Thursday, March 28, 2013

European rumbling - focus on Germany , France , Slovenia , Spain , Cyprus and Italy !

http://www.zerohedge.com/news/2013-03-28/guest-post-cyprus-deal-and-unraveling-fractional-reserve-banking


Guest Post: The Cyprus Deal And The Unraveling Of Fractional-Reserve Banking

Tyler Durden's picture
Submitted by Tyler Durden on 03/28/2013 19:06 -0400




Authored by Joseph Salerno, originally posted at The Circle Bastiat blog,
The “Cyprus deal” as it has been widely referred to in the media may mark the next to last act in the the slow motion collapse of fractional-reserve banking that began with the implosion of the savings-and-loan industry in the U.S. in the late 1980s. This trend continued with the currency crises in Russia, Mexico, East Asia and Argentina in the 1990s in which fractional-reserve banking played a decisive role. The unraveling of fractional-reserve banking became visible even to the average depositor during the financial meltdown of 2008 that ignited bank runs on some of the largest and most venerable financial institutions in the world. The final collapse was only averted by the multi-trillion dollar bailout of U.S. and foreign banks by the Federal Reserve.
Even more than the unprecedented financial crisis of 2008, however, recent events in Cyprus may have struck the mortal blow to fractional-reserve banking. For fractional reserve banking can only exist for as long as the depositors have complete confidence that regardless of the financial woes that befall the bank entrusted with their “deposits,” they will always be able to withdraw them on demand at par in currency, the ultimate cash of any banking system. Ever since World War Two governmental deposit insurance, backed up by the money-creating powers of the central bank, was seen as the unshakable guarantee that warranted such confidence. In effect, fractional-reserve banking was perceived as 100-percent banking by depositors, who acted as if their money was always “in the bank” thanks to the ability of central banks to conjure up money out of thin air (or in cyberspace). Perversely the various crises involving fractional-reserve banking that struck time and again since the late 1980s only reinforced this belief among depositors, because troubled banks and thrift institutions were always bailed out with alacrity–especially the largest and least stable.
Thus arose the “too-big-to-fail doctrine.”Under this doctrine, uninsured bank depositors and bondholders were generally made whole when large banks failed, because it was widely understood that the confidence in the entire banking system was a frail and evanescent thing that would break and completely dissipate as a result of the failure of even a single large institution.
Getting back to the Cyprus deal, admittedly it is hardly ideal from a free-market point of view. The solution in accord with free markets would not involve restricting deposit withdrawals, imposing fascistic capital controls on domestic residents and foreign investors, and dragooning taxpayers in the rest of the Eurozone into contributing to the bailout to the tune of 10 billion euros.Nonetheless, the deal does convey a salutary message to bank depositors and creditors the world over. It does so by forcing previously untouchable senior bondholders and uninsured depositors in the Cypriot banks to bear part of the cost of the bailout. The bondholders of the two largest banks will be wiped out and it is reported that large depositors (i.e. those holding uninsured accounts exceeding 100,000 euros) at the Laiki Bank may also be completely wiped out, losing up to 4.2 billion euros, while large depositors at the Bank of Cyprus will lose between 30 and 60 percent of their deposits. Small depositors in both banks, who hold insured accounts of up to 100,000 euros, would retain the full value of their deposits.
The happy result will be that depositors, both insured and uninsured, in Europe and throughout the world will become much more cautious or even suspicious in dealing with fractional-reserve banks. They will be poised to grab their money and run at the slightest sign or rumor of instability. This will induce banks to radically alter the sources of the funds they raise to finance loans and investments, moving away from deposit and toward equity and bond financing. As was reported yesterday, this is already expected by many analysts:
One potential spillover from yesterday’s agreement is the knock-on effects for bank funding, analysts said. Banks typically fund themselves with some combination of deposits, equity, senior and subordinate notes and covered bonds, which are backed by a pool of high-quality assets that stay on the lender’s balance sheet.

The consequences of the Cyprus bailout could be that banks will be more likely to use contingent convertible bonds — known as CoCos — to raise money as their ability to encumber assets by issuing covered bonds reaches regulatory limits, said Chris Bowie at Ignis Asset Management Ltd. in London.

“We’d expect to see some deposit flight and a shift in funding towards a combination of covered bonds, real equity and quasi-equity,” said Bowie, who is head of credit portfolio management at Ignis, which oversees about $110 billion.
If this indeed occurs it will be a significant move toward a free-market financial system in which the radical mismatching of the maturities of assets and liabilities in the case of demand deposits is eliminated once and for all. A few more banking crises in the Eurozone– especially one in which insured depositors are made to participate in the so-called “bail-in”–will likely cause the faith in government deposit insurance to completely evaporate and with it confidence in fractional-reserve banking system.
There may then naturally arise on the market a system in which equity, bonds, and genuine time deposits that cannot be redeemed before maturity become the exclusive sources of finance for bank loans and investments. Demand deposits, whether checkable or not, would be segregated in actual deposit banks which maintain 100 percent reserves and provide a range of payments systems from ATMs to debit cards. While this conjecture may we overly optimistic, we are certainly a good deal closer to such an outcome today than we were before the “Cyprus deal” was struck.
Of course we would be closer still if there were no bailout and the full brunt of the bank failures were borne solely by the creditors and depositors of the failed banks rather than partly by taxpayers. The latter solution would have completely and definitively exposed the true nature of fractional-reserve banking for all to see.
http://www.presstv.ir/detail/2013/03/28/295584/austerity-will-lead-to-europe-explosion/
‘Austerity will lead to Europe explosion’
French President Francois Hollande (file photo)
French President Francois Hollande (file photo)
Thu Mar 28, 2013 11:17PM GMT
0
French President Francois Hollande warns that austerity measures will lead to Europe’s explosion as the continent continues to struggle with a protracted debt crisis.


“Austerity will condemn Europe to explode,” President Hollande said in a televised interview on Thursday.

“Prolonging austerity today runs the risk of not cutting deficits and certainly create unpopular governments,” he added.

The Socialist president went on to say that “My priority is employment… My mission is to get France to emerge from the crisis with all means.”

Other European leaders also warned in the past about the negative impacts of the austerity drive in the region.

President of the European Council, Herman Van Rompuy warned of social distress in Europe earlier this month.

Italian caretaker Prime Minister Mario Monti said that European Union member states could face a backlash over the austerity measures.

Europe plunged into financial crisis in early 2008. Insolvency now threatens heavily debt-ridden countries such as Greece, Portugal, Italy, Ireland, and Spain.

The worsening debt crisis has forced EU governments to adopt harsh austerity measures and tough economic reforms, which have triggered massive demonstrations in many European countries.

The long-drawn-out eurozone debt crisis is viewed as a threat not only to Europe, but also many other developed economies in the world.





Two good pieces from the Open Europe blog.....




Thursday, March 28, 2013


Has Germany really gone off the idea of an EU treaty change?


Usually technical meetings behind closed doors in Brussels are pretty dull. However, judging by some of the reports floating around, yesterday’s meeting of the EU Committee of Permanent Representatives (COREPER) may have bucked the trend somewhat. This is the negotiation forum for member states' EU ambassadors - the key guys involved in talks over EU policy. This is where a lot of decisions, de facto, are being made.

As we noted in today’s press summary the UK was outright outvoted on the plans for capital requirements for banks (CRD IV), which entail the controversial caps on bankers' bonuses.

However, though it was already clear that the UK had lost that particular battle, it was the talks over the EU's proposed, and in part agreed, banking union which caught our eye. EU ambassadors failed to reach agreement amid continued North-South divisions, but the reason why is interesting.
      Most media failed to pick up on this, but the WSJ Real Time Brussels blog rightly notes that Germany was strongly pushing for a clearer separation between the ECB's monetary duties and supervisory responsibilities, to avoid a running conflict of interest (see here). The only way this can really happen is to give the supervisory board the final say over supervisory decisions (as opposed to now when it rests with the ECB's Governing Council). This, in turn, requires EU treaty change. The Germans wanted a clear commitment from other member states that this would happen.

      According to the WSJ, Berlin also insisted on giving national parliaments (not just the European Parliament) the right to ask questions and get answers on supervisory policy, and giving states under the single supervisor along with the EP the power to remove the Vice Chairman of the supervisory body.
          A couple of interesting points there. This is an incredibly fluid target but those who say that Germany has 'gone off the idea' of Treaty change - in light of David Cameron's speech where he mentioned EU treaty change as an avenue for reform - clearly haven't quite appreciated the nature of the proposals floating around. Of course, Berlin won't be shouting it from the rooftops ahead of a national elections and with the relationship with France at an all time low (well almost), but in many of the Germans demand on eurozone governance is an implicit acknowledgement that something has to change in the EU's institutional framework (see our table here of the broad proposals being discussed [p.9]).

          The scope (limited or full treaty change), nature (EU treaty or inter-governmental) and timing will be discussed, but it will likely happen sooner or later.


            and......

            Thursday, March 28, 2013


            Spain's credibility suffers another blow as Eurostat spots some creative accounting

            Two weeks ago, we noted on our blogthat the Spanish Tax Agency had delayed around €5bn of tax refunds (due in December 2012) deferring payments to January 2013 instead. This contributed to Spain missing its EU-mandated 2012 deficit target (6.74% of GDP, instead of 6.3% of GDP).

            We wondered whether the sudden increase in tax refunds (up by 82.8% in January 2013 compared to previous year) would not lead the European Commission to start asking some question. Sure enough.

            The EU's statistics office Eurostat has asked Spain to raise its 2012 deficit to 6.98% arguing that Spain was not correctly accounting for tax refunds. Basically, Eurostat rules say tax refunds have to be counted towards the deficit when they are claimed by taxpayers. Spain only includes them when they are paid out.

            This means Spain will have to retroactively revise its deficit figures, going all the way back all to 1995. The difference for 2012 in itself is not huge. And Spain remains unlikely to face sanctions, as the European Commission has now shifted its focus to 'structural' deficit, but not inspiring confidence.

            In an official note published yesterday, the Spanish Budget Ministry tried to blame Eurostat for the revision of the deficit figure, saying it was due to a methodological change "demanded by Eurostat over the past few days".

            But according to a spokeswoman for EU Tax Commissioner Algirdas Semeta quoted byExpansión,
            "Eurostat hasn’t changed its methodology or its rules. It has simply found out that the methodology used by Spain was incorrect."
            Eurostat has realised this only now because,
            "The [spending] pattern suddenly changed…when Spain moved to January 2013 certain payments due in December 2012." 
            Eurostat will publish its final deficit figures on 22 April. Spanish Budget Minister Cristóbal Montoro said this month that, if anything, the 2012 deficit figure of 6.74% of GDP would have been revised downwards. He's been proved wrong once. He can only hope it doesn't happen again.


            and......


            http://www.telegraph.co.uk/finance/financialcrisis/9960610/Slovenia-faces-contagion-from-Cyprus-as-banking-crisis-deepens.html

            7:27PM GMT 28 Mar 2013
            Comments98 Comments
            “Banks are under severe distress,” said International Monetary Fund in its annual health check on the country. Non-performing loans of the Slovenia’s three largest banks reached 20.5pc last year, with a third of all corporate loans turning bad.
            Yields on two-year debt in the Alpine state have tripled over the past week, jumping from 1.2pc to 4.26pc before falling back slightly on Thursday. Ten-year yields have reached a post-EMU high of 6.25pc.
            “The country has lost competitiveness since joining the euro and it’s lead to slow economic collapse. Markets have been very complacent, but it has been clear for a long time that the banks need recapitalisation, and it is not easy to raise money in this climate,” said Lars Christensen from Danske Bank.
            The IMF expects the economy to contract by 2pc this year, following a fall of 2.3pc in 2012. “A negative loop between financial distress, fiscal consolidation and weak corporate balance sheets is prolonging the recession. A credible plan to address these issues is essential to restore confidence and access markets,” it said.
            The new prime minister Alenka Bratusek told the Slovene parliament on Wednesday that the fears are overblown. “Our banking system is stable and safe. Comparisons with Cyprus aren’t valid. Deposits are safe and the government is guaranteeing them.”
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