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Luxembourg Is Not The Next Cyprus, Not Yet, But....
Wolf Richter www.testosteronepit.com www.amazon.com/author/wolfrichter
The Grand Duchy of Luxembourg, with a population of just over half a million, smaller even than the other speck in the Eurozone, the Republic of Cyprus, ranks in the top three worldwide in per-capita GDP. In a Eurozone wealth survey, it had the highest average household wealth – €710,100. Only Cyprus, a former off-shore banking center in the Eurozone, came close. Yet Luxembourg is threatened with ruin.
It has 141 banks – bank companies, not ATMs. One bank per 3,808 people. Most of them do private banking. The financial sector added 38% to GDP in 2010 and contributed 30% to the country’s tax revenues, according to the Luxembourg Bankers’ Association (ABBL). All due to bank secrecy and tax laws. But suddenly, after Cyprus had been massacred, Luxembourg buckled.
With the big German guns, and the smaller guns from other nations, swinging in its direction, Luxembourg agreed to participate in an international automatic data-sharing arrangement that would send banking data of foreign clients to their countries, starting in 2015. Prime Minister Jean-Claude Juncker, somewhat defensively, proclaimed that lifting bank secrecy wasn’t such a big deal, that Luxembourg didn’t live from tax evasion. For the banks, the “lights won’t go out in 2015,” he said.
During the entire Eurozone bailout debacle that he presided over until February as President of the Eurogroup, he’d proven to be time and again an inveterate optimist.
“It’s expected that only 60 to 70 banks will survive in the coming years,” declared Alain Steichen, a prominent Luxembourgian tax lawyer, at a conference about the consequences of the data-sharing agreement. He should know. Per his online profile, he “assisted Thomson in the merger acquisition of Reuters in order to form Thomson Reuters, with the group’s main holding location being Luxembourg.” He also “assisted Chase Manhattan in the merger acquisition of JP Morgan in order to form their main holding company in Luxembourg.” Yup, there are a lot of benefits to doing business through Luxembourg.
Combine bank secrecy with nominee corporations to get a particularly juicy cocktail. An entire industry of “fiduciaries” has formed around the banks for that purpose. These accounting, audit, and law firms set up and maintain tax-advantaged nominee corporations, the infamous mailbox companies, whose directors and top executives are principals of the fiduciary firm. The client and the source of money remain anonymous to the outside world. A perfect setup for money laundering. Because the bank is doing business with a Luxembourg mailbox company, not a foreigner, and because the signatories are pillars of Luxembourg’s society, the setup is impervious to the automatic data-sharing arrangement. But now mailbox companies too are under attack, not only in Europe, but also in the US Congress.
“I expect a serious change of the banking landscape because there will be customer withdrawals,” Alain Steichen explained. Some banks, he said, “would lose the critical mass needed to survive.”
The private banks he was talking about managed €300 billion in assets, generated €3.14 billion in revenues, and contributed €503 million in taxes, according to the ABBL. They employ over 10,000 people directly and indirectly. Of the assets under management, 19% are from Luxembourg, the rest from other countries. Half of that system would disappear; the survivors would have to shrink.
“A large part of the clients of the Luxembourgian banks have undeclared money,” Steichen pointed out. They wouldn’t have a lot of options other than closing their accounts in Luxembourg, he said. They might repatriate their funds – and pay fees, taxes, and penalties – or transfer their funds to Singapore, Monaco, or other murky banking centers. Either way, these assets would leave Luxembourg. Their power to generate income, jobs, and tax revenues would evaporate.
This “undeclared money” has been called “black money” in the battle over Cyprus, much of it from Russians. Northern Europe revolted against bailing out mailbox companies and their black-money bank accounts. While they were at it, Northern Europe, including France in this case, shut down the whole offshore machine, crippled the Cypriot economy, smashed its largest source of income and wealth, and demolished its business model. Encouraged by success, Northern Europe, now including the UK, swiveled its guns in direction of Luxembourg.
Luxembourg was horrified. There were too many parallels between it and Cyprus – the mailbox companies, foreign black money, a bloated financial sector, high household wealth.... It was the era of austerity when pensions, wages, and social services were on the chopping block in other countries. Taxes were being jacked up, as in France, to an absurd degree. Belts were being tightened around the poor. So, tax evasion by the rich and not so rich has become an obvious target. Governments would crack down, not on their own tax dodgers, but more conveniently on countries whose business it was to help them.
With 38% of GDP depending on the financial sector, Luxembourg could not risk a sudden “transition” to a new business model, à la Cyprus. Some of the banks could collapse in the process. It would cause a depression and shred the country’s wealth. Instead, Luxembourg would cooperate, in return for a gradual transition, some loopholes, and a little wiggle room, knowing that the good times were over, and that on the other end of the spectrum, there’d be the Cypriot scenario.
Austerity in Spain succeeded in trimming the bloated government sector. But instead of picking up the slack, the private sector destroyed jobs almost four times faster! The hope is that this fiasco will finally reverse course, that something will click and start a virtuous cycle before the unspeakable happens. But so far, it has relentlessly gotten worse. Read.... The Spanish Unemployment Powder Keg
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The article said nothing about the quality of the assets on the banks books. Cyprus had a load of Greek sovereign bonds and other paper probably not marked to market. No doubt no matter what happens the hot money will be long gone with this much warning. The people that earned the money are smarter than the ones trying to confiscate it under the color of law. There may come a time when some Russians terminate with extreme prejudice the employment of some of these grasping hands so that they can be replaced by someone less larcenous. The damage long term to Luxembourg may be the loss of some talented people taking jobs in other countries leaving the country relatively intellectually impoverished. Social engineers always count only heads without consideration of the minds that reside there. The person who says that he is no better than anyone else is a liar or talking about a very limited context, everyone knows someone that they believe is not as smart as themself and even if they are wrong about that one person there is a world full of people both smarter and dumber. The distribution of intelligence seems to vary geographically as well.
Simply a reflection that, in an era of demographic decline, governments have too many wants and their polities have too few resources.
Luxumbourg is in the EU and in between France and Germany. With the EU not exactly a secure haven for wealth, and human nature not likely to change, spot where long-term wealth settles next?
Real estate, especially farm land, obscure jurisdictions, and shiny metals.
The redistribution policies are just another version of the old saw of robbing Peter to pay Paul. The only distribution system that is actually "fair" is Paul earning money to pay to pay his own way. Yes, there are people that can not produce because of age or health, but that is not what is happening today. The infirm and children are and have been provided for without complaint.
If anyone thinks this experiment in finance that is world wide will end up well, if offer you shares of MF Global. You can not and will not succeed in fooling the laws of Phisics or finance.
Expect a new industry with new tools to evade taxes.
It is what they do.
Of course; the anouncement, and whatever degree of follow-through and inforcement actually occur, are politically useful; "see we're going to get those rich, tax cheating so and so's who are causing your misery"; etc. Actually, of course, it was the stupid inumerate government itself that caused the problem; but that will never be admitted. And, of course most of the people who have taken the trouble to protect themselves from the rapacity of their governments will continue to do so. Only the slow and the dim will be roped in. Anything actually effective would spit out a long list of US Senators and Ex.Presidents; that certainly wouldn't be acceptable.
The "mailbox companies" are called "Anstalts"; they will remain sacroscant and untouched. Why? Ex.-president Clinton, and the present criminal in chief, have to have somewhere to park their payoff money. Only the lazy people who didn't bother to set up an Anstalt will be affected.
We'll see who's goose is cooked before it's over....in our lifetime...
Things get worse because Europe and the rest of the world relentlessly burn up 90 million barrels of petroleum every single day and have absolutely nothing to show for it ... but mushrooming debts.
Poor, poor Northern Europe, whose wealth turns out to be an empty sack. It cannot do anything or help anyone it can only reside within the nimbus of its own self-referring preciousness.
Luxembourg, France ... Germany and Japan ... all on the chopping block because they cannot earn anything, nothing is 'productive', neither finance nor nuts-and-bolts. All that's left is the crying.
Do you want to save yourselves, Europeans? How about you Americans? I'm not going to tell you!
: )
Here's the whole story. TPTB are turning the lights off on everything. All Business's will fail and will be owned by the governments . Billions will begin to die. and just when TPTB think they are winning CHRIST COMES BACK AND RAPTURES HIS OWN and the rest will live in the HELL they have created.
So you've got the E.T.A. for this event?
I have to admit it would make a great movie subject. A pissed off Jesus, his merry band of buddies, and millions of graves opening up with zombies flying up to heaven.
Toss in Jason Statham and a machine gun and you got a movie blockbuster.
Well, it makes as much sense as Al Gore's planetary warming.
You would think that as tax haven after tax haven falls to the info sharing agreements that the rich would start to sock their money away in gold.
And that is how gold will reach 50,000.00
Add in the likely fact that before long owners of gold will no longer sell... The the fireworks start!
22-1 Banking-to-GDP ratio should work out really well...Cyprus was 7-1...but hey, who counts anymore..??!!
I've yet to grasp what leverage the big countries have over the banking haven countries that would make them agree to these changes. The Swiss buckled, supposedly, because the US put pressure on the US based branches of the big banks. So close those branches instead? What advantage is there to the Swiss banking system if having a "Swiss Bank Account" doesn't have any more aura of intrigue than an account in Fargo ND? Yet all the havens are caving to pressure. It must be strong pressure to get them sign their own death warrants.
FATCA. What the US told the banks, is either you sign up for information exchange or we withhold 30% of all you US sourced income. It is up to individual banks to comply though, so some banks may not sign up.
Banker sitting in his office. In busts 6 men pointing their weapons at him. The banker says....how may I help you....
DF,
You're a bit too far north in Fargo. South Dakota exempted the banks from usury laws and consequently all credit cards are run out of that State...!!
Toss in a FTT, carbon emissions taxes and wealth taxes and Europe may as well just shoot itself in the head and get it over with!
As china laughs.
Yep. US approached China for a FATCA agreement and the Chinese told them to shove it. So did the rest of Asia.
Act 2...
Everyone stops laughing cause they realize they killed the GOLDEN GOOSE