The Week That Was - Money Centers in Focus

Bruce Krasting's picture


What an interesting week. Monday brought a wave of righteous indignation over the thought of a haircut for Cypriot depositors, on Friday everyone is cheering the idea that deposits over E100k are going to gets 'faced' for 40%. The Cyprus story is far from over, but there are some lessons so far:

- European leaders have shown their hand. They are more than willing to stiff depositors when pushed to the wall.

- The deposit level of +/- E100k has been reinforced at the benchmark for haircuts.

- All Deposits < E100k in European banks are safe.

- All Deposits > E100k are unsafe.

- One would have to be oblivious to these facts (or a complete idiot) to have greater than E100k in an EU bank deposit.

- European Money Centers are at risk.


One consequence of being a money center is that there has to be huge foreign liabilities. Looking at what is owed to external creditors provides some information on what I call the Money Center Debt Syndrome (MCDS). The following numbers on External Debt come from the CIA (Link). The numbers are external debt owing to other countries, minus external debt of other countries held. (The CIA presents all numbers in dollars.) The numbers are only the liabilities, there are foreign assets held against these liabilities. I want to focus on just the debt side of this picture.


The two biggest money centers in Europe are Zurich and London. The MCDS is very obvious:

Switzerland - External Debt = $2.2T. External Debt to GDP = 210%

UK - External Debt = $9.8T. External Debt to GDP = 400%

Again, there are real assets behind most of this debt, so these ratios are not really as scary as they appear. In addition, these money centers are outside of the Euro Zone. I don't think there is an issue with these. Now consider Germany, a country with a large GDP and a relatively small function as a money center:

Germany - External Debt = $5.6T. External Debt to GDP = 150%


Italy/Spain are not money centers at. As a result, they do not suffer from MCDS:

Italy - External Debt = $2.5T. External Debt to GDP = 110%

Spain - External Debt = $1.4T. External Debt to GDP = 93%


The following are 2011 numbers for Cyprus:

Cyprus - External Debt = $106B. External Debt to GDP = 440%

Clearly there was a red flag with external debt/GDP in Cyprus two years ago. The ratio was higher than all the other EU countries. It was higher than Switzerland. Cyprus was an accident waiting to happen.


Now to the point of this article; consider the ratio for this European money center:

Luxemburg - External Debt = $2.2T. External debt to GDP = 3,700%


Yes, yes, I know. Luxemburg is different than Cyprus. Luxemburg is just a booking center, there are assets behind all of this debt. But at the same time, this looks like a very unstable situation.


I end with where I started, only an idiot would leave more than E100k in a Luxemburg bank (any EU bank for the foreseeable future). I believe that the deposits that are behind Luxemburg's external debt are measured in the trillions, the vast majority of those deposits exceed E100k. It would not take much for this situation to slide out of control.




Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
psyops's picture

OutsideLookingIn 23 March 2013 3:10am Still pushing the myth that Cyprus is a dirty-money launderer for Russian mobsters? Some inconvenient facts:

(a) Banking assets of Cyprus are about 7.1x GDP relative to the EU average of 3.5x GDP and similar to Ireland and Malta. Luxembourg, by contrast, where Anglo-Saxon firms do their tax arbitrage has banking assets of 21x GDP. So, Cyprus’s exposure is similar to that of an economy that has large financial services sector, but that still has a real economy too. It is not Luxembourg nor the Cayman Islands nor the Bahamas nor the Channel Islands or the Isle of Man.

(b) 20B of the 70B of deposits in Cyprus are non-EU (aka Russia/CIS) which, while meaningful (28%), hardly dominate the system

(c) The banks are almost 100% deposit funded (something that regulators across the world have been encouraging because deposits tend to be sticky if you take care of them)

(d) Cyprus' problems largely arise due to their exposure to Greece, Cyprus’s neighboring economy, both on the commercial side, but most importantly and most critically because of the Greek Government Bond EU restructuring (this accounts for about 40-50% of the capital needs) which Cyprus signed up for in the spirit of EU / Greek solidarity. It was understood at the time that there would be some protection in exchange for this later on otherwise, Cyprus should have taken a harder line at the time such as ensuring the that Greek branches get covered by the Greek bailout.

(e) Cyprus has two money-center type banks: Laiki (Popular) Bank and Bank of Cyprus. Laiki was purchased by a Greek vehicle (Marfin Investment Group) backed by Gulf money. Marfin’s purchase of Laiki took Laiki from being a fairly conservative local bank to being highly exposed to Greece. Laiki is definitely insolvent and needs to be restructured.

(f) Bank of Cyprus has been more conservative vis-a-vis Greece, but still has meaningful exposure. It is conceivable that, given time, Bank of Cyprus could survive.

(g) Beyond the main two banks, there is Hellenic Bank (a much smaller bank with much less Greek exposure), Cyprus Development Bank (no Greek exposure), the Co-ops (no Greek exposure) and the Cyprus subsidiaries of foreign banks (aka, Russian, English, etc banks), also with no Greek exposure.

(h) All the local oriented banks (BoC, Laiki, Hellenic, Coops) have exposure to the local real estate market that went through a bubble during the 2000-2009 period. This exposure however is not short-term and could be resolved over the period of years. It is a problem, not a crisis, and is offset by the fact that the two main banks have quasi-monopolistic earnings power locally. Given the time and some financial represssion (a la the United States) and the local issues would be manageable yet the depositors with them are being hit to bail out the profligate ones. So much for moral hazard.

(i) There might be some true money laundering in Cyprus just like there is at dozens of Western banks (HSBC, Standard Chartered, and so on). However there are also legitimate tax reasons for investment in Russia to be routed through Cyprus (BP Russia is also a Cyprus company for example) for well-known and transparent tax treaty reasons, no different than Ireland, Luxembourg, Netherlands, Bahamas, Delaware, Nevada and so on. Moreover Cyprus and its courts uses English commercial law which makes it very attractive to international trade.

(j) This is not a bail-in of Depositors of Bank A to rescue Bank A, but a bail-in of Depositors of Banks A-Z to rescue Depositors of Bank A (Laiki), B (Bank of Cyprus) and C (maybe some small amounts to the others). There are for example 3B dollars of Russian money in a subsidiary of VTB in Cyprus, a perfectly solvent Russian bank. This will be haircut in order to bail out Laiki, a bank it has nothing to do with while the depositors in Laiki’s branches in Greece (aka a totally insolvent bank in a much more insolvent sovereign) will not be haircut.

(k) If you're happy that Cyriot savers should be punished en mass for having a 'bloated' financial industry that found itself in trouble, I must assume you would have no objection to having your savings docked the next time the City of London screws up.

Bruce Krasting's picture

Happy? Who's happy? Not me. No one is happy.

All stories have to have an ending. Cyprus no different. That this is ending with depositors footing the bill comes as a huge surprise to me. 10 days ago I would have said, "not possible". I thought the folks in Brussels would have come up with the extra E7b that was required. I'm sure that the EU could have cut a deal on the side where there was a share in the Cyprus gas story (if there is a story). This could have been avoided.

So this is a puzzle to me. Why take the risk of a blowup that could lead to "Exits"? There has to be a reason - What was it?

PS  Thanks for the info provided in the comment. You seem to have a handle on this. Question: Is there really a "gas" story in Cyprus? Noble Drilling has been punching test holes for the past two years. By now, "somebody" knows "something". No?

It would be a hoot if the haircut to Russian depositors resulted in a windfall from gas in a few years. Or was that the plan all along?


Oldwood's picture

Exactly! The big question should be "why". This is th equestion I have been asking for at least the last five years (and should have been paying attention long before). When one asks why it forces you to look at the problem differently than just looking at the immediate problem. Why have banks and governments effectively enabled the entire economy to come to this? We initially can assume greed and corruption, but this looks more and more deliberate over time. This is a deliberate strategic collapse, or imparement to enable the people in power to take more, because we are actually asking them to. Begging them to save us...from ourselves. We are voluntarily entering protective custody.

newworldorder's picture

Thanks for another informative article Bruce. Loved the "art" repost. Keep it coming.

You have highlighted the absurdaty of the debt/safety espectations that the average saver/investor has. The worldwide banking system is a "banking network." Physical portal entries into that system, whether they are Cyprus, Caymans, Luxemburg, Hong Kong, etc., have been sold to us as being safe. Are they? Seems to me that safety exists only when there is faith and rule of law.

Where is the rule of law when the troika can dictate the terms they have in Cyprus? Where is the rule of law in the European Union? The European people should be very concerned that the rule of law has not been apparant. By what rule of law has the troika been able to dictate financial terms to soverein countries like Cyprus, Greece, Ireland, etc?

falak pema's picture

one possible reply is : the rules of law break down when we are in WAR.

And since 2008 its open war; as WB7 so eloquently points out : neo liberal oligarchy markets are war on the people by other means.

The Euro continent is fighting that war using other means; both against the financial anglo model that has polluted its portals; aka the Cyprus via Russian oligarchs part of NWO, and alas, its own people who are being destroyed  as collateral victims of this multi pronged NWO model which has one main nerve center but many networked hubs; not always in unison.

Its war on the people and now more and more amongst themselves as their model goes sour. Don't forget that Putin, China, Japan, along with monarchial Arab lands, along with king kong FED land, are as corrupt as the Troika is...Many heads to this dragon. 

They all eat n drink in the same stinking fiat trough like greedy pigs on rampage. Its financial capitalism, as they say to the stupid.

falak pema's picture

Luxembourg comes close to Cyprus model as its all laundered tax evasive money from mainly EU and also from Third world. 

When you own liabilities due to blatant tax evaders there is an unwritten rule always: if we go belly up in "Act of God", then we don't owe you anything...'cos you cheated a state and God is ultimately on side of legally elected states.

So Luxembourg can always evoke FORCE MAJEURE and ACt of God! 

Lol, so convenient when you are godfearing stakeholders, 'cos you can't shout "thief thief thief " to God's justice.

dunce's picture

All reports do not distinguish between commercial accounts and individual accounts. Many businesses have large payrolls to make and large supply purchases as a part of running the business, either of which might need balances exceeding 100,000 euros for a medium sized enterprise. This sounds like a serious problem far beyond an individual saver. Profitability could be impaired to the point that the business simply shuts down and all employees are out of a job and suppliers might cascade the problem. The whole thing is playing with fire. 

tom's picture

Very good point. While everyone's talking about the Russian gangsta angle, it's the actual working Cypriot economy that's really going to get smashed here.

tom's picture

A better metric to use might be bank assets to GDP. Luxembourg had €743bn bank assets in January to about €45bn GDP last year.

That shows two things

- The banks must hold lots of foreign assets, as a €45bn GDP country couldn't produce €743bn of financial assets (or if it did, that would be the most obvious bubble ever). 

- If those foreign assets go bad en masse, the small government won't be able to bail the system out. Depositors and other creditors would be on the hook.

Question is how wisely did Luxembourger bankers invest. If Cypriot banks had just set aside their dumb ethnic pride and bought Turkish sovereign bonds, they wouldn't be having this crash.

Hmm, Luxembourgers seem to have invested mainly in debt of other banks. Holding €446bn of it, adding loans and bonds. That doesn't sound so hot. Gee I hope those aren't Spanish and Italian banks.

Another €200bn of non-bank private-sector debts. Probably Euromultinationals. Gotta be better than banks.

Only €56bn of public sector debts. Well that was smart, at least.

And some people wonder why Weidmann of the Bundesbank can't find any friends on the ECB council.

imaginalis's picture

I'm glad we live in the US where there is a sound banking system we can all trust! ;)

SAT 800's picture

Hear! Hear! Well said; my man, well said. Our Biggest Banks have been invsolvent for so long it's the new normal.

H E D G E H O G's picture

i just want to be a staircase railing when i grow up, fuck all this banking bullshit..........

H E D G E H O G's picture

oh, and btw, i'd love to see a list of "depositors" that got THE memo early about these "haircuts". betcha the Russian Mafia isn't gonna take a fricken "haircut", without a few/many Cypriot bankers and/or their families  never to be seen again.

wingmann's picture

I have a 100 trillon dollar note from zimbabwe...where should I invest?

williambanzai7's picture

That does it, I'm investing my trillions in stocks!--Mad Ben

chindit13's picture

Given the capital structure of most large Eurobanks, losing deposits is not going to be a good thing.  I the fact that the EU did not demand Cypriot bondholders take a hit a way to encourage large deposits in Eurobanks to become bondholders in Eurobanks?  Is the EU saying we'll put bondholders on a permanent higher footing than depositors, at least large ones?  If this is so, will large depositors buy that, or are the EU-imposed grandfathered CACs on Greek sovereign paper still too fresh?

ekm's picture

Quite impressive article.

pashley1411's picture

I applaud the Cypriots solidarity with Pope Francis I, who are responding to the Holy Father's call for solidarity with poor, by joining them.

At this point atheists all over might want to consider that if there is no god, why does Fate seem to be so intent on kicking the stuffing out of Europe?

SAT 800's picture

That's very droll. "Laughter is the best medicine".

FeralSerf's picture

Is Fate above or below God in the Order of the Universe?

bigwavedave's picture

Bruce. Any data on Lick a' Stein?

ebworthen's picture

Only an idiot would have more than $2,500 in a U.S. Bank or Retirement account.

Bernanke condoned the ECB and IMF theft of Cypriot depositor savings, and did not rule out doing the same in the U.S.

disabledvet's picture

we didn't have deposit insurance when we plunged into the Great Depression oh these many forgotten years ago. needless to say "we got it then" and it probably saved us from GD 2.0. The EU both "had zero deposit insurance" (take all your money to Switzerland effect--easily war gamed) and ridiculous ideas of it (Ireland insures unlimited)...the American approach seems VASTLY superior as it offers consistency "and either your bank can hang or we cut your balls off." we've still had bank failures...many actually. only ignorant CNBC haughtily declares "they are the little people." they've blown so much wealth in Manhattan these last few years i'm starting to doubt if they know what it is anymore. If the State goes belly up though they'll know and know fast.

Oldwood's picture

So it really wasn't uncollateralized loans that caused the great depression, it was simply the lack of "insurance". Right.Insurance will save the world. But gee, it sure seems like we have a lot of insurance now, with the US government being the largest insurance scheme on the planet. How did we end up here? Maybe because insurance conceals risk and actually incentivised risky behavior.  Derivitives anyone?

essence's picture

There's some glaring omissions in this whole Cyprus story.

1) this didn't just suddenly happen ... the Cypriot banks have been deteriorating steadily for some time now. So don't ANYONE now shout out ...."who could've seen this coming. I'm a victim".

2) why have much sympathy for folks (local sheeple or Russian oligarchs) who ignored the warning signs and kept their funds in the Cypriot banks these past few months.

3) Who was in charge of keeping tabs on the health of Cypriot Banks? What banking officials or politicians were behind this disregard? I've read the Cypriot banks took a beating on Greek bonds. How much of the banks present situatuion is due to loss in Greek bonds or is there more to the story than this? And who pushed Cypriot banks into buying dubious Greek bonds?

4) Regarding Capital controls when the Cypriot banks reopen .... WTF do you think would happen? This is the essence of fractional reserve banking. When a saver makes a deposit that doesn't literally mean the bank stores all your funds. The whole system can't withstand a run by depositors. Again, why is anyone acting shocked that captial controls would be implemented?

There's just a fundamental lack of unbiased reporting & analysis going on here.



moneymutt's picture

Why have symapthy? First they had insured deposits....on many levels its crazy what they did going after insured deposits any sane policy would been to protect those smaller amounts, most of economy could live on that, while taking out bigger deposits, bonhodlers etc..if you have insured deposits they should always be available just like people with money in a failed US bank can get their money the Monday after the Friday they closed down bank. The trust removes Bank run. The proposed tax on insured depositis and long closure of banks is exactly what you'd do to f a countries economy immediately and cause default and eventual jubilee, not at all like what they have been doing with slow brutal bleed of austerity up to now .Also, People need bank accounts to transact....businesses have wild swings in cash flow, before they pay staff or vendors they must have money in bank....if banks frozen or capital controls in effect, it removes ability for super cheap transactions, rather it adds horrible costly friction to system.

lotsoffun's picture

so what's different here?  bruce - where are the us numbers?  (which of course are greatly reduced by bernake's monitization)


John_Coltrane's picture

So, presumably if you had $1M Eu to deposit you would divide it into 10 separate accounts and thus be protected.  Its obvious that's how anyone of means with a functioning brain would and does get around the insurance limitations.  This is what anyone in the US should do anyway-diversify.  But investigate the ratio of non-performing loans at your prospective banks.  The few, best credit unions and banks have only 0.1-0.2% of non-performing loans.   Anyone care to hazard a guess of what it is for Wells Fargo and Bank of America etc. (its an order of magnitude greater).

Of course deposit insurance is a total confidence game/fraud anyway.  It should be eliminated.  People need to investigate the soundness of their banks "assets" since that's what's really covering its liability for your deposits.  (Do they loan to deadbeats without jobs and without at least 20% down?  The best credit unions like mine won't consider such a loan since they never sell the loan and hold it on their books)  Further, what is their leverage?  If your deposits are backed by oil or gold fine.  But why not back your money with gold yourself-just buy it with fiat. 

Tapeworm's picture

good idea except that it is illegal for banks to disclose their actual financial condition to anyone other than goomint regulatatory authorities.

 A depositor has nothing to go on other than guesses from the "alternative media". The MSM reprints it all at face value and is nothing more than an unpaid conduit for gombit/bankster propaganda. You know the drill----"no one could have known"

 Reggie and Kyle and some others dug it out on their own without any legitimate help from OCC and FDIC.

disabledvet's picture

the mantra now is "too big to jail" here not "too big to fail." that says to me the Big Banks aren't out of the woods yet. shall we just cut through the crap them and call them "too big to hail" cuz they can't bail you and me out anymore?

NoTTD's picture

"- All Deposits < E100k in European banks are safe."


 You can't possiby believe that.

TSA gropee's picture

I think he forgot to add, "for the time being".

strannick's picture

"Only an idiot would have more than E100k in a Euro bank"

Im hoping this will soon become an ubiquituous T-shirt. Lots of hands with ''NO'' below the slogan.

Gromit's picture

How about Liechtenstein?





THE DORK OF CORK's picture

"The real assets" are actually conduits for the credit hyperinflation.


The assets do not really produce a underlying yield.

They are not a field that requires little non labour inputs.


There is actually nothing there.

Once the (oil) capital is extracted its a apple core at best............enough to feed a few blackbirds but not much else.

Bear's picture

"One would have to be oblivious to these facts (or a complete idiot) to have greater than E100k in an EU bank deposit" ... I wonder how the FED feels with 1 Trillion there

Clowns on Acid's picture

Hey Bruce does the woman in the pic have underwear on ?

Bruce Krasting's picture

In the continuing effort to answer reader questions - I looked - up close.

IHMO, No undies. Then there is that rosy blush on the left breast.....


I'll keep an eye out for more Pin-Ups. The trick is to find a pic that goes with the last sentence of the piece. Slide out of control....


Sometimes I see a pic I like, and then write a story around it. Ass backward...

NoTTD's picture

Try some of Bettie Page's bondage shots.  Should be good for capitol controls.  Just google her name.  You won't be disappointed.

dexter_morgan's picture

lucky bannister ........

hooligan2009's picture

somewhat lacking in relevance 

banks in london (and zurich) have large deposit balances from other banks fron which they have borrowed

the objective is to scalp varying costs of capital amongs banks and facilitate the clearance of the demand of funds from the economis of the globe (mostly corporates)

this analysis is akin to saying that corporates and banks should have a maximum of 100,000 balances

as goes europe, as for the about AAPL holding its billions in insured deposits..there aren't enough banks

how about you net off the debits and credits of banks lending/borrowing to/from each other before you give gross debt to gdp numbers?

how about you net off the reserves of sovereign wealth funds, investment managers, hedge funds and central bank reserves from the gross debt to gdp numbers; unless of course you think these entities should only invest in insured deposits

how about splitting off the currency breakdowns; the vast majority of deposits in London are not in sterling, but in dollars, euro and yen

it is beyond farcical to apply retail deposits with corporate, SWF, Hedge Fund, central bak reserves, investment managers, deposits

a simple analysis of insitutional fund management would reveal the source of the bank deposits and its not retail customers in the UK who are a tiny fraction of global capital markets

there is a very clear difference between retail and wholesale..most people just don't get it 


disabledvet's picture

indeed. "one needs more than vast oil riches but a consumer class as well." the President's father was a world renowned economist. He is quite aware of what needs doing. "firing all the teachers" aint gonna do it either.

Tao 4 the Show's picture

This line is popping up in all the alternative blogs (anyone would be crazy...), and who wouldn't agree, but imagine if even 10% came out of European banks? Where would it go?

If even 5% is withdrawn, the banks will probably crash. It simply can't be done. And this is the root of the very ominous feeling many are expressing. Seems very close to checkmate.

Widowmaker's picture

Still championing the fraud fiat.

The prudent choice is zero anything in a "bank."  Deposit guarantees are more the same - socialized losses for crooked business.  Fucking idiots on ZH.

Banks are all broke beyond repair.  Krasting is amusing to say the least, with all his hope that "your fraud is less than my fraud and that makes it all okay."

Bad behavior and bullshit used to justify worse behavior and deeper bullshit is not an argument, Bruce.

Round and round the bankers circle jerk we go, printing up excuses as fact.

Diplodicus Rex's picture

One would have to be oblivious to these facts (or a complete idiot) to have one penny in an account in an EU bank.


There, fixed it for you.

Bruce Krasting's picture

This my sixth article in five days - I'm bleary eyed. I bash these things out. I struggled with that sentence. Fucked it up, but worse, didn't notice it. It was a mouthful.


I re wrote it: (It still sucks, but WTF...)


- One would have to be oblivious to these facts (or a complete idiot) to have greater than E100k in an EU bank deposit.