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On Capital Flight and Forced Repatriation
There are some folks in America who will wake up this morning and read that Jefferies has been sued for its role in a bond deal with MF Global and they will vote with their feet (Zero hedge Link). They will close their accounts with JEF and move to a safer address. That’s an example of capital flight.
There are people all over the globe who have looked at the rapid un-gluing of the financial system and have bought gold as a safe haven. That’s another example of capital flight.
Every time that something stupid crosses the tape from one of the EU deep thinkers the US bond market catches a bid. Yet another example of capital flight.
I could go on for a bit with this. There are dozens of examples. All around the globe one can find evidence that money is moving around with the sole purpose of finding someplace “safe”.
Capital flight is a perfectly logical consequence in today’s world. Barely a day passes where we are not reminded that nothing is safe any more. Not our currencies, not our equities, not our bonds and certainly not our banks/brokers.
In Greece there are many example where capital flight is undermining stability. The most obvious is the capital flight from the Greek banks that has taken place over the past few years. This flow of money is also perfectly logical. There are many risks of leaving money in a Greek bank:
-The Bank could default. The principal in the account is at risk.The guarantee (up to E100k) is from the government. What's that worth?
-The government could default. The chaos that would follow would result in a freeze of all bank balances.
-The government could announce one morning that it was re-establishing the Drachma. This would mean that any Euros in a Greek bank would be automatically converted into Drachmas at the old official rate. The value of those Drachma would be worth half (or less) as a result of the immediate devaluation that would occur.
Put yourself in the mind of a Greek who had some savings in a local bank. What would you do? You would do whatever you could to get your money to high ground. It would be perfectly reasonable for you to do that. And that is exactly what the Greeks have done. They’ve moved billions of Euros to Swiss banks in an effort to preserve their wealth. In the process they have crippled the Greek banks and have added to the downward spiral in Greece and the rest of the EU.
There was (IMHO) a very significant development on this front last week. A move is being made in Brussels to “force” the Swiss government/banks to transfer all of the assets of Greek citizens back to the Greek banks. For a Greek this means that your money is hostage. It has been functionally expropriated. It will be transferred into a banking system that is fraught with risk. Some portion of the money that goes back to Greece will certainly be lost.
I have talked with some who I know in Athens. They are out of their minds with this development.
Some thoughts/quotes:
- BRUSSELS—The European Commission is helping Greece negotiate an agreement with Switzerland to repatriate as much as $81 billion believed to be hidden in Swiss bank accounts, a high level European Union executive body official said Nov. 17.
$81 billion?? That’s massive. This is not the shopkeeper or pensioner. This is big bucks and that means the Greek shippers. It is a fact that the Greek government doesn’t tax the foreign earnings of the shippers. Call that a mistake, but that is the law. As a result, the shippers have held huge bucks in Switzerland. It’s not dirty money. Right or wrong, there was no legal tax on this.
The European Commission is working with Switzerland and Greece stop what it believes is an ongoing exodus of money from Greek bank accounts into Swiss and other offshore banking centers, the EU official said.
The only way to stop capital flight is to address the underlying causes of the flight. That can’t happen in Greece for years. The alternative is to trap the money, force it to go where it is at most risk. The owner of the money will have no choice. Any rights they might have to preserve their assets will be abrogated.
I’m amazed at this development. The Swiss government/banks are obligated to cooperate with EU tax authorities when there is evidence of tax fraud. But that is not what this is about. The people in Brussels and Bern know that. The fact is that the Greek tax system is so screwed up that there simply are no taxes levied on certain types of income/capital (the shippers). No doubt, some of the Greek cash that is in Switzerland is there because of tax avoidance. But the vast majority is simply safe haven money.
The word “Repatriation” sounds nice enough but really it means “Theft and expropriation”. There will be nothing voluntary about this. There will be little (if any) due process.
If this happens (the folks in Brussels are pushing hard) a very dangerous precedent will have been set. Flight capital will have been made illegal. Where might this go?
-It will go to Spain very quickly. After that it will go to Italy where there are truly huge fortunes outside the country. I see a development like that as being a lights out event.
-It will come to the USA. EU residents have tons of assets here.
-Money that is subject to forced repatriation back to countries with weak banks and bankrupt governments will seek the last remaining safe haven, gold. If governments go so far as to repatriate money, they would also not hesitate to make gold ownership illegal. That too would be a lights out event.
We have a situation developing where the technocrats in Brussels are trying to institute capital controls. They have put a gun to the Swiss government to achieve their objectives. They will likely succeed. The fear of broader capital controls and more repatriation will spread like wildfire. The fact is, capital flight is a very reasonable response in our current environment. Capital controls that either stop or reverse it will undermine confidence and create a panic.
Those officials in Brussels have no idea what they are unleashing.
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"The FDIC is one INCH away from insolvency."
My first reaction was that the FDIC was closer to one micron away from insolvency, then I thought no, it's more like an angstrom away.
But then I realized that the distance the FDIC is away from insolvency can only be determined when pi is resolved to the last decimal place.
i can't seem to google anything with statistics on the FDIC balance sheet - but i recall in the first/second quarter of the year,
they were owing the treasury 15 - 2o billion (meaning money already printed).
but that peanuts.....
Doesnt matter.
The USA can monetize.
Greece cant.
There will be losses in "insured" accounts in Greece when they go back to the drachma
Fed backstops. "Just print the money." There. "You're guaranteed." Doesn't mean there aren't massive losses of course. There was a "Federal Bank" in California that failed...the losses were staggering since "you're only guarnateed up to 100,000." so that means "you're out the other 50 million." Hence "the problem of Greece." It's not the little guy leaving morons! "It's the guy with 10 million." So even you're hundred grand is phucked? YEP! Insofar as MoFoGlobal is concerned that one will be fascinating to watch and see how the cocksuckers weasel out of that one. In "theory" there's a fund. Unlike the FDIC which has functioned incredibly well under this "monetary holocaust" the SIPC has had "timeliness issues." Trading damage has to be staggering...does the exhcange even function anymore? Outside of Treasuries i would say for all intents and purposes "no."
sipc is a fraud. they only cover your lose in the event of a 'fraud'. nothing else. madoff wiped them clean the first time
Let's get Physical.
From BKs article: "Put yourself in the mind of a Greek who had some savings in a local bank. What would you do?"
Zorba would buy a couple of jugs of retsina and find some whores... and, probably waste the rest.
Bruce, if these folks have more money than will fit into all the mattresses of their mansions, perhaps they have too damn much paper? Why didn't they buy some gold and bury it?... maybe they did?
Great article Bruce. Smells like what the US did a couple of years back to the same Swiss banks, similar vein, slightly different motivator. Governments scrambling everywhere to steal individual's cash assets.
One part of the article I must clarify: "Not our currencies, not our equities, not our bonds and certainly not our banks/brokers"
The word "our" belongs nowhere near this sentence. Given the many ways private assets can now be locked up and taken. Currencies, bonds, equities manipulated beyond belief. Banks/brokers, this is like the line George W. spun when he referred to bailing out "our" banks, "our" financial system. Liar. Spun to the people as if they have a common interest with the bankers receiving the bailout swill. Patriotic tripe.
Keep the articles rolling.....
Bruce,
Do you think this will be compelled on the private Swiss banks, or will it follow the US tax induced disclosures that apparently only had effect on the publicly held Swiss banks?
Thanks for the continued digging!
some believe that theft isn't really possible. if You are dedicated enough to prevent theft, then You really do own the property.
http://expose2.wordpress.com
Let's get Physical.
Time to start the hanging. You want to screw me, well your going to pay,not with fiat.
This will set off civil wars, and massive riots.As well it should.
People need to take over THEIR countries again, they do not belong to the BANKS.
ReSet.
Come on, Eileen.
+ $55,000 DosZap
Some of that gold should be kept offshore if you can find a safe place for it.
Hey, .gov bitches! You want to try and take my gold & guns? Come and try... I'll either shoot you dead or be in Peru, with enough money to bribe them NOT to send me or anything back. Repatriate, my ass!
As you may know DC i've been a gold bull for many a year and still am... but i dont think we should look to europe for money printing. Someone pointed out to me that Germany is in full control of what's happening.
There are quick solutions for the crisis i.e. money printing by the European Central Bank and buying bonds to keep the yields down. Germany is opposing those measures, it fears inflation but mainly it wants to drive permanent reforms in those countries that need to reform.
Essentially, Germany is using the bond vigilantes, to force Greece, Italy, Spain, Portugal and Ireland (the PIIGS) to get their act together, which basically means cutting real wages and reducing their citizens' standard of living.
When a country becomes uncompetitive it has two options: devalue the currency or cut real wages and living standards. They amount to the same thing, but the former is politically acceptable because it doesn't feel like a cut in living standards, and because the export sector benefits directly. The PIIGS cannot devalue because they are in the euro, so they must cut wages, while at the same time moving the government's budgets out of deficit so sovereign debt doesn't keep mounting up.
It is almost impossible for a democracy openly to cut living standards and remain in power, which is why Italy and Greece have temporarily suspended democracy. Unelected "technocrats" have been appointed as prime minister of each country and they are expected to do the things an elected politician would never do, not if they wanted to get elected again: that is, cut government spending, raise taxes and reduce wages.
Is this all part of the inevitable ascendancy of the surplus countries – China and Germany – and the demise of the deficit countries: the United States, Italy, Greece, etc.
Germany is running the largest trade surplus in the world; it is running a larger trade surplus than China at the moment.
But whereas China is actively manipulating its currency to keep it down and generate its trade surplus, Germany is doing it via the euro, which is being held down by the fact that most of its members are running big deficits. If Germany left the euro, its currency would suddenly appreciate by 30–40% and it would lose its competitive advantage and its surplus.
That's why Germany will never let the euro disintegrate and will do everything possible keep it together, including all the existing members, PIIGS and all.
Its the rise of Germany, which is dictating policy in Europe and i suspect Germany is not going to let the European Union fall over. But they are forcing through economic policy changes.
The Germans believe they have time on their side and by letting bond yields go up they are putting on pressure for change to happen politically and economically.
No quick resolution to the situation. But we need to look at other drivers for gold rather than the ECB.
Great comment and tremendous value added to the discussion. Thanks.
I hope by that you mean oil. We could be "embargoed" this week. "They can't help themselves" as they say. It is an act of war of course.