Cyprus and Spain agreed with the troika to steal 40% of deposits in Cyprus (from deposits larger than 100K Euros) and at least that much in Spain. The thefts are profoundly disturbing on several levels. First, the thefts are justified on the grounds that this is not a tax and, therefore, no authorization is needed other than the OK of the governments involved. The moves bring into question the contracts between Depositors and the banks. You simply can not trust them. Only gold and silver in the hand can be regarded as safe from govt confiscation.
While, the stock markets of Europe are reacting positively for now, the moves are inherently deflationary and disruptive. What next? More of the same in Italy and eventually in the United States?
Monday, March 25, 2013
Saturday, March 23, 2013
Cyprus: what is a Depositor?
Debate is raging within the EU and the IMF as to the definition of "Depositor." The question came to the fore in connection with the attempted bank robbery in Cyprus.
For centuries a Depositor was understood to mean an owner of money on deposit (meaning safe keeping). Deposits below a certain limit were insured, so if the bank failed, the Depositor would have the money returned.
The EU and the IMF had attempted to redefine a "Depositor" as an "Investor" in the bank. Under this new definition if the bank encountered difficulties due to losses, the losses would be made whole from the deposits of Depositors being treated as Investors.
The new definition does away with the concept of insured deposits. Will this lead to bank runs? Too early to tell.
For centuries a Depositor was understood to mean an owner of money on deposit (meaning safe keeping). Deposits below a certain limit were insured, so if the bank failed, the Depositor would have the money returned.
The EU and the IMF had attempted to redefine a "Depositor" as an "Investor" in the bank. Under this new definition if the bank encountered difficulties due to losses, the losses would be made whole from the deposits of Depositors being treated as Investors.
The new definition does away with the concept of insured deposits. Will this lead to bank runs? Too early to tell.
Cyprus: an example of Contagion.
Cyprus is a small country, its economy totals roughly E18B/year. The Country has two major banks: The Bank of Cyprus and Cyprus Popular Bank. Cyprus Popular Bank, founded in 1901 as a small savings bank, operates in Cyprus, Greece, the U.K., Ukraine, Russia, Romania, Serbia, Malta and China through 439 branches, servicing 1.35 million customers, according to information on its website. The total bank deposits in these two banks totaled E126B, of which the E31B was Russian money(some people put the Russian deposits at E120B).
So, what is the problem? Cyprus Popular posted a net loss of E3.65B for 2011 and E1.56B for the first 9 months of 2012. (I have not seen the figures on the Bank of Cyprus). What happened? Well, remember the "haircut" depositors in Greek banks had to take to avoid Greek defaults? While European banks were allowed to avoid the haircut, Cypriot banks took the brunt. Thus, we can truly say that the Cypriot banking crisis is due to the decisions of the EU robbing the Cypriot banks while sparing the EU banks . To add insult to injury, Michael Meister, deputy parliamentary leader of Merkel’s CDU, told BBC Radio 4’sToday program: "Cyprus is living in an illusion,”. “They have to restructure the whole economy, restructure the banking sector and until now I don’t see the Cyprus people and politicians agreeing on this.”
That's why you see Cypriots demonstrating.
Cypriot legislators are rushing to comply with EU orders. Part of the orders will spread the contagion further down the line. Deposits larger that E100,00 at Cyprus Popular will be frozen untill the govt decides how much of a haircut they will have take to satisfy the EU.
So, the Greek crisis will leave its footprint far and wide.
So, what is the problem? Cyprus Popular posted a net loss of E3.65B for 2011 and E1.56B for the first 9 months of 2012. (I have not seen the figures on the Bank of Cyprus). What happened? Well, remember the "haircut" depositors in Greek banks had to take to avoid Greek defaults? While European banks were allowed to avoid the haircut, Cypriot banks took the brunt. Thus, we can truly say that the Cypriot banking crisis is due to the decisions of the EU robbing the Cypriot banks while sparing the EU banks . To add insult to injury, Michael Meister, deputy parliamentary leader of Merkel’s CDU, told BBC Radio 4’sToday program: "Cyprus is living in an illusion,”. “They have to restructure the whole economy, restructure the banking sector and until now I don’t see the Cyprus people and politicians agreeing on this.”
That's why you see Cypriots demonstrating.
Cypriot legislators are rushing to comply with EU orders. Part of the orders will spread the contagion further down the line. Deposits larger that E100,00 at Cyprus Popular will be frozen untill the govt decides how much of a haircut they will have take to satisfy the EU.
So, the Greek crisis will leave its footprint far and wide.
Thursday, March 21, 2013
Update on Cyprus. What is extend and pretend?
European and other banks are propped up by the "extend and pretend" strategy. Bad loans are carried as if they were good(and credit is extended to the bank) and that's the pretend part. The day comes when the bank needs to make a payment and it can't. That's where the Cypriot banks are today.
The troika extended the time the banks need to come up with the funds. This usually requires a banking holiday. The two banks were supposed to open this last Tuesday, then today and the holiday is extended to next Monday. There is also talk of even further extension.
The contagion works like this. Banks owe depositors, who in turn owe other depositors and creditors. When the flow from a bank is interrupted, everyone if the flow suffers losses. Consequences can be severe as well as unexpected. For example, before unification a West German bank (Herstatt) went bankrupt and the interaction in the flow made the Franklin National Bank in America insolvent. That is the contagion part.
The troika extended the time the banks need to come up with the funds. This usually requires a banking holiday. The two banks were supposed to open this last Tuesday, then today and the holiday is extended to next Monday. There is also talk of even further extension.
The contagion works like this. Banks owe depositors, who in turn owe other depositors and creditors. When the flow from a bank is interrupted, everyone if the flow suffers losses. Consequences can be severe as well as unexpected. For example, before unification a West German bank (Herstatt) went bankrupt and the interaction in the flow made the Franklin National Bank in America insolvent. That is the contagion part.
Is there a point in correcting the Drive-by-Media?
Today's headlines are about the "improving" economic indicators. It is pointed out that new applications for unemployment are nearly flat, but the two improvements have to do with housing and the Stock Market. In other words, all that pumping is buoying the Stock Market and pushing house sales. Thirty year mortgage interest has dropped now to 3.54% and anyone with money is buying homes.
Is that a good thing? Not really. Today's low interest loans will show up as "problem loans" in the banks' ledgers in years to come.
How about manufacturing and consumer sentiment? Nope, not those.And that is why the FED keeps pumping.
Is that a good thing? Not really. Today's low interest loans will show up as "problem loans" in the banks' ledgers in years to come.
How about manufacturing and consumer sentiment? Nope, not those.And that is why the FED keeps pumping.
Cyprus options: Nothing good.
The nature of the problem:
The two main Cypriot banks are insolvent and need E17B to continue. They appealed to the 'troika' (the IMF, the ECB and the EU) to get the money. The troika replied that they are willing to lend E10B, but Cyprus has to come up with E7B.
The original solution:
To clip every deposit a certain percentage as a 'tax.'
Status: Voted down by Cypriot Parliament. Bank holiday freezes accounts.
Options left now:
1. Try to clip unsecured accounts. Only raises E200M.
2. Try to mortgage gas fields in Mediterranean. Difficult to gage how much these are worth. Takes too much time.
3. Try to get a direct loan from Russia. Very problematic. The Russians are not keen to do this and the Europrans aren't either.
4. Raid Cyprus' pension funds as done in Ireland. Doable, but may not be enough.
Consequences: If this can't be papered over, Cyprus will melt down financially. At stake are almost $500B (the contagion) or E30B in accounts
The two main Cypriot banks are insolvent and need E17B to continue. They appealed to the 'troika' (the IMF, the ECB and the EU) to get the money. The troika replied that they are willing to lend E10B, but Cyprus has to come up with E7B.
The original solution:
To clip every deposit a certain percentage as a 'tax.'
Status: Voted down by Cypriot Parliament. Bank holiday freezes accounts.
Options left now:
1. Try to clip unsecured accounts. Only raises E200M.
2. Try to mortgage gas fields in Mediterranean. Difficult to gage how much these are worth. Takes too much time.
3. Try to get a direct loan from Russia. Very problematic. The Russians are not keen to do this and the Europrans aren't either.
4. Raid Cyprus' pension funds as done in Ireland. Doable, but may not be enough.
Consequences: If this can't be papered over, Cyprus will melt down financially. At stake are almost $500B (the contagion) or E30B in accounts
Wednesday, March 20, 2013
Cyprus: has the IMF made a huge mistake?
IMHO, YES and YES.
Mistake #1.
In spite of the false reports of the Drive-by-Media (also known as 'Lame Stream') there was more money at stake than the E5B - much more. Cyprus is used by the Russians as their own Switzerland and between 100-500B Euros are stashed there by former and current Security Apparat officials, plus whatever the Russians want to spend off budget. It is one thing to shout imprecations at the Russian Bear (from a safe distance), it is not so safe to try to swipe their pocket book. The IMF, and by implication Washington, created this confrontation with Russia and Putin and the Cypriot Parliament voted it down. No doubt, the Cypriots were told what would happen to them if they went along with the proposed theft.
Mistake #2.
The IMF (and by implication the FED) was trying to change the practice of how the bailouts were done. To suddenly confiscate a portion of people's money as a requirement challenged not only procedures used to conduct the bailouts, but undermined the integrity of the banking system. The moves the IMF wanted went against all the agreements and promises made about the banks. Furthermore, the IMF proposal puts Europe one step away from a bank run.
Mistake #3.
By defying the IMF and the EU, Cyprus puts the question to the EU: you want us IN or OUT? A default by Cyprus will start the contagion and possible bank runs and the unraveling of the EU.
We live in interesting times.
Mistake #1.
In spite of the false reports of the Drive-by-Media (also known as 'Lame Stream') there was more money at stake than the E5B - much more. Cyprus is used by the Russians as their own Switzerland and between 100-500B Euros are stashed there by former and current Security Apparat officials, plus whatever the Russians want to spend off budget. It is one thing to shout imprecations at the Russian Bear (from a safe distance), it is not so safe to try to swipe their pocket book. The IMF, and by implication Washington, created this confrontation with Russia and Putin and the Cypriot Parliament voted it down. No doubt, the Cypriots were told what would happen to them if they went along with the proposed theft.
Mistake #2.
The IMF (and by implication the FED) was trying to change the practice of how the bailouts were done. To suddenly confiscate a portion of people's money as a requirement challenged not only procedures used to conduct the bailouts, but undermined the integrity of the banking system. The moves the IMF wanted went against all the agreements and promises made about the banks. Furthermore, the IMF proposal puts Europe one step away from a bank run.
Mistake #3.
By defying the IMF and the EU, Cyprus puts the question to the EU: you want us IN or OUT? A default by Cyprus will start the contagion and possible bank runs and the unraveling of the EU.
We live in interesting times.
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