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Two Sides of Cyprus
Let me first (try to) give you a justification for the seizure of bank deposits in Cyprus.
Everybody who knows any thing about Cyprus also knows that the domestic banks were a parking lot for Russian hot money. I wrote about this back in 2011 (Link). There are a gazillion other articles saying the same thing.
That being the case, the seizure of some of the black Russian money as part of a bailout for Cyprus is not really a surprise. With dirty money flowing in, the stupid banks in Cyprus used the deposits to buy crappy assets like the sovereign bonds of Greece. To a significant extent, the hot money caused the problem – and therefore the E5.8b ($7.5b) hit to depositors is justified.
The folks in Berlin, Brussels and Paris all understood that Cyprus was a Russian front. To bailout Cyprus is one thing, but to bail out Russian Oligarchs is quite another. What else could the Euro Deciders do?
I struggle to come up with a valid comparison for what has happened in Cyprus. Think what the backlash would be if somehow the FDIC/Federal Reserve were forced to step in to bailout an entity that was a depository for the Mexican drug lords. If faced with a similar situation, America would do the same as the EU. Screw the hot money crowd.
And now the other side. This is a huge development, a potential game changer. If the seizure of accounts had happened in Greece (or the other PIGS) the European Monetary Union, as we know it today, would not exist. The EU would have imploded within months. This outcome would have resulted in some form of Euro break up, and a return to national currencies. That scenario has broad global implications.
The decision to clip depositors was not taken lightly. The ECB, and all the other Finance ministers contributed to the decision to take the depositors money. While making that decision, they had to have considered the consequences. Certainly there was recognition that this was an unprecedented step, and that it was extraordinarily hostile to bank depositors.
How are markets going to react to this? Will people care if some Russian money was stolen? Will they conclude that this was a unique event, and the depositors in Italy, Spain and France will never face the same losses that depositors in Cyprus have realized?
Given the significance of what has happened it would be logical to assume that a huge safe-haven trade could be the market’s response. If the Cyprus seizure had happened a year ago, the market would have reacted with:
- The Euro trades cheap against all crosses.
- The Yen strengthens against the Euro and the dollar.
-European bond spreads widen. Money moves to Germany, while Spanish and Italian bonds get crushed.
-The EURCHF comes under attack. The Swiss national Bank floor of 1.2000 is tested, and the SNB is forced to intervene to maintain the peg.
-US bonds trade rich.
-Money moves to the UK (where banks are ‘safe’) and Sterling strengthens.
-Money moves to gold, and other PMs.
-Stocks would take a beating globally.
While all of those things might have happened a year ago, I’m not sure that is the case today. As of Friday, the markets hated gold/PMs, Sterling, the Yen against everything (including the Euro), the EURCHF, US bonds and everyone loved stocks.
Is it possible that everything that was in the market on Friday is going to be reversed? I would think not, but these are very unusual circumstances. Nothing like the seizure of depositor’s money has ever happened before, so we are on uncharted ground.
Given the fact that the EU deciders were well aware of the potential consequences to financial stability within the EU, I wonder if some additional “market friendly” steps might be in the offing. (There must be a plan 'B" in place - that or the guys pulling the strings are idiots.)
Because of the Russian money angle, the step to seize deposits might be glossed over. On the other hand, there is a great risk that what has happened is a turning point in modern finance. I’m not aware of any precedent for what has occurred. I say again, if this had happened in any other country in Europe – the monetary union would be dead within months. That possibility still exists, even though it was just crooked Russian money that was stolen. We shall see the market’s reaction in a matter of hours – I can’t wait.
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Wow, this feels like Sept 1939 and the invasion of Poland all over again...I hope Frau Merkel locks up those dark skinned, money handling, usurious Jews…ehm sorry..Cypriots to the Nicosia Ghetto and throws away the key…
Nothing like the scapegoating of dark skinned Untermenschen to satisfy German nationalist instincts and win an election...
If I were a Cypriot peasant, I'd queue up to the bank and close the acct post haste in protest. Most Americans would do this, and likely begin marching (rifles slung on shoulder) down Main Street in protest. If enough of the peasants do this in Cyprus, the peasants in Greece might well follow suit. Perhaps even Spain. Dominoes anybody ?
" Most Americans would do this, and likely begin marching (rifles slung on shoulder) down Main Street in protest. "
No they wouldn't, becauae its already happened and continues to happen today. American Savers loose about 5% a year because of inflation. While Cyrus was an overt theft of savers money, American Politicans and Bankers do it covertly with inflation, banking fees and other crap.
Unfortunately for those who took this step, they are dependent on Russian gas to heat their houses. Stealing the Oligarchs money might compel them to have "pipeline difficulties" this upcoming winter.
they appear to be trying "the bulldozer method" actually. (h/t Banzai.) "when in doubt just seize what's left." http://www.youtube.com/watch?v=drvaZz3FWOI
Good job Bruce!
Umm,if you jailed everyone in Italy for tax avoidance there might be a huge shortage of jail cells.Please attempt to clarify between scary Russian mafia who break kneecaps and simple tax evasion.I agree that Cyprus is just the stopping place for this money on its flow offshore.I also agree that German internal politics have an impact at this time.
Two points: A) I am reminded of the American judge who years ago was quoted," I can't define obscenity,but I know it when I see it".
B) The references to mexican drug cartels should include AG Holders' "fast and furious" operations,gunrunning by the Federal government which resulted in the death of a US Border Patrol officer. Worst. Attorney General. Ever.
Solution, build PRIVATE prisons... winning!
Never forget that Cyprus is a former British protectorate In fact, most of today's tax havens have a British connection. Cyprus is but the first step for Russian money leaving the country. The ultimate destination of this, and other "hot money" is typically London (the City).
PRECISELY. Got a flat in One Hyde Park yet?
http://www.vanityfair.com/society/2013/04/mysterious-residents-one-hyde-...
Great link. Really interesting.
ibramovich much?
Think what the backlash would be if somehow the FDIC/Federal Reserve were forced to step in to bailout an entity that was a depository for the Mexican drug lords.
IF??? LOL! It already happened!
Brucie ignores facts when it pleases him. He forgets them when that doesn't work. He makes them up when that isn't enough.
I wonder how long till the City of London Blitz No2 now....
I bet Mr. Schauble having his Financy Ministry in the former Luftwafe headquarters in Berlin was a choice dictated by an unconscious preference for both National Socialist aesthetics and Blitzkrieg tactics...Bruce,
Your argument that the tax would be considered as external for EU and targeting primarily "hot" russian money is wrong. In that case the tax should have been designed to be levied only on the deposits of Euro 1m and above.
Your agrument that people would consider it as one-time event isolated to Cyprus is, very unfortunately, also incorrect. It would have been the case if executed smoothly and shown that the systemic issues related to SUBSTANTIALLY ALL EU debt are to be resolved with such a "one-time" tax. Apparently, something quite opposite is happening. The execution is the worst possible. The resulting "tax" is too small to probably solve the problems of Cyprus itself, not even talking about southern EU, or EU at large. And, finally, the people are shown that EU deposit guaranty is fiction, and can be easily violated at times when suposedly "everything is fixed".
Your wishful thinking that all current market trends would be unaffected by this "one-time" event may prove to be true, yet I think they will be just that, wishful thinking...
been butting heads with Bruce regularly now going on four years...but this one i think is ABSOLUTELY spot on. I would argue we could just be days away from a return to the DM. "if it ain't broke don't fix it" and everything has been trending this way going on three years now (Greek bailout? really? where?) we shall see but obviously with Germany the "anchor tenant" in NATO as well as it would appear the EU itself i fail to see how this train can change direction this late in the came. http://www.youtube.com/watch?v=f19GKcZU1vg
A tax that targets only the deposit portion of wealth with no exemptions for small depositors who may be the type that are too unsophisticated to be taking advantage of the more favored investments of the financially elite is hugely regressive.
of cause it is. My point was, even such a tax would be considered to be more fair comparing to what they are doing right now.
I read in another post that the under EUR100k "attack" was a requirement to get the Russians to go along. Not sure if it is true.
How can Cypriots complain? Americans are losing 6%-9% of their bank deposits every year due to inflation. Of course, in Cyprus it was done all at once. In the US we do it a la boiling frog.
Well... there's no smiling while they're being fucked. In the US TPTB are well versed in proper manners... all marketing, all marketing... (all hail god Bernays)
Mr Market knew about this blow up a week ago
on spec lets guess that any bank run should give savers everywhere the shivers once more and have the [desired] effect of taking money off the sidelines and invested in stocks, where [damn the risk-off, full steam ahead] you can match their monetary induced inflation premium, sort of.
this is the reason the stock market made new highs, this was a planned event. [now its time to sell the news, and the wall street investors look around with shit-eaten grins while they take profits]
heh, an interesting argument. The stocks as the safest place to avoid deposit confiscation.... Did not it come to your mind that brokerage accounts also may be subject to a special "one-time" "tax"???. And why have not you considered the possibility that some money of beloved AMZN you just bought may be parked somewhere in Cyprus Bank?
they wanted to put a surcharge on stock trades. what happened to that? it's almost like the sales tax exemption online retailers were getting. How may years did that go before someone thought to make these guys pay their fair share. on spec i must say, that in the event of another crash, take your clue from Argentina, bond holders get whacked, but stock buyers will be made whole, and if they buy the bottom, they may even get obscenely wealthy. NYSE is this nations largest GSE. Greenspan says so.
Well, you are mixing different things together here. Let's distinguish between loss due govmt bonds default, loss due inflation/devaluation and loss due confiscation. Here we are discussing specifically loss from confiscation. If the government confiscates your bank deposit, what would prevent it to confiscate your brokerage account? Any argument? And please do not tell me this has not happened before....
By the way, to confiscate ill-gotten gains due to "speculation" in equities may look much more fairer to the general public comparing to bank deposits confiscation.
one thing CBs can do is reflate a broken market, US 87 and Argentina. eventually you were made whole if you had stocks, but many Italian housewifes were cashed in about 50% of the ARG sovereign bonds face value. (so that's how they did it?!) so what are they doing on Cypress right now, taking investors cash and giving them bankshares. confiscation=loss due to inflation=negative yield government paper, they've been stealing from you for years, now its out in the open, that's all.
"aking investors cash and giving them bankshares. confiscation=loss due to inflation=negative yield government paper, they've been stealing from you for years, now its out in the open, that's all."
It's a runaway meltdown. They cannot stop it. Deflating the currency (inflation) is in full rage, and those whose export sectors are weak just plain fail (Cyprus, though there's energy lurking there- that's the pot of gold that TPTB are fighting for, and all the little people are getting stomped on as the titan battle). In the past it was generally at most only a handful of countries (Asian meltdown was the most threatening), the rest of the globe could pretty much absorb the tremors (by importing from those countries- extra incentive by better trade position with stronger currencies).
corzine will chair the brokers meeting....vaporozined!
It might also explain the very unusual movement in the USDCHF over the past couple of weeks. Somebody knew something somewhere and I didn't get the memo.
Guess I gotta update my Outlook Express...
So its all black Russian money in Cyprus banks.
But how comes, that the US and also the UK have both military bases and airports on the Turkish as well as the Greek part of Cyprus, this small island.
Is this Putins money overthere? Dont think so. Its the money of the Friends of Russia to use a term coined nowadays for Syria. Its black money, its huge money but its under the control from the US/UK. So its their problem. Why should Euroland pay a dime for this paper money. Its just numbers on paper and now Euroland should pay for this numbers in new printed Euros, but presto.
You've got the stage all laid out correctly but you're seeing a small prop as a main element. It's NOT about any existing money, it's about control over energy resources (future money). Same as it is in all the other contentious areas on the planet, same as it ever was...
For this the US cannot get away with declaring that this is a mission of "spreading democracy." The storyline, therefore, comes from the Big Players in the EU and is right in line with the rest of their long-running theme of banking crisis... they have already programmed people for this distraction that is Cyprus "hot money."
'Black money, its huge money but its under the control from the US/UK.'
The U.S. gov't black budget is now in the tens of billions. Even your KongressKlown doesn't get to see it.
Is that 'hot money'? Crates of hundreds airlifted to Iraq, is that 'hot money'?
'Hot money' is a myth invented by our overlords, who print the stuff and distribute it on an industrial scale to their murderous cronies.
Good article Bruce, we have to wonder how much of this Russian money is "hot money" and how much was simply looking for a parking place in the shade. Russia has a form of gangster capitalism in which everyone plays rough. The idea of "hot money" is that is usually made through direct investment, but as you point out , this money was parked in banks, and the banks were responsible for making bad investments [so why was the EU upset, they were buying crappy Greek paper?]
if you take Screw the Hot Money as the global monetary cause celebre', then the whole house of cards is going to come tumbling down, including China.
If the house of cards comes down because crooks get clipped, then the cards have to come down. Let it happen.....
Wow, this really feels like the Sept 1939, the invasion of Poland all over again...
They just now do it with Euros instead of Panzers... I wonder how long until we witness the City of London Blitz No2...
"I wonder how long until we witness the City of London Blitz No2..."
Not soon enough? (but, is this speaking in circle, "they" blitzing themselves?)
http://www.vanityfair.com/society/2013/04/mysterious-residents-one-hyde-...
Actually... I need to back up. The article specifically notes that the new big wealth ISN'T those in finance, in which case this might not take on the circular function that I might have hinted at, which would also mean that the possibility would likely be much greater.
But where did all that Hot Money come from to begin with? The banks create-eth, the banks taketh away, and eventually put it all in their accounts. Once it's printed, it's only a matter of time until it's all theirs.
AND, isn't the true ownership stated on each bill? Obviously we've failed to read the (not-so) fine print...
It's their game.
It's their marbles.
They win.
Don't like it? Don't play. (begging for marbles only locks you in to playing Their game)
Always enjoy BK's posts but this is not one of his best. Haven't a few US and UK banks been found with drug lord money on deposit? At the risk of showing how old I've become my sole 'inside the big bank' story was the time I worked at Bank of America's data processing center in San Francisco in my college days. The midnight shift. Here giant computers of the magnetic tape variety whirred all night long and spewed thick bundles of paper that showed the deposit balance of every account. My job was to seperate these piles of paper and sort them by bank branch so that the tellers could look up each depositers balance. On occasion the mighty computers would have a problem and production would stop so I would have an opportunity to study the data output more closely. I would see lots of Mexicans with multimillion dollar balances in a California branch of BofA. I wondered if the Mexican government ( assuming these folks were not the Mexican government) knew that so many of its citizens had all this money stashed in California?
Mexico has a long history of wealth disparity [the GOP in this country will tell you Mexico is a Marxist country, and that immigrants who come here always join the Democratic Party. Which is about as true as saying the poor rural Americans in red states always vote Democratic... As long as they believe it..]
One of the world's richest men is Carlos Slim, who bought up the Merval when Argentina went broke a few years ago. There is a growing middle class in Mexico, and the border is really just a comfortable fiction. {There are plans to build a deepwater port about 100 mile south of TJ which would be bigger than the port of LA}
Hasn't our fed bailed out banks dealing in " hot Mexican drug money" already?
Banksters everywhere are watching this with avid interest.
Ballsy move. Can they get away with it?
I'm not seeing you defending as much as explaining this twist of events so it's too bad you're catching so much flak. Otrher than being a novel (and therefore destabilizing) form of theft I don't see this as much different than the other ways .GOV takes our money. They have the guns and we have the money, what';s not to understand? One difference here would be if they're truly stealing Russian mobsters' money- that's a pretty stupid thing to do. I have a friend who's an Orthodox priest who has buried several parishioners recently immigrated from Russia who didn't live up to what the mobsters who sent them here required. You don't piss those guys off and get away with it. I know if I were on some commission trying to find a way out of the Cyprus bank problem the last thing I would do is vote to steal some mobster's money. Not a single one of the EU technocrat rulers is bullet-proof. Unless there is a secret loophole that excludes accounts owned by the real mobsters there will be blowback from this. If the mob bosses don't get revenge directly they wil use Putin.
Thank you. I think I made a mistake with this article. I should have started with the second part, The section where I say that this is a huge development, and it might result in an EU breakup.
This article was "Two Sides". I'm getting shot for one side, and no applause for the other.
Can't win..........
Here's an argument that QE results in the same "tax" on US depositors as Cyprus' more blatant version. Either way, its all about keeping the banks intact:
"ank CD rates were around 4% in 2008. Since that time, the Federal Reserve's interest rate manipulation has kept CD rates pinned between 0% and 1%. This has allowed the banks to borrow at near-zero, whether from depositors or directly from the Fed, and invest in Treasuries or mortgage-backed securities earning 2%, 3%, or more. Using this free-money interest rate spread, banks have indeed earned their way back to solvency. But savers have had their 4% annual interest confiscated by the Fed."
http://www.wcvarones.com/2013/03/think-cyprus-cant-happen-here-it.html
" Using this free-money interest rate spread, banks have indeed earned their way back to solvency. But savers have had their 4% annual interest confiscated by the Fed.""
Then the bankls haven't really EARNED their way back to solvency. They have stolen other people's sovlency.
Orly mentioned that Europe's next winter could be a bit chillier if Mr. Putin's friends wish it so.
Ya know, that unintended consequences thing.
The "its mostly Russian hot money" is "the end justifies the means" argument. The European Finance Ministers, the ECB and the entire European Union Leadership knew what going on in Cyprus for a number of years. Yet - They all turned a blind eye to this hot money coming into a small country like Cyprus. Now, they hold a gun to the head of the average Cypriot. Why dont they try to do the same in Italy, Spain, Ireland, Greece etc?
The collective hypocricy of EU leadership and bankster accomodation is astounding. This is what the EU has come to stand for; Sacrifice the individual, prevent the collapse of the Bankster Union at any cost. The sooner Europeans understand this, the better off we all will be.