Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on March 18, 2013
Cyprus Targets Its Savers in Bailout Agreement
After markets closed on Friday, it was announced that Cyprus worked out a deal with the European Central Bank, European Commission, and the International Monetary Fund (“the Troika”). Here is a typical article reporting on the story.
Cyrpus has been in desperate need of a bailout, and was in discussions as early as June last year. They asked for an amount of money roughly equal to their annual GDP (for comparison, this would be about $15 trillion in the US!) The question is how did Cyprus arrive at this end of the road?
The root of the problem is the manufacture of counterfeit credit. Examples of counterfeit credit include Greek government bonds, sold by Greece to finance their social welfare state, Cyprus government bonds, sold by Cyprus to finance their social welfare state, and Cyprus bank debt, including deposits, used to finance the purchase of said Greek and Cyprus government bonds. To a bank, a deposit is a liability and it owns loans and bonds as assets.
As the world now knows, Greece is unable to pay. Greece is now mired in so-called “austerity”, a package-deal of falling government spending, rising tax rates, and no relief from crippling regulations. The result has been falling tax revenues, rising unemployment and social unrest. Holders of Greek government bonds (and Greek bank bonds) have taken losses already and will take more.
I define inflation as an expansion of counterfeit credit. Bond prices may rise for a time, making participants feel richer. But eventually, all debt borrowed without means or intent to repay is defaulted, and this is deflation. Default can come in many forms, and the imposed loss on depositors in Cyprus is no less a default than other forms. Deflation is now imploding in Cyprus.
In the initial proposal, depositors in Cyprus banks are to be stripped of 6.7% of deposits under €100,000 and 9.9% of amounts over that. Electronic bank transfers have been blocked and cash machines have run out of cash. A bank run is the inevitable reaction to the threat of loss of deposits in a bank.
Subsequent to the initial story, news is now coming out that the Cyprus parliament has postponed the decision and may in fact not be able to reach agreement. They may tinker with the percentages, to penalize smaller savers less (and larger savers more). However, the damage is already done. They have hit their savers with a grievous blow, and this will do irreparable harm to trust and confidence.
As well it should! In more civilized times, there was a long established precedent regarding the capital structure of a bank. Equity holders incur the first losses as they own the upside profits and capital gains. Next come unsecured creditors who are paid a higher interest rate, followed by secured bondholders who are paid a lower interest rate. Depositors are paid the lowest interest rate of all, but are assured to be made whole, even if it means every other class in the capital structure is utterly wiped out.
As caveat to the following paragraph, I acknowledge that I have not read anything definitive yet regarding bondholders. I present my assumptions (which I think are likely correct).
As with the bankruptcy of General Motors in the US, it looks like the rule of law and common sense has been recklessly set aside. The fruit from planting these bitter seeds will be harvested for many years hence. As with GM, political expediency drives pragmatic and ill-considered actions. In Cyprus, bondholders include politically connected banks and sovereign governments. Bureaucrats decided it would be acceptable to use depositors like sacrificial lambs. The only debate at the moment seems to be how to apportion the damage amongst “rich” and “non-rich” depositors.
In Part II (free registration required) we discuss the likely impact to the markets outside Cyprus, such as the euro, the dollar, gold and silver, and the US stock market.
13 Comments on "Cyprus Targets Its Savers in Bailout Agreement"
keith on Mon, 18th Mar 2013 12:50 pm
This is a means to devalue the Euro. European Government’s will now cry to print money in response to the threat of bank runs. Of course, the money was printed months ago and now waits on pallets in some undisclosed warehouse. Let the currency wars start.
Arthur on Mon, 18th Mar 2013 4:25 pm
“They asked for an amount of money roughly equal to their annual GDP (for comparison, this would be about $15 trillion in the US!)”
Cyprus has a GDP of 0.2% of EU GDP. The bill mainly footed by Russian black money, Putin is predictably not ammused:
http://uk.reuters.com/article/2013/03/18/uk-russia-putin-cyprus-idUKBRE92H07120130318
I agree with the measure though. The mess is made locally, so the bailout should be paid for largely locally, not by the European taxpayer. From now on you have to pay attention where you store your money and not rely on the state to bail you out. Better even, invest in hard assets (like a house) and minimize the amount of cash you have.
GregT on Mon, 18th Mar 2013 4:26 pm
The Currency Wars have already started. The EU now needs to catch up to the US, in the race to the bottom.
GregT on Mon, 18th Mar 2013 4:43 pm
Arthur,
Welcome back!
Tens of millions of people that “invested” in real estate in the US, have already lost their entire life savings. Tens of millions more are in foreclosure. Real estate is starting to drop in Canada as well. Some believe that we are in for a 40% correction. There is no easy way out of this mess and it isn’t over by a long shot.
Probably the smartest thing to invest in right now, would be a vegetable garden.
Fishman on Mon, 18th Mar 2013 5:53 pm
Ooops. Socialist running out of other people’s money, where do they go next? Coming to a bank near you soon.
J-Gav on Mon, 18th Mar 2013 8:31 pm
Taxing people who save instead of paying interest on those savings is supposed to be a solution? Absurd! The banksters are laughing all the way to …their own banks. The world is so financially F-ed up that there seems to be practically no escape from their pincers.
Yep, vegetable garden.
GregT on Tue, 19th Mar 2013 12:24 am
J-Gav,
To escape from their pincers, you would have to move to Iran or North Korea. Better hurry up though, the banksters have plans to take them down too.
BillT on Tue, 19th Mar 2013 12:55 am
And the beat goes on … as the world rushes to the bottom.
arthur plow on Tue, 19th Mar 2013 2:55 am
“Probably the smartest thing to invest in right now, would be a vegetable garden.”
Too late, Monsanto is controlling the seeds by now.
FoxV on Tue, 19th Mar 2013 4:20 pm
This is a test case. Cyprus is small enough, they can let it burn. It is also a tax haven and money laundering center so Europeans will be very sympathetic. Although there will be a few holes put in heads when this goes through. Russian’s are not known for taking insults lightly.
Let the Euro capital flight begin! Because guess what GregT; its coming to Canada 🙂
FoxV on Tue, 19th Mar 2013 4:21 pm
This is a test case. Cyprus is small enough, they can let it burn. It is also a tax haven and money laundering center so Europeans will not be very sympathetic. Although there will be a few holes put in heads when this goes through. Russian’s are not known for taking insults lightly.
Let the Euro capital flight begin! Because guess what GregT; its coming to Canada 🙂
Hugh Culliton on Tue, 19th Mar 2013 4:31 pm
Greg T: if they get away with it in Cyprus, I give it a year before they try it elsewhere in Europe. I think we have longer than that before it hits Canada. But not much. My RRSP is looking more like junk then usual. Depending on how Cyprus goes down I might just cash it out, turn it to silver, and work on the garden.
GregT on Tue, 19th Mar 2013 4:56 pm
FoxV,
It is coming to Canada, and much sooner than people realize. Our Prime Minister already warned us on a nationally televised interview. He said that the US fiscal situation was “a runaway train”, and that he is very concerned with the recent dramatic increase in Canadian household debt. At some point the Canadian Central Bank will have no choice but to raise interest rates. When that happens, the dominos will fall.