bank of Cyprus, Laiki, and Hellenic – passed what was supposedly a gruelling assessment.

Bank of Cyprus chief executive officer Andreas Eliades (who resigned on ) said at the time : "The stress test results justify the group's strategic choices and actions, and illustrate its very strong capital base even under the most extreme, difficult and adverse scenarios." All of Britain's banks also passed these stress tests. Make of that what you will.

10 Change your name to "Lance Corporal" for 100% safety

Worries that "our boys" might be at any risk of a Cypriot bank meltdown prompted an emergency dash of the RAF's finest from Brize Norton to RAF Akrotiri (on the south coast of the island) laden with €1m to ensure no service personnel would be caught short. Any with savings in Bank of Cyprus and Laiki will also be compensated for losses. There are, at least, some bank accounts that are untouchable.
Niccolo and Donkey

The only currencies worth investing in are non-NATO ammunition, nutmeg and peppercorns, cowrie shells, and commemorative Ron Paul gold coins.

Sam Spade

The fact is that no one's money is safe from governmental/corporate looting after Cyprus, and one should act accordingly, while still being prepared to lose a large chunk of what they have (sticking under the mattress is problematic in normal times, much less where governmental policy is to decrease the purchasing power of the mattress).

That being said, Europeans have a lot more to fear right now than anyone else.

In Spain the state prohibited cash payments in the amount over 2,500 Euros last year.
What's written about Iceland didn't actually happen, you know that?
Basically on all three points: it didn't let them fail, it nationalized them essentially passing the debt to the peopl; it didn't protect depositors, most of private deposits were annihilated; "debt forgiveness" didn't happen unless citizens declared bankruptcy.

Not to mention that economy in Iceland is far from "booming".
Why ron pahl gold coins?