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Mainstream Media Says Cyprus Salvaged By EU Deal, I Say Cyprus Is Sacrificed By Said Deal - Thrown Into Depression

Reggie Middleton's picture



Last week I posed the question "Is The Cypriot Government Crazy Or Do They Really Fear Bankers That Much?" The country even considering imposing loses on bank depositors over creditors seemed absurd at best. Even the faux consolation of compensating holders of pure liquidity (or at least what was formerly believed to be pure liquidity - banks have been closed for a week now and ATM withdrawals have been limited to 100 euro per day due to the capital controls I clearly warned of last year) was a scheme born out of lunacy, and unlikely to compensate anyone for anything. Well, this is the latest from Bloomberg:

The revised accord spares bank accounts below the insured limit of 100,000 euros.

I was curious to see how they could impose losses on insured accounts in the first place, after all the accounts were insured basically (through implied backstop) by the same entities (EU/EC/ECB) that were attempting to force the loss, no?

It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second biggest.

Losses of 40% are outrageous, particularly considering this is the most liquid and presumably the most sacrosanct tier of the capital structure. How can one assume that this will not have extremely negative repercussions?

Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.

Here we see the bondholders, both junior and senior taking losses. This is interesting, like in Ireland, all of the market risk takers are assuming losses, many of these losses are absolute. Of even greater interest is what happens when the depositors are added into the fray. Now, junior and senior bondholders, as well as depositors are on guard. The ONLY likely scenario to occur when these banks re-open is capital flight, capital controls or not!

Banks in Cyprus, which have been shut for the past week, will remain closed until further notice. Lawmakers in Cyprus voted last week to impose capital controls to prevent a run on deposits when they reopen. “This solution we reached tonight doesn’t have the downsides that the solution of last week did,” said Dutch Finance Minister Jeroen Dijsselbloem, chairman of the euro ministers’ panel.

Yeah, they can try to prevent the run on deposits, and even with some limited success, but now that you have wiped out (or nearly wiped out) junior and senior creditors as well as depositors, you have a lot more holes to plug in that liquidity dam, don't you? Again, from The Anatomy of a European Bank Run!


Using this European bank as a proxy for Bear Stearns in January of 2008, another bank collapse situation that I warned of months in advance (see Is this the Breaking of the Bear?). The tall stalk represents the liabilities behind the bank's illiquid level 2 and level 3 assets (including the ill fated mortgage products). Equity is destroyed as the assets leveraged through the use of these liabilities are nearly halved in value, leaving mostly liabilities. The maroon stalk represents the extreme risk posed by capital flight through a depositor run, which Cypriot officials feel they have controlled through capital controls, still there is the excessive reliance on very short term liabilities to fund very long term and illiquid assets that have depreciated in price. Wait, there's more!

The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors.  In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!



I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? Well, with the bondholders getting fully wiped out and the primary rung on the capital structure remaining simply because it is forcibly locked in against its will - at least whats remained if it since uninsured depositors face losses of up to 40%, if it were your money opposing Cypriot banks as counterparty, wouldn't it be pretty much guaranteed.This was clearly demarcated in my piece last week,Liar, Liar Banking System On Fire! Watch As I Spit Fact That Burns Down The Sham Formerly Know As The EU Banking System. 

And back to that Bloomberg article...

On the creditors’ side, parliaments in GermanyFinland and the Netherlands may hold votes to approve loans to Cyprus from the European Stability Mechanism, the 500 billion-euro rescue fund.

Klaus Regling, managing director of the rescue fund, said approval by creditor governments in mid-April will pave the way for the first payouts to Cyprus in early May.

This is interesting. The first payments are due out in early May, and the capital will flee from these banks early TUESDAY morning, or as soon as the bank holiday is over and the banks reopen. Damn, that was a good plan if I ever heard one!!!

Lagarde said she will recommend that the IMF provide loans, without giving a figure. “There might have been a bit of friction here and there,” she said.

And on top of it, the IMF hasn't even guaranteed a loan amount. The Cyprus banks gutted the confidence of its banking system and robbed its wealthiest depositors for an IOU of an unspecified amount and time frame. Damn, that was a good plan if I ever heard one!!!

The next step lies with the ECB, which needs to keep funds flowing to solvent Cypriot banks to enable them to open. While Draghi and Executive Board member Joerg Asmussen left Brussels without commenting to reporters, a statement by the ministers said the bank will channel liquidity to the Bank of Cyprus “in line with applicable rules.”

... The effort to go after insured deposits, while abandoned, may have harmful repercussions, said Moody’s in a note early today. “Policy makers’ recent decisions raise the risk of deposit outflows, capital flight, increased bank and sovereign funding costs and broader financial-market dislocation throughout the euro area in the future,” Moody’s said.

No shit, Sherlock! And it is uncanny insight such as this that has spawned documentaries such as this....

In closing, I will also like to add that the 100k euro limit will likely hit the small businesses and middle class ex-pat community considerably harder than it hits the Russian oligarchs 0who are wealthy enough to have some geographic diversification. The small businesses are the ones who employ the vast amount of the population (them, and the now extra broke government, that is). Wiping out 40% of a small to medium business's liquid assets over 100k is tantamount to corporate genocide. Add to that the extreme taxation to come from attempting to pay back the Troika and the guaranteed spike in unemployment stemming from all of those broken companies, the breakdown economic activity from those missing businesses and the near guaranteed counterparty run whenever those banks open up again (if ever), and you have a austerity-imposed depression on your hands. This is a depression that's currently occurring in Greece and was forecast 3 years ago, see The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! That's actually good news compared to what's likely to happen to those other countries' bank depositors who feel that their liquid assets, at one time thought to be actually liquid and sacrosanct, are at risk like those of the Cyrprians. 

Ready! Set! Bank Run!!!

Cyprus contagion rawCyprus contagion raw

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Mon, 03/25/2013 - 14:39 | 3373522 franzpick
franzpick's picture

All it takes for the U.S.-IMF-EU-bankster-corporate complex to continue to exert its corrupt influence worldwide, is for a few hundreds of millions of good bank acccount demand depositors to do nothing.

It's high time for some Gandhi style non-participation: our political votes may no longer count, but we could very effectively vote out the entrenched rot by repeated swipes of our debit/ATM cards that would shrink Reggies red pillar of demand deposits upon which the corruption depends.

We already have an NRA, so how about an NDA National Depositors Association, maybe with the motto:  Depositors of the World Disperse.

Mon, 03/25/2013 - 13:50 | 3373183 Hulk
Hulk's picture

Great Job Reggie ! And thanks, I have learned a ton from you over the years...

Mon, 03/25/2013 - 13:50 | 3373175 YHC-FTSE
YHC-FTSE's picture

Visited boombustblog today. I like a man who puts his face on everything instead of hiding behind a corporate logo. Not that Reggie's contributions can't stand on their own merits, but it shows refreshing confidence in his own work and instils trust. Sterling job mate. Many thanks.

Unless there's a miraculous change in the global economy,  I think a pan-eurozone bank run is on the cards in the medium-long term. But looking at the sluggish reaction from the msm, it could take awhile. There's no mention of any large depositor flight. Yet.

Mon, 03/25/2013 - 13:44 | 3373146 poldark
poldark's picture

Will banks in Cyprus be opening tomorrow?


Mon, 03/25/2013 - 13:42 | 3373133 poldark
poldark's picture

Anyone with more than 100k euros in a EZ bank will be looking to get their money out.

Who will be bailing-in those banks?

Mon, 03/25/2013 - 13:29 | 3373036 kito
kito's picture

reggie what would you prefer??? that they bail out cyprus with a loan that goes straight to the banks so everyone can be happy??? you enjoy the nanny state??? fact is reggie, while Pig Merkel and the others have done their best to screw up europe, at least this latest plan dissolves a bank that has no business being in business.........and while it sucks, the UNinsured depositors have to live with the unfortunate consequence of having their money wiped out along with the bondholders and shareholders of the bank........this latest proposal is much closer to a "free market" solution than any in the past.................

Mon, 03/25/2013 - 13:22 | 3372999 Clowns on Acid
Clowns on Acid's picture

Reggie is spot per usual. The counterparty risk / increased collateral, waterfall trip clauses starts a momentum that is self fulfilling...bankruptcy.

We know why Bernak is funneling $85B / mth effectively to US banks. Keep the counterparties happy and collateral values stable. Of course how long the Bernak can keep all these spinning dishes in the air is the conundrum in my mind.

ECB must feel that Bernank has their back (as does BOJ) so that they  can follow through on their "austerity" policies. Fed and BOJ will have to continue printing to provide systemic liquidity.


Mon, 03/25/2013 - 13:37 | 3373097 YHC-FTSE
YHC-FTSE's picture

Re: ECB feeling Bernanke has its back.

True. Also consider that the deal could not have been done if it weren't for the least mentioned entity of the Troika, the IMF.

IMF = USA by the logic of the US being the largest voting block and the USD being the largest component of the SDR.

Mon, 03/25/2013 - 13:08 | 3372918 wingmann
wingmann's picture

I had a100,000 euros in Cyprus...and all I got was a lousy t-shirt.

Mon, 03/25/2013 - 13:16 | 3372894 JOYFUL
JOYFUL's picture

This is starting get too close to life imitating art. Guy goes up against the mob. Doesn't back down.

Gritty realism of the production values turns down the heat on overt violence and stock shoot outs, preferring to alternate between bouts of number crunching numbness and  breakouts of seemingly surrealist-inspired make believe - like where the central character goes 'hunting for squid'...dressed in a loin cloth.

Part early Paul Newman(the Hustler)part Eddie Murphy, and just enough of Chas Bronson to make the whole mix so over the top as completely jive with the spirit of the times, what appears at first glance to be a just another conventionally trained finance guy, with a heart of gold but an itch to get ahead, by the films' end has turned into a hardedged enforcer of the law of the slide rule...with a calculated penchant for confrontational case studies that call to mind the manner in which fellow actor\director\producer Clint Eastwood used a simple recipe to boil things down to the basics, no shades of compromise.

The rougish charm of this newcomer to the mantle of cinema verite appears to recognize no boundaries of nation or language. His debut is about to be released internationally - as a remake of Caine's classic Get Carter - titled here Counterparty Risk... in France and Belgium as La Loi Du Milieu Deux; in Germany Reggie Rechnet Ab; in Spain and Latin America Asesino Implacable, and in Turkey Alacaklar.

Good luck an God Bless Reggie...just make sure you rewrite the ending a little different from the Caine script! \The Late, Great Joe Henderson\another master of blowin(his own) horn!


Mon, 03/25/2013 - 12:47 | 3372808 Peter Pan
Peter Pan's picture

Europe did the only thing it could showed its strength and what a bully it could be by picking on its tiniest member. And all this for the sake of 6 billion euros.

It also bypassed democracy and property rights with a play on words.

Merkel might think she is the iron maiden but her European structure is made of sticks and straw and the wolf ( also known as market reality) is at the door.

Mon, 03/25/2013 - 12:46 | 3372805 yabs
yabs's picture

way to go Reggie

you're da man

Mon, 03/25/2013 - 12:46 | 3372797 GoldIsMoney
GoldIsMoney's picture

You are 100 % right. It's one of the biggest thefts ever having taken place. 

It's pure arbitrariness...

Mon, 03/25/2013 - 12:42 | 3372781 Buck Johnson
Buck Johnson's picture

I totally forgot about the counterparties that are invested in the banks, they will also start a run to get their money out also.  And Reggie is correct, it's all confidence and these banks aren't allowing people to get their money has destoryed confidence.  Also I never thought about the small businesses who have accounts that are about to get wiped out, this is going to get bloody.

Mon, 03/25/2013 - 12:41 | 3372780 ramacers
ramacers's picture

sorry reggie, there is no "mainstream" media anymore; it's just the Supine Media with the rest, stragglers like Fox (sometimes), ZH, RCP (sometimes), Limbaugh,etc. holdin' the fort. expect a lot more propaganda.

Mon, 03/25/2013 - 12:37 | 3372756 Ban KKiller
Ban KKiller's picture

Goal=Debt Slavery

Outcome+reality=what exactly is the goal again? 


Mr. Middleton, may I buy you a drink in Manhatten sometime in May when all is good? 

Mon, 03/25/2013 - 12:37 | 3372753 Hongcha
Hongcha's picture

Cyprus' throat was cut by Merkel and the EU; for all to see.

Mon, 03/25/2013 - 13:02 | 3372740 Haole
Haole's picture

"Cyprus a Template For EU" - D-boom


Good to see you post again Reggie!

Mon, 03/25/2013 - 12:33 | 3372726 RichardENixon
RichardENixon's picture

MSM in the US is only interested in the gay marriage issue.

Mon, 03/25/2013 - 12:08 | 3372570 surfsup
surfsup's picture

We try to understand the Elite's "creative destruction" and upon seeing this they snicker off into some dark corner with a heckling laugh...  

Know your predators.  

Thanks Reggie!

Mon, 03/25/2013 - 12:04 | 3372547 BarryG
Mon, 03/25/2013 - 12:01 | 3372533 FunkyOldGeezer
FunkyOldGeezer's picture

Mainstream media in the UK very much NOT saying it's a good deal.

Mon, 03/25/2013 - 11:59 | 3372528 arsenal009
arsenal009's picture

Can someone pls explain the last graph.  What is on the y-axis?



Mon, 03/25/2013 - 12:02 | 3372519 Downtoolong
Downtoolong's picture

Exactly. The EU was salvaged by the EU / Cyprus deal, not Cyprus.

The way I see it, it’s analogous to Congress voting down TARP, then, the Federal Reserve, Wall Street, and the Treasury Dept. responding to Congress saying, “Fine, here’s our Plan B, which is even worse for most of your constituents, and we’re doing it regardless of what you say now.”

And by the way, the Fed, Wall Street, and the MSM are all O.K. with what just happened.


Mon, 03/25/2013 - 11:57 | 3372514 Going Loco
Going Loco's picture

Cyprus gets worse and worse the more you think about it. Who is going to buy real estate in a country with capital controls (one-way door closes behind you as you take your money in). So all the ex-pat and holiday homes can now only be sold to people who already have their money in the country, except they haven't really got their money any longer have they? So where does that leave the sorry remnants of the Cypriot banking system if the residential real estate element of the collateral securing outstanding loans is greatly reduced in value? probably it leaves them more bust than they are now (if that's possible). So there will be absolutely no finance available for anyone to do anything. This could last a generation or two. If Cyprus carries on like this, in the Euro with a non-fungible euro, it's financial services industry dead and tourism decapitated by excessively high exchange rates and no fresh capital coming in and no hope.... it could be the basket case to end all basket cases. You can't rule out a descent into chaos and violence. Silly buggers should have left the Euro and defaulted on their debts the same day they closed their banks. It's not as though people weren't saying that. Lots of people were.

Meanwhile here is a view on the UK banking situation:

Mon, 03/25/2013 - 12:38 | 3372759 Navymugsy
Navymugsy's picture

Cyprus already has a huge problem with title deeds not being issued for properties that are paid in full. Hell, some of them were cash purchases back in the boom days of 2003-2006 and these folks still haven't received clear title to their property. It's a long story but worth googling or "startpaging" as I don't trust google.

Mon, 03/25/2013 - 11:53 | 3372489 Melin
Melin's picture

I have a huge, non-sexual crush on Reggie.

Mon, 03/25/2013 - 12:34 | 3372741 Navymugsy
Navymugsy's picture

The fact that you were compelled to add "non sexual" makes me wonder...

Mon, 03/25/2013 - 13:36 | 3373095 Melin
Melin's picture

Enjoy yourself.

Mon, 03/25/2013 - 11:47 | 3372459 q99x2
q99x2's picture

Time to cash out Reggie. They're coming for all assets.

Mon, 03/25/2013 - 12:45 | 3372796 NotApplicable
NotApplicable's picture

He's not worried. It's not like the DTCC has ever ripped him off before.

All your assets are belong to [ ??? ].

Mon, 03/25/2013 - 12:27 | 3372698 Banksters
Banksters's picture

Maybe the EU thinks they can drive money into sovereign bonds and equity markets?   

Mon, 03/25/2013 - 12:56 | 3372857 Careless Whisper
Careless Whisper's picture

An interesting part of the deal is that Cyprus agreed to "Privitize" it's gov owned assets. Translation: Cyprus sells the monopoly electric company, water works, bridges, and so on, to the IMF cronies for dirt cheap, then they double and triple the fees. This is nothing new BTW.


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