Cyprus Targets Its Savers in Bailout Agreement

Monetary Metals's picture

 

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.

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JOYFUL's picture

Part two - no 'free registration' needed ...

as was discussed, just the other day here...when it still seemed a theoretical exercise...

A reconstituted "LATIN[Monetary]LEAGUE" - that collection of states which formalised decades-old tradition of a common currency system; at first France, Belgium, Switzerland and Italy - later joined by Greece, Romania, Spain, Bulgaria and !Venezuela! Their combination worked sufficiently well to survive up to WW1 - a period of time all but sure to outlast the lifespan of Barrosso&Cie's latest "thousand year Reich" - and was most seriously sabotaged by the Papal States' inability to refrain from counterfeiting and currency debasement - a specialty of "God's Bankers" it would seem - and the Prussian War, the aftermath of which saw out the end of the 'silver standard' and the ascendancy of the new Unholy Roman Emperors of the Kuhn, Loeb Co., Lazard Frères, J.W. Seligman Co., Goldman, Sachs & Co., and Ladenburg, Thalman & Co type.

 

Beppe Grillo and the rest of the new "Latin Kings" are already hard at work...on reconstituting the 'nation state' and sovereignity of the southern brothers...at this point the only hard question left is whether France is even worth admitting!

Credit Agricole  Societe Generale Paribas....bye bye mon Cowboy!...(apres moi, le Deleuze!)

Nobody For President's picture

On Tuesday, February 12 (yeah, this year) the Eurocrats were all agreed on Cyprus:

BRUSSELS (AP) -- For a second day in a row, the European Union's top financial official sought Tuesday to quash speculation that private bank depositors in Cyprus might be forced to take losses as part of a bailout deal — a suggestion that's fueled fears of large-scale withdrawals from the country's troubled banks.

The new head of the euro area's 17 finance ministers stoked concerns Monday about the security of uninsured private deposits in Cyprus when he declined to rule out such a step following repeated questions from reporters. Instead, Eurogroup chief Jeroen Dijsselbloem, who is also the Dutch finance minister, said the matter had not been discussed at the meeting he'd just chaired — his first.

Olli Rehn, the EU's monetary affairs commission, stepped in then to say that the European Commission, the union's executive arm, was not working on any such proposal.

On Tuesday, following a meeting of all 27 EU finance ministers, Rehn repeated that and then went a step further.

Even though private creditors were forced to take losses as part of a deal to bail out Greece, Rehn noted that the Commission had said at the time that such a step would not be repeated — and that, he said, remains the Commission's position.

"The Commission is not working on any PSI option for Cyprus," Rehn said, using jargon for Private Sector Involvement, or forced losses on private creditors.

"Greece is a specific and unique case in this regard," he said.

Meanwhile, the front-runner in Cyprus' presidential election, to be held Feb 17, said Tuesday that he would not sign any bailout deal that would force private depositors to take losses. Right-wing opposition leader Nicos Anastasiades said it was "imperative that we put an end to insecurity and uncertainty."

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But that was last month...

And these lying assholes wonder why 'the little people' don't trust them?

It is truly amazing what lying motherfuckers these assholes are.

'Course, we do so much better here in the US of A...

The Heart's picture

"'Course, we do so much better here in the US of A..."

And herein lies the crux of the real problems. Elected leaders have the ability to really change this.

People are seeing and understanding that the elected leadership does not have their best interests in mind and as unbelivable as it may seem, they do actually lie.