Thread: Why Cyprus Matters (And The ECB Knows It) WHEN THE RED QUEEN IS AFTER YOUR HEAD

Why Cyprus Matters (And The ECB Knows It)

Submitted by Tyler Durden on 03/23/2013 18:21 -0400

Via Mark J. Grant, author of Out of the Box,

WHEN THE RED QUEEN IS AFTER YOUR HEAD

When Zig turns to Zag and the Red Queen is after your head then extraordinary care is necessitated. To quote Holmes, "The game is afoot" on the Continent.

I have been asked, with some frequency, why the bondholders have not been tagged in the Cyprus fiasco. That answer is simple. Most of Cyprus's bonds are pledged as collateral at the ECB or in the Target2 financing program. Then one may also ask why the bonds of the two large Cypriot banks are not being hit. The answer is the same; most are held as collateral at the ECB or Target2. In both cases, remember uncounted liabilities, the government of Cyprus has guaranteed the debt. Consequently if the two Cyprus banks default it is of small matter as the sovereign has guaranteed the debt. However if the country defaults and leaves the European Union then it will matter and matter significantly as the tiny country of Cyprus would wipe out the entire equity capital of the European Central Bank. While it is not a matter of public record it is estimated that Cyprus has guaranteed about $11.6 billion of collateral at the ECB.

On Friday Cyprus made provisions for the re-structuring of its banks. They also imposed capital controls. However what they have not done yet is decide how they will reach the funding demanded by Europe. That decision was postponed until after a meeting with the Troika that will take place today and a meeting of the EU Finance Ministers that will take place on Sunday.

The last go-round on this issue, as you may recall, resulted in not one single vote for the imposition of the expropriation of people's bank accounts or what Europe misguidedly calls a tax. Taxes are legislated, paid from people's checkbooks and not removed from their bank accounts by a government. Taking money from a citizen's bank account by fiat is little more than theft as it is delineated as private property and is the person's own money and not a bond or stock or a security of some sort with the normal risks appended to any sort of an investment. Even in the case of a bank closure where there is a bankruptcy proceeding there is the "due process of law" where decisions are made by the Judiciary and not mandated by a session of Parliament. Further, not all of the deposits in Cyprus are in troubled banks. There is UBS, several Israeli banks, a number of French banks et al that are not troubled and still Europe wants to demand that the bank accounts in those relatively healthy banks have depositor's money taken out of them to pay for the woes of the government.

Equally troubling to me has been the European process. The ECB gave Cyprus four days to come up with the funding demanded by Germany before they turn off the lending to Cyprus. I am reminded of Mr. Draghi's, "We will do whatever it takes" speech but this was not what I had thought it meant. The word "bullied" comes to mind as well as the word "vengeance."There is some discussion to be had about deposit guarantees as part of this drama but, setting that aside for a moment, to even take one Euro from a person's bank account strikes me as a precedent that will have long lasting effects on all the people in Europe as the seizure of private property is no longer protected by law. Then to offer shares in a bankrupt institution as compensation is an attendance at the Theatre of the Absurd while I wonder how they are going to force UBS or BNP to issue shares for the money taken from those banks.

In the Press, on this Saturday morning, they are discussing a European proposal to expropriate 25% of all bank accounts in the entire country of Cyprus to help pay the bills. This would be from normal citizens, Russians, other foreigners, British expats, American corporations and any one at all with money in any Cyprus bank. This would include not just the banks of Cyprus but also the French, Swiss, Emirates and Israeli banks et al with offices there. There is a long history of bank robbery in the world but this is one heist that makes John Dillinger or Jessie James a small fry by comparison.

(Reuters) German Chancellor Angela Merkel told lawmakers that while she wanted to keep Cyprus in the euro zone, it must first recognize it had no future as an offshore financial center.

Given what Europe is attempting to do to Cyprus she might as well have said, "that it must first recognize that it had no future" and left it there. Bank accounts expropriated, a future expropriated and the reputation of the European Union tossed into the Rhine and drowning.

I think that about sums it up.

Why Cyprus Matters (And The ECB Knows It) | Zero Hedge

Cyprus' Laiki Bank Lowers ATM Withdrawal Limit To €100

Submitted by Tyler Durden on 03/24/2013 09:04 -0400

With its banks indefinitely closed, and capital controls already in place making it virtually impossible any material cash will leave the local bank branches or certainly the island (especially in direction Moscow), gas stations about to shut down due to lack of cash, next it was the turn of the ATMs. Sure enough, as CNBC's Michelle Caruso-Cabrera reports on the ground from Nicosia, moments ago the nation's second largest, and second most insolvent bank, Laiki Bank, announced that withdrawals are now limited to €100. The picture below from MCC shows as an employee takes down old sign that said previous €260 limit. At this pace, in lieu of some grand bargain, we expect it is only hours before the final limit is imposed: withdrawals now limited to €0.



"Employee takes down old sign that said previous €260 limit"

Source: Michelle Caruso-Cabrera

Cyprus' Laiki Bank Lowers ATM Withdrawal Limit To €100 | Zero Hedge

Four Feckless Features Of A Post-Cyprus Europe

Submitted by Tyler Durden on 03/24/2013 16:00 -0400

Authored by Gavyn Davies, originally posted at The FT,

The calmness of the financial markets in the face of the deteriorating Cyprus crisis in the past week has been remarkable. Although Cyprus is tiny enough to be completely overlooked in most circumstances, its economy and banking system have characteristics similar to other, much larger, eurozone countries. Cyprus is certainly at the extreme end, but an over-leveraged banking system, with insufficient capital and reliance on foreign funding, is familiar territory in the eurozone.

Cyprus is therefore, in some respects, a microcosm of the entire eurozone crisis, if a microcosm on steroids. The manner in which the crisis has been handled by the Eurogroup and the ECB will have demonstration effects on other economies, for good or ill.

At the time of writing, the outcome of this weekend’s negotiations remains uncertain. However, assuming that there is no catastrophic breakdown in the talks, leading to the exit of Cyprus from the euro area, the broad outline of the settlement seems to be taking shape. It is reported that the Cypriot government will accept a “bail in” of depositors in one or both of its troubled banks, allowing the release of eurozone financial support, while still keeping the government debt/GDP ratio under 150 per cent.

Furthermore, the banking sector should be sufficiently cleaned up and recapitalised to allow the ECB to release further Emergency Lending Assistance from the central bank of Cyprus next week, thus enabling the banks to re-open. Many large depositors would find themselves subject to painful haircuts, rumoured to be around 33 per cent, and then locked into equity in the “bad bank” which would be created by the bank restructuring.

Controls would be imposed on the free movement of capital, so these large depositors, many of them Russian, would be unable to withdraw their remaining funds for an indefinite period. If the Cyprus Parliament baulks at these terms, which is still not impossible, then the spectre of an early exit from the euro would once again begin to loom into view.

A deal of the sort outlined above, keeping the euro intact, would probably be enough to prevent any immediate contagion effects to other economies. After all, everyone knows that Cyprus is a special case, given the size of its banking sector relative to GDP, its exposure to foreign depositors of questionable virtue and its concentration of bank lending to the collapsed Greek economy.

No other economy has that combination of disadvantages, which has made a conventional bank rescue impossible for the Cypriot government, and unacceptable to the rest of the eurozone, especially Germany. Bank depositors in Spain and Italy will presumably be aware of these unique features, and therefore more willing to view it as a special case.

That said, four of the features of the reported deal are setting unfortunate precedents for the future.

First, the way in which the bank failures have been handled shows that the eurozone is still very far removed from a workable banking union. The original rescue plan last weekend made the cardinal mistake of requiring a haircut on small depositors of under €100,000, who could reasonably have expected protection from losses. It is a well established principle of bank work-outs that losses should be taken in the following order: shareholders first, then bondholders, then uninsured depositors, then insured small depositors. The fact that the Eurogroup was willing even to contemplate anything different sends a very bad signal, though hopefully the worst has now been avoided.

Second, the principle of divorcing the debt of governments from that of banks (and thus breaking the “diabolical loop” which threatened to bring down Spain last year), was very rapidly thrown out of the window in Cyprus. There was apparently no willingness to use ESM money directly to recapitalise the banks, even though that is being done successfully with the Bankia resolution in Spain this very week.

German Finance Minister Schauble even went as far as to say that in other countries small deposits are safe “only on the proviso that the states are solvent”. Does that not drive a coach and horses through the separation of banks and governments, which was one of the principle promises made by eurozone leaders at their crucial summit of June 29, 2012?

Third, there is the possibility that investors will view any haircut on large depositors not as a special tax, or a bail in of creditors, but as a capital levy on investors.What is the difference, one might ask? A capital levy occurs when governments require their citizens to contribute to state finances by paying a percentage of their wealth to the government. The theory is that, if this is done without warning in extraordinary circumstances, and as a once only event, it allows revenue to be raised without having the usual disincentive effects on work effort and savings.

Barry Eichengreen’s fascinating analysis of the history of capital levies argues that they will inevitably be considered when governments get themselves into severe debt crises, though he adds that they are hard to apply in democracies, and are rarely successful. It would be most unfortunate if investors in the euro area began to fear that capital levies of this sort might come onto the agenda if the crisis gets worse. A flight of capital could result. (See also “Cyprus Levy: Historical Precedents” by Carola Binder.)

Fourth, there is the fact that direct controls over the exit of capital from a eurozone member will have occurred for the first time in Cyprus. This replicates what happened in the Icelandic bank crisis, when capital controls were originally said to be temporary, but have proven impossible to remove ever since. But to have this happen within the borders of a “single currency” is a different matter. Indeed, it seems to breach one of the basic principles of a single currency in the first place. (See Jeremy Warner.)

If the reported deal is done to keep Cyprus inside the euro by Monday, we can expect to hear, very loudly, that this is a unique case, and that the unfortunate features of this settlement cannot be extrapolated to any other future circumstances. Let us hope not. If nothing else, it would certainly demonstrate that the eurozone still has much work to do before the crisis is fully under control.

Four Feckless Features Of A Post-Cyprus Europe | Zero Hedge

Cyprus Bailout Needs Rise By €2 Billion As Conditions Deteriorate Rapidly

Submitted by Tyler Durden on 03/24/2013 12:21 -0400

A week of closed banks, depositor angst, and economic malaise is creating an increasingly vicious circle for Cyprus (and implicitly the European Union). As Die Welt notes, because the economic data of the tiny 'irrelevant' island could be considerably worse than previously thought (or forecast by Troika) thanks to the distortions created this week by bank closings, several people around the Troika said the exact amount of the bailout remains uncertain and could amount to EUR2bn more than expected. With the Troika capping their handout at EUR10bn of the current EUR17bn needed (and the deposit levy reportedly filling EUR6bn of that EUR7bn hole), the need for a bigger bailout - which seems increasingly likely - will fall on Cyprus banks' depositors (or taxpayers) leading to a hard-to-beat downward spiral. Simply put, the more deposits are pulled, the more deposits need to be confiscated; and with retailer stocks running low ("will last another 2-3 days") and cash-on-delivery demanded, the real economy will "have a problem if this is not resolved by next week."

Via The Guardian,

Retailers, facing cash-on-delivery demands from suppliers, warned stocks were running low. "At the moment, supplies will last another two or three days," said Adamos Hadijadamou, head of Cyprus's Association of Supermarkets. "We'll have a problem if this is not resolved by next week."

Via Die Welt (and Google Translate),

Cyprus needs a lot more money than expected

A few hours before the emergency meeting of the situation seems to capture from bankruptcy Cyprus to deteriorate: From Troika says that money could not exceed the estimated range.

Cyprus needs for information of the "world" more money to bail out its banks and the stabilization of its national budget. Not initially agreed 17 billion euros were enough states in the field of negotiations. The exact amount is not certain. Several people around the troika said the "world" that the increased demand would amount to around two billion euros.

Because the economic data of the island nation could be worse than previously thought, additional billions are needed. One reason for the expansion of the bailout, the distortions caused by the closing of the banks, which has been going on for a week. The financial institutions will not open until next week again.

The troika of EU, European Central Bank (ECB) and International Monetary Fund (IMF) had agreed originally with Cyprus on a rescue package amounting to 17 billion euros. Ten billion would provide the troika, the remaining seven will apply even Cyprus.

Almost six billion would achieve the Cypriot government by the proposed compulsory levy on savings. More money to flush tax increases, such as the increase of the corporate tax in the state coffers.


Cyprus Bailout Needs Rise By €2 Billion As Conditions Deteriorate Rapidly | Zero Hedge

With Russia "Demanding Cyprus Out Of The Eurozone" Here Is A List Of Possible Russian Punitive Reprisals

Submitted by Tyler Durden on 03/24/2013 12:06 -0400

As has been made abundantly clear on these pages since the breakout of the latest Cyprus crisis, the Russian policy vis-a-vis its now former Mediterranean offshore deposit haven-cum-soon to be naval base, has been a simple one: let the country implode on the heels of the Eurozone's latest humiliating policy faux pas, so that Putin can swoop in, pick up assets (including those of a gaseous nature, much to Turkey's chagrin) for free, while being welcome like the victorious Russian red army saving Cyprus from its slavedriving European overlords (a strategy whose culmination Merkel has very generously assisted with).

Curiously there had been some confusion about Russia's "noble" motives in Cyprus (seemingly forgetting that in Realpolitik, as in love and war, all is fair). We hope all such confusion can now be put to rest following the clarification by Jorgo Hatzimarkakis, the German Euro deputy of Greek origin, who told Skai television on Sunday morning that Russia did not want Cyprus to stay in the eurozone.

From Kathimerini:

Jorgo Hatzimarkakis, the German Euro deputy of Greek origin told Skai television on Sunday morning that Russia did not want Cyprus to stay in the eurozone.

“Cyprus’s alternative plan was only a half-plan that also relied on Moscow’s help. However Russia preferred a Cyprus outside the eurozone, but inside the European Union,” stated Hatzimarkakis.

Cypriot Finance Minister Michalis Sarris returned to Cyprus on Friday after his week-long effort to convince Russian authorities to lend some support to the Republic in the form of a new interstate loan, contribution to a bailout fund or even the extension of the 2.5-billion-euro loan from 2011, but to no avail.

At this point it bears (pun intended) pointing out that what Russia does as Cyprus situation devolves into utter ad hoc chaos, in both Cyprus and Europe, is the biggest and most important wildcard. So here, according to the Guardian, are some things a suddenly quite furious Russia can do (aside from watching quietly on the side as its billionaires are suicided):

Fears are growing of Russian reprisals against European businesses as EU authorities desperately seek a deal to save the Cypriot economy by imposing a 25% levy on bank deposits of more than €100,000.

As the island scrambled to put together a rescue programme, its finance minister, Michalis Sarris, said "significant progress" had been made on the latest levy plan in talks with officials from the European Union, the European Central Bank and the International Monetary Fund.

The government in Nicosia faces a deadline of Monday to reach an agreement or the European Central Bank says it will cut off emergency cash to the island, spelling the likely financial collapse of its banking system and a potential exit from the European single currency.

However, with Russian investors having an estimated €30bn (£26bn) deposited in banks on the island, the growing optimism about a deal was accompanied by fears of retaliation from Moscow. Alexander Nekrassov, a former Kremlin adviser, said: "If it is the case that there will be a 25% levy on deposits greater than €100,000 then some Russians will suffer very badly.

"Then, of course, Moscow will be looking for ways to punish the EU. There are a number of large German companies operating in Russia. You could possibly look at freezing assets or taxing assets. The Kremlin is adopting a wait and see policy."

Nekrassov rejected suggestions that Russia might hit back by cutting off gas supplies, a tactic the country used in 2009 after the collapse of talks with Ukraine to end a row over unpaid bills and energy pricing.

"Gas is no longer a weapon," Nekrassov said. "When Russia did that before, it realised that the foreign energy lobby reacted and efforts to find alternative sources were increased. If Russia kept threatening, it knows that nobody would be buying its gas in 20 years' time."

Mike Ingram, an analyst at City broker BGC Partners, said: "In Russia, historically, if they want an asset they just grab it. If they want cash out of a [EU] business [in Russia] they just create a tax bill or raid offices and make your life unpleasant. They could also make life difficult diplomatically on issues such as Syria. They might also rattle a few sabres over deployment of the missile defence system."

Sadly, unlike the rest of the algorithmic world, Russia does not succumb to the idiotic policy of "if S&P is up, then all is well" and neither does it have an endogenous bent toward seeing everything in an optimistic light, unlike Mr. Ingram above. Which is why with the decision-making process in Europe in total disarray, keep a very close eye on Russia's next steps, as well as on any potential future suicides of Russian oligarch billionaires.

With Russia "Demanding Cyprus Out Of The Eurozone" Here Is A List Of Possible Russian Punitive Reprisals | Zero Hedge

Guest Post: Why Cyprus 2013 Is Worse Than The KreditAnstalt (1931) And Argentina 2001 Crises

Submitted by Tyler Durden on 03/24/2013 11:29 -0400

Submitted by Martin Sibileau of A View from the Trenches blog,

Why Cyprus 2013 is worse than the KreditAnstalt (1931) and Argentina 2001 crises

The Cyprus 2013, like any other event, can be thought in political and economic terms.Political analysis: Two dimensions

Politically, I can see two dimensions. The first dimension belongs to the geopolitical history of the region, with the addition of the recently discovered natural gas reserves. The historical relevance goes as far back as 1853, the year the Crimean War began. The Crimean War took place in the adjacent Black Sea, but the political interest was the same: To avoid the expansion of Russia into the Mediterranean. The relevance of this episode was the break-up of the balance of power established after the Napoleonic Wars, with the Congress of Vienna, in 1815. From then on, a whole new series of unexpected events would lead to a weaker France, a stronger Prussia, new alliances and a final resolution sixty years later: World War I. It is within this same framework that I see Cyprus 2013 as a very relevant political event: Should Russia eventually obtain a bailout of Cyprus (as I write, this does not seem likely) against a pledge on the natural gas reserves or a naval base, a new balance of power will have been drafted in the region, with Israel as the biggest loser.The second political dimension refers to a point I made exactly a year ago, precisely inspired in the KreditAnstalt event of 1931.

In an article titled: “On gold, stocks, financial repression and the KreditAnstalt of 1931” I wrote:

“(The KreditAnstalt event) was triggered because France, a public sector creditor, introduced a political condition to Austria, in exchange for a bailout of the KreditAnstalt. Today, like in 1931, in the Euro zone, the public sector is increasingly the creditor of the public sector. In 1931, England and France were creditors of Austria and demanded conditions that no private investor would have demanded. Private investors live and die by their profits and losses. Politicians live and die by the votes they get. Private investors worry about the sustainability and capital structure of the borrower, the collateralization and the funding profile of their credits. Politicians worry about the sustainability of their power. It’s a fact and we must learn to live with it. In 2012, Greece and increasingly other peripheral EU countries owe to other governments, the IMF and the European Central Bank. Private investors have been wiped out and will not return any moment soon. We fear that just like in 1931, when the next bailout is due either for Greece again or Portugal or Spain, political conditions will be demanded that no private investor in his/her right mind would ever have demanded. Think of it... What in the world had the customs union between Austria and Germany in 1931 had to do with the capitalization ratio of the KreditAnstalt??? Nothing! Yet, millions and millions of people worldwide were condemned to misery in only a matter of days as their savings evaporated! Ladies and gentlemen, welcome to the world of fiat currencies! You have been warned! If months from now you read in the papers that the EU Council irresponsibly demands strange things from a peripheral country in need of a bailout, remember the KreditAnstalt. Remember 1931. Please, understand that this is not a tail risk. The tail risk is precisely the opposite. The real tail risk here is that when the next bailout comes due, politicians think like private investors and give priority to economic rather than political considerations. That’s the tail risk! If such a crisis occurred, the media will speak of increased correlations and tell you that everything is actually fine on this side of the Atlantic. But if you read us, you will know that all that led to such a situation was perfectly foreseeable and nothing is really fine on this side of the Atlantic either. You will have remembered 1931…”

At this point, I think all is said and I have nothing else to add. My worries a year ago are proving too correct.Economic analysis: Confiscation and two broken promises

Cyprus 2013 is worse than the KreditAnstalt and Argentina 2001 crises because it has an element of confiscation and two broken promises that were absent in the latter.ConfiscationNeither in 1931 or in 2001 were the depositors in Austria or Argentina subject to an explicit and arbitrary confiscation of their savings by their fellow representatives, meeting at a Parliament. This is a totally new element of violence in the drama. Back in 1931 and in 2001, depositors simply run against their banks for price discovery: to discover the true value of holding US dollar bills –physical- vs. their respective fiat currencies (shillings and pesos). That was all what these exercises (i.e. runs) were about. The governments did not intervene to distort the final discovery. In the ‘30s, through contagion to the US, such discovery allowed depositors to realize that their US dollars were worth a lot less than 1/20.67^th of an ounce of gold. In the 21^st century, the final act of the same game will see holders of fiat gold realizing that there is a premium for physical gold.Both in 1931 and 2001, governments intervened only to slow down the process of price discovery. But could not change the outcome of the same. In the case of Argentina, with a credit multiplier for US dollars of 1/0.3 (30% was the reserve ratio), the US dollar ended trading at 3 pesos by 2003. Nobody should have been surprised in Argentina therefore, that the peso lost 2/3rds of its value vs. the US dollar. The devaluation was not a confiscation. Depositors did not bail out their banks or the government. Depositors simply suffer a market priced transfer of wealth that benefited those who held physical US dollars. And neither the banks nor the government had physical US dollars. That’s why they both went bankrupt.

In Cyprus 2013, depositors have no clue as to what the final recovery of their capital will be. The expected losses have no connection with a public credit multiplier (In Argentina everyone and their grandmothers knew that as of March 1995, by regulation of the central bank, for every three fiat US dollars circulating there was only 1 real US dollar as backup). In Cyprus, the final recovery is being “debated” at this moment by members of Parliament and is consulted to powers outside the country, in Brussels, in Berlin, in Washington DC and in Moscow. This is far worse. This will bring an element of social conflict, of resentment, that will not be easy to appease.Broken Promise no. 1: The promise of a banking union

During 2012, real efforts were made by policy makers to convince the public that the Euro zone was shifting towards a banking union first, as the stepping stone to a political union. The cornerstone of that promise was the role of the European Central Bank as lender of last resort. It had to be an unanimous promise; a promise to every jurisdiction. For all practical purposes, it should matter very little what the GDP or population of a member of the union is. In fact, if the European Central Bank can not come up with the EUR5.8BN package that is claimed to be minimally needed to kick the Cypriot can down the road….what can we expect when this problem gets to Italy, which doesn’t even have a government to negotiate with yet???

In 1931, the promise of international support for Austria was only implicit. In 2001, the promise of a lender of last resort was explicitly absent in Argentina. Nobody in either Austria or Argentina had never expected anything. Nobody was promised anything. Nobody was let down. This is not the case in 2013.

Broken Promise no. 2: The promise that deposits below EUR100,000 are guaranteedPerhaps I missed something here, but as far as I know, I never saw Mario Draghi calling for a press conference to say: “Dear depositors of Euros in the Euro zone: As long as this central bank I preside exists, regardless of geography or political circumstance, any deposit up to EUR100M is guaranteed by my institution”. If I missed such message, please, accept my apologies and be kind enough to send me the link to watch it online (I cut my cable tv subscription last year, in the interest my kids’ education).The promised EUR100M deposit guarantee has not been openly defended in Cyprus 2013. To my knowledge, there was never such a promise either in 1931 or in 2001. Therefore, Cypriot depositors were left in the cold far worse than their counterparts in Austria or Argentina, whose expectations had never been high.Final thoughts

If you look at the case of Argentina 2001, you will realize that it was a pretty clean bet. In Argentina, the reserve ratio on US dollars was known: 30%. We all knew that the USD deposits had been loaned out to the government and that the government faced a significant probability of default. Banks however offered depositors of US dollars a 20% p.a. interest rate. Therefore, an Argentine depositor was faced with a clean bet: Earn 20% p.a. vs. the probability of losing 2/3rds of capital. If you thought that the probability of default of the Argentine government was beyond four years, you would play the bet with a chance of winning it.

What are depositors of Euros faced with today? Anything but a clean bet! They don’t know what the expected loss on their capital will be, because it will be decided over a weekend by politicians who don’t even represent them. They don’t really know where their deposits went to and they also ignore what jurisdiction they really belong to. Finally, depositors are paid mere basis points for their trust in the system vs. the 20% p.a. Argentina offered in 2001 (thanks to the zero-interest rate policies of the 21^st century). In light of all this, I can only conclude that anyone still having an unsecured deposit in a Euro zone bank should get his/her head examined!

Guest Post: Why Cyprus 2013 Is Worse Than The KreditAnstalt (1931) And Argentina 2001 Crises | Zero Hedge