Iceberg Cyprus Set to Sink Euroland Titanic




Moves to steal money from people’s bank accounts as per the initial audacious Brussels ultimatum to Cyprus, might yet stoke the biggest bank run ever seen in the EU and even collapse the euro, reports suggest.

Cyprus should do an Iceland and jail the bankers

Even if the initial foolish plans (see here) have been dropped, the knock on damage across Europe is not so easily reversed. Effectively Eurogroup finance ministers in Brussels last week told deposit-holders in the European Union: “when we next need money we’ll just take it from your bank accounts although to make it ‘legal’ we’ll call it a tax”.

Effectively this has destroyed the trust on which the fractional reserve banking system rests with impacts the clearly inexperienced Mr Jeroen Dijsselbloem,46, new Dutch chairman of the Eurogroup of finance ministers, failed fully to assess when he tabled the gung ho demands on Cyprus last weekend.

UPDATE March 25: Now its black and white. All deposit holders in the EU face the same smash and grab threat as the banking crisis worsens. The warning could not be clearer.

 

So bad is the week-old Cyprus crisis, that the Internet is alive with frantic warnings to anyone holding a bank account or other investments in the European Union to pull their money out.

 No sympathy from  the French: In a statement to Canal Plus television, French Finance Minister Pierre Moscovici has said Cyprus is a casino economy on the brink of bankcruptcy: To all those who say that we are strangling an entire people, which is immoral, you must nonetheless look at the fact that Cyprus is a casino economy that was on the brink of bankruptcy and we had to, and have to, do something about it… After all, it is a completely rogue economy.

As a result of crass EU handling of the entire debacle, feelings among the citizens of austerity-damaged Europe, are highly inflammable and Germany, seen as the driving force of an austerity-related recession, again finds itself widely and angrily vilified.

The disproportionate, ill-considered and factually disputable remarks above, by France’s Socialist Finance Minister Pierre Moscovici, add fuel to the fire and do little to ameliorate matters. They may of course have something to do with gas exploration concessions off the Cyprus coast held by France’s Total SA. “To date, the Greek Cypriots have awarded licenses for six offshore exploration blocks that could contain up to 40 trillion cubic feet of gas. Aside from Noble, these licenses have gone to Total SA of France and a joint venture between Eni SpA (ENI) of Italy and Korea Gas Corp” according to this article: Mediterranean gas could provide 40% of Europe’s total gas needs.

A sign of the rising tensions caused by the Cyprus smash and grab were seen in a piece by a contributor to Spain’s El Pais newspaper — subsequently retracted and removed from the Internet — who wrote: “Merkel, Like Hitler, Has Declared War On Europe” (“Merkel, como Hitler, ha declarado la guerra al resto del continente, ahora para garantizarse su espacio vital económico.”). In Spain of course youth unemployment currently stands at an unprecedented and explosive 55.5%. The original is still available online here courtesy of a Spanish blogger.

The full translation of this explosive piece by Juan Torres López, professor of Economics at Universidade de Sevilha, is reprinted below courtesy of a commenter on the Zero Hedge site: “It is very significant that one usually talks of ‘punishment’ in reference to the measures that Merkel and her ministers impose on the countries most affected by the crisis. They tell their compatriots that they must punish our irresponsibility, because now the Germans will not pay for our waste and our debts.

“But the reasoning is false because the irresponsible people have not been those that Merkel is determined to punish, but rather the German banks who they protect and those of other countries who lent, with equal irresponsibility, to gain billions. The big European economic groups managed to establish a highly imperfect and asymmetric model of monetary union, which quickly reproduced and enlarged the original inequalities between the economies that it joined.

“Moreover, thanks to their huge investment capacity and the great power of their governments, large northern companies were able to retain many businesses and even entire sectors of peripheral countries, such as Spain. That caused huge trade deficits in the latter and surpluses especially in Germany and to a lesser extent in other countries. In parallel, the policies of successive German governments concentrated more income on top of the social pyramid, increasing its already high level of savings.

“From 1998 to 2008 the wealth of the richest 10% of Germans rose from 45% to 53% of the total, that of the next 40% fell from 46% to 40%, and that of the poorest 50% dropped from 4% to 1%. These circumstances put huge quantities of capital at the disposition of German banks. But instead of dedicating it to improving the German domestic economy and the situation of the lower income levels, they used it (some 704 billion euros through 2009, according to the Bank for International Settlements) to finance the debt of Irish banks, the Spanish property bubble, Greek corporate debt or, to speculate, what they did was to make private debt in peripheral Europe disappear and load German banks with toxic assets (900 billion euros in 2009).

“At the outbreak of the crisis they were seriously weakened, but they succeeded in presenting their insolvency, not as the result of their great recklessness and irresponsibility (to which Merkel never refers), but rather as the result of wasteful spending and public debt in countries whose banks they lent to. The Germans quickly withdrew their money from these countries, but the debt remained in the balance sheets of the indebted banks. Merkel emerged as the champion of German bankers, and to help them launched two strategies:

First, bailouts, sold as if they were aimed at saving countries, but which actually consisted of giving governments money in loans paid by the people, to pass it on to domestic banks so that they could recover as soon as possible, and in turn pay the Germans.

“Second, prevent the ECB from cutting off at the roots the speculative attacks against the debt of the periphery, since the rise in risk premiums of the latter lowers Germany’s cost of financing. Merkel, like Hitler, has declared war on the rest of Europe, this time to secure her economic Lebensraum. She punishes us to protect her big corporations and banks, and also to hide from her electorate the shame of a model that has made the poverty level in her country the highest in the past 20 years, such that 25% of its employees earn less than 9.15 euros per hour, or that half of her population have, as I said, a miserable 1% of the national wealth. The tragedy is the massive collusion between pan-European financial interests that dominate our governments, and that these, rather than defend us with patriotism and dignity, betray us to act as mere bit players of Merkel.”


(See below for more on whether Germany and German banks are really whiter than white.)

Meanwhile Business Insider puts the Cyprus crisis into perspective: “Europe Has A Crisis — And It’s Much Bigger Than Cyprus: This week, Danske Bank economist Frank Øland Hansen warned that France was beginning to look more like a peripheral country than a core one. Not only is the economy sinking, but from a labor cost/competitiveness standpoint, it’s looking PIIGSish…”

When the banks of the Sweden, Norway and Iceland went out of control, the people refused to bail them out, and the economies of all three countries were the better for it. Instead of allowing themselves to be bullied by international investors represented by the IMF and the European Union, the Cypriots who are facing a similar crisis today might want to learn from the Viking example.- People of Cyprus: Follow the Vikings! – George Lakey 

So how has Cyprus, a tiny eastern Mediterranean island accounting for less than one third of one per cent of the total eurozone economy, provoked such turmoil?

Cash, gas and Germany’s September elections essentially.

Cash. To keep its  financial institutions from defaulting: the system in Cyprus needs an immediate injection of some €15.8 billion.  The latest proposal to raise it is that deposit holders with more than €100,000 in the Bank of Cyprus will lose 20% of their money. Savers with more than €100,000 in any other bank will lose 4%, capital controls will be imposed to stop a bank run and the government will set about trying to restructure the banks. The European Central Bank warns it will pull the plug on Cyprus banks by Tuesday morning if parliament in Nicosia fails to ratify whatever deal is finally cobbled together. Late last night (Sunday March 24) tense negotiations were still deadlocked.

 Unsecured Depositors Of The World, Unite… And Get The Hell Out Of These Countries was one of the dramatic headlines on the Zero Hedge website and showing at the last tally 47,340 reads by concerned punters.

Gas. Cyprus sits on vast unexploited natural gas fields which make the island of geo-strategic importance both to the European Union and to Russia currently Germany’s biggest supplier of natural gas. As Matthew O’Brien writes in The Atlantic “Cyprus might have huge natural gas reserves. Upper-end estimates value the hoped-for-reserves at €300 billion, but that’s all they are for now: hoped for. Almost none of the reserves have been proved yet. And besides, even if they do exist, it would still be another decade before they came on line. But this could be enough to save Cyprus now. “

Efforts by Cyprus to pledge future gas revenues and stakes in bringing the reserves on stream in exchange for  a bailout have sparked conflicts and battle cries from all players in the region, not the least Turkey : Turkey warns Cyprus of ‘new crisis’ if gas revenues included in solidarity fund “Turkey has warned of a “new crisis” in the eastern Mediterranean if Cyprus proceeds with plans to collateralize future gas revenues as part of a national investment fund aimed at staving off a disorderly default.

“Ankara warned that the island’s natural resources also belong to Turkish Cypriots and as such could not be included in the package being put together by Nicosia. ‘The idea of the Greek Cypriot Administration of Southern Cyprus (GCASC) to offer the natural resources of the island as collateral for a solidarity investment fund or any other borrowing scheme to be established due to its current economic crisis, ignoring the inherent rights of the Turkish Cypriots who are co-owners of the Island, is a dangerous manifestation of the illusion of being the sole owner of the Island, which may lead to a new crisis in the region,’ ” the (Turkish) Foreign Ministry said in a statement.

Elections. Germany, Europe’s paymaster and up to  now chief source of bailout monies for the Eurozone’s troubled economies, has finally got an attack of bailout fatigue mainly because  current German Chancellor Angela Merkel is fighting to win a September federal election. Unfortunately for Cyprus the outcome of the German elections hinges around a tough stance on further banking bailouts. The Cypriots face being sacrificed to ensure Merkel’s re-election.

In the words of one commenter on the Zero Hedge site, summing up the attempted endgame:

“…the ECB freaks, goes Bernanke on the PIIGS bond markets buying everything in sight on Germany’s dime, and then the Euro area ratifies a full-on political union to justify this to the ‘taxpayers’ or ‘voters’ or whatever you call the equipment of manufacturing consensus over there, becoming in effect the USofE, comprising a number of provinces/states that once were called ‘Germany’ or ‘France,’ back in the barbaric times of nation-state democracy, henceforth to be known as ‘nationalist bigotry.’  In other words, they throw Cyprus overboard to keep all the other rats from jumping ship long enough to make sure that they all stay in the same boat for good.”

That may or may not be the endgame but as financial advisor Reggie Middleton, interviewed by Max Kaiser on the iconoclastic broadcaster’s latest TV show notes, crass errors by Eurogroup ministers spell plenty of pain for all EU citizens.

This excerpt of Keiser Report 421 features Reggie Middleton proffering a simple definition of what a bank is and why the EU/ECB/Germany, through Cyprus has utterly destroyed the confidence in the concept of banking in Europe. See Reggie Middleton develop his view here:

Published on Mar 23, 2013

What’s behind the EU’s attack on Cyprus, where it has demanded that as part of a bailout package ordinary Cypriots must hand over some of their hard-earned cash? Some claim it exposes the extreme, even fascistic nature of sections of the Brussels-based Euro-elite. In truth, Cyprus-bashing, like Greece-bashing before it, reveals how politically incapacitated and bereft of solutions Brussels has become. Attacking small, relatively unpowerful nations in the south or east of Europe has become a displacement activity for EU suits who don’t have the first clue what to do about the problem at the heart of Europe: the crisis of the Euro and the stagnation of modern European capitalism. The swagger of the assault on Cyprus disguises the disarray in the citadels of Brussels. – Brendan O’Neill editor of  Spiked 

Others see darker forces at work. Philip Ammerman Managing Partner of Navigator Consulting Group an Athens-based consultancy writes on his blog:…at the heart of the issue is a dramatic refusal by the Eurozone finance ministers to understand basic financial reality. By embarking on this step, they dramatically undermine faith in the European banking system. Although they claim that this is a “unique instance” (the same term used for the Greek government bond haircuts), it is only a question of time before the hyper-indebted governments of Spain, Italy, Belgium and perhaps France follow suit…

“The Eurozone has had over a year to prepare for this crisis, but sprang the idea of a levy at the last minute as a fait accompli…’Cyprus has a banking sector that is way too big and they are insolvent with that model and no one outside of Cyprus is at fault for that,’ Schaeuble said. ‘This business model is not sustainable, there is no alternative.’ This is one of the greatest fallacies of all, and flies in the face of established EU law and international banking practise. The EU has adopted the Basel II and III regulations, which make detailed provisions for the ratio of bank core capital to deposits and loans.

“But nowhere is there a requirement, or even a definition, that a country’s banking sector must shrink to a certain proportion of GDP. This is confirmed both by the absence of any such indicator in EU or international law or standards. It is also confirmed by the fact that no such condition was raised in the Irish or Spanish bail-outs…

“It is a statement tossed out with the air of authority, which unfortunately no one has challenged, and which bears no relation to legal or financial reality… 

“So the first logical fallacy is that Cyprus must be punished for a crime it hasn’t committed: being an attractive location for Russian investments. Let’s assume that this ‘crime’ is true: that Cyprus is a hub of Russian money laundering. What is the solution? Is the solution to destroy the country’s banking system, which is what the current Eurozone solution is doing? 

“Or is the solution to tighten EU rules on money laundering, pricing transfers and tax avoidance schemes, affecting not only Cyprus, but jurisdictions such as The Netherlands, Luxembourg, Lichtenstein, London, Jersey, Guernsey, Ireland, Isle of Man, Malta and others? 

“Germany certainly tried to destroy the Irish economic model as part of Ireland’s bail-out: it failed. But in Cyprus, a country of just 860,000 residents, was “non-systemically relevant”, and had no choice… 

“I sincerely doubt we have heard the last of deposit confiscation. Italy, France, Spain and Belgium are mismanaging their national budgets and will likely follow the Cypriot example at some point in the future. Having taxed financial transactions, the inevitable next step is to tax savings, rather than “only” the interest on savings.

“The democratic deficit within the European Union has been clearly indicated beyond a shadow of a doubt, as has the role of Germany and its satellite countries. I expect these tendencies to continue in the future, to the detriment of the people of a continent that are daily confronted with declining economic competitiveness, adverse demographics, absurd taxation, an anti-entrepreneurial culture and cut-throat international competition.

The Cyprus crisis is the result of policy mistakes and a failure of collective responsibility, as well as an illustration of what bad policy can do and could do if it’s not correctedAdrian Blundell-Wignall, Special Advisor to the OECD Secretary General on Financial Markets. 

“The Cypriot project to develop hydrocarbons will also be set back. The junk Cyprus credit rating will mean years of higher interest rates and a lack of capital availability. Russia will likely withdraw its political and economic cover. And it is clear that rather than being the vaunted engine of geopolitical and economic stability the European Union claims to be, it is actually an engine of destruction in the case of Cyprus… 

“The most charitable thing one could say is that the European Union’s crisis management and decision-making function is perhaps permanently dysfunctional. But this is obviously not enough. 

“I find it difficult to understand how a relatively simple EUR 17.5 billion sovereign and bank bailout can be so badly managed, particularly by Germany. 

“The undercurrent of hysteria, logical fallacy, finger-pointing and false morality one sees resurface time and time again among German political leadership and press is not a harbinger of good times in the present or the future… 

“The sight of a country with 82 million inhabitants and a EUR 2.6 trillion GDP ganging up so obviously on Cyprus, a country of 860,000 and a EUR 18 billion GDP, is deeply unedifying. This is seen in the constant and escalating stream of threats, deliberate misstatements, and omissions from Wolfgang Schauble, Angela Merkel and others. 

“The refusal to consider a rational bank recap and restructuring programme for Cyprus over a period of 3-5 years, and to provide a calm framework for negotiations without false deadlines and threats, is inconceivable, particularly if one compares this to how Germany’s government has treated German bank recapitalisations.

The fact that the German Parliament has to approve the Cypriot bail-out makes this bail-out, and any other one, prey to the lowest political instinct of the German political class and its accompanying yellow press.”

Germany complains it is taking all the flak for the measures against Cyprus. Here is one example of Cypriot anger at Chancellor Merkel.

Earlier in this report the issue was raised of whether Germany was whiter than white on matters of the probity of its financial institutions. Here are the findings of a writer on the Real World Economics Review blog who highlights the hypocrisy involved: “March 23, 2013: I was a little fed up with the stories about banksters from Cyprus. How about Deutsche Bank, the largest bank of Europe, darling of the German government and, Lehman style, “Chief Executive Officer Josef Ackermann, who has called proposals to limit bank size “misguided,” will leave behind a balance sheet about 40 percent larger than in 2006, and more than 80 percent as big as Germany’s economy, when he steps down in May. The firm is the second-most leveraged and third-least capitalized of Europe’s 10 largest banks”.

A quick Google search on ‘Deutsche Bank’ and ‘Fraud’ yielded the next fifteen links:

1. The biggest criminal tax-fraud persecution in history

2. Deutsche bank drops unethical traders to restore credibility,

3. “Federal authorities say Deutsche Bank has agreed to pay more than $550 million to resolve a federal tax shelter fraud investigation.”

4. Deutsche Bank, JP Morgan, UBS and Depfa Bank Plc were convicted by a Milan judge for their role in overseeing fraud by their bankers in the sale of derivatives to the city of Milan.

5. Welcome to Deutsche Bank Fraud Exposed. Fraudulent foreclosures (and evictions) are known to be rampant around the country.

6.Pakistani family brings fraud case against Deutsche Bank

7. German police raids Deutsche Bank offices in tax fraud probe

8. Whistleblowers alleges massive fraud at Deutsche Bank.

9. Foreclosure Theft Scam – Deutsche Bank & Morgan Stanley Caught in Hawaii

10. A housing corporation swindel in the Netherlands: The CFO, the broker and the bank: Vestia derivative disaster seems suddenly more than ‘just a case of megalomanic trading’

11. Deutsche Bank Derivative Helped Monte Paschi Mask Losses.

12. India: “It is difficult to imagine an organisation like Deutsche Bank laying themselves open to such frauds, and speaks volumes about the checks and balances being maintained, or lack thereof.”

13. A prize winning article (by Jesse Frederik and Eric Smit, Jesse being a irregular contributor to this blog) about a Deutsche Bank derivatives scam which costed a financially once more than solid recycling company 209 millions

14. “Deutsche Bank’s management and supervisory board were discussing provisions of between $300 million (247 million euros) and $1 billion, according to Handelsblatt, which quoted sources in the sector.

15. Pforzheim, a German city, sues Deutsche Bank because of alleged swindle

Here is a sampling of further views and comments on the Cyprus Carpet Bombing Offensive, culled from a range of Internet sources:

Economist Liam Halligan writing in the UK’s Daily Telegraph newspaper  has some explosive opinions: “The eurozone, taken together, is the second largest economy on Earth and, surely, the region most likely to spark a systemic lurch on global markets, yanking us back to the bad old days of “risk-off”. Cyprus could be the pinprick that bursts the eurozone’s balloon.

“The political and financial edifice that is monetary union looks more susceptible than ever to an explosive outcome. Laiki Bank – and probably the Bank of Cyprus, too – the biggest banks on the island, would probably be rendered insolvent.

“A Cyprus bank run could easily spark copycat outcomes in other highly-indebted eurozone countries with weak banks, not least Italy and Spain – economies which are, respectively, 60 times and 90 times bigger than Cyprus.

“While it’s good that the crass stupidity of confiscating small savers’ bank deposits now looks unlikely, I cannot believe such an idea was ever proposed. To have taken this draconian step would not only have breached a eurozone guarantee extended just a few years ago when this ghastly crisis began. It would also have been the most efficient way imaginable to spread conflict and political extremism across Europe, while undermining the financial and legal fabric of capitalism itself.

“The idea was utter lunacy and yet it was put forward, in all seriousness, by politicians and officials from both Berlin and Brussels. One wonders whether some of these people have any grasp of basic economics.”

Tim Worstall writing on Forbes website says: “I had actually thought that we’d seen peak stupidity already in this euro crisis. The state guarantee by Ireland of all bonds and deposits in Irish banks. Note, they guaranteed absolutely without limit. That has oft been marked as an incredibly silly thing to do by people vastly cleverer than I am. But my worry is that this Cypriot decision is even worse. Even if this “tax” is never used again, even if it really is a one off, some significant portion of the populace simply aren’t going to trust government protestations of deposit insurance in the future. Which will, inevitably, lead to cascading bank failures. My worry is that some future Friedman, some monetary scholar of the future, will write in her history of these times that it was this, this one action, this one moment, that was the gibbering insanity that crashed the system for a decade or more.”

Germany’s Der Speigel magazine quotes Peter Bofinger, a member of the government-appointed German Council of Economic Experts known colloquially as the “Five Wise Men” since 2004. He is a professor of monetary policy and international economics at the University of Würzburg. His most recent book, published in German, is called “Ist der Markt noch zu retten?” (“Can the Market Still Be Saved?”). He cautions the talks of levies on small bank depositors “is the worst possible decision. Making small-scale savers pay is extremely dangerous. It will shake the trust of depositors across the Continent. Europe’s citizens now have to fear for their money.”

The Zero Hedge website features a very gloomy prognosis warning of another world war: “And while we commiserate with the simple people of Cyprus (and soon everywhere else), who have for no fault of their own become the first pawns to be sacrificed in the systemic endspiel, we are grateful to Europe for proving us, once again, correct. Because our only purpose with this media experiment has been to warn our readers that concentrating unlimited decision-making power in the hands of a very few conflicted individuals, without checks and without balances, always, always, ends in absolute disaster, bloodshed, and ultimately war. Sadly, at this point there is nothing that can change the final outcome of what is an ongoing systemic failure. One can, at most, prepare as much as possible and hope for the best.”

Writing on his blog  Lars Seier Christensen, co-founder & CEO, Saxo Bank A/S says: “We have seen again that the Eurozone is unable to deal rationally with its problems. This has got to be the most incompetent handling of a Euro crisis event so far, but underlines the hopeless situation the 17 countries that share the common currency are in. The panic is so great that no step is too extreme to preserve the doomed project and to defend the political capital invested in this monumental failure. That we have already come to a stage where politicians blatantly attempt to confiscate innocent and weak citizens’ savings is a new low that was somewhat unexpected already at this point. It bodes ill for what can happen when the crisis deepens in the future – which it will.”

Interview with Iceland’s President Olafur Ragnar Grimmson who says let banks fail.

Should Cyprus take a lesson from Iceland?
Several writers and commentators have urged an Iceland solution. Among them Thorsten Beck Professor of Economics and Chairman of the European Banking Center at Tilburg University writing on the Voxeu website. He says: “Iceland was vilified in 2008 for allowing its banks to fail, transferring domestic deposits into good banks and leaving foreign deposits and other claims and bad assets in the original banks, to be resolved over time. On the other hand, the Icelandic government kept its fiscal house in order and maintained an investment grade for its bonds throughout the crisis. Iceland’s economy has recovered building on industries other than banks for renewed growth, even though Iceland’s society is still suffering from the traumatic events of 2008. And while mistakes might have been made in the resolution process (Danielsson, 2011), Iceland’s banking sector does not drag down Iceland’s growth any longer and might eventually even make a positive contribution. What can we learn from Iceland? Unlike Cyprus it is outside the Eurozone, so it was politically and legally easier for it to allow its banks to fail. The bank failures, however, had ripple effects throughout the globe given the rapid international expansion of Icelandic banks both in deposit collection and asset markets. Such ripple effects might be actually lower in the case of a systemic Cypriotic bank failure. Most importantly, Iceland’s experience ‘ended in horror’ rather than led to the ‘horror without end’ that Greece has been living through over the past four years and that Cyprus is now facing for years to come. The Icelandic approach of recognising losses, allocating them and moving on might not be easily replicable, but it certainly shows that there is an alternative to the approach that the Eurozone has been taking over the past four years! “

For the record Iceland’s President Olafur Ragnar Grimmson was interviewed over the weekend (26./27.01.2013) at the World Economic Forum in Davos on why Iceland has enjoyed such a strong recovery after it’s complete financial collapse in 2008. Grimsson’s famous response was: “„… We were wise enough not to follow the traditional prevailing orthodoxies of the Western financial world in the last 30 years. We introduced currency controls, we let the banks fail, we provided support for the poor, and we didn’t introduce austerity measures like you’re seeing here in Europe. … Why are the banks considered to be the holy churches of the modern economy? Why are private banks not like airlines and tele-communication companies and allowed to go bankrupt if they have been run in an irresponsible way? The theory that you have to bail-out banks is a theory that you allow bankers enjoy for their own profit their success, and then let ordinary people bear their failure through taxes and austerity. 
People in enlightened democracies are not going to accept that in the long run. …”

Finally and apocalyptically Zero Hedge carries a piece by a contributor warning of the knock-on effects globally of the Cyprus affair: “Everyone who wishes to know what will happen unless everyone is aware of what may happen, should read the attached paper. We are entering a time of great challenge and uncertainty, when the systems, ideas and stories that framed our lives in one world are torn apart, but before new stories and dependencies have had time to evolve. Our challenge is to let go, and go forth…Finally, neither wealth nor geography is a protection. Our evolved co-dependencies mean that we are all in this together. “

Trade-Off: Financial System Supply-Chain Cross-Contagion: a study in global systemic collapse (pdf)

Financial System Supply-Chain Cross-Contagion – A Study in Global Systemic Collapse

Cyprus: will the Deal last? Probably not
In a comment on the outcome, Graham Bishop,  an independent adviser on European financial affairs who supports closer financial/political union writes: “The Eurogroup finally agreed a deal with Cyprus . It bears a great similarity to what was offered a week ago but the losses in Laiki and Bank of Cyprus (BoC) are now borne completely by shareholders, bondholders and large/uninsured depositors. For Laiki, the probability is that those classes will be wiped out completely; for BoC, large depositors may lose perhaps 20% on current calculations as sufficient of their deposits are converted into equity to give a 9% capital ratio. The loans offered to Cyprus remain unchanged at up to ?10 billion.  This story is a long way from over. The economic outlook is now much worse than say a month ago and that will flow through into loan losses at other banks. To the extent that uninsured depositors also had back-to-back loans, then it may prove more difficult to collect repayment of the loans especially if they are outside Cyprus. The business model of Cyprus is comprehensively shattered and it will urgently need development aid rather than new debt.  This agreement has broken new ground in the Eurozone?s search for solutions to excessive debt that should never have been undertaken by a host government, or permitted by the eurozone. The search for political mechanisms to give the collective power to stop this happening in the future still point inexorably towards a much greater degree of `political union?  Financial markets will now apply far more discipline to weak banks and governments as no-one will believe that there will never be PSI again. Indeed, Cyprus will struggle to avoid that as the economy unravels. Uninsured personal/corporate depositors are now quite clear about what can happen in a bank resolution.  This episode also has a regional political dimension: Turkey staked an unambiguous claim on behalf of Turkish Cypriots to a share of any gas that eventually comes ashore.”

Story: Ken Pottinger
editorial@french-news-online.com

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