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The Week That Was - Money Centers in Focus
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.
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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.
You can get some rest, i'll do some drivin.
Doh, I see I'm last to the party again....
<note to self: read all comments before posting>
Luxembourg isn't Cyprus. It's where EU (as opposed to ex-USSR) oligarchs and kleptocrats shield their wealth. Juncker probably doesn't want to find out what it feels like to be fucked gently with a chainsaw, but since the 3,700% figure is 370, 000 times the booked "profits" of their insolvent banks (plus a couple restaurants and garbage men's salaries) if there is a disturbance in the EUR farce, then the cash conduit that they skim their GDP from could subject to extreme fluctuations that they might not be able to conceal, because if Cyprus is a vein in the periphery of EUR fiat beast, Luxembourg is a major artery.
Well noted. If Luxembourg goes, the EU goes. In 1.5 seconds.
Well, I for one find using a bank to be handy.
So I keep some money there.
But only a small amount and...
Way Under The Deposit Guarantee Aggregate Cap.
Now, somewhat heretical to some of those here, my good fellas and babes, anybody keeping any money in any bank above any deposit ceiling, if the shit hits and money's lost...
Tough Noogies, Dipshit.
Why put anything at risk in any bank when you can run everything from a cheap line of credit?
where's the collapse in the USA? the stock market has soared, bond yields have plunged (meaning the value of said paper has soared.) The government can't back stop the deposit insurance? "only if your bank is run by a bunch of criminals." if your giving depositors 12% return on their money with a bank that has no collateral other than the cash on deposit...somebody's lying...or totally full of shit. More than likely both.
Elvgren rocks.
The totally different attitudes toward <100k vs >100k shows how weak the rule of law in the EU is. It's a fair-weather union. Soon enough 10k will be the new 100k. I think Putin sees glorious times ahead.
OK, I'll play, Bruce.
Let's say I'm not a Fin Min or an economist. Just some product manager for Case International or Deere, trying to get paid by a dealer for ten midsized tractors or four combines, a million Euro, more or less. How do I do that without banks? Are we back to traveler's checks or a suitcase full of cash? This is not a theoretical problem. There are more than a few volk sweating blood over this. Que pasa?
There are thousands of examples of what you describe every day. The whole system is based on trust.
In 2008 (when the SHTF) the FDIC guaranteed all "transaction accounts" regardless of size. The rule was intended to eliminate the risk of Case or Deere (etc) losing money on a "normal" transaction. The law was kept on the books until 1/1/2013. Today, there are no transaction guarantees in the US over 100k.
There are none in Europe either. To my knowledge, there are none in any country.
Is this a problem? We shall see. It certainly is a hole in the bucket. It's just a question of how big the hole is.
Didn't know that was gone. Thanks.
When you get some rest, you might want to look into the "reserves" behind the FDIC. One more off-balance sheet train wreck in progress.
hopefully bruce will run this down. but if i remember correctly - by the end of 2009 - there were no 'reserves' at the fdic but an 80 billion IOU to the treasury (printed money??) let's all think about this, ok? if you had brokerage or 401k account at bear steans, lehman, ally bank, washington mutual, wachovia bank, merrill lyncy (i'm missing a few, but you get the point?), you had zero. nothing. nill. zilch. nada. so the money was printed and handed back if you had 'cash' deposits. if you had securities, SPIC has a pool of 2 billion dollars. ask the madoff victims how that worked out for them.
of all the players during this whole epidemic, i have to give sheila bair a huge +++ she spoke the truth to the degree possible short of bathtub problems and she checked out.
say hello to your "free market capitalism" New York. the whole thing is just some bailout scheme? PHUCK YOU AND THE FED CHAIRMAN YOU RODE IN ON!
Correct me if I'm wrong, but trade has been financed for centuries WITHOUT banks. Contracts can be concluded in any monetary instrument (unless legal tender laws forbid it). Europe sent tremendous amounts of silver and gold to China and India (they wouldn't accept anything else) for silks, spices and cloth. Though trade could be completed with various asset classes. States shifted gold around to clear balances.
It is not a theoretical problem, it is a problem that has already been solved. Though we like to think banking improved the financial system, did it really? Is global mind crushing debt a realistic tradeoff? ( for all the idiots that want to scream about numbers, remember, they are the result of an inflated currency regime).
Point well taken. It was done, and can be done, but at a snail's pace.
As I recall, about half of English common law was devoted to what happens when goods are lost in transit, someone doesn't pay, wars, floods, acts of God, acts of Lloyd.
With the net, some things would be easier, but who do you know and trust in Hong Kong, except WB7?
Ah yes, counterparty trust. Gentlemen, I give you: Bitcoin. There is no counterparty to trust. Like gold. If someone can solve the untrusty interface with fiat money (we're working on it) then we may have a winner.
"against the law now." amazingly no sooner than i took an sudden interest in the now exponentially increasing value of the fact that this CURRENCY can't be traced. I think Bruce is right that Government itself has a real problem here. if say..."east diddly dumb phuck sitting on a boat load of oil" decides "i prefer my privacy to your bullshit" this does appear to represent some type of "threat." though clearly "it's not from the terrorists." God forbid if you go over the speed limit...http://www.youtube.com/watch?v=RvV3nn_de2k
what's next? "eliminate the fast break in basketball"?
I would imagine people would be very creative if given the chance. This is always the first step that Bastiat reminds us of: what if? Trade still has to sail the oceans blue and we have excellent communication networks. The maritime and admiralty law already exists. Realistically, I see very few barricades to trade.
"a man only limited by his passion" is a man indeed. i hear girls are really into this one: http://www.youtube.com/watch?v=wvWHnK2FiCk sounds real good with Sammy Hagar playing above i might add...
Transfer the risk to Uncle Sam (and by extension Uncle Ben before the circle jerk back to yourself is complete) and pass the 20bps cost on to the consumer...
http://www.exim.gov/tools/exposurefees/shorttermfibcfinancing/
Sure, but the costs are actually a lot higher. The average business letter costs over $75 in time, supplies, etc.
Here's the larger point. Your subs, suppliers, dealers are subject to the full risk on their float. Even a small, not very profitable business can have a few million in transit through their bank for payroll, vendors, etc. If they get hit on that, and it looks like they will, that can ricochet around the world at light speed.
If you are burdened with the long production lead times associated with heavy equipment manufacturing, then the costs would be significantly higher, but the challenge is the same, transferring payment risk to someone with a printing press. I have a steel mattress that pays the same interest as my banker to cover a few payrolls and a straight-to-voicemail button in the event of a bank holiday... The fact is that the ivory tower idiots have seen fit to do-away with safe-keeping accounts at FIs, manual credit decisioning, and deposit insurance- so a bank is horrible place to "store" money, but a necessary one to move money long distance. Simultaneously, companies have gutted (automated) their internal credit departments which renders them often unable to gauge risk effectively. The food and energy must to flow, so the CB's will print whatever they have to in order to keep their TBTF SIFIs afloat (and keep the beasts that come out in the dark away). Between the FDIC-expiration and the revelation of intentions in Cyprus- organizations need to pull their money out of the "system" and work to develop alternatives until it is made safe for depositors again.
If your customers are rated borrowers (or politically connected in their host country) there are more options then for SME customers, but anything exotic would require a deep, experienced, but still creative credit department, and this an otherwise legacy multi-FTE headcount cost.
Great point about the automated credit ratings. That is so wrong on so many levels. But it's cheap, cheap, cheap.
looks kinda expensive when i see trillion dollar deficits...but hey that's just me. "when does the Government re-rack hit?" don't tell me "it's when we shut down bitcoin and fire a bunch of school teachers."
Why would anyone, especially someone in the EU, keep any more than necessary in a bank? It should be clear to all at this juncture that when you deposit money in a bank, it is no longer yours. You get a receipt and take on all the risks of the bank ( for which they pay you nothing).
While banks no longer have to worry about risk, us peasants still do. Is it really all that difficult to maintain a safe? You already need one for your guns.
They are coming for your bitcoins, they are coming for your cash, they are coming for your 401k's. They will try to confiscate your pm's and then place windfall taxes on their use. When all that is gone, they will partition your wealth and give you credits in their new currency: The Fuck You Hard.
You see, debts MUST be paid, but RISK? Those calculations are for markets in free countries. It's a totalitarian bankster paradise and we aren't allowed in the skybox.
Unlike the USA, there is no safe place to store large amounts of Euros. Because the EU has only a faux Federal Government, EU deposit insurance isn't worth shit, and all State government bonds have default risk. There are no Federal EU bonds. None of these things is true in the USA. The USG is good to the 250K of insured deposits since it issues its own currency, and Treasury Direct is a safe place to store huge amounts of money.
There might be an element of 'punishing the offshore banking center that launders euros instead of the 'normal' EU banking centers (in Germany) that launder euros.
Why beat on depositors at all, why do it now? Why not next year when the crisis is presumably dead and buried?
A: if the crisis is over it is because the European economy has completely unraveled and there is no euro.
All these countries are looking at currency conversion losses. If Cyprus goes back the the pound, depositors will lose 40% ... or more.
The euro bosses think, "Why not extract that 40% right off the top right now?"
It's all too cynical but these are Europeans ...
You overlooked the liens on real estate (any equity really) and explicit demeurrage (over and above high inflation), but well done and...
Thank God someone said it
thats exactly the sentiment in Europe. Never go beyond the legal protected limit. Put the rest in other assets less liquid.
good graffiti there.
Don't rely on the law if you don't have to.
but how do i finance the State? these are rational folks over there: "we must deposit our money in banks so that we can support all the goodies." in the USA we have "Wall Street" and "security firms" (Merrill, Morgan, the one that's from San Diego that has come from nowhere to become 'number four in the US' in the span of just five years...only the New York Times would profess such outrage and attack "Sudden Capitalism"...i wonder what Larry Kudlow thinks of Connecticut's prospects now? Time to find a new tax haven? God forbid if a new and revolutionary source of liquidity suddenly appears. Even Morgan got pissed at "those Rockefellers and all their "god damn money." Interestingly all that money...after going into looney bins first suddenly discovered "the media." Ain't looked back ever since...http://www.youtube.com/watch?v=CUaBobyto_w
After Iceland, you would think people would have learned to avoid these island banking centers. Maybe people thought Cyprus was protected because it was in the EMU. The Europeans have made it clear that this is not the case.
I'm curious about Singapore. It seems to be another banking center with a high ED/GDP ratio. Do you know what is behind that debt?
I don't have any money in Singapore and am not considering it. Just wonder what the chances are for a crisis there.
Love those pics Bruce!
"avoid these island banking centers."
Like England? Or the Caymans?
Did everyone see the hilarious 'the Bruce Krasting' - a 'financial haircut' - amid William Banzai's political artwork ?
Bruce Krasting, Putin and the oligarchs, ha!
'Banzai7 Institute - Hot Cuts for Hot Money'
http://www.flickr.com/photos/expd/8577533833/in/photostream/lightbox/
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BK - like the cheesecake photo girls ! Even better than Banksy !
Hot money is what is used once you run out of EASY money! Careful how you spend that now!!
Hot money should always be spent on easy women. Just as easy money should always be spent on hot women.
Bruce: drop the "K" from "Euro 100" and I think we can all agree. Even if your accounts are fully insured. you're getting what, 1% in interest? And for that, you have the risk of capital controls, week long bank closures, fees up the ass, etc. You don't need a large balance to float a checking account.
Come to papa, baby....
+1 to BK on another great pic from the past. After 18 years of marriage, you could turn me in to that rail and I'd be ok with it......
Bruce, again with the art that reminds me of Art Frahm:
http://lileks.com/institute/frahm/index.html
The hot chick olden days pictures are awesome. Thank you Bruce.
If you are hoping people are going to get what they deserve, then yes, I agree. Of course, this would require actual accountability. So don't hold your breath. They will kill the currency before handing over any real "wealth". They rigged the game, profitted, lived large, but by god we will all suffer. Roll the motherfucking guillotines already.
Sure, end your article with a picture of my banister polisher.
Would have been better had it included the sound track.
and a different angle
My tired old eyes.
I read that subtitle as: only an idiot would have more than 100 Euro in an EU bank.
I was about to applaud Bruce for that.
Only an idiot would have any money in a euro bank
Only an idiot would have ANY money in ANY bank. There, fixed...
I don't remember her name, but I do remember those boobs! Playboy playmate of the year in the late '60s as I recall.