Iconic Australian humor on the Cypriot banking system.
http://www.zerohedge.com/news/2013-03-31/seven-broken-taboos-cyprus-deal
Submitted by Tyler Durden on 03/31/2013 16:43 -0400
http://hat4uk.wordpress.com/2013/03/30/the-saturday-essay-more-looting-levies-more-asset-taxes-now-its-default-or-die/
http://www.eurointelligence.com/
http://hat4uk.wordpress.com/2013/03/29/smoke-signals-special-eurogroup-will-stop-capital-flight-now/
The Slog has posted endlessly about ECB boss Mario Draghi’s disappearing act since March 7th.Last Saturday, I posted this opinion on what Mario is busy doing:
A Spanish flea in the ear? A bit of odd behaviour from that Unsinkable Bank Santander. This circular was sent out to all its lucky customers during the last 48 hours. Entitled ‘IMPORTANT CHANGES TO TERMS AND CONDITIONS FOR
SANTANDER BUSINESS CURRENT ACCOUNTS AND BUSINESS SAVINGS ACCOUNTS’ (like what people just lost 85% of the value in Cyprus) it notes what the changes are ‘For businesses with a business turnover up £250,000.’ That’s SMEs to you and me.
Crazy times....... cyprus rip off moving fast.....
http://www.zerohedge.com/news/2013-03-29/and-scene-big-cypriot-depositors-face-complete-wipe-out
Submitted by Tyler Durden on 03/29/2013 20:47 -0400
http://www.telegraph.co.uk/finance/financialcrisis/9962244/Big-depositors-in-Bank-of-Cyprus-to-be-hit-much-worse-than-feared.html
( Apart from slowly peeling back the skin of the onion on how bad so called big deposits will be robbed , the other deception is that deposits under 100 , 000 are safe - yet folks can't take more than 300 euros out of their banks a day ! Just wait until these capital controls continue for much longer than a month...... And wait until folks digest that the Central Bank of Cyprus said more than a month before the hammer fell that deposit robbery contemplated herein was unconstitutional ? )
Submitted by Tyler Durden on 03/29/2013 12:48 -0400
http://www.zerohedge.com/news/2013-03-31/seven-broken-taboos-cyprus-deal
The Seven Broken Taboos Of The Cyprus Deal
Via Barclays,
From a European perspective, the list of broken taboos and assumptions continues to grow. It includes:
1. EU sovereign debt cannot be restructured: broken by the Greek PSI.2. Senior bank debt-holders cannot be bailed in: broken several times with respect to banks in Denmark, Ireland and now two Cypriot banks.3. Depositors are sacrosanct:broken by Cyprus – deposits greater than the formal guarantee (EUR100k) in the two biggest banks, with EUR4.2bn of uninsured deposits in Laiki Bank set for a large haircut of unknown size, and Bank of Cyprus deposits set for a haircut of around 35% according to several news reports (eg, Economist, Reuters).4. Depositors should not be punitively taxed: broken by the Cypriot government and implicitly endorsed by the EU, but vetoed by the Cypriot parliament.5. If capital controls are applied in the euro area, it is ‘game over’: broken by Cyprus – banks were shut for nearly two weeks; draconian controls of uncertain duration have been imposed.6. Discussion of a euro exit is ‘off limits’: already it is apparent that euro exit was discussed with respect to Greece during H1 12; this topic again re-emerged last weekend with respect to Cyprus.7. The EU can rely on the IMF to be sympathetic in providing financing without haircuts, even for countries with high public debt: from the Greek and now the Cypriot experience, the Fund is evidently evaluating new programmes more critically, particularly when debt/GDP ratios rise above 100%.
Cyprus can also be considered “the exception that proves the rule”. The euro’s core founding principles, based on the Maastricht Treaty’s “irrevocable” fixing of currency rates, and of the free movement of capital, have been violated. The euro will never be the same again; its preservation now depends urgently upon economic recovery. Without the delivery of economic growth, unemployment will rise to yet higher post-war record levels, and the widespread and growing disillusionment felt by EU citizens towards their economic regime will threaten to spill over into more explicit questioning of the euro’s suitability.
http://hat4uk.wordpress.com/2013/03/30/the-saturday-essay-more-looting-levies-more-asset-taxes-now-its-default-or-die/
THE SATURDAY ESSAY: More looting-levies, more asset taxes. Now it’s default or die.
Why electing defaulters to power is the only way left
Friday having seen the enthusiastic support of De Nederlandsche Bank President Klaas Knot for Djisselbloem’s plan to pick the pockets of every despositor in Europe, there are now hardly any major nations still in the closet when it comes to Global Looting.
On Thursday, Canadian bloggers cottoned on to the plans of their government via the annual budget statement. On pages 144 and 145 of “Economic Action Plan 2013″ (already submitted to the Canadian House of Commons), it openly proposes ‘to implement a ‘bail-in’ regime for systemically important banks’ there.
The second wave of evidence about what’s coming I referred to yesterday: the banks hastily sending out acres of fly-shit to their customers to blame any future disappearance of money-substances from their accounts. The general line of defence being offering by these creeps is “ve are only obeyink orders”. The first one out of the blocks appears to have been Santander. Yesterday, the one from HSBC started landing on Slogger doormats. Guess what? The wording and headings are exactly the same as the Santander mailshots.
In short, the entire operation is being coordinated and run by the Treasury. Any chance of Ed Miliband – our friend in tough times – asking a PMQ about this next Wednesday? Don’t hold your breath. Our MPs these days simply do as they’re told, or what they want – whichever is the easiest and most profitable route at the time.
What we are seeing come to pass at the moment is what those previously nutwhack sites from three years ago were screaming at a deaf audience: in the end, they’ll confiscate our money to bail out the lunatics. But where will it end?
There’s a Radio 4 audio clip of Michael Winner at his best in the BBC archives, grumbling two decades ago about how restaurants steal from their customers. Winner says:
“I called a waiter over and said look, you’ve added an obligatory 15% service charge to the bill and a cover charge of 10%. Now my credit-card slip has arrive and you’ve left a blank space so I can add a further gratuity on top. Should I just undress so you can have my clothes as well?”
Bizarrely, we now have to ask ourselves the same about Djisselbloem Plan…and where it will end. After all, there’s plenty to go at.
For example, behind the guise of us “all being in this together”, George Osborne could painlessly announce an emergency Budget in the UK, and slap a 5% levy on all houses valued over £250,000. “The rich must help depress house prices so the young can get on the bandwagon” the Squeaky Draper would allege. If nothing else, this would please Vince Cable, who has been demanding a ‘mansion tax’ for two years already. Note the use of ‘mansion’ there, to suggest ‘a tiny minority of the rich’. But it wouldn’t be of course: a good 60% of all houses in London are now worth over half a million, and the average British house price is currently about £160,000. So at least 40% of property owning Brits would have to cough up £10,000.
How they’d raise it is another matter – which is why thus far the emphasis has been on theft via a willing intermediary. There, the government takes what it already knows you’ve got available….without taxpayers having to bother the poor banks for a loan, they too having no money either, allegedly. The increasingly vicious nature of this circle is mind-blowing.
But such complications about property are seen by Treasury nomenklatura (and their accountancy advisers) as merely obstacles needing some creative thought applied to their removal. One said to me earlier this week, “It would actually be remarkably simple: the tax would be declared, payable with interest on the sale of the house. It would simply be a disguised way of bringing the Stamp Duty further downmarket”. Easy when you know how innit?
The problem for the Brussels-am-Berlin rapists in Greece was that they were (and still are) forced to demand tax monies from those who haven’t got any left. When one gets to the same stage of madness as Louis XVI, it’s time for a rethink. Cyprus was it, and this is now – quite clearly – going to be the future for all of us. But care must be taken not to turn a depression into a slump, so direct takes on future purchases have to be avoided: even the FinMin mobsters can grasp that much.
So the next stop could be property. But how much further could they go after that? I would say “not much”…because again, it is a classic case of taxing the sans coulottes and raising the price of their bread: you don’t collect any tax, and it results in Bastille-storming. Greece is, I would say, very close to this stage now, as is Italy. I suspect that only Tsipras and Grillo can stop it. Who might come after them, however, doesn’t bear thinking about.
For what it’s worth, here’s my two-pennorth: I suspect that what we’ll get is banks being ‘rescued’ worldwide, the quicker to empty them of SME and private deposits. It would be Communist seizure spun as national necessity.
Take the situation with Britain’s RBS. The Treasury has been trying to flog it for eighteen months without any success, and its CEO Stephen Hester has tried to rape his SME customers but been caught, stupid boy. Along the way, to save its subsidiaries the bank has had to inflict several ‘glitches’ to avoid paying some £80 billion by a certain date. But the situation inside the bank remains as dire as ever.
The official date suggest that ‘the taxpayer’ already owns 82% of the Royal Bank of Skullduggery, which is of course bollocks because all we own is a ginormous debt. The Establishment owns and runs it as a means of trying the fleece the taxpayer. But it would be a matter of two days work to nationalise (“save”) the bank completely, and then enact a Laika-style assets freeze. The rules having been changed already (see mailshots previously spotted) the Treasury would simply say to everyone – “the rich” – with monies over £100,000 in the bank that they they were no longer insured. Money is then printed by Carney the Canuck in Threadneedle Street to amortise the RBS debt into a ‘Bad Bank’, and the rest goes into the freezer….aka Her Majesty’s Government. What’s left – smaller savers and investment banking – is then given to another disaster like HBOS, thus making their balance sheet look better. Sorted. Until HBOS goes tits-up.
Of course, in the end you run out of things to
nationalise rationalise. A wannabe popular Labour administration could dash in to stop electricity, water, gas and local councils ‘profiteering’ at the citizenry’s expense….an election winner if ever there was one. This gives you a free hand to put up all the prices and hand them straight over to the HMRC. But then you run out of things to improve, save, rescue and freeze. Inflation goes up and economic growth goes down. So ergo the tax take falls. What then?
It isn’t going to work.
The answer is that there is no “what” to happen “then”. The strategy is so obviously doomed, it cannot possibly get that far. Once the wealthy have all the ‘glitz bricks’ property and the gold, the global system will ban gold sales to the public. FDR did it, this mob wouldn’t hesitate to. For real people, there will be nowhere to invest, no way out of being levied, and in the end, nowhere to work.
But this still has no, zilch, zero and f**k all chance of monetising the debts, derivatives and other insurance calls sitting out there in the ether. What the Eunatics are doing today – and the other leeches will do the day after tomorrow – is a pointless waste of time, a last few yards along which to kick the battered can before it finally rolls over the cliff, has a string attached to it, and they all promise that hanging onto the string is the only way, and thus represents our socio-patriotic duty.
Wake up Dumbos, it isn’t going to work.
You’ve tried taxes, you’ve tried austerity, you’ve tried levies, you’ve tried asset freezes, and you’ll try every sneaky-snakey trick in your little black book: but it isn’t going to be enough. More and more money will go to Asia, more and more worthless fiat money will be printed, more and more debt will accrue in the West, and then one day when nothing is being produced and bond markets, stock markets and commodity markets are going through the floor, we will end up with what I identified years ago as Indeflation – inflated Sovereign demands, deflated goods value, and zero demand.
You will I’m sure all be bored by this by now, but as I have been saying since Spring 2009, debt forgiveness is the only way out.
The current asylum inmates will never do that: never never never. Be they BamBers promoting their euro, Wall Street running Washington, Beijing exporting crap and owed trillions by its buyers, globalist bankers, multinational producers, politicians, tax accountants or corporate lawyers, they will never relent. They can’t: if they do, the problems will be horrendous but soluble. Their downside is that there will no longer be any place in it for them.
While we still have the democratic electoral power to do so, the one and only way now to force debt forgiveness globally is for we, the People, to elect politicians who promise to default on all debt the day after they are elected. Yes, I know this will evoke a crisis via immediate capital flight from that country, but they’re just going to have to live with it. The alternative is, as I’ve tried to outline above, an unthinkable can-strewn road heading towards mass lemming impressions.
The first country to do this, I imagine, will be Italy. Greece may well be next, but I think Spain could still beat them to it. Without doubt, the nation that can do it with the least pain is France – given its relatively sparse population sitting on a huge amount of food-producing land. For Britain – dependent on services and hugely overpopulated – it would the the end.
But once such things happen, the game really will be up for mercantilist globalism. ‘Siege economies’ need be no such thing: self-sufficiency by nation – with judicious trade in surpluses – remains the best way forward: and the only way to avoid a cataclysmic thermo-nuclear conflict in the end.
Too many visitors to this site see me as ‘doom-mongering’, but they rarely leave anything in the way of rationally argued support for their opinion. My prediction is very simple:
1. Global Looting is coming and it will be self-defeating.
2. The people at the top are mad and stupid.
3. They will not countenance debt forgiveness, so they must be replaced by those who will.
4. The mercantilist model of global economics and Friedmanite econo-fiscal ideas are a busted flush.
5. Self-sufficient Sovereigns trading in surpluses represent the best future for the human race.
Tell me why I’m wrong – with the facts to support it – and I’ll happily listen. For me, it’s Page One sanity compared to what we have now. Over to you.
And for the rest of us who know the self-styled élite will wind up killing us all given half a chance, I’m making a special appeal for you to forward and repost this essay in as many places as possible. Hits are of absolutely no importance to me beyond the raising global awareness of the need to do something before it’s too late. Thanks.
http://www.eurointelligence.com/
March 28, 2013
0
All of Draghi's horses - thoughts on banking union and the Cyprus 'solution'
By Miguel Carrión Álavarez
"The central bank defends the payment system every day, every hour, every minute." Scott Fullwiler[1] calls this "the fundamental truth of central bank operations" and I will call it the essence of monetary union.
The usual institutional arrangement in monetary economies is that payments are made in state-issued currency, or by means of credit instruments denominated in a state currency serving as the unit of account. in advanced economies Banks provide the essential infrastructure of the payments system: they operate the channels, namely branches and ATMs, through which people and firms obtain cash; their demand accounts provide a store of value; and they provide their customers with payment instruments such as debit cards, or also credit-based instruments such as cheques and credit cards. Just as banks guarantee their customers' credit, backed by the customers' bank deposits, when issuing to them widely acceptable payment instruments; so the state guarantees the credit of the banks in relation to their customers' demand deposits, through deposit insurance schemes. All of this must be relatively transparent to the public if the payments system is to function effectively. Deposit insurance was, in fact, invented to prevent bank runs and you cannot have just a bit of it: it must be total up to a certain amount. The UK tried to have only partial deposit insurance and we saw how that turned out with Northern Rock in September 2007.
In addition to this, the central bank acts as a clearinghouse for payments among banks, which comes into play every time two people use means of payment issued by two different banks to mediate an economic exchange between them. Central bank liquidity provision and lending-of-last-resort actions exist to protect the bank clearing system and thus the overall payments system. This is the meaning of Scott Fullwiler's dictum above, and the 'zeroth mandate' of central banks even if their charter say their first (and maybe only) mandate is price stability, for there can be no price stability without a stable payment and clearing system.
Similarly, for international payments the BIS in Basel acts as a central bank of central banks. In the Eurozone the Eurosystem acts as a clearinghouse between Eurozone central banks through the TARGET2 system, and the ECB defends the stability of the payments and clearing system by means of its ordinary, and currently quite extraordinary, liquidity provision. The ECB may talk about broken monetary policy transmission channels but what should keep them awake at night is the possibility of a broken payments and clearing system.
It is thus not unreasonable to argue that, in a monetary union with free movement of capital and electronic means of payment, deposit insurance should be union-wide. If it isn't there is a risk of bank deposit runs or destructive zero-sum games, as seen when at the end of 2008 the IceSave fiasco and the Irish blanket bank guarantee forced the EcoFin to harmonise deposit insurance[2]. Even then the choice to mutualise Eurozone bank deposit insurance was rejected, and lo and behold the issue resurfaced again in the banking union debate in the second half of 2012.
Deposit insurance is a state guarantee of the banking business and a recognition that banks are service providers of the public good of a payments system. Such a state guarantee requires regulation and supervision if moral hazard is to be avoided. Again, if liquidity provision and deposit insurance are to be mutualised, then it is reasonable that bank regulation and supervision should also be mutualised. Whether or not the banking supervisor is the same central bank that provides liquidity, there is an obvious synergy between the two functions and so-called Chinese walls between the two would prevent either from being effective. In the throes of the Greek sovereign debt crisis in 2011, Guntram Wolff of Bruegel[3]argued
"The ECB - providing a large part of the infrastructure of the ESRB - knows which banks use Greek bonds as collateral for the open market operations and should therefore have a good picture of exposure to Greek bonds. The ECB should also have fairly detailed information on the interbank market, from which contagion across banks can be assessed."
The Eurozone would therefore be handicapping itself it it prevented the ECB in its capacity as liquidity provider from sharing information with whichever institutions are responsible for bank regulation, supervision and resolution.
In addition, deposit insurance requires the ability to intervene an insolvent institution and to summarily put it into receivership or restructure it. In the US the FDIC has been doing this for 80 years, for thousands of banks[4], though apparently unbeknownst to the US President[5]
"Here's the problem; Sweden had like five banks. [LAUGHS] We've got thousands of banks."
The example of the FDIC makes it inexplicable that the fact that there are a few thousand banks in the EU is used as an argument against EU-wide deposit guarantee and bank resolution by people who should know better.
An ordinary judicial insolvency or liquidation process seems to be inadequately slow for banks, which is why special resolution regimes are needed. Such were advocated, for instance, by Joseph Stiglitz[6] (who called them 'super-chapter-11' by reference to US bankruptcy law) in light of the experience of the late 1990s Asian and Russian currency crises. The case of Lehman Brothers showed that nondepository institutions might also require a speedy resolution scheme which the FDIC could not provide and which 4 years later is still not in place. In Europe, a special resolution regime for banks is in the cards, but so far it appears that only Spain has anticipated such legislation, and only under duress as a result of the July 2012 Memorandum of Understanding.
In sum, the case seems compelling for a Eurozone-wide clearing system, liquidity provision, deposit insurance, banking regulation and supervision, and a special resolution scheme for banks. The case is underpinned by the necessity to provide a unified and efficient payments system for the currency area, and the need to ensure its safety and defend its integrity. Arguments against joint supervision hinder the Central bank in distinguishing between illiquid and insolvent institutions. Polemics against joint deposit insurance actually foster cross-border deposit runs. And rhetoric against Target2 undermines the integrity of the payments and clearing system itself.
The Target2 'issue' dovetails with deposit insurance because the whole point of worrying about Target2 is that, in case of a Euro breakup, the Bundesbank might not be able to recover its claims on the Eurosystem. However, these claims are, at least partly, balanced by nonresident deposits in German banks. As Paul de Grauwe[7] has pointed out, that problem would be solved if, after a Euro breakup, the Bundestag removed deposit insurance for nonresident deposits. In addition, Karl Whelan[8] has argued that even a Euro exit would not necessarily entail a repudiation of central bank debts to the Eurosystem, precisely because of its role as a clearinghouse for cross-border payments. Nevertheless, to the extent that German Target2 balances reflect peripheral residents taking their deposits abroad rather than German residents repatriating their foreign holdings, much clarity would be achieved if those banks taking full-page ads[9] encouraging Chancellor Merkel to oppose Euro-wide deposit insurance, instead lobbied the Bundestag to remove the umbrella of deposit insurance from nonresident deposits. It is not possible for a Euro member state to entertain Euro breakup, decry Target2 balances, refuse deposit insurance, and yet benefit from a panic in the deposit-taking zero-sum game. Or rather, it can be done but it's not in the wider European public interest.
And so we come to the unfortunate outcome of the Cyprus crisis between the Eurogroup meetings of March 15 and March 25, 2013. The initial decision to bail in the insured depositors of Cypriot banks cast doubt on the commitment of those present in the Justus Lipsius building (finance ministers, Commissioners and ECB board members) to the integrity of the Eurozone payments system, and on their ability to act in the public interest. Probably the best one-liner was provided by David Zervos, who said[10]
"All of us should really take a moment to consider what the governments of Europe have done. To be clear, they initiated a surprise assault on the precautionary savings of their own people."
With the move to 'tax' deposits below the €100k deposit insurance limit, on the legalistic argument contrived by the European Commission that if a tax is levied a minute before a bank fails in order to pay for a recapitalization the bank never failed and thus deposit insurance never came into play, the Eurogroup reneged on the October 2008 commitment to harmonize deposit insurance across the European Union. To go by immediate press accounts of the March 15 negotiations[11] [12] EU Commissioner Rehn and Cyprus President Anastassiades both made specific proposals taxing depositors under the deposit guarantee ceiling, and the ECB threatened to force the insolvency of the Cypriot banks which would have put the Cypriot government on the hook for €30bn in deposit insurance it could ill afford. Many people, German Finance minister Schäuble among them, have since attempted to exonerate themselves on the argument that they made proposals that left insured deposits unaffected. Nobody, least of all the ECB, appears to have warned of the implications of undermining deposit insurance. But in fact, to stem a bank run, a Cypriot bank holiday which ended up lasting nearly two weeks and included capital controls in the form on a ban on wire transfers.
I would like to expand on the implications of the Eurogroup's "assault on precautionary savings". Ashoka Mody[13] has estimated that, in the OECD,
at least two-fifths of the increase in households’ saving rates between 2007 and 2009 was due to increased uncertainty about labour-income prospects
What this means is that, at times of economic uncertainty, ordinary people increase their stock of saving (precautionary savings are not savings for deleveraging, but to build 'rainy day funds'). Mody observes that in 2010 savings rates dropped again, which we can speculate is due to the modest economic recovery that took place that year. But given that the economic conditions in the Eurozone since 2010, and especially in 2012, haven't been all that good, with several countries in recession and a couple in outright depression; and given the unanimously gloomy official economic forecasts for the next year; it would not be surprising to find that households have again attempted to build up a rainy day fund in the form of liquid deposits at their local bank after the dates explored by Mody and his coauthors. The increasingly explicit threats by the Eurogroup to tax these deposits also beyond Cyprus can only encourage households to shift their precautionary savings away from bank deposits.
The final Eurogroup decision on Cyprus ended up restoring deposit insurance and imposing a resolution of only the two money-center banks in Cyprus, leaving the rest of the banking system initially untouched. However, the message that it was the political intention of the Eurogroup to liquidate Cyprus' "business model" make a run on the remains of the Cypriot banking system a near certainty, and indeed the Cypriot parliament legislated stringent capital controls. But the Cypriot capital controls not only ringfence the Country to avoid a capital flight: they also completely tear up the modern payment system that used to exist in Cyprus. For ordinary people there will be restrictions on cash withdrawals, on check cashing, on payment orders, and on the use of payment cards. But the capital control bill passes by the Cypriot parliament also allows the monetary authorities to limit interbank lending. In order to save the Euro, and in order to save Cyprus from a crippling capital outflow, the entire payment and clearing system is Cyprus has been destroyed. The fact that not only the Eurogroup but the European Commission and the central banks involved are going along with this with only a meek statement that the capital controls should be lifted "as soon as possible".
When Roosevelt's Emergency Banking Act of 1933 instituted a multi-day bank holiday it was on the promise that when banks reopened they would be solvent, and the promise was upheld and most banks opened within 4 days. Nothing of the sort is being promised in Cyprus, although the banks have finally open. Without a diagnosis of the underlying problem other that "the Cypriot economic model is unsustainable", the problem with ringfencing Cyprus and dismantling its payments system "for reasons of public safety and security", ostensibly to prevent an "uncontrollable outflow of deposits" is that it is not clear how the Cypriot and European authorities expect to fix the underlying problem in the very short time they're buying themselves (supposedly 7 days).
Finally, it should give everyone pause that Eurogroup president Jeroen Dijsselbloem would characterize deposits above the €100k insurance limit as a risky investment earning a return
"… Because if I finance a bank and I know if the bank will get in trouble I will be hit and I will lose my money, I will put a price on that. I think that’s a sound economic principle. …" [14]
This completely ignores the fact that an important economic role of large deposits is to serve as revolving capital for firms of all sizes. Just like households have increased their "precautionary savings" in response to the recession, so firms may have increased their operating cash holdings in reaction to the contraction of trade credit that has accompanied a financial crisis lasting already 5 years. Have the European economic authorities thought out the impact that appealing to the "moral hazard" of large depositors as "investors" in "sky assets" may have on day-to-day functioning of the real economy?
In conclusion, even if an immediate bank run due to Cyprus is avoided in the rest of the Eurozone, will all of Draghi's horses and all of Draghi's men be able to put together the broken egg of public confidence in deposit insurance, and more generally in the Eurozone's commitment to the integrity of its payments system?
[1] Fullwiler, Scott T., Modern Central Bank Operations – The General Principles(June 1, 2008). Available at SSRN: ssrn.com/abstract=1658232
[2] Ecofin Council, Immediate responses to financial turmoil - Council Conclusions (7 October 2008)www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/misc/103202.pdf
[3] Wolff, Guntram B., ESRB should act on sovereign risk, (May 5 2011)www.bruegel.org/nc/blog/detail/article/206-esrb-should-act-on-sovereign-risk/
[5] ABC News, Obama: No 'Easy Out' for Wall Street (February 10, 2009)abcnews.go.com/Politics/Business/story
[6] Stiglitz, Joseph E., Globalization and its Discontents (2002) W W Norton & Co.
[7] De Grauwe, Paul and Ji, Yuemei, What Germany should fear most is its own fear (September 18, 2012) www.voxeu.org/article/how-germany-can-avoid-wealth-losses-if-eurozone-breaks-limit-conversion-german-residents
[8] Whelan, Karl, TARGET2 and Central Bank Balance Sheets. University College Dublin. School of Economics, 2012-11. hdl.handle.net/10197/3919
[9] Handelsblatt, Sparkassen und Volksbanken treiben Merkel zum Kampf(September 13, 2012)www.handelsblatt.com/unternehmen/banken/einlagensicherung-sparkassen-und-volksbanken-treiben-merkel-zum-kampf/7129638.html
[10] Business Insider, ZERVOS: 'This Is A Nuclear War On Savings And Wealth' (March 17, 2013) www.businessinsider.com/zervos-this-is-a-nuclear-war-on-savings-and-wealth-2013-3
[11] Spiegel, Peter, Cyprus depositors’ fate sealed in Berlin (March 17, 2013)www.ft.com/intl/cms/s/0/f890566a-8f24-11e2-a39b-00144feabdc0.html
[12] Steinhausser, Gabriele; Stevis, Matina and Walker, Marcus, Cyprus Rescue Risks Backlash (March 18, 2013)online.wsj.com/article/SB10001424127887323639604578366700444429538.html
[13] Mody, Ashoka; Sandri, Damiano and Ohnsorge, Franziska, Precautionary savings in the Great Recession (22 February, 2012)www.voxeu.org/article/precautionary-savings-great-recession
[14] Financial Times, The FT/Reuters Dijsselbloem interview transcript (26 March, 2013) blogs.ft.com/brusselsblog/2013/03/the-ftreuters-dijsselbloem-interview-transcript/
http://hat4uk.wordpress.com/2013/03/29/smoke-signals-special-eurogroup-will-stop-capital-flight-now/
Smoke Signals Special: ‘Eurogroup will stop capital flight NOW’
Is the European public being quietly alerted to an assets freeze? Will eurocapital controls be rushed through on this bank holiday weekend?
The Slog has posted endlessly about ECB boss Mario Draghi’s disappearing act since March 7th.Last Saturday, I posted this opinion on what Mario is busy doing:
‘The mystery of Mario Draghi the Invisible Man is more disturbing in some ways. I posted about Schäuble briefing bigtime against him the week before last, and I now think it boils down to two serious possibilities. The first is that Berlin has somehow neutralised the ECB boss, and told him to stay out of public and leave it to them. If so, he has managed very well to be AWOL during a classic Brussels-am-Berlin cock-up. But even as the ECB demanded a Nicosia decision by Monday and then demanded more money after the Moscow talks broke down, SuperMario was nowhere to be seen. That is odd.
The second possibility – and one I increasingly favour – is that from the outset Mario Draghi saw Cyprus as a distraction, no more: he knows that via his control over the banking purse-strings, he can bring the island to its knees any time he likes. Either he knew (or guessed) that the Berlin mentality would jackboot into the situation and use it as a test-case for (a) future events where threats are felt to be necessary and (b) setting the precedent for State theft of depositor funds under the guise of bollocks like Open Bank Recontruction (OBR) or fantasy ‘levies’. Of course, he would prefer to be away from that grubby operation, but I return to the key word here – distraction: Germany’s aim is control; Draghi’s aim is the survival of the euro, whatever it might cost. The two need not be the same, and in the long term probably won’t be….Personally, I suspect what he plans to do adds up to yet another form of citizen pauperisation alongside the bank robbery approach….’
In the last 48 hours, I’ve been getting some worrying signs from Out There. They suggest to me that a major move might be attempted this weekend. What follows is a compendium of why I suspect it’s a strong possibility.
A Spanish flea in the ear? A bit of odd behaviour from that Unsinkable Bank Santander. This circular was sent out to all its lucky customers during the last 48 hours. Entitled ‘IMPORTANT CHANGES TO TERMS AND CONDITIONS FORSANTANDER BUSINESS CURRENT ACCOUNTS AND BUSINESS SAVINGS ACCOUNTS’ (like what people just lost 85% of the value in Cyprus) it notes what the changes are ‘For businesses with a business turnover up £250,000.’ That’s SMEs to you and me.
Especially notable is Para 1(b) which now reads as follows (my emphasis):
’1 b) Your Money
Any money held for you in an account with Santander UK plc will be held in its capacity as a bank and not as a trustee. In accordance with FSA requirements we are obliged to notify you that the client money rules on money do not apply to a Banking Consolidation Directive (BCD) in relation to deposits within the meaning of the BCD held by that institution. As a result, the money will not be held within the client money rules of the FSA.’
Any money held for you in an account with Santander UK plc will be held in its capacity as a bank and not as a trustee. In accordance with FSA requirements we are obliged to notify you that the client money rules on money do not apply to a Banking Consolidation Directive (BCD) in relation to deposits within the meaning of the BCD held by that institution. As a result, the money will not be held within the client money rules of the FSA.’
If I can just put into English what this means, ‘We hereby abrogate all responsibility for the business funds you keep with us, because we can no longer be trusted. In fact not only can we not be trusted, if those nasty Government people spot we’re up the swannee and order us to restructure, all bets are off, and the chances are you’ll lose the lot because they’ll steal it for the bailout. Ithangyew.’
The interesting thing about the choice of SMEs for such a circular reflects the fact that, by far, their current accounts have far more ‘velocity’ than private Mr Average: that is, at any given time they could have £150,000+ in cash between outflow and inflow…even though their annualised turnover is under £250,000. Also larger (multinational) businesses would kick up a stink, whereas as Stephen Hester has taught us already, SMEs can be easily kicked around. And finally, mopping up 100,000 SME accounts at £100K average a pop is a far easier way to steal than snaffling fifty quid from two million private current accounts.
Bear in mind, this is a Spanish bank we’re dealing with here. Que viva Espagne and all that, but as long ago as June 2012, the relative credit-worthiness of Santander UK was downgraded by Moody’s; and at the start of December, Spain formally requested €39.5bn of European funds to recapitalise its banking system. It clearly wasn’t anywhere near enough; just fifteen days ago, the respected site Seeking Alpha had this to say:
‘….setting up Spain’s “bad bank” SAREB, Spain has managed to at least create the illusion that the growth rate of non-performing loans in the system has topped out….in fact, the percentage of bad loans in the system actually continues to grow, even though this is no longer visible in the official aggregated data…’
That’ll be the old leger-de-main and can kicking acrobat Act then. And although Santander was described by the Goforits in mid 2012 as “a stable bank storming through the crisis”, the tone has changed somewhat since then. Here are some more smoke signals for all you palefaces out there getting paler by the minute:
1. 25 Oct 2012: One-off charges for bad lending and dropping purchase of RBS branches as growth prospects slow. Santander UK profits down to £372m as fewer home loans agreed
2. 19 Jan 2013: Santander admits to a catalogue of ‘errors’, then has to be chased for a goodwill cheque
3. 31 Jan 2013: Santander suffers a sharp decline in profits as the domestic economy slumps, and bad debts rise.
So here we have a bank that needs more money. Guess what happens next….
4. 9 Mar 2013: Long-suffering Isa savers are finally seeing rates edge up as Santander launches new range.
But the instances of stalling just keep on popping up…
5. 18 Mar 2013: Santander bank account ‘glitch’ loses HSBC customer £5,500 following money transfer
6. 25 Mar 2013: Elderly couple who lodged a cheque from Canada into Santander during June 2012 still waiting for the funds to clear.
When even IT expects a meltdown, be very afraid. A disturbing tip pops into The Slog’s mailbox concerning Easter weekend and those wonderful banking blokes who gave you 2008. A top Wally in charge of City computer networks says there will be no complex updating and system repair done this weekend.
This is far more important than you may think. A four-day holiday is prime time for geeks and software nerds to sit in a dark trading room and debug everything. The idea of not doing it can only be explained by one thing – which the computer MoU confirms:
“All computer & program updates are cancelled this weekend as they are semi-anticipating mayhem next week in the markets and cannot risk having any maintenance work running over.”
Now then, what might produce market mayhem? And what else would you try to effect during a bank holiday? Seriously, I am that man praying that this smoke signal is wrong: I don’t have my affairs fully in order yet, and it does have a ring of truth about it. Perhaps also helping to explain everyone being in the dark about Draghi the Invisible Vampire over the last three weeks.
The Troika has learned the lessons of Cyprus. Cyprus taught us how quickly the big, hot and smart money disappears. It happened so fast, in fact, that the Cyprus Bank depositors left behind – the entirely innocent in most cases –will pick up the bill. Not oligarchs, not ESMs, not ECBs, and most definitely not Berlin: just ordinary savers who have amassed €100,000 euros during a lifetime. People like this are not the self-styled élite: they’re you and me and people we know.
Odd goings on at the ECB website. For Mario Draghi, it seems, weekly reporting of capital flight from the eurozone is too frequent: what Dracula in his dark underground cave would like is no reporting of it. Go to the ECB website, and you will note there that the Central Bank hasn’t released any financial stats for over a week now. You may also spot that the open-request search engine box has disappeared. Monetary, financial markets and balance of payments statistics haven’t been updated at all for over a month.
The imperturbable pondering the Unthinkable. I invested an hour yesterday talking to the Chairman of one of Britain’s largest and most successful wealth management consultancies. I told him I was in the process of moving out of Sterling – and Europe as a banking centre. I asked what he thought.
“Why would you not do that?” was his response. He then enlarged on his view: “Catch the Tube into central London now, and everyone is talking about whether their money is safe in a Western bank…or branches of such a bank in Asia. This sort of thing is unheard of in my lifetime. There is a sense of acceleration, and acceleration always happens just before the end”.
I mentioned the Slogpost about Djisselbloem’s plan for euro-wide capital controls.
“I’d be disturbed if he didn’t have one,” my friend replied, “But if he’s does have one, then he needs to get a move on. Cyprus has changed everything: the treatment of depositors there has removed any trust for the foreseeable future. If the eurogroup is going to introduce controls, now is the time….not in a month or so”.
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Yesterday in Frankfurt, Marketwatch opined as follows: ‘the precedents set by the Cyprus deal have undermined the euro in a very important way. The imposition of capital controls–a euro-zone first–now means that a euro held in a Cypriot bank account can’t be moved, withdrawn or even spent with the same ease as a euro held in a bank account in Germany, France or anywhere else in the 17-nation eurozone. Simply put, a “Cypriot euro” is worth less than a euro held in a bank account anywhere else.’
It makes the whole idea of EMU a nonsense: it is, in fact, the beginning of the end of EMU. In a client note after the true level of Cyprus haircut was announced, Deutsche Bank strategist George Saravelos wrote, ‘Economic and monetary union across the entire euro zone no longer exists. Even though [Cyprus] is very small, policy makers’ willingness to suspend cross-border euro convertibility is a meaningfully negative signal for the euro zone.’ The economics boffins at Nomura concurred: ‘Common currency, by definition, means that a euro in country A is equivalent to a euro in country B’ they wrote. UBS Head of Global Economics Paul Donovan told CNBC, “If you impose capital controls, effectively, the monetary union is dead.”. And perhaps most chilling of all, David Mann, Regional Head of Research for the Americas at Standard Chartered Bank says, “There is no point in anyone claiming they know what’s coming next. It’s [capital controls] gone from something hardly mentioned a week ago to something that is being taken absolutely seriously enough to be running into a real scenario. But it has to be instant. Bank runs can literally be electronic — they happen at a touch of the button.”
Well, we have a four-day weekend here, when all the fingers are away from all of the buttons. Stay tuned: if I come up with anything more concrete still, you’ll be the first to know.
Crazy times....... cyprus rip off moving fast.....
http://www.zerohedge.com/news/2013-03-29/and-scene-big-cypriot-depositors-face-complete-wipe-out
And Scene: Big Cypriot Depositors Facing Complete Wipe Out
9.9%? 30%? 60%? 80%? Nope - according to the latest from Reuters, the cash-on-cash return to all uninsured depositors in the healthy, i.e., only remaining big Cyprus bank, will be a big, fat doughnut.
In what appears to be drastically worse than many had hoped (and expected), uninsured depositors in Cyprus' largest bank stand to get no actual cash back from their initial deposit as the plan (expected to be announced tomorrow) is:
- 22.5% of the previous cash deposit gone forever (pure haircut)
- 40% of the previous cash deposit will receive interest (but will never be repaid),
- and the remaining 37.5% of the previous cash deposit will be swapped into equity into the bank (a completely worthless bank that is of course.)
So, theoretically this is 62.5% haircut but once everyone decides to 'sell' their shares to reconstitute some cash then we would imagine it will be far greater. Furthermore, at what valuation will the 37.5% equity be allocated (we suspect a rather aggressive mark-up to 'market' clearing levels).
Critically though, there is no cash. None. If you had EUR150,000 in the bank last week, you now have EUR0,000 to draw on! But will earn interest on EUR60,000 (though we do not know at what rate); and own EUR56,250 worth of Bank of Cyprus shares (the same bank that will experience the slow-burn leak of capital controlled outflows).
It seems, just as we warned, that the deposit outflow leakage that we discussed did indeed weaken the situation of the large banks significantly.
As Reuters adds, the toughening of the terms will send a clear signal that the bailout means the end of Cyprus as a hub for offshore finance and could accelerate economic decline on the island and bring steeper job losses.
http://www.telegraph.co.uk/finance/financialcrisis/9962244/Big-depositors-in-Bank-of-Cyprus-to-be-hit-much-worse-than-feared.html
( Apart from slowly peeling back the skin of the onion on how bad so called big deposits will be robbed , the other deception is that deposits under 100 , 000 are safe - yet folks can't take more than 300 euros out of their banks a day ! Just wait until these capital controls continue for much longer than a month...... And wait until folks digest that the Central Bank of Cyprus said more than a month before the hammer fell that deposit robbery contemplated herein was unconstitutional ? )
Big depositors in Bank of Cyprus to be hit much worse than feared
Savers in Cyprus' largest bank face losing a far worse-than-expected 60pc of their deposits over €100,000 as part of a €10bn EU bail-out deal struck this week.
9:13PM GMT 29 Mar 2013
Under an arrangement expected to be announced on Saturday, depositors in Bank of Cyprus will receive shares in the lender worth 37.5pc of any savings over €100,000, while the rest may never be paid back, according to Reuters, citing a source with direct knowledge of the terms.
Of the 62.5pc of uninsured deposits not converted to bank shares, about 40pc will continue to accrue interest but will not be repaid unless the bank does well, while the final 22.5pc will cease to attract interest, the source told Reuters.
Government figures, including finance minister Michalis Sarris and central bank governor Panicos Demetriades, had previously indicated that depositors in the island's largest lender would lose around 40pc of their uninsured savings as part of an 11th hour agreement reached in Brussels in the early hours of Monday.
Meanwhile, account holders in Laiki Bank, the country's second largest, stand to lose up to 80pc of their money as the lender is wound down and insured deposits transferred to Bank of Cyprus.
The harsher-than-expected terms on the Bank of Cyprus' largest depositors will provoke further anger among Cypriots, who face sharp economic decline with the contraction of their dominant banking sector.
Cypriot President Nicos Anastasiades, who has been in the job barely a month, said the risk of bankruptcy had been contained thanks to the bail-out but accused the 17-nation euro currency bloc of making "unprecedented demands that forced Cyprus to become an experiment".
Amid a debate in Cyprus about a possible exit from the euro and a return to the Cypriot pound, the president said: "We have no intention of leaving the euro. In no way will we experiment with the future of our country."
President Anastasiades said unprecedented restrictions imposed on bank transactions in Cyprus would be “gradually eased”.
The Central Bank of Cyprus later announced that there would be no limits on debit and credit card transactions or money transfers made inside the country, adding it will attempt to "refine or relax" its set of strict capital controls on a daily basis.
Overseas transactions would still be limited to €5,000, however, and daily cash withdrawals are capped at €300.
The government initially said the capital controls would stay in place for seven days, but Ioannis Kasoulides, the foreign minister, said on Thursday they could last "about a month".
Many economists believe the government may be compelled to leave the restrictions in place for months or even years.
They point out that capital controls introduced in Iceland in 2008 to cope with its banking and economic crisis are still in place today.
The president said the immediate threat of bankruptcy had been thwarted. "The situation, despite the tragedy of it all, is contained," he said.
But he conceded that the bailout deal would prove “painful”.
"Everyone will have to make sacrifices as our financial situation, in the violent way in which it has developed, will oblige all of us to share the burden," he said.
There has been debate in Cyprus over whether the country would be better off leaving the euro and returning to its old currency, the Cypriot pound.
Earlier this week the head of the Orthodox Church in Cyprus said the euro was doomed and Cyprus would be better off going it alone.
“The euro cannot last. I’m not saying that it will crumble tomorrow but with the brains that they have in Brussels, it is certain that it will not last in the long term, and the best thing is to think about how to escape it,” said Archbishop Chrysostomos II.
But most bankers, business lobbies and politicians are opposed to the idea.
Andreas Pittas, a prominent businessman who owns a large pharmaceutical company, said a return to the pound would be disastrous. “It would simply ruin the business world of Cyprus. It would simply kill the economy,” he told The Cyprus Weekly newspaper.
Alexis Antoniades, an economist from Princeton University, said that returning to the Cyprus pound would be a problem because as an island, Cyprus imports most of its goods, and they would become more expensive.
But he said it should not be ruled out altogether. “Maybe defaulting on its euro debts and going solo with the Cypriot pound will help the economy regain its competitiveness and start from a clean slate. Going back to an independent currency may be the least painful of the various difficult operations.”
Banks opened as normal yesterday, a day after they had reopened after being shut for nearly two weeks to avert a run on deposits.
Outside a branch of Laiki Bank in Nicosia, Doros Kakas, a 50-year-old businessman who lived in London for more than 20 years, said he was one of the fortunate ones, having moved most of his savings to the UK some time ago.
“I’m lucky. Some people in Laiki have lost everything. I’m worried that Spain and Italy will go the way of Cyprus. Then what happens to France, Germany, England? Are we all going down ? ”
This just bears repeating.......
http://www.zerohedge.com/news/2013-03-29/oooops
Oooops...
After reading this memo from the Central Bank of Cyprus sent to bank CEOs on February 11, arguably to put them at ease, all we can say is "Oooops"...
We'll ignore the contents of the memo, including such statements that "restricting the property rights of depositors" is unconstitutional - that is after all for the people of Cyprus to opine on (we did however have a hearty laugh upon learning that there is a European Convention of Human Rights),
As for the FT article referenced? The following, from February 10, which references a "confidential memo" which foretold the events from two weeks ago with absolute precision :
A radical new option for the financial rescue of Cyprus would force losses on uninsured depositors in Cypriot banks, as well as investors in the country’s sovereign bonds, according to a confidential memorandum prepared ahead of Monday’s meeting of eurozone finance ministers.The proposal for a “bail-in” of investors and depositors, and drastic shrinking of the Cypriot banking sector, is one of three options put forward as alternatives to a full-scale bailout. The ministers are trying to agree a rescue plan by March, to follow the presidential elections in Cyprus later this month.By “bailing in” uninsured bank depositors, it would also involve more foreign investors, especially from Russia, some of whom have used Cyprus as a tax haven in recent years. That would answer criticism from Berlin in particular, where politicians are calling for more drastic action to stop the island being used for money laundering and tax evasion.Labelled “strictly confidential” and distributed to eurozone officials last week, the memo says the radical version of the plan – including a “haircut” of 50 per cent on sovereign bonds – would shrink the Cypriot financial sector, now nearly eight times larger than the island’s economy, by about one-third by 2015.Senior EU officials who have seen the document cautioned that imposing losses on bank depositors and a sovereign debt restructuring remain unlikely. Underlining the dissuasive language in the memo, they said that bailing in depositors was never considered in previous eurozone bailouts because of concern that it could lead to bank runs in other financially fragile countries.But the authors warn such drastic action could restart contagion in eurozone financial markets...
So far the contagion has been mostly contained, courtesy of epic intervention on behalf of the BIS to keep the EUR stable for the past two weeks. Once again, we doubt this will persist.
At least at this point we know that a Cyprus sovereign debt haircut of 50%, which is noted on the memo as the missing piece to the "sustainability" puzzle, is next.
In the meantime, dear citizens of the world, please enjoy as your central bankers lie to you each and every day, and never forget that everything is under control.
Courtesy of SigmaTV, h/t John Johns, andYiannis Mouzakis
http://english.capital.gr/News.asp?id=1760341
Open Europe: Cyprus kept in the euro, but at what cost? |
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The most positive aspect of Eurogroup’s deal on Cyprus was that a deal was reached and that some steps have been taken to counter moral hazard.
According to Open Europe΄s flash analysis, however, overall, this is a bad deal for Cyprus and the Cypriot population. Cypriot GDP is likely to collapse in the wake of the deal with the possible capital controls hampering the functioning of the economy. The large loan from the eurozone will push debt up to unsustainable levels while the austerity accompanying it (along with the bank restructuring plan) will increase unemployment and cause social tension. There is a strong chance Cyprus could become a zombie economy – reliant on eurozone and central bank funding, with little hope of economic growth, Open Europe reported.
Meanwhile, the country will remain at the edge of the single currency as tensions increase between members with Germany, the ECB and the IMF now looking intent on a more radical approach to the crisis.
The eurozone took this one down to the wire. But after a week of intense back and forth negotiations, a deal was reached on the Cypriot bailout. Below Open Europe lays out the key points of the deal (the ones that are known, there are plenty of grey areas remaining) and our key reactions to the deal. Key points of the deal: • Laiki bank will be fully resolved – it will be split into a good bank and bad bank. The good bank will merge with the Bank of Cyprus (which will also take on Laiki’s circa €8bn Emergency Liquidity Assistance – a last-resort funding system outside the usual ECB operations). The bad bank will be wound down over time with all uninsured depositors (over €100,000) taking significant losses (no percentage yet but some could lose all their money above the threshold). • The Bank of Cyprus will be recapitalised using a debt to equity swap and the transfer of assets from Laiki. Uninsured depositors will take large hits in this process – again no percentage but reports suggest up to 40%. • These actions will be taken using the new bank restructuring plan passed in the Cypriot Parliament on Friday. Crucially, no further vote will be needed in the Cypriot parliament since there is no direct deposit levy. • The banks will not receive any of the €10bn bailout money, the entire recapitalisation will be done using the tools outlined above. • Not clear when the banks will reopen but significant capital controls are likely to be in place, creating a risk of Cypriot euros being “localised”. • Further tax increases may be included in the detailed plan to be drawn up between the two sides. What does this deal mean for Europe? 1. Europe once again sidestepped democratic procedure to secure a deal: By removing the deposit levy and forcing losses on depositors through the bank restructuring the eurozone was able to dodge a tricky second vote in the Cypriot Parliament. Although the bank restructuring proposals were approved in the Parliament on Friday, it is not clear that all Cypriot MPs were fully aware of how far the restructuring tools could be pushed. However, it’s likely that the final deal that will actually activate the bailout loan – the Memorandum of Understanding – will need approval of the Cypriot Parliament, so there may be another vote yet to come. Parliamentary approval is not guaranteed but voting it down would again be close to a vote to leave the euro. 2. A change in tack from Germany and the ECB: Germany has made it clear that it is no longer willing to foot the bill for extensive bailouts without the recipient country taking a share of the burden and making some radical changes. The ECB, by setting an ultimatum, has signalled that it is willing to use the significant leverage and control which it has to force what it sees as the desirable outcome, meaning it is becoming an increasingly political actor (which its mandate does not allow). In combination with the sense of unfairness that has been built on all sides, this could serve to entrench the North-South standoff in the Eurozone, making future talks trickier. 3. Will the Troika break up? Reports overnight and throughout the week have shown that this relationship has become increasingly strained, particularly between the IMF and the European Commission. Some strains were visible also over the Greek debt sustainability analysis, but looks to be far worse this time around. With Germany and the northern countries insistent on the IMF’s continued involvement there could be further conflict. Any future bailout deals will likely remain strained because of this. What does this deal mean for Cyprus? 1. Despite avoiding taxing small depositors, political upheaval looks likely: Although the most controversial aspect of the original plan was dropped there will likely be some political fallout. Ultimately, the government in Cyprus has been shown up by the crisis, with both the Finance Minister and President reportedly threatening to resign at various stages. Furthermore, the bank restructuring will likely cause significant unemployment. 2. The standard of living and the wider economy could collapse: Cyprus’ position as a financial centre could be over. There are few other alternatives for growth. One option that remains is tourism, but with a significantly overvalued currency it is not clear to what extent Cyprus can take advantage of this. The capital controls will severely hamper liquidity in the economy, while it will be very difficult for the small island to trade with the rest of the world (it is far from self-sufficient). The collapse in GDP could be anywhere between 5% and 10% this year, depending on how long capital controls are imposed, while the resulting collapse in tax revenue could make the government’s position worse. There is a strong chance Cyprus could become a zombie economy – reliant on eurozone and ECB funding to function, possibly requiring further bailouts. 3. The capital controls will keep Cyprus teetering at the edge of the euro: As we noted over the weekend, these controls are severe and could de facto lead to Cyprus being seen as out of the euro. Ultimately, money is no longer fungible between Cyprus and the rest of the Eurozone and, at this point in time, it’s hard to argue that a euro in Cyprus is worth the same as a euro elsewhere. The real problem though may not be imposing the controls but removing them – Iceland still has capital controls in place, five years after it installed them (despite having the advantage of a devalued currency). 4. Is Cypriot debt sustainable? A key goal throughout these negotiations has been to make Cypriot debt sustainable (unlike under the Greek bailouts). Open Europe does not believe this has been achieved due to the likely collapse in GDP noted above. A €10bn bailout will push Cypriot debt to GDP to 140% - if Cypriot GDP falls by just 5% this year, that rises to 148%. What is the geopolitical fallout of this deal? There is yet to be a clear reaction from Russia but Russian depositors are likely to be hit hard by this deal. Russia’s First Deputy Prime Minister Igor Shuvalov has suggested today that an extension of the €2.5bn loan given to Cyprus is not guaranteed – something which the eurozone indicated was necessary last night. Separately, Russia remains the key energy supplier for most of the EU and has already issued veiled threats around this deal – such as a withdrawal of money from the EU and a switch-away from euro currency reserves. Central banks once again dodge losses: Overnight it became clear that the ECB and IMF were insistent that the ELA must be moved from Laiki bank to the Bank of Cyprus as part of the deal. The main reason for this must be to avoid the Cypriot Central Bank taking losses on the ELA, which would have been counterproductive as it would have to have been recapped by the Cypriot government, a cost which would need to be added to the bailout bill. This episode does highlight that the assets pledged as collateral at the ELA are basically worthless and that avoiding central bank losses will always be a key objective in any bailout negotiations. Worryingly, once the banks reopen (capital controls notwithstanding) money will likely flow out, leading to an increase in ELA and reliance on central bank funding. Are there any positives from this deal? • The main positive is that a deal was finally reached, the alternative would likely have been messy for the eurozone and the EU. • There is some reduction in moral hazard, since those who invested in the large undercapitalised banks are footing the bill – as opposed to all depositors. • Some trust in terms of the deposit guarantee below €100,000 may have been restored. • Senior bank bondholders in Laiki and possibly Bank of Cyprus will be bailed in (taking losses) – although this may not raise much cash, it is the correct order in which to restructure the banks. These small points will provide little comfort as the Cypriot population endures the harsh reality of rising unemployment, fiscal consolidation, private sector stagnation and internal devaluation, all while under stringent capital controls. |
And note sly Greece is trying to create its own " Too Big To Fail Bank " ( and someone at the troika finally woke up and figured out the risks inherent in such a huge bank relative to Greece's GDP - think of what just went down in cyprus with their two big banks ) and is trying to stop that in its tracks......
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