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Monday, March 18, 2013

Cyprus, The Shot Fired At Rome

My brother sent me an email saying I should blog on the Cyprus debacle, so I will. Although I won't without being honest, so this will be an ugly, almost vicious post.

Europe has learned nothing. They deserve what they are going to get and they are going to get it good and hard. The idea of a united Europe and a Common Market with equal rights under the law has already been deeply betrayed, and this now makes it clear that there are those who will be sent to the wall in order to send a message to others. 

There is nothing of justice in this. Cyprus is being crucified with Easter coming up, and it is being done to put pressure on the Grillinis in Italy. 

This goes back to the profoundly cynical and indeed evil dealings with Greece. It is true that Greece was originally the malefactor, but for their own purposes, the EU Powers That Be (EUPTB) made the disaster much worse. Instead of permitting Greece to default in a structured way, which would have meant that many banks and other finance cos in the rest of Europe would have had losses they would have had to recognize, they kept the ball rolling in the old-fashioned banking way - they rolled the debt and added more. Of course rough conditions were imposed as a price, so the Greek economy was deeply impacted. But all of that, while clearly a facade, was not evil. Greece had gotten themselves into the situation.

No, what was evil was how they essentially stole money from all the innocents to lower the cost of their facade. Originally, a write-off of about 30% of Greek government debt was necessary, plus various austerity measures. Certainly 40% would have been very sufficient. By issuing new debt and then making that debt primary (preserving it from losses), the EUPTB forced massive losses upon the innocent holders of Greek debt - somewhere around 85%, by my reckoning. More for some, because if you needed the funds you had in these instruments, there was a time when some of them were selling for 10 or 12%.

So this wiped out pensioners, banks, etc. And it was cruel, dishonest and unnecessary. By magnifying the losses to good-faith holders of the debt, it is true that ECB and Germany did not have to pay the cost of the facade that they had built for their own purposes. But by wiping out pension funds, pensioners and all other private holders, they dropped a bunch of fiscal bowling balls that are still rolling around Europe, knocking over those still standing, not to mention utterly destroying the lives of some very helpless and quite innocent people. It is one thing to lose 40% of your retirement funds. It is quite another to lose 85%.

The moment that this Greek deal was worked out, some very large banking institutions in Cyprus became insolvent. The country is tiny, and does not have much internal industry other than goats and rich people. So the strategy Cyprus has followed for decades is low corporate taxes, which attracts money in. The attempt was to be a sunnier Switzerland. However there is not much to invest in inside the country, so that money is invested outside the country, and there were heavy investments in Greek bonds.

Of course, there were other much more significant consequences. The Greek deal meant that every private holder of, say, Spanish and Italian bonds now had to recalculate their potential losses. To relieve the pressure, the ECB had been buying bonds, but the relief then backfired, because if intervention came at the cost of all private debt holders being junior to the "official" debt holders (all losses being handed to them), then obviously the ECB buying bonds was no protection at all, and indeed it made things much worse. If a country has a structural unpayable debt of say 15%, and protected interests try to hide this by buying 20% of the bonds, the remaining 80% will eventually have to take a larger percentage writeoff, and by allowing the structural default to be hidden for longer, it will be larger. Thus what was a 15% potential loss when you bought the bonds may easily turn into a 30% or 40% loss. And in fact, Italy's structural default is now about 35%. Istat just quietly released the information that the economy contracted not 2.4% in 2012, but 2.8%. That takes Italy's debt to GDP ratio to 128%, with a guarantee that it gets worse in the lucky year of 2013.

So the EUPTB promised that the Greek debacle would never be inflicted again. That Greece had been unique, and that in the future all debt holders from bailouts would be treated equally. Further, the ECB quietly bailed out Cyprus.

It is true that in Cyprus, seizing bank deposits is not technically stealing money from bondholders. If you are a Cypriot who had money in the bank to pay your property or income taxes, it is even worse.

So why was this done? Well, first we  have to understand that the ECB precipitated the "crisis" by abruptly withdrawing its liquidity support. It was effectively a commando raid launched under cover of night. This then forced the Cyprus government onto the rocks. They have no choice but to somehow comply. They clearly realize that they cannot impose losses on the small deposit holders, because if they do, there will be a massive run on the banks as soon as they open and a bunch of smaller banks that are the equivalent of credit unions, and that had no exposure to the Greek losses, will be promptly wiped out. Instant, massive depression. The bank holiday will be extended this week until the legislature can try to figure out some way to save something from the Euroflames.

Cyprus is effectively done. Wiped out. The other condition was that Cyprus has to raise corporate taxes. It's a deliberate attack - the fiscal equivalent of carpet bombing the place. Not only has the troika not saved itself from losses, it is now facing a much larger loss than was necessary to cover the Cypriot situation.

So why? WHY? Well, those damnable truth-telling Grillinis in Italy are a problem. This is a direct attempt to put pressure on them to join with Bersani's bloc and walk the Monti line, to keep the lie going for a few more crucial years. Instead, what was happening was that Bersani's bloc was wandering over to walk the Grillini line. There is nothing that can effectively be used to exert pressure on the recalcitrant populace like a threat to seize their money. The ECB, after refusing to say what its Italian bond  holdings were for years, had suddenly disclosed them before the election. That gentle hint that the ECB could destroy Italy's finances any time it wished by simply selling those bonds was drowned out by the Grillinis and domestic suffering, so now the ECB has joined the internal domestic political affray by nailing the bleeding carcasses of a bunch of entirely innocent Cypriots to some stakes in public squares in Rome. It's the Nero solution to public disorder.

The strangest part about this is that the Grillinis actually have some ideas that could work. For example, a dual currency system would effectively allow internal devaluation without crushing the economy, thus boosting exports. Of course Italy must default on some of its debt, but it is not yet a basket case. Under the gentle, benevolent hand of the EU it would get there, and for some reason, the Italians, who in effect invented modern banking, seem disinclined to hold an auto da fe and fling half the country into the flames.

Here we must grimly contemplate the terrifying reality that Europe is now a House of Destruction, a Temple of Wrath, in which the babes and the Roma must be sacrificed to Baal. (That's because for some reason they seem to be short on the traditional victims - the Jews.)

The reason we must concede this is that instead of allowing troubled countries to actually work out their problems, which always requires a public accounting and write-down, the EUPTB are now actively frustrating attempts to deal with it. Thus, the original accusations against Greece of financial dishonesty (which were true) are now the mandates issued to various fiscally unstable countries.

This is the reason that Portugal bonds reacted so badly to the War on Cyprus is that they too are a small country which can be annihilated without meaningful impact on the big Euro countries.

Everything you see now in Europe is a lie. Perhaps the Euro could not be saved. Perhaps it could have been. But now the Common Market is deeply jeopardized. The hatred, fear and distrust which are now being generated will not die for generations to come.

I think that in the end Germany, its manufacturing client states of the Czech Republic and Poland, and the northern Republics will form a sort of union. That would leave the entire Eastern bloc forced to cleave to that Novo-Hanseatic League as protection from Russia, to ensure that Putin doesn't start wrestling bears in the forests of Latvia.

The question is whether France will go with the north or go with the south. Germany needs the larger army of France. But France may not wish to be the client state of Germany, which in effect it would be.Hollande has not been a success for France, and the reality is that the EU problems are pushing Germany's economy to restructure around exports to Asia and weapons exports. Oh, isn't this going to be fun!

This post needs a soundtrack. Here it is:

The evil you do will live after you.


Coming soon to a credit union or 401(k) near you...except in our case they'll probably trade us non-interest-bearing bonds in return for our cash.

Oh, and sporkfed; This is what a wealth tax looks like. First they realize they can't go after real assets without destroying the economy, so they go after the "big" liquid assets. Then they realize that all the "big" liquid assets melted away instantaneously, so they go after Grandma's bank account.

Neil - no, I think the proposal was to trade us 30 year Treasuries with say an interest rate of 2 or 3%. Who could not be excited at such a prospect?

This is exactly what a "wealth" tax looks like, but the problem with wealth taxes is that they turn regressive with a speed approaching infinity.
I listened to CBS cover this today, during their 90 second spot. They didn't say a word about money being confiscated from the accounts. They said there was a "proposal" to "tax" some accounts. Of course conservative are expecting 401ks to be taxed or confiscated in this country, and would not be too surprised if something like this was tried here.

I don't see this ending well.
a commenter on Mish's site posted a link to this pdf file: http://www.ucy.ac.cy/data/ecorece/STEPHANOU_123-130.pdf

Seems to be some good info on the banking system in Cyprus.
Teri, thank you. That is good info indeed.

The fundamental problem for Cyprus is that the banking sector is large and the debt is not disproportionate, therefore the banking sector was always going to have to invest its reserves outside the country.

The connections between it and Greece are one reason why there was such involvement there.
Absolute tour de force post, MoM!

A lot of us are beginning to think this is 2013's Bear Stearns moment.
This is not the end. This is not the beginning of the end. It is, perhaps, the end of the beginning.

The "Tax" idea will play well. Like "Pay their fair share".

Will anyone write me odds on Obama getting a 3rd term?


cf, I don't know if it's the end of the beginning or the beginning of the end, but the game has certainly changed. M_O_M is dead-on in her post--in forcing a tax haven to raise taxes they showed the world they're willing to destroy a nation's economy in order to retain power. They'll do the same to Italy, too.

This has nothing to do with the greater good anymore. The mask is off, for anyone who cares to look.

CF - regarding the third term, wouldn't you need the army's support? I don't think he would get it.

But as to the thrust of the question - yes, we are watching democracy as an institution fold before us. It would be pure complacency not to think about such issues.
TJ - odd that you should mention Bear Stearns. I've been thinking about it all weekend. I don't think Cyprus is a problem for the markets - I think the implications of what is being done to Cyprus are a political and ethical problem for Europe, and that the eventual market repercussions arise from that.

One of the reasons that Bear Stearns was singled out for punitive treatment, I do believe, was its earlier failure to participate in a bailout. So a justification for the Cyprus action has been cobbled up, but it does not stand against the facts, such as those contained in the paper Teri provided.
Neil & CF (Churchill's initial, at least, must be capitalized!):

In the wake of WWII, Europe did not believe in justice. Who could? Justice could only have meant more destruction. It did formulate a belief in humane mercy that carried it a long way.

I think the Cyprus sacrifice will destroy that belief too. What else can remain? How can the smaller countries believe in the common good?

There are cultural and ethical principles that often, over the longer run, have more to do with economies and the fates of peoples than mere numbers.

I think what has been killed here was Europe's heart. Soros' dream just died an unnatural and unnecessary death. This is a horrible end to a hopeful epoch.

So now we are back to the Congress of Vienna, in which the fates of the smaller countries are to be instruments of the diplomacy of the larger countries. Unmercifully so.
. To place bond holders above depositors and ultimately above tax payers is immoral. To structure the tax code regressively and then retroactively eliminate the benefits promised while enabling the banks and MNC's to feed
at the public trough is also immoral. David Stockman is
right on this issue, the middle and lower classes don't have the means to dig us out of this hole.

So a couple of interesting things. First, why are they not taking out the debt holders? Seems strange. Also, sounds as if there's significant money laundering/Criminal Russian funds held in Cypress. Finally I think the banks were paying above market rates for deposits. If that's the case I'm a bit less sympathetic to depositors at these institutions.You accepted the high return, now you pay the price. For instance if you received 5% on your deposit for the last 2 years and there's a 10% tax, did you really lose anything?
CF - when you have a 4%? (I know it's way below 10%) corporate tax rate, you are going to get a lot of foreign money in.

There's dirty Russian money everywhere. I do not believe that the large Cyprus banks are that much different than many other institutions. Call me cynical, but what is left of the Greek banking system but a conduit to wash Russian funds?

However, if the problem were actually money laundering, the solutions to that are well-known. But that is not the problem being addressed here. When it turns out that Wachovia is allowing use of its commercial account to defraud even the holders of its personal accounts, the appropriate regulatory response has never before been deemed to fine the holders of the personal accounts.

There was a pretty strong division between the coops in Cyprus and the big boys. The idea of coming after the absolutely innocent schmuck who has his money in a coop precisely to avoid risk (low return) and grabbing his money violates all principles of dealing with risk.

On the other hand, various persons had suggested the idea of grabbing bank deposits as a way of cutting down sovereign debt before. Not in this context.

It's clear that the failure of the Italian technocracy conjoined with Germany's absolute determination to prevent a unified system of bank deposit insurance (which they have already agreed to in principle) is causing the rule of law in Europe to be converted to the law of right makes might.

The ECB provides unlimited liquidity and will do "whatever it takes", but this is imposed upon the Cyprus population?

Orphanides is pointing out the obvious in this interview.

Also - regarding rates: I think deposit rates in Cyprus averaged under 5% at their peak.

In general, money launderers pay the bank for the service. The bank does not pay them. Therefore I strongly suspect that the real Russian moolah moved on to other quarters over the last six months, and that in fact intensive money laundering wasn't that much of a factor in Cyprus.

Cyprus rates have risen due to risk concerns since the Greek massacre. Therefore there were recently, I believe, some hot money premium rates offered.

PE across Europe was deeply, deeply into dirty Russian money. I recall watching a recording of a PE banker conference in what? 2007? Austrians and Germans. They didn't even blush about what they were doing. It is something to hear a guy sitting there and saying that you could put an accountant in a Turkish enterprise, but that you couldn't do it in a Russian enterprise, because the accountant would be killed. Nor a manager. Don't tell me that Raiffeisen and Commerzbank don't have piles of essentially dirty money sitting in them.

Cyprus is a corporate tax shelter. It is not even in the same class as Luxembourg. Juncker must be pissing his britches about now.

There is no question that Cyprus is being deliberately taken down as an example to others.

So Schaeuble is giving German interviews saying that deposit insurance is only as good as the credit of the sovereign. That's not what Germany agreed to, or what others thought they agreed to.

Still, the obvious is that for many people their banking account is merely the place where they keep their money to pay bills. It rolls in and it rolls out. Those types don't get the returns on investment accounts. If you seize their money, you just take their money. No BS justification works here.

Even if the Cyprus legislature decides not to do it, Cyprus is now through. Money will exit and the ECB will yank. They cannot afford to let Cyprus live - the object is to beat Italy into submission. A failure in Cyprus would take the lid of in Italy.

It's no coincidence that all of a sudden there are Germans talking about the good a 15% deposit levy would do for Italy. This is so OBVIOUS:
So, you like jokes?

Translated version.

Note the article was published 3/15.


Heh, I had just put it on my task list for the week to see if I can find an analysis of Luxembourg's capital position. But surely Luxembourg had gotten some sort of tacit dispensation for its fiscal policies. Doesn't it count for something that Benelux is in the heart of the old "cockpit of Europe", and therefore the geopolitical key to the EU?

New Zealand thinks this is a great idea:

The Cyprus Finance Minister resigns but the president won't accept his resignation:

No one seems to have any idea what this all means.
"Money will exit and the ECB will yank. They cannot afford to let Cyprus live"

Gee, I wonder what will take its place in Cyprus? At least Iceland is somewhat remote and isolated.
And as I understand it, Iceland rejected the bailouts, let the banks fail and are recovering.

And they seem to be the only country actually pressing criminal charges against bankers: http://visir.is/nine-people-indicted-in-the-biggest-case-of-its-kind/article/2013130318951
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Straight up comment, no ego. "Well duh!"

Are there people who think the EUZ cares about 0.2% Cyprus? This has always been about Italy. The EUs big error is that 5 Star is gaining in popularity and another election could conceivably give them the PM.

Talk about using a bazooka on a fly. Worse, it was a one shot weapon.

Euros are no longer a currency. How do I know this? Capital controls mean a Euro in Cyprus is worth different than a Euro elsewhere A deposited Euro in Cyprus is worth different than a euro in your hand. The very definitions of what makes a currency.
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