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The Gloriously Ballooning Bailout Bedlam Of Cyprus
Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter
Bailouts start out small. At first, Cyprus just had a funding crisis; the markets had gotten smart, after years of dousing the country with cheap euros. Not that the risks weren’t there before. But markets opened their eyes. So Cyprus went begging to Russia, and got €2.5 billion in November 2011. That money evaporated without a trace. Then last June, the two largest banks were deemed to need €2.3 billion – €500 million for the Bank of Cyprus and €1.8 billion for Laiki Bank – to fill a void in their regulatory capital, the story went. No big deal.
But the banks had been eviscerated by mismanagement and corruption, and their balance sheets were loaded with deteriorating Greek corporate debt; Greek government bonds that had received a 70% haircut; loans to developers extended during the real-estate bubble that had blown up; loans on developments that were never finished or were built so shoddily that they’ve been declared uninhabitable; loans to politicians that were written off as gifts; and mortgages extended to homeowners who were tangled up in a title-deed scandal that the banks themselves had aided and abetted, leaving 130,000 properties (in a country with 838,000 souls) without title deeds, with disputed ownership, and often worthless mortgages.
So by the end of June, as bailout talks with the Troika took off, “sources” mumbled something about €10 billion, including a government bailout, that hadn’t been on the table before. People gasped. But it was just the beginning. In August, Central Bank Governor Panicos Demetriades told parliament that the banks alone would need €12 billion! Plus a government bailout. Rumor consensus settled on €15 billion total. Then in September Russian Finance Minister Anton Siluanov upped the ante: Cyprus would indeed need €15 billion from the Troika, plus €5 billion from Russia, for a total of €20 billion.
Every time someone looked at the cesspool that these banks were, the bailout amount jumped. By March 25, the Troika’s number had risen to €17 billion. But it would be a new way of doing bank bailouts. The EU would contribute €9 billion, the IMF €1 billion, and €7 billion would be extracted from Cypriot uninsured depositors, bank bondholders, public sector workers, pensioners, corporate taxpayers, and others. Laiki Bank would be dismantled. The alternative would have been the collapse of the banks and the default of the government. It was an elegant, finely tuned instrument designed to keep the Eurozone intact – regardless of the price.
The havoc was immediate. So it was tweaked while banks were closed for over a week and draconian capital controls were imposed. The economy froze. But the deal stuck. Until late Wednesday.
That’s when the draft report, “Assessment of the actual or potential financing needs of Cyprus,” was leaked. Someone had given the banking cesspool, the governmental black hole, and the collapsing economy another look. “Debt sustainability analysis” it was called. And the bailout amount jumped to €23 billion – a dizzying 125% of GDP –ten times the bailout estimate of last June.
The additional €6 billion? The Cypriot government would have to extract them from people, businesses, and institutions. The Central Bank would have to sell €400 million worth of gold. Holders of Cypriot government bonds would get an appointment at the Eurozone barbershop for a crew cut. And so on. Bedlam broke out.
The Troika “served poison,” summarized President of Parliament Yannakis Omirou. “We will resist,” said Giorgos Doulouka, spokesman of the main opposition Akel party. “They are eating us alive,” he added. President Nikos Anastasiades asked for “extra assistance” from the Troika. He was immediately shot down by Luxembourg Finance Minister Luc Frieden – the “volume will remain at €10 billion” – and by German government spokesman Steffen Seibert – “The contribution from international creditors will not change.”
Two members of the governing council of the Central Bank – Haris Achniotis and Andreas Matsis – resigned and in their letter to President Anastasiades complained that the council served only for “decorative” purposes. A third member – Luis Christofides – resigned for the same reason.
The two sums weren’t “strictly comparable,” explained EU Economic and Monetary Affairs Commissioner Olli Rehn, trying to brush off the jump from €17 billion to €23 billion. “People have been comparing apples with pears and coming up with oranges.” One was “related to net financing needs” and the other was “a gross financing concept” that included buffers for a weaker fiscal development and more losses at the banks.
So at their meeting in Dublin Friday evening, the Eurozone finance ministers approved the €9 billion for Cyprus, noting “with satisfaction that the Cypriot authorities have implemented decisive bank resolution, restructuring, and recapitalization measures to address the fragile and unique situation of Cyprus’ financial sector....” Parliaments in Germany, Finland and other countries will rubber-stamp the deal. And by mid-May, the first few billions might start winding their way toward Cyprus.
But that too is just the beginning. The financial sector with its offshore services and foreign money, the core of the Cypriot economy, has been gutted. Whatever foreign money hadn’t left already would flee as soon as possible. People would no longer be able to get rich off corruption, money laundering, tax evasion, and other financial services, or off a real estate bubble.
But they did get rich off them: The average Cypriot household, according to a Eurozone-wide survey, the largest ever in Europe, had a phenomenal net worth of €670,900 ($872,000!). Over three times that of German or Dutch households, and just shy of Luxembourg’s €710,100. Wealth achievable only by small countries with huge, murky banking centers. Or oil. Few countries in the world are in that elite club. The results were so explosive that publication was delayed until after the Cyprus bailout had been decided. But the power structure had known the results for weeks [read... Total Fiasco: Germans are the Poorest, Cypriots the Second Richest in The Eurozone].
That wealth had been sucked out of the banks and the government until neither had a drop of lifeblood left. Now the party was over. And those households would be asked to foot a big part of the bailout costs. You can almost hear the snickering among European politicians.
But with financial services and real estate eliminated as a major economic activity, the country will have to refocus. Tourism is hard; it’s handicapped by the high euro and tough competition from Turkey. There is also offshore natural gas, but it will take years before the money starts flowing. The economy, deprived of its traditional activities, might perform a double-digit dive this year, and more bailout costs already appear on the horizon.
There could not possibly be any clouds on the horizon with the Dow and the S&P 500 setting all-time highs, while the German DAX is marching relentlessly towards 8,000 and the Japanese Nikkei is soaring. But just then, a deeply connected representative of the world’s real economy spoils the rosy scenario. Read... “During The Last Crisis, We Had China,” Now We Have No One
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There is no justification for stealing private wealth regardless of how much has been legally accumulated. Stop all the nonsenses that it's ok to confiscate other peoples' money simply because they have it.
Cyprus is now the template microcosm of corrupt oligarchy shenanigans and the people who closed their eyes to that reality when it unfolded since Elstine days; now cry wolf and its too late. They are toast.
Merkel is now caught between two stools, her brinkmanship act of club med bail-ins and ECB/Draghi contrary policy of bail outs of core EZ banks will end up doing the great splits. The FED holds the cards in that monetary see-saw via its swap lines but for how long can Ben hold the Qe infinity fort?
Hyper inflation...wow, or hyper deflation...wowieeeeee. Its getting ominous.
Tedious. Just tedious. Every bailout costs more than originally estimated and sinks the bailed-out country into the quicksand.
At what point is a government going to say "we aren't paying you back, ECB"? Forget LEAVING the Euro or the EU or anything that dramatic, just default on your commitments and dare them to kick you out. They CAN'T, by the way, legally. Nor are they likely to for multiple reasons.
Clear the debt, stay in the Euro at the same time, if that's what you want. Let the ECB bitch and moan. Let them threaten. And if you get in trouble again and they won't play ball, THEN you can leave the Euro if worse comes to worse. Meanwhile, you still have something like a functioning economy at street level (which Cyprus no longer has).
Compared to the heavy-hit of outright exit from the Euro I would consider this a "modest proposal."
Why is the ECB the only party never allowed to have a party default on them? They get to be the only guaranteed winner in the world? Why? What good are they if they can never take the slightest hit to their capital? If they make loans they should have to assume the risk of a default.
JR"I can see clearly now the rain is gone, all of the obstacles are have gone a way; goin to be a bright, bright sunshining day." Milestones
Enjoyed that! “And I’ll be there before the next teardrop falls.”
Overriding truth is as clear as an approaching locomotive. To try and weave complex scenarios around this event is to deny its impact. That overriding truth, in the case of Cyprus, is that the Troika banking cartel set up this country to be robbed.
They designed the blueprint and carried it out: the Troika stole the money, the Troika took the deposits of innocent, trusting people…private property. This is exactly what they will do in every country in every situation now that the Rubicon has been crossed, including the United States, and if they call it unsecured depositors, or creditors, debt holders or owners of the company or new concepts of management yet to be designed; the truth remains, they are stealing private property and they are using it for their own personal benefit.
And they must be stopped.
At the end of the day, if their legalese for plunder doesn’t work, they will use the military to come for your money, and if you don’t give it to them they will have you shot.
Somewhere along this trend line, these people have to be removed from power.
The Cyprus bail-in was just the trailer, the beta-test, for the approach that the “too big to fail and too big to jail” banksters will use to swipe depositor assets to guarantee their solvency using “a bit of wordsmithing.”
As Andy Sutton explains this weekend in “The Fleecing of Bank Depositors Has Just Begun”:
“The story broke from nowhere and caught many off guard. To others it was the manifestation of previously unspoken fears. It was, and is, by far the biggest story of 2013, the decade, and quite possibly the millennium. It was the crossing of another Rubicon. For years and decades, the financial piranhas had wandered around the edges, nibbling a little here and a little there. Inflation, bailouts, and other monetary mischief had already eroded the value of most currencies. But never before had they actually made the boldest of moves – to steal what were always considered to be the most liquid and secure of funds – bank deposits. In a weekend, the liquid became the illiquid and the secure became the repossessed.
“Hey, let’s not split hairs here, the money was stolen. The media dutifully came up with another new buzzword – the ‘bail-in’. Talk about putting a positive spin on outright theft."
And if you think not that something wicked this way comes, “Spain, Canada, and New Zealand have already adopted specific measures using the ‘bail-in’ approach.” And the FDIC and Bank of England, not to mention BIS.
Says Sutton: “Cyprus was just a small prize. There are much bigger fish to fry – like you.” And he explains in great and chilling detail the “blueprint.”
“Truth told,” he says “this is nothing new; there is already the precedent of a series of frighteningly similar situations that are already part of America’s decaying reputation as an advocate for private property rights.”
After relaying the convoluted language in the various blueprints, including Title II of the Dodd-Frank Act, on who ultimately takes the hit, you, Sutton says.
“And this is where the noose closes around the necks of depositors. Pay close attention. Unsecured debt is money that is OWED by the now insolvent bank to creditors. That debt is unsecured, meaning that the creditors can’t repossess buildings, etc. to make good on the unpaid debt. So they’re going to take a bunch of people that are owed something and turn them into owners of the company by converting debt to equity. So what you have is the common and preferred stockholders wiped out and a bunch of creditors now owning the company. But where does the capital come from that is mentioned in the above paragraph? All we’ve done to this point is shuffled some deck chairs on the SS BrokenBank. We’ve wiped out the original capital/owner’s equity and replaced it with ‘unsecured debt’ holders. This resolution mechanism ONLY works if you assume that the deposits fall into the same category as ‘unsecured debt’ and as such are written-down along with unsecured debt (a la Cyprus). Otherwise you’d be in a situation where public money would be needed to re-liquefy the new firm and both Dodd-Frank and the FDIC/BOE report specifically state that public money will not be put at risk. Instead, depositor money will be at risk….
“It must also be noted that the FDIC/BOE report was dated 10-December-2012; well in advance of the Cypriot bank holiday. The blueprints for America and Europe were laid well ahead of the beta test.”
As Sutton puts it: "Physically isolated, the Cypriots never had a chance.”
He concludes: “Our world has changed many times in the last decade. This is just another step in that progression away from liberty.”
http://www.marketoracle.co.uk/Article39923.html
bailout is neocode meaning "social redistrubition", carl marx would love it.
http://covert.nl.ae/http://covert.nl.a
What does it matter? What matters is that even if only one, but likely many, honest, hard working, law abiding Cypriots had their life's earnings stolen.
And the precedence set.
draconian capital controls were imposed
Now that's funny. You don't read ZH -you know London branches open all the time and so-, do you?
so again "i tax the deposits to pay for..." what again? now you have a completely obliterated economy..."corrupt" or otherwise. and this is a template? i'm sorry but i'm just not buying anything denominated in euro's. Cyprus appears to have been one of the better economies in the eurozone. but then some clown came along and said "you're not playing by the rules." and of course in nowhere in this article is it mentioned that if you had 100,000 euro in a bank you can collect 12% interest. "gee, that can't have anything to do with the so called cesspool." if i've got a billion dollars in a bank in Cyprus 12% is 120 million a year! hell even 100,000 is probably enough to live on. "can't have that" said the euro crazies. so now you have...what? 30% unemployment that is/is not to be paid? negative 25% GDP print coming? "fois gras" the universal export? http://en.wikipedia.org/wiki/Foie_gras
"The average Cypriot household, according to a Eurozone-wide survey, the largest ever in Europe, had a phenomenal net worth of €670,900 ($872,000!)."
In finance, "average" is more often than not used to hide the real situation. If you look at the average net worth of Bill Gates and 100,000 destitute people, the average net wealth is still at least $670,000.
In a country with only some 800,000 people, a few billionaires will make the average competely meaningless.
Bill Downey has an interesting and unique perspective on what has happened over the last couple of days.
It's his contention that at least some physical buyers were locked out of the market on several occasions and most notably on Friday forcing gold holders to hedge by buying or selling shorts. He can backup what he is saying as much as anyone can in a global market with a thousand moving parts.
More here http://screwtapefiles.blogspot.com/2013/04/bill-downey-how-gold-market-w...
Thanks for that; interesting read.
Yes, that was an interesting article. Monday will be a day to be alert!
The world needs more lerts.
;-)
(Remember that bumper sticker? "Be alert, the world needs more lerts". I'm thinking late 70's)
Better to be a lert that to be a noid (avoid the "noids!")
Cyprus - leave the Euro and ECB.
Same for Greece, Italy, Spain, and the rest.
The Euro has been nothing but a tool of oppression.
That's the thing that's so infuriating. The Euro has bankrupted nations that formerly were happy places with lots of tourists, good food, historial sites and natural beauty. Trying to force everyone into one mold failed miserably and YET big majorities in Greece, Spain, Italy, Portugal and Cyprus are desperate to stay in the EU. It's almost like, "Here, let me tie the rope so you can hang me...and i'll get you a beer while you're at it." IIt's as if they can't conceive of a future outside thee EU. Perhaps they have no idea there are alternatives out there.
If you pay me for my debt, even though I have none, how much do you think I could find. That's a no brainer.
A little disingenuous as households are generally multi generational.
Not unusual for three generations or four to be under one roof.
Could say the same about household wealth of American TBTF bankers. Bailouts by the middle class to the higher income earners. Look at Hamptoms vs Flagstaff. Cyprus vs Germany. Euro, dollar, bondholders, shares. It has all become the charade of cash. Paper, that is.
I know, America will soon implode and I think it will come from the muni bonds. Also with all that gone for Cyprus, there is nothing that they can do to keep their countries economy growing. And on top of that what outside investor will put their money in that country in this generation? No more offshore banking, no more scams to make money and now what do they have. What will happen is that the young and able workers will emigrate to other countries to find work just like what happened and continue to happen in Ireland. But Cyprus have a small population and with less workers that mean less tax revenue. Not to mention what middleclass or any class person in Cyprus will ever deposit money back in their banks? They are all trying to get their money out via the 300 euro limit and other ways.
Once people lose confidence, it's hard to go back to the trusted bank.
I keep hearing about the average income in Cyprus. What I want to know is the median household income in Cyprus