As we have vociferously warned since September 2011, and most recently as the Cyprus debacle exploded explained why it is just beginning, Germany's Council of Economic Experts (or so-called 'Five Wise Men') just confirmed a wealth tax is coming. As the Telegraph reports, confirming our expectations, Germany warns that states in trouble must pay more for their own salvation, arguing that there is enough wealth in homes and private assets across the Mediterranean to cover bail-out costs. They further added that targeting deposit-holders is also a mistake, since the "resourceful rich just move their money to banks in northern Europe and avoid paying," preferring instead taxes on property or other less-mobile assets, "for example, over the next 10 years, the rich should give up a portion of their assets." As we noted here and here, the differences between mean and median wealth in the peripheral nations suggest that people in the bailed-out countries are often better-off than those in Germany - - "this shows that Germany has been right to take a tough line of euro rescue loans." However, the implications of a wealth tax - implicitly impacting the pro-euro Southern European uber-rich - raises the specter of EU breakup once again.
Last week we laid out the apparent 'blueprint' from the EU Commission for every other country with a banking system in which non-performing loans are soaring. With Mario Draghi's patsy in place at the Cypriot Central Bank, happy to hand over the nation's gold at the beck-and-call of the EU leaders - despite the Cypriot President's disgust at the 'coercion' of the new deal chiding the central bank for "catching the government by surprise," it now seems, as this Cyprus Mail op-ed explains, that the people of this nation are ready for change - real change, , otherwise, "we may wake up one morning and find the country has completely shut down, crushed under the weight of its mounting, unserviceable debts with no banks, businesses or services able to operate."
One more domino in the dollar reserve supremacy regime falls. Following the announcement two weeks ago that "Australia And China will Enable Direct Currency Convertibility", which in turn was the culmination of two years of Yuan internationalization efforts as summarized by the following: "World's Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade", "China, Russia Drop Dollar In Bilateral Trade", "China And Iran To Bypass Dollar, Plan Oil Barter System", "India and Japan sign new $15bn currency swap agreement", "Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says", "India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees", and "The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap", China has now launched yet another feeler to see what the apetite toward its currency is, this time in the heart of the Eurozone: Paris. According to China Daily, as reported by Reuters, "France intends to set up a currency swap line with China to make Paris a major offshore yuan trading hub in Europe, competing against London." As a reminder the BOE and the PBOC announced a currency swap line back in February, in effect linking up the CNY to the GBP. Now it is the EUR's turn.
You can almost hear the snickering among European politicians.
- Korean Nuclear Worries Raised (WSJ)
- Och-Ziff, With Strategy from a 30-Year-Old Debt Specialist, Racks Up Big Score (WSJ)
- Japan's big "Abenomics" gamble: how to tell if it's paying off (Reuters)
- Kuroda walks a two-year tightrope (FT)
- China Rebound at Risk as Xi Curbs Officials’ Spending (BBG)
- BOJ Said to Consider Boosting Outlook for Inflation (BBG) - for energy prices? Absolutely: by double digits
- Cyprus May Loosen Bank Restrictions in Days (WSJ)
- Cyprus mulls early EU structural funds (Reuters)
- Russia slashes 2013 growth forecast (FT)
- Japan, U.S. Agree on Trade-Talks Entry (WSJ)
- IMF Trims U.S. Growth Outlook in Draft Report Citing Fiscal Cuts (BBG)
- Mexico Is Picking Up the Peso (WSJ)
The troubles in Cyprus have set off a new examination of the health of the eurozone, with a particular focus on which country might be next in line for a bailout and the extent to which shareholders and depositors will take losses when banks fail (bail-ins). As UK think-tank, OpenEurope notes, much of the attention has settled on two countries. Portugal, which has been propelled back into the headlines, with the country’s constitutional court recently ruling against some of the government’s EU-mandated budget cuts. Secondly, Slovenia, which is facing a massive banking crisis, in turn providing another potential testing ground for the eurozone’s vaguely defined ‘bail-in’ plans. OpenEurope provides a quick run-down of the key points to watch in each country.
Disparities, bailouts, and a slow-motion blowup.
The Central Bank of Cyprus (CBC) said last night however that selling the island’s gold had not been on the table. “Such an issue has not been raised, has not been discussed and is not being discussed at the moment,” CBC spokeswoman Aliki Stylianou said. Stylianou added that sale of the gold was a matter handled exclusively by the CBC board. A spokesperson for the Central Bank of Cyprus told the Cyprus News Agency (CNA) that reports of the $523 million gold sale have not been, “raised, discussed or debated,” with the bank’s board of directors. The Central Bank of Cyprus denied the gold sale after reports on Reuters said that Cyprus officials had agreed to sell around 400 million euros in excess gold reserves to contribute to the country's bailout. Stylianou, the spokesperson for the Central Bank of Cyprus said that the gold sale was, “never discussed nor are there current or future plans to do so on the board’s agenda.” Reuters based its story on a draft report from the European Commission which assessed the nation's financing needs.
As was reported in the previously presented Cypriot Debt Sustainability Analysis, which among other things had this stunner inside of it, things in Cyprus have gone from bad to worse in the brief span of a month. 35% worse to be exact, because this is how much the total bailout of Cyprus has grown by in a few shorts weeks, from €17 to €23 billion, which happened because just as we predicted the stealth outflow from banks was much worse (read bigger) than previously reported, leaving banks with a far bigger hole to plug. This is problematic because at least previously the bailout as a percentage of GDP was in the double digits. No longer so, as the latest (and soon to be re-revised higher) bailout figure now stands at over 120% of the country's €18.8 billion GDP (which itself is about to tumble following the collapse of the economy).
- Obama to report to his bosses today: Obama Meets With Blankfein, Dimon and Moynihan Today (BBG)
- 2007 is here all over again: Seeking Relief, Banks Shift Risk to Murkier Corners (NYT)
- Kuroda Calls BOJ Inflation Target 'Flexible' (WSJ)
- Lagarde warns over three-speed world (FT)
- N. Korea’s Retro Propaganda Calls U.S. Boiled Pumpkin (BBG)
- Luxembourg To Ease Bank Secrecy Rule, Share Data In 2015 (BBG)
- Bank of Korea Keeps Policy Steady (WSJ)
- BOE Stimulus Dilemma Persists as Inflation Seen Higher (BBG)
- EU Sounds Alarm on Spain (WSJ)
- Qatar gives Egypt $3bn aid package (FT)
- RBNZ Says Deposit Insurance May Increase Risk of Bank Failure (BBG)
- Plosser Calls for Reducing QE Pace Citing Gains in Labor Market (BBG)
- Obama budget aims to kick start deficit-reduction talks (Reuters)
Futures green? Check. Overnight ramp in either the EURUSD or USDJPY carry funding pair? Check? Lack of good economic news and plethora of economic misses? Check. In short, all the ingredients for continued New Normal record highs, driven only by the central bank liquidity tsunami are here. The weakness started with Australia's stunning unemployment jump overnight which saw a 36,100 drop in jobs on just 7,500 expected. A miss in Chinese auto sales was next, with 1.59MM cars sole in March, below the 1.596 expected, and even despite the surge in M2 and loan data, the Shanghai Composite closed down once again, dropping 0.29% to 2219.6. Nikkei continued its deranged liquidity-fueled ways, rising 1.96% even as Kuroda is starting to become quite concerned about the rapid move in the Yen, saying he "may adjust policy before the 2% target is reached if the economy and other indicators are growing rapidly." They aren't, and won't be, but if the Nikkei225 is confused for the economy, he just may push on the breaks which would send the only reason for the latest rally, the USDJPY tumbling. Finally, looking at Europe, Italy sold well less than the maximum €6 billion targeted in 2016, 2017 and 2028 bonds, which dented some of the enthusiasm for Italian paper although with Japanese money desperate to be parked somewhere, it will continue going into European and all other fixed income, distorting market signals for a long time. In short, expect the central-bank risk levitation to continue as all the deteriorating fundamentals and reality are ignored once more, and hopium and P/E multiple expansion are the only story in town.
Explains the political motivation for slamming the account holders in Cypriot banks.
Wondering which dominoes are next to fall in Europe? Here is a list based on a simple but powerful precept: follow the smart money. In this case, the smart money entered the at-risk banking sector of a particular nation to skim the fat premium offered by its higher interest rates--rates that reflected the higher risk. The smart money then exits the nations' banking sector before the inevitable solvency crisis triggers capital controls and depositor expropriations (the comically misleading "bail-in"). Why is any money left in at-risk periphery banks? "Things fail from the periphery to the core." With this in mind, we might arrange the dominoes in this order: Slovenia, Portugal, Malta, and then Spain.
Here We Go: Cyprus To Sell €400 Million In Gold, About 75% Of Its Total Holdings, To Finance Part Of Its BailoutSubmitted by Tyler Durden on 04/10/2013 09:38 -0500
Curious why every bank and their grandmother, and most recently Goldman today, has been lining up to push the price of gold as low as possible? Here's why:
- CYPRUS TO SELL 400 MLN EUROS WORTH OF GOLD RESERVES TO FINANCE PART OF ITS BAILOUT - TROIKA DOCUMENTS - RTRS
Or about 10 tons of gold. But... the bailout was prefunded and there was no need to provide any additional cash? What happened: was the deposit outflow discovered to have been even greater than the worst case scenario and thus Cyprus needed even more cash? As for the buyers? We will venture a guess: central banks buying at the lows.
Finally: congratulations Cypriots. You are now handing over your gold for the one time, unbeatable opportunity to remain a vassal state to the Eurozone. But at least you have your €.