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    Senior Member AirborneSapper7's Avatar
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    For Everyone Shocked By What Just Happened... And Why This Is Just The Beginning

    For Everyone Shocked By What Just Happened... And Why This Is Just The Beginning

    Submitted by Tyler Durden on 03/16/2013 18:28 -0400


    Today, lots of people wake up in shock and horror to what happened in Cyprus: a forced capital reallocation mandated by political elites under the guise of an "equity investment" in insolvent banks, which is really code for a "coercive, mandatory wealth tax." If less concerned about political correctness, one could say that what just happened was daylight robbery from savers to banks and the status quo. These same people may be even more shocked to learn that today's Cypriot "resolution" is merely the first of many such coercive interventions into personal wealth, first in Europe, and then everywhere else.
    For the benefit of those people, we wish to point them to our article from September 2011, "The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis", which predicted and explained all of this and much more. What else did the September BCG study conclude? Simply that such mandatory, coercive wealth tax is merely the beginning for a world in which there was some $21 trillion in excess debt as of 2009, a number which has since ballooned to over $30 trillion. And with inflation woefully late in appearing and "inflating away" said debt overhang, Europe first is finally moving to Plan B, and is using Cyrprus as its Guniea Pig.

    For those who missed it the first time, here it is again. Somehow we think many more people will listen this time around:


    Restructuring the debt overhang in the euro zone would require financing and would be a daunting task. In order to finance controlled restructuring, politicians could well conclude that it was necessary to tax the existing wealth of the private sector. Many politicians would see taxing financial assets as the fairest way of resolving the problem. Taxing existing financial assets would acknowledge one fact: these investments are not as valuable as their owners think, as the debtors (governments, households, and corporations) will be unable to meet their commitments. Exhibit 3 shows the one-time tax on financial assets required to provide the necessary funds for an orderly restructuring.



    For most countries, a haircut of 11 to 30 percent would be sufficient to cover the costs of an orderly debt restructuring. Only in Greece, Spain, and Portugal would the burden for the private sector be significantly higher; in Ireland, it would be too high because the financial assets of the Irish people are smaller than the required adjustment of debt levels. This underscores the dimension of the Irish real estate and debt bubble.

    In the overall context of the future of the euro zone, politicians would need to propose a broader sharing of the burden so that taxpayers in such countries as Germany, France, and the Netherlands would contribute more than the share required to reduce their own debt load. This would be unpopular, but the banks and insurance companies in these countries would benefit. To ensure a socially acceptable sharing of the burden, politicians would no doubt decide to tax financial assets only above a certain threshold—€100,000, for example. Given that any such tax would be meant as a one-time correction of current debt levels, they would need to balance it by removing wealth taxes and capital-gains taxes. The drastic action of imposing a tax on assets would probably make it easier politically to lower income taxes in order to stimulate further growth. (See Exhibit 4.)


    Curiously, not even BCG expected the initial shot across the bow to be so bad that everyone, not just those above the €100,000 threshold would be impaired. Alas, that is the sad reality in Europe, where as the chart above shows, a total of €6.1 trillion with a T in additional wealth confiscation tax is coming.
    Oh, and US of A... fear not - your turn is coming too: with a price tag of €8.2 trillion in wealth tax pending as of 2009. This number is now somewhere north of €15 trillion.


    The full BCG study which we urge everyone to read AT THE PAGE LINK


    For Everyone Shocked By What Just Happened... And Why This Is Just The Beginning | Zero Hedge
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    Senior Member AirborneSapper7's Avatar
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    Germany And IMF's Initial Deposit Haircut Demand: 40% Of Total

    Submitted by Tyler Durden on 03/16/2013 19:29 -0400

    As the President of Cyprus proclaims to his people that "we' should all take responsibility as his historic decision will "lead to the permanent rescue of the economy," it appears that the settled-upon 9.9% haircut is a 'good deal' compared to the stunning 40% of total deposits that Germany's FinMin Schaeuble and the IMF demanded. This action, his statement notes, enables the rescue of 8,000 banking sector jobs and ensuring the liquidity of the banks, "allowing the economy to proceed decisively to a new beginning." Ekathimerini reports," this is the first time in the eurozone that a levy has been imposed not on the interest of bank accounts but on the capital itself," and was the only way to bridge most of the the gap between the EUR17bn Nicosia needed and the EUR10bn the ESM was offering, though tax on interest in Cypriot banks will also rise to 20-25%. It is the 40% haircut requirement that concerns us the most as clearly going forward that means other nations, starting Monday (or Tuesday given national holidays) see deposit outflows surge, as the willingness to take such steps is now painfully clear.

    Statement by the President of the Republic of Cyprus,

    It is well known that the deep economic crisis and the state of emergency in which the country has found itself did not come about in the last fortnight since we have undertaken the administration of the country.

    The state of emergency and critical nature of the times do not allow me, as they do not allow anyone, to embark on a blame game.

    In the extraordinary meeting of the Eurogroup, we faced decisions that had already been taken and came across faits accomplis through which we were faced with the following dilemmas:

    On Tuesday, March 19 we would either choose: the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis, which would put a definitive end to the uncertainty and restart our economy.

    A possible choice of the catastrophic scenario option would have the following consequences:

    1. On Tuesday, March 19, immediately after the holiday weekend, one of the two banks in crisis would cease to operate, since the European Central Bank, following the decision already taken, would terminate the provision of liquidity. The second bank would suspend its work, and neither could avoid collapse. Such a phenomenon would instantly lead 8.000 families to unemployment.
    2. The State would be obliged to compensate depositors in response to the obligation regarding guaranteed deposits. The capital required in such a case would amount to about 30 billion euros, which the State would be unable to pay.
    3. A proportionate amount corresponding to the deposits of thousands of depositors for deposits over 100.000 Euro, would be led to a vicious cycle of asset liquidation, and these depositors would suffer losses of over 60%.
    4. Such an uncontrolled situation would push the whole banking system into collapse with all the attendant consequences.
    5. Thousands of small and medium enterprises, and other businesses would be driven to bankruptcy due to their inability to trade.


    As a result of the above, the service sector would be led to a complete collapse with a possible exit from the euro. That, in addition to the national weakening of Cyprus, would lead to devaluation of the currency by at least 40%.

    The second choice was the controlled management of the crisis, through the decisions taken and which can be summarized as follows:

    1. Ensuring the liquidity of the banks and the rescue of the banking system through their recapitalization.
    2. Rescuing 8.000 jobs in the banking sector and thousands of others which would be lost as a corollary of not maintaining the operations of banks.
    3. Total rescuing of deposits, with just the exchange of a small percentage of savings with shares of the two banks. Currently, these shares do not have their full value, but with the economic recovery they will repay most it not all of the amount that will be cut.
    4. This option results in a drastic reduction of public debt, makes it manageable and sustainable and relieves future generations from the burden of repayment.
    5. It saves provident and pension funds and avoids taking other tough measures such as wage and pension cuts that were put on the negotiations table.
    6. It avoids further recession and the risk of the vicious circle of a second memorandum.


    We are not aiming to gloss over the situation. The solution chosen may be painful, but it was the only one that would allow us to continue our lives without adventures. It's a decision that leads to the historic and permanent rescue our economy.

    In the next few hours we will all have to take responsibility. Tomorrow I will address the Cypriot people.

    Via ekathemerini,

    Already bank customers are gathering outside major and cooperative banks, Skai television reported on Saturday morning, as angry depositors demand their money.
    ...

    This is the first time in the eurozone that a levy has been imposed not on the interest of bank accounts but on the capital itself. In addition to that there is a levy on interest, too, and an increase in the 10 percent corporate tax that has been one of the main driving forces behind Cyprus’s financial progress after the 1974 Turkish invasion, generating growth by attracting foreign direct investment.
    Notably, the account haircut does not affect bank accounts in Cypriot bank branches based in Greece, according to sources from the Greek Finance Ministry.
    Tax on interest will amount to between 20 and 25 percent.
    ...
    Cyprus state broadcaster CyBC reported on Saturday that German Finance Minister actually entered the Eurogroup meeting on Friday proposing a 40 percent haircut on Cypriot bank accounts. Sarris stated on Saturday that this had also been the proposal of the International Monetary Fund.
    Sarris stated in Brussels that in view of the threat from the European Central Bank for banks in Cyprus to shut down and chaos to ensue, the increase in interest taxation and the haircut to bank accounts became necessary. “A disorderly default, that was a genuine possibility, has been averted,” he said.
    “It allows our economy to proceed decisively to a new beginning.”
    ...
    Opposition leader Antros Kyprianou, the General Secretary of leftist AKEL, accused the government of not consulting the other parties, saying that "the government bears full responsibility for developments in the economy as instead of choosing the road of consensus it has decided to go it alone."


    Germany And IMF's Initial Deposit Haircut Demand: 40% Of Total | Zero Hedge
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    Senior Member AirborneSapper7's Avatar
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    After Cyprus, Who Is Next?

    Submitted by Tyler Durden on 03/16/2013 14:41 -0400

    Short answer: we don't know.

    We do, however, know something we have been pointing out since early 2012 - when it comes to the funding structure of European banks, there is a dramatic difference between the US and Europe. In the US, as we showed most recently two months ago, the Big Three depositor banks (JPM, Wells and Bank of America, excluding the still pseudo-nationalized Citi), have a record $858 billion in excess deposits over loans.


    Extending the above to cover the entire US financial system, shows more of the same: according to the Fed, in the latest week ended March 6, there was a total of $9,283 billion in consolidated deposits, covering just $7,255 billion in commercial bank loans, a record $2+ trillion in excess deposits over loans.

    How is it possible that there is a record amount of deposits in the US financial system, while the notional outstanding of total commercial loans is less than at the time Lehman filed? Simple - the delta has been filled by the Fed's excess reserves, which amounts to... drumroll... just over $2 trillion, which via circuitous ways make its way back to the bank deposit ledger - this was explained in "A Record $2 Trillion In Deposits Over Loans - The Fed's Indirect Market Propping Pathway Exposed."
    In other words, by becoming America's indirect "bad bank", the Fed has mitigated the concern of a deposit run, or at least within the US traditional banking system, however in the process making the US $14 trillion shadow banking system (where it was been soaking up safe collateral at an epic pace) breathtakingly fragile.
    However, shadow banking is a topic for another day. For the time being, the take home message is that at least superficially, there is a record $2 trillion in deposits which are not encumbered by loans, and which incidentally are used by banks such as JPM to fund the operations of its prop trading desks, such as the CIO, and ramp stocks and risk in general, higher (as also explained previously) at least until these investments go horribly wrong and we get the usual theater of Senatorial hearings and the like.
    So what about Europe? Here things get bad. Very bad. So bad in fact that we covered it all just one short year ago, in "A Few Quick Reminders Why NOTHING Has Been Fixed In Europe (And Why LTRO 3 Is Not Coming)."
    Sure enough LTRO 3 didn't come (for the reasons we explained), and a year after the above post was penned, nothing has still changed in Europe, as Cyprus' bank depositors just learned to their humiliation and savings losses.
    What is the reason for this? Well, as readers can surmise based on what just happened in Europe, it once again has to do with deposits, and specifically the loan-to-deposit ratios of European banks. Because if the US has an excess of deposits over loans, Europe is and has always suffered from the inverse: a massive excess of loans (impaired assets) compared to the most critical of bank liabilities - deposits. This goes back to centuries of capital formation in Europe, which unlike the US has always relied far more on secured bank loans than on unsecured corporate debt as can be seen on the chart below.

    One doesn't have to be a rocket scientist to figure out that in a world in which European loans are massively mismarked relative to fair value, and where bad and non-performing loans are an exponentially rising component of all "asset" exposure, it will be the liabilities that are ultimately impaired. Liabilities such as deposits.
    This happened in Cyprus overnight, where the non-performing asset side of the consolidated bank balance sheet was just forced to collapse to allow the continued operation of the country's financial system, however with a far smaller corporate bond and loan liability matching (there was only €2 billion in bond outstanding in Cyprus which made any realistic bail-in impossible) the only way to shrink the liabilities of the consolidated balance sheet - inevitable when one is terminally impairing assets - was to impair the most sacrosanct of bank liabilities - deposits.
    This is precisely what just happened. The reason it happened first in Cyprus was for two reasons: i) the primary bank liability was deposits, and ii) a key source of deposit funding was those "evil" oligarch Russians: after all they deserve to be taught a lesson, or so the populist thinking in Germany and the Netherlands goes. Well, that may be the case, but at least half of the impaired deposits ended up belonging to the local population, which was neither oligarchic, nor "evil", not stole (allegedly) to make their money.
    Of course, those who had read Zero Hedge a year ago would have known all about this. This is what we said in March of 2012:

    The chart below explains why not only is Europe's severely asset constrained, it is also running out of funding, in the form of depositor cash: the most critical bank liability. Remember: without incremental deposits, banks can not invest in new assets, unless they generate cash from operations, and thus grow shareholder equity. There is a problem: as the final chart below shows, Europe, and especially Scandinavia which has consistently remained off the radar, is literally off the charts when it comes to LTD ratios.

    With banks such as Danske, SHB, Swebank, DnB, and Nordea literally at 200% Loan-to-Deposits, but most other European banks too, even the tiniest outflow in deposit cash (ala what is happening in the PIIGS) will send the system into yet another liquidity spasm. Only this time, since what little unencumbered assets remaining have already been pledged to the ECB, there will be no quick LTRO collateral-type fix this time.


    One year after we warned Europe that it was only a matter of time before deposits become impaired to "grow into" the European bank balance sheet, Cyprus has drawn the short stick.
    And yes: we don't know who will be next, but we do know that nothing has changed in the one year since we wrote our warning a year ago (because guarantees - not actions - of unlimited funding by the ECB not only do not help the actual underlying problems, they exacerbate them) and the last thing we want is to be accused by Europe of spreading the evil truth. But we do know that the unprecedented asset-liability mismatch in Europe is very unsustainable, and the lower the funding deposits in a given bank, the greater the eagerness will by management, regulators and politicians to impair, and confiscate said deposits, allowing a parallel collapse in bad assets and a gradual progression to a viable banking system. The only problem is said viability will be on the backs of savers and depositors once more who will have no choice but to lose much more than just 9.9% of their savings before it is all said and done.

    So for those who really want to know who is next - look to the left side of the chart above: that's where the loan-to-deposit ratio among European banks is highest, and thus most unsustainable.


    After Cyprus, Who Is Next? | Zero Hedge

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    Senior Member AirborneSapper7's Avatar
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    Cyprus "Uncharted Territory" Sets Sell-Side Scrambling

    Submitted by Tyler Durden on 03/16/2013 14:07 -0400

    While offering up some 'hope' that the unprecedented tax on Cypriot deposits will not spark "massive" contagion (due to the ECB's "promise"), it appears from this summary of sell-side opinion on this weekend's European developments that the sell-side is starting to panic... it would appear the European credit markets, that have been so skittish in recent weeks (especially the financials), had it right all along? whocouldanode? It seems, as the head of the European Parliament's Economic and Monetary Affairs Committee, no less, said: "The lesson here is that the EU's single-market rules will be flouted when the Eurozone, ECB, and IMF say so."

    Via Bloomberg,

    Holger Schmieding, chief economist at Berenberg Bank:

    • Optimistic this will not spark “massive” contagion thanks to ECB promise that it will do all it takes to keep reform countries in the euro
    • The risk that this “could backfire is not zero”
    • We are in “unchartered territory again”

    Charles Diebel, head of market strategy at Lloyds Banking Group Plc:

    • Given that the agreement was announced after banks in Cyprus had closed for the weekend the chance of capital flight is “unlikely” as it’s already too late
    • The tax will “increase nervousness” and pressure peripherals at least in the short term
    • Could pressure the euro

    Alberto Gallo, head of European macro credit research at Royal Bank of Scotland Group Plc:

    • Cyprus a special case with bank assets of EU125b over 7x the size of the economy
    • Unique also as Cypriot banks have only EU2b of bonds outstanding, making bondholder bail-in ineffective
    • Possible that some small periphery banks may suffer deposit outflow to larger firms

    Annalisa Piazza, a fixed-income analyst at Newedge Group:

    • This will spread “some panic” across the euro area periphery which could result in capital outflows
    • Will have impact on concern that similar measures could be applied elsewhere
    • Some weakening of the euro cannot be ruled out



    And from an 'insider' - Sharon Bowles, head of the European Parliament’s Economic and Monetary Affairs Committee, said:

    • Levy on deposits agreed under Cyprus bailout deal means circumventing EU deposit guarantee laws
    • “It robs smaller investors of the protection they were promised,”
    • The lesson here is that the EU’s single market rules will be flouted when the Eurozone, ECB and IMF say so,”



    Cyprus "Uncharted Territory" Sets Sell-Side Scrambling | Zero Hedge
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    What Cyprus Would Look Like In The US

    Submitted by Tyler Durden on 03/18/2013 08:25 -0400

    Cyprus is now old news: local (and Russian... and UK... and European) depositors will see anywhere between 3% and 13% (or more) of their deposits, depending on what the "fair" threshold of a "lot" of money is determined to be in the first revision to the deposit tax levy, confiscated and in return they will get "equity" in broke banks, and maybe some gas-linked bonds. That much we know. The question then becomes: what would "Cyprus" look like if it took place in the US? Below, courtesy of William Banzai, is one artist's impression...




    What Cyprus Would Look Like In The US | Zero Hedge
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