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The Seven Broken Taboos Of The Cyprus Deal

Submitted by Tyler Durden on 03/31/2013 16:43 -0400

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.


The Seven Broken Taboos Of The Cyprus Deal | Zero Hedge

How Cyprus Exposed The Fundamental Flaw Of Fractional Reserve Banking

Submitted by Tyler Durden on 03/31/2013 18:03 -0400

In the past week much has been written about the emerging distinction between the Cypriot Euro and the currency of the Eurozone proper, even though the two are (or were) identical. The argument goes that all €'s are equal, but those that are found elsewhere than on the doomed island in the eastern Mediterranean are more equal than the Cypriot euros, or something along those lines. This of course, while superficially right, is woefully inaccurate as it misses the core of the problem, which is a distinction between electronic currency and hard, tangible banknotes. Which is why the capital controls imposed in Cyprus do little to limit the distribution and dissemination of electronic payments within the confines of the island (when it comes to payments leaving the island to other jurisdictions it is a different matter entirely), and are focused exclusively at limiting the procurement and allowance of paper banknotes in the hands of Cypriots (hence the limits on ATM and bank branch withdrawals, as well as the hard limit on currency exiting the island).

In other words, what the Cyprus fiasco should have taught those lucky enough to be in a net equity position vis-a-vis wealth (i.e., have cash savings greater than debts) is that suddenly a €100 banknote is worth far more than €100 in the bank, especially if the €100 is over the insured €100,000 limit, and especially in a time of ZIRP when said €100 collects no interest but is certainly an impairable liability if and when the bank goes tits up.

Said otherwise, there is now a very distinct premium to the value of hard cash over electronic cash.

And while this is true for Euros, it is just as true for US Dollars, Mexican Pesos, Iranian Rials and all other currencies in a fiat regime.

Which brings us to the crux of the issue, namely fractional reserve banking, or a system in which one currency unit in hard fiat currency can be redeposited with the bank that created it (as a reminder in a fiat system currency is created at the commercial bank level: as the Fed itself has made quite clear, "The actual process of money creation takes place primarily in banks") to be lent out and re-re-deposited an (un)limited number of times, until there is a literal pyramid of liabilities and obligations lying on top of every dollar, euro, or whatever other currency, is in circulation. The issue is that the bulk of such obligations are electronic, and in its purest form, a bank run such as that seen in Cyprus, and preempted with the imposition of the first capital controls in the history of the Eurozone, seeks to convert electronic deposits into hard currency.

Alas, as the very name "fractional reserve banking" implies, there is a very big problem with this, and is why every bank run ultimately would end in absolute disaster and the collapse of a fiat regime, hyperinflation, and systemic bank and sovereign defaults, war, and other unpleasantries, if not halted while in process.

Why?

One look at the chart below should be sufficient to explain this rather problematic issue of a broken banking system in which trust is evaporating faster than Ice Cubes in the circle of hell reserved for economist PhD's.


In summary:

• Total US Currency in circulation (i.e., all US Dollars out there): $1,102 billion (source)
• Total Deposits in US Commercial Banks: $9,294 billion (source)

Which means that if (and we are not saying it will) a Cyprus-style fiasco were to occur in the US, and those $9.3 trillion in total deposits seek to obtain "physical representation" in the form of actual currency (i.e., a systemic bank run), just as all those lining up in front of Cypriot ATMs are desperate to do each and every day when they have a €300 limit on physical cash withdrawals, there will be a roughly 88% haircut for every single dollar that US savers believe is "safe" in the bank.

Of course, this entire example is only applicable within the confines of the fiat monetary system, assuming there are no other currency equivalents, such as precious metals, hard assets, or even virtual electronic currencies. But naturally to the broken monetary system, which relies on nothing but faith, trust and, hence, credit, even the thought of an alternative to a regime in which the breakdown of trust results in a 90% (at least) haircut of accumulated wealth, is pure heresy.

Which is why the deeper the rabbit hole goes, and the more countries are Cyprus'ed, the greater the onslaught and attack against gold, silver, and other traditional and historic fallback currencies to what is increasingly pejoratively known simply as "paper."

How Cyprus Exposed The Fundamental Flaw Of Fractional Reserve Banking | Zero Hedge

Cyprus Parliament President Says "No Future" Under Troika, Calls For "Iceland" Solution

Submitted by Tyler Durden on 03/31/2013 13:20 -0400

Just last week Yiannakis Omirou, Cypriot House of Representatives President, was calling for the nation to accept it is "time for responsibility" as they progressed towards a final solution; and yet today, as Cyprus' Famagusta reports, he believes the 'Troika-imposed' responsibility will, "turn Cyprus into a colony of the worst possible type." His 'Icelandic' solution is to "leave the Troika and EMS behind," to ensure "national independence, national sovereignty, moral integrity, and economic independence." He may have a point; judging from the chart below of the Troika's poster-child Greece, relative to Iceland, things are not going so well. As Omirou ominously concludes, "if we remain bound by the Troika and the memorandum Cyprus’ destiny is already foretold and there will be no future."




Via Famagusta Gazette,

There is no other alternative but to free Cyprus from the bonds of the troika and the memorandum, House of Representatives President Yiannakis Omirou has said.

Omirou also expressed his conviction that no Attorney General would dream of not following through with the results of an investigation led by an independent committee to apportion blame on those responsible for bringing the country’s economy and banking sector near collapse.

Omirou talked about the troika demands, which according to him will multiply and will turn Cyprus to a colony of the worst possible type and warned “I would like to send a message to the Cyprus people that there is no other way, there is no alternative apart from freeing (the country) from the troika’s and the memorandum’s bonds”.

He noted that certainly, “this road will demand sacrifices”, adding that “by leaving the troika and the EMS behind us, we will ensure our national independence, our national sovereignty, our moral integrity and our economic independence”.

“If we remain bound by the Troika and the memorandum Cyprus’ destiny is already foretold and there will be no future”, he pointed out.

h/t Mark Grant

Cyprus Parliament President Says "No Future" Under Troika, Calls For "Iceland" Solution | Zero Hedge

Cyprus President's Family Transferred Tens Of Millions To London Days Before Deposit Haircuts

Submitted by Tyler Durden on 03/31/2013 15:11 -0400

A day after former Cypriot President Vassilou was found to be among many elite Cypriot (politicians and businessmen) who had loans written-off by the major (now insolvent) banks; it appears the rot is far fouler than expected. In a somewhat stunning (or purely coincidental) revelation, ENETEnglish reports that Cypriot newspaper Haravgi claims that current President Nicos Anastasiades' family businesses transferred 'dozens of millions' from their Laiki Bank accounts to London just a week before the devastating depositor haircuts were unleashed upon his people. Of course, the denials are loud and Anastasiades has demanded an investigation into the claims; we are sure the government-selected 'independent' committee will be as thorough as the Libor anti-trust investigators. As a reminder, as we noted yesterday, here are Cyprus' gun control laws.

Via EnetEnglish,

A company owned by in-laws of Cypriot President Nicos Anastasiades withdrew dozens of millions from Laiki Bank on March 12 and 13, according to an article published in Cypriot newspaper Haravgi.

The newspaper, which is affiliated to the communist-rooted AKEL party, reports that three days before the Eurogroup meeting the company took five promissory notes worth €21m from Laiki Bank and transferred the money to London.

Responding to the allegations, Anastasiades said: “The attempt to defame companies or people linked to my family… is nothing but an attempt to distract people from the liability of those who led the country to a state of bankruptcy.”

The president added that no one, including himself, will be exempt from the ongoing investigations looking into responsibilities over the near collapse of the economy.

Anastasiades added that when the investigative committee convenes on Tuesday, he will request that its members look into this particular case with the same attentiveness as all other cases.

The company in question has firmly denied the reports.

Last Friday a list of companies and politicians that had loans written off by banks at the heart of Cyprus' bailout crisis was published in Greece and was subsequently handed to the Cypriot parliament's ethics committee. The list includes the names of politicians from Cyprus' biggest parties (excluding the socialist EDEK and the Greens).

Cyprus President's Family Transferred Tens Of Millions To London Days Before Deposit Haircuts | Zero Hedge