Guest Host: Tom Gjelten

Political leaders in Cyprus are in crisis talks. They face the collapse of their banks and are looking desperately for a way to avoid that prospect. The European Union could help with a bailout fund, but only if Cyprus puts in $13 billion. The financial sector accounts for 40 percent of the Cypriot economy, and without outside aid, it’s likely to fail. Cyprus’s financial ties to Russia would widen the impact. But critics of the proposed bailout say ordinary citizens would end up paying. Meanwhile, the banks in Cyprus remain closed. Please join us to discuss what the current crisis in Cyprus means for the rest of us.


  • Nicholas Schrifin Correspondent, ABC News
  • Sheila Bair Senior adviser at The Pew Charitable Trusts and former chair of Federal Deposit Insurance Corporation.
  • Jacob Kirkegaard Research fellow at the Peterson Institute and senior associate at Rhodium Group, a New York-based research firm.
  • Nicholas Karambelas Legal counsel for the American Hellenic Institute.


  • 10:06:55

    MR. TOM GJELTENThanks for joining us. I'm Tom Gjelten of NPR, sitting in for Diane Rehm. Diane is visiting East Tennessee University. If you have any money in a bank in Cyprus, you can't get to it until at least next Tuesday. Banks there remain closed as the government scrambles to come up with the cash it needs to secure a European Union bailout.

  • 10:07:17

    MR. TOM GJELTENJoining me to talk about why Cyprus got it in this trouble and how the crisis there affects the rest of us: Sheila Bair of The Pew Charitable Trusts and former chair of the FDIC, Jacob Kirkegaard of the Peterson Institute for International Economics and Nicholas Karambelas, legal counsel of the American Hellenic Institute. And you can join us.

  • 10:07:40

    MR. TOM GJELTENI actually doubt many of you have money in Cyprus. But what's going on there is really important, and I'm sure you have questions and comments. Our phone number is 1-800-433-8850. Our email is You could also reach us via Facebook or Twitter. Good morning, everyone.

  • 10:08:02

    MS. SHEILA BAIRGood morning.

  • 10:08:03

    MR. JACOB KIRKEGAARDGood morning.

  • 10:08:03


  • 10:08:04

    GJELTENI'm anxious to hear your thoughts on what's going on in Cyprus. But before we go there, I want first to hear from ABC News correspondent, Nick Schifrin, who's on the ground in Cyprus. He's been covering the developments there and joins us by phone from Limassol, Cyprus. Good morning, Nick. Good afternoon to you.

  • 10:08:25

    MR. NICHOLAS SCHIFRINGood morning. Good afternoon, Tom.

  • 10:08:27

    GJELTENSo tell us the latest, Nick. We know that there had been these crisis meetings with the Cypriot political leaders. And the parliament, of course, ultimately, I assume, will have to approve any deal that's worked out. Is the parliament meeting at this hour?

  • 10:08:46

    SCHIFRINThe parliament is about to start meeting right now, talking about plan B, basically to try and get out of this mess. Cyprus needs about $20 billion at least of a loan very quickly. If they don't get money by Monday, the banks will actually perhaps go under because the money that's guaranteed by the European Central Bank, the ECB, they say that they're not going to fund these banks which are really running on empty right now.

  • 10:09:18

    SCHIFRINAnd as these politicians talk, I think it's really important to talk about what's going on for regular Cypriots or the Americans or the Brits who have come here, who have moved here or retired here. I mean, you really get a sense that the social fabric of this country is slowly beginning to tear. A lot of people I've spoken to have gone to ATMs this morning or this afternoon. I've seen very long lines. And after 10 or 15 people, they can't get their own money. I mean, this is their own money and their own checking account.

  • 10:09:51

    SCHIFRINThe ATM runs out of money. They have to go to another ATM or another ATM. There still is money in some of them, but it's difficult to find. The gas stations are saying they're not going to take anything but cash. And obviously if you have a hard time getting money out of an ATM, that's extremely difficult.

  • 10:10:06


  • 10:10:06

    SCHIFRINI talked to one pharmacist who's saying that she's running out of drugs. So there's a real sense that, while there's not a crisis -- sorry -- there's not panic in the streets yet, there's a lot of anger and a lot of frustration building.

  • 10:10:19

    GJELTENWell, it's interesting, Nick, because, of course, there been unrest in Greece, a lot of unrest in Greece. We've seen demonstrations in Spain. But what you're describing sounds like a much more urgent situation, a desperate situation. You're talking about just a matter of days away from some kind of collapse.

  • 10:10:36

    SCHIFRINThe pharmacist says that she's fine for three or four days and she is having to give some drugs on credit to her customers simply because they don't have any cash. Four, five, six days maximum, she says. But after that, she's going to have a hard time giving absolutely essential medicines to some of her customers. I spoke with a hospital who is also doing the same thing. They're giving procedures on credit, hoping that the checks that their patients are writing, hoping that the credit cards go through.

  • 10:11:07

    SCHIFRINThere's no way to guarantee that while the banks stay shut. Now, the politicians and everyone is working on it. They will vote tonight, or they're expected to vote tonight. And maybe we'll get through this. And everyone is hoping that. But there's a real fear that if this goes on for the next few days or a week, then there'll be real problems.

  • 10:11:23

    GJELTENWell, Nick, as you said at the beginning, Cyprus needs $20 billion and, what, only 20 billion euros, only about half of that would come from the European Union. Cyprus needs to come up with the balance. And there was a proposal to do that, in part, by taxing, putting a levy on bank deposits so that bank depositors would have to sort of pony up much of this money. And that proposal was voted down overwhelmingly. Was it yesterday in the Cypriot parliament?

  • 10:11:55

    SCHIFRINThere was so much anger on the street, so many people coming up to our cameras, telling local reports that what the Europeans would like to call a haircut, basically taking a little money out of everybody's bank accounts, what the Cypriots and the people I was speaking to were calling out and right theft, I mean, as if the government was sticking up the bank. And so what -- the plan B, it seems, is a combination, perhaps smaller percentages taken out of everyone's bank accounts or perhaps only bank accounts above 100,000 euros.

  • 10:12:28

    SCHIFRINBut they're also talking about a complex group of ideas to try and get that money from Cyprus toward the loans. So they're not actually borrowing all the money. Those ideas include nationalizing the pension perhaps, splitting some of the banks that are in trouble into kind of good banks and bad banks. We've talked about that in other countries in the eurozone that have had problems and deals with Russia, whether Russia would buy one of the banks or somehow figure out how to take some of Cyprus' debt.

  • 10:12:57

    SCHIFRINIn exchange, Cyprus is offering perhaps land for a base or some rights to its natural gas field right offshore. So, you know, Cyprus is in desperate health and is looking for Russia for help and looking pretty much anywhere within its own country to try and find at no less than that $7 billion, 5.8 billion euros. That's the minimum that the ECB, the European Central Bank has said that they have to contribute. And Cyprus is trying to get that down, but it's not clear that they're able to.

  • 10:13:28

    GJELTENBut, Nick, the Cypriots do understand that this -- the outcome of this crisis depends largely on them. I mean, they're not going to be bailed out ultimately by Russia, by the European Union entirely. They're going to have to come up with a solution to this problem. Are they facing up to that reality?

  • 10:13:47

    SCHIFRINOh, I think they are, and I think they faced up to that reality in marathon negotiations last weekend in Europe when they agreed to allow every single Cypriot saver, I mean, everybody who has a bank account would lose money. I mean, think about it as a politician, how unpopular that would be that the government says we're going to take your cash. I mean, they know this is the crisis. They know that they have to contribute to this. The question is how. There's simply not enough cash. Cyprus can't afford its own debt right now.

  • 10:14:16

    SCHIFRINAnd so where do you look? Do you look to nationalize pension? Do you look to split off your banks and create a bad bank that you take into the government? Do you sell the good banks? They're looking everywhere. And every economist that I've spoken to in the last couple of days has their own plan, and they say, look, you know, this is what the government should do.

  • 10:14:31

    SCHIFRINAnd they're extremely animated. And the government is trying. The president who was only elected, I think, about 24 days ago or -- sorry -- took office only about 3 1/2 weeks ago is trying to do this. And they understand that they're in real trouble. But at the same time, they're also desperate for a little leeway.

  • 10:14:49

    SCHIFRINThey're desperate for more time. They're desperate for anyone to say, OK, we took this to the precipice. We understand that it was politically unpalatable to take money from all of your citizens' accounts. We understand. Here's a little break. That's what they're desperate for. It's not clear they're going to get it. But they're certainly asking for it.

  • 10:15:10

    GJELTENWell, Nick, you're describing a very dramatic -- excuse me -- a dramatic situation there in Cyprus, and thanks so much for giving us that first-hand account. Thanks for calling.

  • 10:15:21


  • 10:15:21

    GJELTENYeah. Nick Schifrin is ABC News correspondent who's been covering the events in Cyprus. So let's turn now to our panel. Jacob Kirkegaard, first with you, I mean, what Nick Schifrin describes is a really dramatic situation. And it's dramatic not just for the people of Cyprus, but for the people of Europe and perhaps even for the United States as well. Explain a little bit here. At the overall level, what is at stake?

  • 10:15:46

    KIRKEGAARDWell, I mean, I think first of all what is at stake is a lot of -- there is a lot at stake for the Cypriots themselves. I mean, they face, as Nick was describing, a potential catastrophe in the coming days. There's no doubt about that. What is at stake for the rest of Europe is, of course, the credibility of the European Central Bank, the credibility of the entire European banking system.

  • 10:16:08

    KIRKEGAARDExcuse me. I don't, however, personally believe that the immediate spillover effect to other European countries from Cyprus is going to be that great. So in the short term, I do believe that the costs of this are really bearing down mostly on the Cypriots.

  • 10:16:26

    GJELTENAnd, Nick Karambelas, you represent investors and depositors in Cyprus and business interests in Cyprus. What are you hearing from your people?

  • 10:16:35

    KARAMBELASWell, I think the vote that occurred Tuesday -- you may want to look at it this way -- the Cypriot House of Representatives, which is its official name -- we call it parliament -- voted their hearts. And then -- now, they're going to come up with a situation, a proposal that is somewhat more palatable, may even involve the Church of Cyprus, which is a huge economic player in Cyprus and in other parts of the world, Middle East and Africa.

  • 10:17:10

    KARAMBELASAnd then the representatives will vote their minds. And that's probably the situation that will occur. Now, the bookend is Monday, so that puts the onus on the House of Representatives to vote their minds.

  • 10:17:32

    GJELTENAnd, Sheila Bair, do you see a realistic option here, a practical option that you think the Cypriots can accept?

  • 10:17:38

    BAIRI think the realistic option is that there aren't any good options. But first and foremost, I think pretty much everybody who's looked at this agrees that the insured depositors, those were the sovereign, made a legal commitment to protect their deposits. So I suppose 100,000 euros should be protected. And that should be something that the European finance ministers, the IMF, I think, should very publicly commit to, that there were not going to be any more talk of haircuts of insured depositors.

  • 10:18:01

    BAIRIf that guarantee starts becoming in question, I think you already have a fragile situation in the banking system in Southern Europe. It's just going to get a lot worse. So that would be number one. Number two, I think they have to look at their uninsured depositors. You know, during the crisis here, we -- there were uninsured depositors at any bank who had to take significant haircuts. It's not pretty. It's not nice. But it's the way the rules work.

  • 10:18:23

    BAIRAnd I believe that is the way the rules are supposed to work in Cyprus as well. But that underscores -- and they need to do some fundamental bank restructuring. The banks are insolvent. They need to be restructured. They need to be split off, sold off, whatever. So those are realistic options. They're not good options, but I think those are tough measures that have to be taken.

  • 10:18:40

    GJELTENSheila Bair is the former chair of the Federal Deposit Insurance Corporation. We're talking about the crisis in Cyprus, the bank in Cyprus. We're going to take a short break. We'll be right back.

  • 10:20:05

    GJELTENWelcome back. I'm Tom Gjelten, sitting in today for Diane Rehm. And our subject today is the rapidly escalating banking crisis in Cyprus, what it means for the people living in Cyprus, what it means for Europe, what it means for those of us here in the United States. And I have a terrific panel here in the studio with me. Sheila Bair is a senior adviser at The Pew Charitable Trusts and the former chair of the Federal Deposit Insurance Corporation.

  • 10:20:30

    GJELTENAlso, Jacob Kirkegaard, research fellow at the Peterson Institute for International Economics and a senior associate at Rhodium Group, which is a New York-based research firm, also, Nick Karambelas who's a legal counsel for the American Hellenic Institute. Sheila, just before the break, we were talking about this issue of the insured deposits. And Americans have benefited ever since the Great Depression from the organization that you used to had, the Federal Deposit Insurance Corporation, which guarantees bank depositors that their deposits up to $100,000 in this...

  • 10:21:08

    BAIRIt's now $250,000.

  • 10:21:09

    GJELTENIt raised during the financial crisis, didn't it...

  • 10:21:11

    BAIRRight. Yes.

  • 10:21:11

    GJELTEN...up to -- that they can be sure of getting that. That's an...

  • 10:21:14


  • 10:21:15 important principle that really did a lot to restore confidence in the banking system in this country. And...

  • 10:21:19

    BAIRIt did, yes.

  • 10:21:20

    GJELTEN...what do you make of this proposal to now sort of take a portion of those deposits there in Cyprus?

  • 10:21:26

    BAIRWell, I think it's just singularly wrong-headed. It's unfair. It's grossly unfair. It violates the rule of law. But it also -- it's economically doesn't make sense and it's potentially destabilizing because the banking system, especially in Southern Europe, is quite fragile. I've been amazed that the way the insured depositors have kept their deposits in Southern European banks.

  • 10:21:46

    BAIRBut this type of signal is very bad. And as I said, I think the finance managers in the IMF all need to stand up and say, never again. We're not going to touch insured deposits. They also -- I think this underscores, something I've been saying for years now, that the eurozone needs to collectively back strong deposit guarantee system.

  • 10:22:04

    BAIRThese individual sovereign systems are of varying strength. And, look, this is not only good for consumers, but it also is good for the economy. At the FDIC, not only do we protect deposits, but we made sure you had seamless access to it. So you don't have these kind of economic disruptions when people can't get their money to pay for food, medicine, rent, whatever, what have you.

  • 10:22:27

    GJELTENBut there is a devil's advocate case here, isn't there? I mean, many of those depositors are non-Cypriot citizens.

  • 10:22:34


  • 10:22:35

    GJELTENSo we would, for the first time, see foreigners sort of paying some of the costs of the bailout. Jacob, there are arguments to be made for this approach, right?

  • 10:22:45

    KIRKEGAARDYeah. I mean, I -- I mean, while I certainly agree with Sheila that having insured depositors touch in the way that was initially proposed raises a whole host of issues and is potentially destabilizing. The fact of the matter is we need to also put in sort of perspective the magnitude of the Cypriot banking system. I mean, the Cypriot banking system is enormous. It's seven times the size of the entire Cypriot economy, which means that the -- just the insured depositors in Cyprus is 180 percent or so of GDP.

  • 10:23:18

    KIRKEGAARDIt's 35 billion euros. Which means that in my opinion, you're making a distinction between insured depositors and the, shall we say, overall financial viability of the Cypriot government itself I don't think, in this case, makes a lot of sense. So I actually do believe that having a depositor levy like the one that was originally described last Friday, is actually makes a lot of sense because you do have a lot of foreign residents.

  • 10:23:47

    KIRKEGAARDIt's a way to expand the tax base. You know, if you just do a back-of-the-envelope calculation, if you say, well, OK, half of these deposits are from nonresidents, well, that's easily 15 percent of Cypriot GDP that you can raise in new revenue, which are revenue that is not going to come out of the pensions of Cypriot residents or other types of austerity measures.

  • 10:24:09

    GJELTENWhich would otherwise be what would happen.

  • 10:24:11

    KIRKEGAARDYeah. I mean, so in that sense, there is a, admittedly, somewhat perverse financial logic in doing this.

  • 10:24:18

    GJELTENI'm wondering if there is a way to sort of split this difference, perhaps only putting the levy, the tax and deposits above that portion that is guaranteed and, you know, letting the really big depositors carry the burden. Nick.

  • 10:24:35

    KARAMBELASI think that's probably what we're going to see something coming out of it. I mean, you still fall short however of the 5.8 euros that are needed. And then I think that brings in the other elements that we -- that the finance minister now is in Moscow trying to arrange some other kind of financing for this to probably make up that difference and also to where the Church of Cyprus comes in.

  • 10:25:03

    KARAMBELASWith the Church of Cyprus, which is an autocephalous church and a big land owner, the question then becomes, who's going to take the mortgage? And how will that be done? And that's obviously something that should've been months in the making. It's very hard to do in three days.

  • 10:25:20

    GJELTENYeah. Well, Sheila, you said at the outset, there are no good options, only bad options. And I think you would acknowledge that if you were just to hurt the investors, if you were just to hurt the bondholders that that could have its own -- it could produce its own crisis (unintelligible).

  • 10:25:36

    BAIRWell, there's not much in a way of bondholder debt to be wiped out. Though they gave them a complete pass, which I don't understand, that is about 40 million. It should be wiped out, whatever the dollar amount is. Again, I think -- look, if you want long-term stability, you need some standards. You need some rules.

  • 10:25:52

    BAIRThis ad hoc way of making decisions, here, we're going to wipe out bondholders, here, we're going to protect him and go after the depositors, that just creates confusion among bank creditors, and pretty soon, nobody wants to do business with your banking system 'cause they don't know where they will stand. So I think following standard claims priority, wiping out bondholders, and then, yes, they're going to have to insist uninsured depositors. I support that. I think that's inevitable. But the...

  • 10:26:15

    GJELTENAs long as they protect the small -- the...

  • 10:26:17

    BAIRBut the insured depositors -- yes, there's a legal commitment to protect those depositors below the insurance limits. And deposit insurance is essential to have stable liquidity in a banking system, whether it's the U.S. or Europe. You need to respect those deposit insurance guarantees.

  • 10:26:32

    GJELTENJacob, who came up with this proposal in the first place? Was it the so -- representatives of the so-called troika, the IMF, the European Union, the European Central Bank?

  • 10:26:41

    KIRKEGAARDWell, no. There's actually a lot of recrimination going around about who actually came up with this deal. So basically, the press report suggests that there was clearly a decision taken by the troika that this -- they were -- that Cyprus was only going to get about 60 percent of GDP in a bailout which incidentally is a lot more than both Portugal, Ireland and even Greece initially received. So it's not that Cyprus doesn't get a lot of money. They actually do.

  • 10:27:09

    KIRKEGAARDBut because their financing needs are so big, they needed to chip in as well. And that -- the number, as Nick said, was 5.8 billion euros. And then the -- someone proposed and the proposal came. It seems from the troika to use a deposit or haircut. Then things get a little murky because no one really is willing to own up to who came up with the idea to also touch insured depositors.

  • 10:27:40

    KIRKEGAARDBut it seems like that actually, that was the idea of the Cypriot government itself because the Cypriot president apparently said, we do not want to tax or levy uninsured tax -- depositors by more than 10 percent. And then, you know, you do the math, and that works out to be 7 percent for insured depositors. So it was really the Cypriot government that is -- that decided to -- for this burden sharing, which ultimately, of course, had turned out to be a huge political mistake for the Cypriot government itself.

  • 10:28:10

    GJELTENWell, so what's at stake here? What's being tested is the ability of European institutions to deal with this very challenging bailout case. But, Nick, we now have the finance minister from Cyprus in Moscow, of all places, trying to get a Russian bailout. How serious is that effort? How likely are the Russians to come to the aid of Cyprus? And then a question for the rest of you as well, what would this mean for the future of European resolution if a E.U. member ends up going to Russia to get help?

  • 10:28:43

    KARAMBELASI think you, first of all, have to look at a very long relationship between Cyprus and the Soviet Union and after the Soviet Union fell even more long relationship after that. Cyprus was one of the non-aligned countries even though its president was an archbishop of the Greek Orthodox Church at that time. So they have a long relationship. But the -- I think the ultimate issue is there's already a Russian loan to Cyprus of approximately 2.5 billion euros.

  • 10:29:21

    KARAMBELASAnd in order for the Russians to add another loan, there would have to be a combination of some kind of a discount or a restructuring of that first loan and then looking for new money to make up this $5.8 billion gap. And then you said the long term. There's -- I think there's been a somewhat of an overemphasis on what the long term would look like because Cyprus has had a long relationship with Russia.

  • 10:29:55

    KARAMBELASAnd so the geopolitical aspect of it would really come down to what non-economic conditions and terms Russia would be seeking and whether those would be palatable, especially to the present -- the current president who is -- said he will join the Partnership for Peace, the kind of anteroom to NATO.

  • 10:30:20

    GJELTENAnd the Russians might want to put a lean on that, on those gas reserves that have recently been discovered.

  • 10:30:25

    KARAMBELASAnd that's the other element, but people, you know, that's more speculative.

  • 10:30:30


  • 10:30:31

    KIRKEGAARDNo, I mean, I -- but I think, personally, I want to see the Russian -- I mean, I believe the Russian money is coming when I see it because...

  • 10:30:37


  • 10:30:37

    KIRKEGAARD...if we go back to Iceland, there was a lot of talk that Russia was also going to give Iceland a 4 billion euro loan. That never materialized. And I think -- but beyond that, I mean, I agree with everything that Nick said, and I think there's actually quite a room for Russia to, for instance, put money in, you know, sort of equity in the new natural gas exploration that is going on there.

  • 10:31:02

    KIRKEGAARDWhere I think it'll be very difficult for Russia, on the other hand, to make direct investments is in the Cypriot banking system. I think it'll be very tricky to simply sell some of these crisis-stricken banks to Russian investors and then expect the ECB to just say, OK, that's fine, and continue to backstop it.

  • 10:31:20

    GJELTENJacob Kirkegaard has been following the European debt and financial crisis since it began. He's a research fellow at the Peterson Institute. You're listening to "The Diane Rehm Show." Sheila Bair, how unusual is that? I mean, we've had a whole series of crises across Europe over the last couple of years, but how unique is this one, and how uniquely challenging is it for European policymakers?

  • 10:31:47

    BAIRI think it's quite unique and unprecedented. And it just keeps dragging on with no long term strategic thinking and a very Byzantine process for making decisions. And that's why you get these very ad hoc initiatives that create a lot of market confusion, which I do think is creating a bigger drag on their economy and their banking system.

  • 10:32:06

    BAIRYou know, my personal view is that it's very hard to have monetary union without a fiscal union. And that, at the core, is the bottom of the problem. But they don't -- the decision making is so incremental, it will be years. People give lip service to fiscal union, but actually accomplishing it is very difficult.

  • 10:32:20

    BAIRMy view is a good place to start would be with a unified deposit guarantee system, having the eurozone countries collectively back a deposit insurance system that would at least stabilize the banks throughout the region and also, I think, provide for -- if you pre-fund it, provide for a better fiscal responsibility and backing these guarantees, and perhaps some supervisory capacity as well. But they just can't even make that kind of decision, so you end up with the situations as we have in Cyprus, which are very difficult and destabilizing for the rest of the area.

  • 10:32:53

    GJELTENNick Karambelas, we have to consider here the scenario, the possibility that Cyprus will have to leave the eurozone and would be the first casualty of this crisis in terms of a country actually leaving the eurozone. What would that mean for people of Cyprus?

  • 10:33:09

    KARAMBELASWell, first of all, it's the lawyer in me, but the eurozone so-called treaty is two paragraphs in an annex to the Treaty of Lisbon, which redid the treaties of the E.U. It does not provide for a legal means or method of either leaving the eurozone or being forced out of the eurozone. So you have that same problem -- same issue was raised with Greece.

  • 10:33:38

    KARAMBELASThere isn't a voluntary or involuntary way legally to be out. Now, I suppose that the ECB could just stop sending euros down to Cyprus. That would violate a whole host of provisions, and I would love to take that case. But I think we have to look at that first, and I don't think that that is really a possibility.

  • 10:34:03

    GJELTENLet's remind our listeners a little bit about Cyprus. Cyprus, its recent history, how did the banking system get to be so big there? How did it establish this close relationship with Russia? And remind us of the war in Cyprus that sort of resulted in the division of the island.

  • 10:34:21

    KARAMBELASWell, Cyprus became an independent republic after being a British colony in 1960. There was a host of issues between the Greek Cypriot and Turkish Cypriot communities in 1974 in response to a coup engineered from Athens at that time. A government was imposed on the Greek -- on the republic. And as a result, Turkey unlawfully invaded Cyprus and now continues to occupy 1/3 of the island.

  • 10:34:56

    KARAMBELASThat's important because in 1974, Cyprus had to figure out what kind of business it was going to be into because it lost a third of its farming capability. And so that was the reason they got into the international offshore business center. Also at that time, Beirut was disintegrating as an offshore center, so Cyprus was able to develop that. And that's where this present relationship really comes from with Russia and others.

  • 10:35:29

    GJELTENI want to get our listeners in on this conversation now. Dan is on the line from Syracuse, New York. Good morning, Dan. Thanks for calling.

  • 10:35:37

    DAN...taking my call. A three-part question: How much of this banking crisis is caused by the garbage derivatives peddled around the world by Goldman Sachs? Number two, don't we face the same danger to our FDIC because our new banking rules cover Goldman Sachs' bogus investment under our FDIC rules? And number three, isn't this a major threat to U.S. national security because Lanny Breuer at the Justice Department refuses to prosecute Goldman Sachs for clear cases of fraud in peddling these fraudulent derivatives?

  • 10:36:04

    GJELTENSheila, these are your favorite issues. You love to talk about them, don't you?

  • 10:36:06

    BAIRYes. Well, first, I'd like you to tell me how you really feel about Goldman Sachs. But let me try to -- I don't know if Goldman Sachs -- certainly in Greece, that was a big driver of some of the false impressions created, shall we say, of the Greek financial strength. I don't know that that's been an issue in Cyprus. In terms of the FDIC being at risk, Goldman Sachs has a very small insured bank. And that's the good news, though it has been growing.

  • 10:36:34

    BAIRAnd so I think whether it's Goldman Sachs, whether a city financial institution, this underscores the need for regulators to have much tougher supervision, much stronger capital requirements that constrain leverage, especially in the big trading operations of these very large financial institutions.

  • 10:36:51

    BAIRSo I, you know, I think you're right to flag. This is an increasing risk for the FDIC after the crisis. These big investment banks, including Goldman Sachs, became bank holding companies and started growing their insured banks. So I hope that puts your mind at ease a little bit, but I do think it underscores regulators need to be on top of this.

  • 10:37:09

    GJELTENWell, it seems like we need these reminders once in a while to remember that this financial crisis that hit us four years ago is not -- five years ago is not entirely behind us. There are still a lot of issues to be worked out. My guests here are Sheila Bair, former chair of the Federal Deposit Insurance Corporation, Jacob Kirkegaard from the Peterson Institute and Nicholas Karambelas of the American Hellenic Institute. When we come back, we'll be taking your calls talking about the situation in Cyprus. I'm Tom Gjelten. Stay tuned.

  • 10:40:04

    GJELTENWelcome back. I'm Tom Gjelten, sitting in today for Diane Rehm. And our subject is the bank crisis in Cyprus, what it means for the people of Cyprus, what it means for Europe, what it means for the United States as well. You can join our conversation. Our phone number is 1-800-433-8850. Our email is

  • 10:40:24

    GJELTENAnd I actually want to go to an email right now. This is from Suzanne who says, "It's a shame the parliament in Cyprus voted down the recent proposal. They were probably pressured by the Russians and other non-Cypriots who would have lost their large amounts of cash had that deposit tax gone through." She says she thought the bailout requirement was the perfect idea. Let those that took advantage of lax regulations pay for the bail out. "I do think," she says, "that they should have raised the limit higher so that real residents would not be taxed."

  • 10:40:59

    GJELTENJacob, she mentions the Russians -- the Russian depositors here -- and there is -- we have seen throughout Europe this sort of ethnic politics, nationality based politics coming into the debate, haven't we? Germany has been -- Germans -- many Germans feel that their country, they as taxpayers, have been able -- have been forced to bail out the more profited spenders in the southern periphery. We now see this comment about Russians. How big an issue is this kind of nationality politics in the European situation right now?

  • 10:41:35

    KIRKEGAARDWell, I think that there is no doubt that there is a lot of fragmentation of the European banking system along these national lines precisely because, as Sheila said earlier, there has been no -- there's no centralized backstop between -- behind the European banks. So investors, they look around, they say, well, actually maybe a German bank looks a lot safer than, you know, a Cypriot or a Greek or a Spanish bank because it's ultimately backed by Germany rather than a much weaker government.

  • 10:42:04

    KIRKEGAARDAnd there's also, of course, a lot of, you know, demonstrations, anti-German demonstrations in Cyprus right now. But on the other hand, Angela Merkel is very popular in Germany for taking a tough stance against this. So there are these issues going along. But I will still say, though, that, you know, when you do look at what has happened as part of this crisis -- I mean, you do now have a joint sovereign fund. The European stability mechanism worth up to 500 billion Euros, which is actually backstopped by everybody.

  • 10:42:37

    KIRKEGAARDSo below the, shall we say, headline figures of re-nationalization of politics in the Euro area, there are actually some, in my opinion, substantial institutional improvements. But, you know, you're racing against time in some ways because the longer these crisis drags out, the more you're going to flame these national sentiments.

  • 10:42:58

    GJELTENLet's go now to Tom, who's on the line from New Bedford, Mass. Good morning, Tom. Thanks for calling "The Diane Rehm Show."

  • 10:43:05

    TOMGood morning. I appreciate the precious caller's questions because something almost entirely missing from this conversation is a forward discussion of how this crisis developed...

  • 10:43:13

    GJELTENWell, that's my function as the moderator.

  • 10:43:14

    TOM...and why -- yeah, why -- who's responsible? And can your panel address that?

  • 10:43:19

    GJELTENNick, have you been -- you're very familiar with the situation in Cyprus as a representative -- legal representative of many interests there. How did this crisis developed? Give us a little background.

  • 10:43:30

    KARAMBELASThe crisis developed in, you know, without going too much into the blame game, it developed one from something Jacob said earlier, the huge banking sector, seven times, eight times the GDP. But it also -- it was kind of triggered, though, by the fact that the Cypriot banks had purchased Greek bonds.

  • 10:43:50

    KARAMBELASAnd when in 2011 the -- there was this haircut, which the sovereign bondholders all agreed to take up to 70 percent, this affected, obviously, the civility of the Cypriot banks. And I think at that time, there wasn't enough attention paid to -- what is the effect of this kind of a discount on banks on Cyprus?

  • 10:44:16

    GJELTENWhere they proportionally some of the biggest holders of Greek sovereign debt?

  • 10:44:19

    KARAMBELASAlmost totally in Cyprus.

  • 10:44:21

    KIRKEGAARDI mean, there's no doubt that what -- the Greek debt restructuring was really what triggered this because it blew, at 20 percent of GDP, 25 percent of GDP, a hole in the balance sheets of the Cypriot banks.

  • 10:44:32

    KIRKEGAARDBut what that actually illustrates is just that even if you, you know, there are some people who call for a debt restructuring of Cypriot sovereign debt now. But the fact that this actually originated with the Greek debt restructuring just shows that even if you do that, there is no free lunch here. You're just basically passing the buck. And the problem, in this case, is that even if you restructure the Cypriot government debt, you're going to end up, actually, blowing a further bigger hole in the banks, in the Cypriot pension funds and others that actually own this Cypriot government debt domestically.

  • 10:45:05

    GJELTENSheila, Joan writes and she refers -- she says, "The coverage of the Cyprus problem always mentions the banks had lots of money from overseas, people who made bad investments in Greece." But she's also wondering if the Cyprius (sic) -- Cypriot government has been spending too much.

  • 10:45:22

    BAIRRight. Well, it's understood that they do have some significant fiscal problems as well. And going back to the problem with the Cyprus banks holding so much in Greek debt, I would note that the capital rules in Europe give positive incentives for banks to buy sovereign debt, especially distress sovereign debt which has a higher yield.

  • 10:45:42

    GJELTENExplain what you mean by, Sheila.

  • 10:45:43

    BAIRWell, so most sovereign debt, not all -- and Greece now has been downgraded, so it's a little different in situation. But in most European countries, if you buy sovereign debt, it's treated by regulators as having zero risk, which means that you don't have to fund any of that acquisition with common equity. You can be completely leveraged. So you can hold zero percent capital and that's very bad.

  • 10:46:05

    BAIRIt encourages leverage, very -- highly leveraged investments in distress sovereign debt. And then when there comes a need to restructure this debt, you got a problem with your banking system. And this has been a broader issue with getting this debt restructured in Europe is that so much of it is internally held by the European banks.

  • 10:46:20

    GJELTENAnd are we seeing very much reform along this line, Jacob?

  • 10:46:24

    KIRKEGAARDI think the short end is that there is no. I mean, this is part of the sort of ongoing reforms of the Basel capital requirements, which is really a global regime. And so far, I certainly haven't seen any moves to address the issues that Sheila raised with respect to...

  • 10:46:38

    BAIRWell, there is something called the leverage ratio which we have in the U.S. You also have a zero percent risk treatment for U.S. sovereign debt. But we also have something called the leverage ratio, which says everything that you do has to have -- be funded with at least 5 percent common equity. They don't have anything like that in Europe. The Basel Committee has agreed to a leverage ratio, but they have not implemented it in Europe.

  • 10:46:59

    GJELTENLet's go now to Bob, who's on the line from Dallas, Texas. Good morning, Bob. You're on "The Diane Rehm Show."

  • 10:47:04

    BOBGood morning. I'm want to know if, like inflation, when we print money here and people have money and savings, isn't it the same thing is going into their account and devaluing it by 5 percent or something?

  • 10:47:18

    GJELTENWell, you know, Sheila, this is interesting that Bob raised this point because, actually, I saw a letter in The Wall Street Journal yesterday that pointed out that the very low interest rates that have been paid to bank depositors in the United States over the last four years amounts, in a sense, to taking...

  • 10:47:31


  • 10:47:31

    GJELTEN...a cut from the depositors.

  • 10:47:32

    BAIRWell, yeah.

  • 10:47:33

    GJELTENThere's just no way of doing it.

  • 10:47:33

    BAIRSo -- well, you're preaching to the choir here. I've been a long-term critic of Fed monetary policy. I think it's penalizing savers. We're not getting one thing out of it. We're getting banks taking -- investing in more securities and building up excess reserves. They're not taking the money and making loans. So I'm with the caller on that. This is a function of monetary policy. I don't now how the positive insurance works, but it's a very valid point.

  • 10:47:55


  • 10:47:55

    KIRKEGAARDNo. I mean, there's another element here, which that the Cypriot banks actually be paid higher deposit interest rates than other banks in the Euro area. I mean, they were offering, you know, 4 1/2 percent yields on deposits where other Euro-area banks where, perhaps, as low as 2 percent or 1 percent. So there is an argument, you could say, well, actually this deposit levy is actually just clawing back some of those excess, if you like, interest rate income that particular offshore depositors have had over a number of years.

  • 10:48:25

    GJELTENAnd do we all agree that, in the end, there is going to be some kind of levy or tax on deposits in Cyprus as part of this ultimate solution here?

  • 10:48:34

    BAIRAbove the insured deposit limits. So I think that's appropriate, yes, above the insured deposit limits.

  • 10:48:39

    KARAMBELASI agree with Sheila. It's going to happen, and it's going to be -- as I said, the House of Representative is voting its mind.

  • 10:48:46

    GJELTENBut will -- could it include some tax on deposits under the insured limit but perhaps at a lower -- much lower rate, which I think is part of the -- that part of that proposal is still alive if I'm not mistaken.

  • 10:48:59

    BAIRWell, it could be. I would -- I hope not. I hope not. I think that breaches what has been really a cardinal rule since all this crisis that insured depositors are always protected. And even if they've gotten high interest deals, there is a legal commitment to protect those principal balances plus accumulated interests. That's how deposit insurance works. And I think at some point you need to respect the rule of law which people have relied on. These are regular people, waitresses, you know, policemen. These aren't, for the most part, I don't think regressions under the deposit limits.

  • 10:49:29

    GJELTENYou're nodding your head, Jacob.

  • 10:49:30

    KIRKEGAARDNo. I mean, I fully agree to that. I hope it could happen. I hope it will not. But I think if it does happen, it represents the redistributive policy choice of the Cypriot government basically protecting larger deposits at the expense of smaller depositors. And I think that's an important point to bring forward. It's the Cypriot choice.

  • 10:49:47

    GJELTENLet's go now to Tristan, who's on the line from Gainesville, Fla. Good morning, Tristan.

  • 10:49:52

    TRISTANHi. Good morning. I was calling to get your guests' opinion about -- my original question was the impact of this crisis in Turkish and Greek region, if that's somewhat similar and then generally about Turkish interest and potential role in the economic recovery in Cyprus.

  • 10:50:13


  • 10:50:13

    KARAMBELASWell, let me just take it this way. As I said, Turkey invade and continues to occupy unlawfully one-third of Cyprus. There is a case that's been decided in the European Court of Human Rights, Cyprus v. Turkey. And probably if Turkey paid its compensation and damages for its invasion, there might be more than enough money to go around.

  • 10:50:40

    GJELTENSheila, I want to ask you about -- David from Vermont sent us an email, wondering whether there's anything to be learned from Iceland's experience in 2008 and 2009. Now, the parallels there are obvious. Iceland also had bank deposits that totally overshadowed the size of its economy. As Jacob mentioned, there was also a talk in Iceland that maybe Russia would come in to help Iceland out. Is there anything to be learned about the way that Iceland recovered largely from that crisis?

  • 10:51:14

    BAIRYes. I think a lot of people had learned from Iceland. They took their lumps. They took their losses early. People who did not have legal protections on their liabilities, bond holders and the depositors took losses. And that was appropriate. That was how the system was set up. It was difficult at first, but they recovered much more quickly as opposed to trying to keep doing this ad hoc bailouts that just keeps dragging on and dragging on.

  • 10:51:35

    KIRKEGAARDWell, I guess, I would just...

  • 10:51:35


  • 10:51:36

    KIRKEGAARD...add to that that there was actually -- what the Icelandics also did was that they basically burned the depositors of the Icelandic Bank subsidiaries in the U.K. and the Netherlands. So they actually did burn quite a lot of both insured and unsecured depositors.

  • 10:51:54

    GJELTENJacob Kirkegaard is research fellow at the Peterson Institute. I'm Tom Gjelten. You're listening to "The Diane Rehm Show." And let's go now to Laurie, who's on the line from Houston, Texas. Good morning, Laurie. You're on "The Diane Rehm Show."

  • 10:52:11

    LAURIEThank you. My question is about -- I haven't heard any discussion of Cyprus' role as a tax haven. And when I was living in Europe, and there were always a bunch of Brits running around, peddling, oh, you can make this much interest there. You don't have to, you know, you can set up a shell company. And a lot of those Russian -- and I'm not trying to specify just the Russians, but a lot of that money came in to avoid tax rates in the rest of Europe and Russia. So how does that, you know, figure in to the equation?

  • 10:52:38

    GJELTENSo you had high tax rates in the rest of Europe and high interest rates on deposits in Cyprus.

  • 10:52:43

    LAURIEIn Cyprus.

  • 10:52:44

    GJELTENMade it a pretty attractive to do business, Nick.

  • 10:52:47

    KARAMBELASWell, I think -- I've seen all these reports in the press and calling it a tax haven. I think, again, after the Turkish invasion in 1974, the Republic of Cyprus had to do whatever it could do to, you know, reform and regain an economy, and this was one of the things that developed over time. Cyprus has been accused of being non-compliant with money laundering laws.

  • 10:53:16

    KARAMBELASIt's really -- it recently dates back to a German intelligence report, and that's the same intelligence service that gave us Curveball. But I think you need to look at money laundering, if that's what the caller is referring to, as a global issue. And there are even some international agencies that show that Cyprus is more compliant than Germany.

  • 10:53:41

    GJELTENThe money laundering is illegal. I mean, I think that what she was referring to is something that's legal, simply the imbalance between tax policies in the rest of Europe and tax policies in Cyprus and also the interest rates. That's not -- there's nothing illegal about that discrepancy.

  • 10:53:55

    KARAMBELASNo, but it goes back to what Sheila said. You know, the -- every country is allowed to set its own tax rate and its own interest rate.

  • 10:54:03


  • 10:54:04

    KIRKEGAARDI guess I would just point out that this discrepancy is a significant -- even if it's not a legal issue, which it is not, it is a significant political issue in the Euro area. And it's one of the reasons why, you know, countries like the Germans are not going to back down.

  • 10:54:17

    GJELTENWell, this goes to Sheila's point that ultimately so much of this whole financial crisis in Europe has political roots and the solution has to be, in part, political by bringing together fiscal policies so there's more consistency in fiscal policies across Europe. Kevin is on the line now from Atlantic, Ga. -- Atlanta, Ga. Good morning, Kevin.

  • 10:54:36

    KEVINYeah. Good morning to everyone. I've lived in Greece for the past decade, and I have bank accounts there. Now, I support Europeans who do not want to pay for Southern and Eastern European corruption. Why doesn't the E.U. go after the people in Cyprus and Greece who hold really vast fortunes in those countries and in Switzerland? Now that would include Greek oligarchs and politicians, Russian oligarchs, the Greek Orthodox Church, Mount Athos, organized crime, the (word?). It's a question of the people who lived by the rule of law versus people who do not live by the rule of law.

  • 10:55:17

    GJELTENKevin, now what happened to your fortune in Greek banks?

  • 10:55:21

    KEVINI want to ask you. Where is my fortune?

  • 10:55:26

    KEVINNo. We don't have...

  • 10:55:27

    BAIRI hope you're under the insured deposit limits.

  • 10:55:30

    KEVINWe're the little guys. We took a prudent amount of money out of the Greek banks and brought it to the United States last year to just to hedge our bets.

  • 10:55:39

    GJELTENUh-huh. And -- well, you suffered what is colloquially known as a haircut. Jacob.

  • 10:55:47

    KIRKEGAARDNo. I mean, I think that in a large, you know, in a large part of the populations around Europe -- and I should say domestically, I'm sure in Greece as well and Cyprus as well, there is a lack -- there is the sense of where is the justice here? And I think if you look at, for instance, the Greek IMF program, a very significant component of that has to do with improve the tax collection effort of that country, which has clearly been deficient up until and during the crisis.

  • 10:56:16

    KIRKEGAARDAnd as I said earlier, the choice of a depositor levy in Cyprus -- in the case of Cyprus, is another way to distribute the tax collection burden. I disagree with, you know, including uninsured -- the insured depositors, but it's a Cypriot choice.

  • 10:56:33

    GJELTENWell, let's hope that the political leadership in Cyprus, the European leadership, maybe even the Russian leadership find a way to resolve this very scary situation in Cyprus so that people are able to get their medicine, buy their food, buy their gas, et cetera. It is indeed a dramatic and an urgent situation that we've been talking about this morning.

  • 10:56:55

    GJELTENMy guests had been Sheila Bair, who is former chair of Federal Deposit Insurance Corporation, now a senior adviser at The Pew Charitable Trusts, Jacob Kirkegaard, research fellow at the Peterson Institute for International Economics and Nicholas Karambelas, legal counsel for the American Hellenic Institute. Earlier we were joined by Nick Schifrin on the ground in Cyprus, an ABC News correspondent there. I'm Tom Gjelten, sitting in today for Diane Rehm. Thanks for listening.

  • 10:57:21

    ANNOUNCER"The Diane Rehm Show" is produced by Sandra Pinkard, Nancy Robertson, Denise Couture, Susan Nabors, Rebecca Kaufman and Lisa Dunn. The engineer is Erin Stamper. Natalie Yuravlivker answers the phones. Visit for audio archives, transcripts, podcasts and CD sales. Call 202-885-1200 for more information.

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