This page has been archived and commenting is disabled.

European Bank 'Jogs' And The Final Kick Of The Can

Tyler Durden's picture





 

Authored by Juhani Huopainen, originally posted at his blog at TradingFloor.com,

An interesting compromise on Cyprus: a EUR 5 billion bail-in by a small haircut on deposits, with bank stocks offered in return to the depositors and a EUR 10 billion bailout from the EU, coupled with the usual austerity requirements.

By acting after the Italian elections, options were limited
The option of conducting a bail-in (confiscating deposits) was tabled months ago and leaked. The deposit flight from Cyprus was measured in billions because of that. Guess if the leak will ever be investigated? The European Union had painted itself in the corner: not wanting to deal with Cyprus immediately has proven costly. The EU had hoped for a pro-euro, pro-austerity government in Italy, but the plan backfired. The idea was that by postponing the bailout it would help in the elections.

It was impossible to wait until the German elections, as Cyprus has a bond maturity in June that it would have been unable to pay. As the maturity date was so close, there was no time to take the bond owners to court (the bonds were issued under English law, so a simple haircut was not possible). The only way to fund the bailout was either a gift from the EU or deposit confiscation. They did both.

Russia obviously made some thinly veiled threats that they would only accept a deposit haircut of below 10 percent, so in order to rake in enough money from the deposits, the EU had to go for the little people’s accounts as well – thus breaking their word on the guaranteed deposits below EUR 100,000. Even with that, the EU has to fork over EUR 10 bn as the confiscation will bring in only EUR 5 bn.

Warming up for a bank jog?
Personally I believe a simple gift of EUR 5 bn of free money would have been a better choice. The lending of EUR 10 bn raises the debt/GDP, lowers growth prospects, forces austerity and has the danger of creating a negative spiral that could turn the island into a second Greece: a continuous source of headaches and disappointment to the EU. The haircut is small and while commissioner Rehn stated that this is a one-off and Cyprus is a special case, whether the depositors in Spain and Italy believe this remains to be seen. If not, the bank jogs slow bank runs could start again. That could push Spain to eventually apply for the ECB's OMT-program. Perhaps that is what Brussels and the ECB actually want. But with the IMF and Germany coming to the negotiations demanding a 40 percent deposit cut, ‘more Europe’ is no longer a winning campaign promise.

Further apart or closer still?
There are two ways of seeing this: #1 Europe just became even more dysfunctional and fragmented, or #2 it has become more unified in doing whatever it takes to protect investors’ interests:

#1 Europe has violated the sanctity of private property, the guaranteed deposit limit of EUR 100,000, democratic decision-making, innocent people end up paying for other’s mistakes by coercion, depositors in crisis countries will move their funds to countries deemed safe, igniting the crisis. The deposit haircut will not remain an isolated case, and investors cannot trust the ECB, Brussels or Germany any more. National governments are at the mercy of the Troika, and the ECB is not the glue that holds the union together, but a weapon of financial mass destruction that forces any opponents to comply. Cyprus is not a special, isolated case.

 

Conclusions: Bank runs and panic. Sell EUR, sell crisis country bonds, buy safe assets preferably outside the euro area.

 

#2 Decision-makers have finally found a way to impose austerity on non-compliant member nations over the democratic multilateral process. The electorate is finally forced to accept its responsibility to vote for sane and proper leaders and to monitor their performance. While deposit cuts and other measures seem unfair, they are easy to implement and difficult to avoid – the only way to avoid is a bankrun, which would bring any government to its knees. By their actions, the Germans, the IMF and the ECB have shown that they mean business. Incentives for governments to freeride on the euro and pretend fiscal austerity and labor market reforms have greatly diminished. The idea of leaving the euro or partial bond defaults is suddenly less popular, as it is known that the ECB will destroy and nation stepping out of line. Government- and bank bond owners have been protected through fiscal repression, protecting investors. Cyprus is a special, unique case.

 

Conclusions: Euro area breakup-risk minimal, exit-talk and resistance to austerity decreased. Defaults ruled out. Buy crisis country bonds and stocks in the euro area, avoid bank deposits in crisis countries.

Personally, I’d vote for #1. The commentary is already utterly negative, but it might take some time for the markets to realize that the upside in crisis country bonds is minimal and there are no restrictions stopping the bank jogs. Next week in Europe will be very, very interesting.

 

Sunday funnies:
On Friday morning the IMF posted a large report on Europe where they stated that the deposit guarantee scheme in the euro area must be ironclad. On Friday evening they happily agreed to go against their own advice.

Cyprus has agreed to an outside audit of its banking sector, but Nicos Anastasiades, the president, says it will “never” accept a haircut of depositors – Financial Times, March 14, 2013

 


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 03/18/2013 - 15:45 | Link to Comment Croesus
Croesus's picture

ECONOMIC COLLAPSE, BITCHEZ!

Mon, 03/18/2013 - 15:54 | Link to Comment DJ Happy Ending
DJ Happy Ending's picture

If there wasn't an EU-wide bank run today, there won't be one.

Mon, 03/18/2013 - 15:55 | Link to Comment Pladizow
Pladizow's picture

Would the FDIC protect bank deposits from theft by the bank?

Mon, 03/18/2013 - 15:58 | Link to Comment DJ Happy Ending
DJ Happy Ending's picture

They are supposed to but as we all know, regulations are enforced until they aren't.

Mon, 03/18/2013 - 16:07 | Link to Comment Abraxas
Abraxas's picture

These guys actually WANT to be dragged out from their offices and got hanged to the lamp-posts. "The Return of the Black Friday" is coming soon to the country near you.

Mon, 03/18/2013 - 16:10 | Link to Comment James_Cole
James_Cole's picture

Somehow Jamie Dimon arranged this whole thing, luckiest guy in the world right now. 

Mon, 03/18/2013 - 16:22 | Link to Comment negative rates
negative rates's picture

Neither one is a good outcome, this won't end well.

Mon, 03/18/2013 - 18:49 | Link to Comment DonGenaro
Mon, 03/18/2013 - 16:02 | Link to Comment SafelyGraze
SafelyGraze's picture

next time, offer an interest rate of 10 percent per annum *first*

that will lure proper size deposits [investments]

at which point, *then* you explain that, in order to better serve blah blah, and you-didn't-deposit-that blah blah but go ahead and keep a big hunk of the deposits [investments] .. the rest has been re-allocated to different vehicles.

with deferred withdrawal

and drop the 10 percent back down to zero

hugs, 
the consumer protection people

 

Mon, 03/18/2013 - 16:07 | Link to Comment Eisenhorn
Eisenhorn's picture

Don't worry about that.  Banks don't steal.  They get "bailed out" by the "government".

 

Mon, 03/18/2013 - 16:13 | Link to Comment SoundMoney45
SoundMoney45's picture

The FDIC will protect against theft of deposits by the bank.  The FDIC will not protect against theft of deposits by government entitites, the FED, or the BIS.

Mon, 03/18/2013 - 16:15 | Link to Comment lotusblue
lotusblue's picture

DJ Happy Ending,

I'm just not so sure.Probably you're correct.Whith Cyprus Gov. Seeming they'll vote down this LEVY,What's ECB to do? Let Cyprus leave the EU? Let Cyprus collapse ? This is AGAINST EU law !

ECB is legally obligated to keep CYPRUS solvent. The effect on rest of EU,I think,is diminimus.

Thoughts anyone ? Tyler ?

Mon, 03/18/2013 - 17:49 | Link to Comment SkottFree
SkottFree's picture

Would the FDIC protect bank deposits from theft by the FDIC?

Mon, 03/18/2013 - 18:18 | Link to Comment SDShack
SDShack's picture

circle jerk

Mon, 03/18/2013 - 18:19 | Link to Comment SDShack
SDShack's picture

Theft from the bank... yes. But that isn't what is happening in Cyprus. This is theft of bank deposits by the Cyprus Government as a tax (levy). In your scenario, the question is "Would the FDIC protect bank deposits from theft by the US Government?" I think we all know the answer to that. For reference, ask a GM bond holder.

Mon, 03/18/2013 - 16:00 | Link to Comment Renfield
Renfield's picture

<<If there wasn't an EU-wide bank run today, there won't be one.>>

Yeah some people say so but I'm with Denninger on this one...the awareness of something like this starts small, but as it grows it snowballs. I would consider it more likely to 'escalate' over the next few months, rather than just go away.

It's fun playing Miss Cleo if you're not much of a bank customer. If you are, then it becomes a lot more important to guess the right outcome...and it's not easy to identify a real black swan immediately after the fact.

Mon, 03/18/2013 - 16:13 | Link to Comment Whatta
Whatta's picture

Pulling your money totally out of the system is a major idea for almost all of us.

TO assume that Cyprus and this situation will create an immediate jog/run is a bit of a stretch. But in the next days and weeks if the stench gets any worse I could see a jog beginning with more purpose.

I'd at least put some more fiats under the mattress if nothing else. Adding some junk silver also.

Mon, 03/18/2013 - 16:10 | Link to Comment TheGardener
TheGardener's picture

Might is right.

Just a test run.

Cut.

30% cut ? No, they said the next script is for the lot,
and they are not coming back.

Mon, 03/18/2013 - 16:14 | Link to Comment Croesus
Croesus's picture

@ DJ Happy Ending:

Wrong:

The Cypriot experience is just the beginning of things to come. The whole thing is a confidence game, and it doesn't really matter whether they decide to take the depositor's money, or not. The mere threat of taking the money is all it takes to shatter confidence. 

Most floods start out with a single drop of rain.

 

Mon, 03/18/2013 - 16:13 | Link to Comment DogSlime
DogSlime's picture

If there wasn't an EU-wide bank run today, there won't be one.

The Cyprus banks only open on Thursday at the earliest, though.  If there's a run in Cyprus, doesn't that put additional pressure on the banks that are already requiring bailout by these measures?

Would a Thursday bank run in Cyprus be an isolated - or containable - incident?

Soon find out!  :P

Mon, 03/18/2013 - 16:14 | Link to Comment lotusblue
lotusblue's picture

DJ Happy Ending,

    I'm just not so sure.Probably you're correct.Whith Cyprus Gov. Seeming they'll vote down this LEVY,What's ECB to do? Let Cyprus leave the EU? Let Cyprus collapse ? This is AGAINST EU law !

ECB is legally obligated to keep CYPRUS solvent. The effect on rest of EU,I think,is diminimus.

Thoughts anyone ?  Tyler ?

Mon, 03/18/2013 - 18:54 | Link to Comment TheProphet
TheProphet's picture

Unless people are rioting in front of a bank, there is no way to know that a bank run has occurred until after it is well underway or even over.

So, if there was a bank run in Europe today, how would you know?

This will be a process of weeks, but within a month the Tylers will be publishing data that clearly shows deposits not just fleeing for "safer" banks, but vanishing from the system entirely.

Mon, 03/18/2013 - 16:15 | Link to Comment Croesus
Croesus's picture

@ DJ Happy Ending:

Wrong:

The Cypriot experience is just the beginning of things to come. The whole thing is a confidence game, and it doesn't really matter whether they decide to take the depositor's money, or not. The mere threat of taking the money is all it takes to shatter confidence. 

Most floods start out with a single drop of rain.

Mon, 03/18/2013 - 16:25 | Link to Comment negative rates
negative rates's picture

No snow flake ever feels responsible for the avalance.

Mon, 03/18/2013 - 15:54 | Link to Comment Renfield
Renfield's picture

Now THIS is an intelligent presentation of "two sides of the story".

I'm with you on view no. 1. And it ain't only in Europe that bank jogging be the new trend. Ironically it'll be the people with the most savings in bank accounts (the, err, 'valued clients') who'll be leading the pack. I fully expect some members of my family will suddenly start getting an education.

Mon, 03/18/2013 - 15:53 | Link to Comment Popo
Popo's picture

Option 3:  The old equity cram-down:  Convert equity to debt.  Bank shares get set at .01 cents IMMEDIATELY before the DAX opens.   Germany foots the bailout with the equity from banks.

Let's see if ANY European leaders have the balls to propose it.   It's been on the table since 2008, and none of the banker puppets wants to go there.

Mon, 03/18/2013 - 15:55 | Link to Comment q99x2
q99x2's picture

They should let those people have their money. They are going to be very thirsty and hungry by Thursday.

Mon, 03/18/2013 - 16:02 | Link to Comment Renfield
Renfield's picture

Gold star. If the banks and media have some crowd-calming to do now, just wait until people have been locked away from their ATM for a few days.

Mon, 03/18/2013 - 15:55 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

The slippery slope will become much steeper folks. This was just round one.

Mon, 03/18/2013 - 16:16 | Link to Comment Whatta
Whatta's picture

Normalcy bias is in hyperdrive today in the good ol' Divided States of Obamica today. I've been called a loon multiple times for suggesting something like Cyprus could happen here sooner (possible) or later (probable).

Mon, 03/18/2013 - 15:55 | Link to Comment buzzsaw99
buzzsaw99's picture

I want my 90% or whatever right freaking now bitchez.

Mon, 03/18/2013 - 16:17 | Link to Comment Number 156
Number 156's picture

'The EU had hoped for a pro-euro, pro-austerity government in Italy, but the plan backfired.'

The EU had hoped that everyone in Italy would be as dumb as a box of hammers. Now they must crush Democracy.

'Personally I believe a simple gift of EUR 5 bn of free money would have been a better choice.'

How about telling the EU and their Bondholders to get lost?

Mon, 03/18/2013 - 15:59 | Link to Comment NoTTD
NoTTD's picture

A preference for #2 only makes sense if you are one of the speculative investors the EU is so concerned about.   You know, one who can decide not to have a bank account in certain countries - as opposed ot those who live there and have little choice - and one who can actually buy sovereign bonds.

 

So, fuck you.

Mon, 03/18/2013 - 16:01 | Link to Comment Eisenhorn
Eisenhorn's picture

Doesn't matter.  The game is rigged and the Central Bank cartels have firm control.  We will be sitting here next March with the Dow at 16,500ish talking about "the final kick of the can".

 

When you can print money with the Ctrl-P ability of modern central banks, the game is over.  They might allow dips, but this game is going to go on for decades at this rate.

 

This is the new normal, and it will be for a very long time.  There is no more economic reality except that which is created by the power elite and the banks.

Mon, 03/18/2013 - 16:10 | Link to Comment Renfield
Renfield's picture

Attention all planets of the Solar Federation. Attention all planets of the Solar Federation. Attention all planets of the Solar Federation.

We have assumed control. We have assumed control. We have assumed control.

Mon, 03/18/2013 - 18:02 | Link to Comment SkottFree
SkottFree's picture

There is nothing wrong with your televsion set!

Do not attempt to adjust the picture!

We are controling transmission!

We will control the horizonal

We will control the vertical

We can change the picture from a soft blur or sharpen it to crystal clarity!

For the next hour sit quitely and watch us work our magick with your money!

Mon, 03/18/2013 - 16:11 | Link to Comment Mountainview
Mountainview's picture

Central bankers power over citizens will not last for long...(many times proven by history, in most cases in a dramatic way)...

Mon, 03/18/2013 - 16:04 | Link to Comment tornado_watch
tornado_watch's picture
Cyprus—2009 Article IV Consultation, Concluding Statement of the Mission (IMF)

Nicosia, June 29, 2009

...

1. Cyprus appears to be weathering the global crisis so far. It is the only country in the euro area to record positive growth in the first quarter of 2009, and among those that have not required public capital injections into its financial sector. The relatively benign impact of the crisis is due, in part, to conservative financial sector practices and strict supervision, and the elimination of exchange rate risk following euro adoption. Past budget surpluses, low public debt, and the long-awaited enactment of pension reforms have also sustained investor confidence, as evidenced by a successful sovereign bond issue in June 2009.

Mon, 03/18/2013 - 16:06 | Link to Comment Too Big 2
Too Big 2's picture

We are well on the road to serfdom...bullish PM, hollow points, private safety deposit box companies, and still bullish on tight waists with big tits!

Mon, 03/18/2013 - 16:06 | Link to Comment Too Big 2
Too Big 2's picture

We are well on the road to serfdom...bullish PM, hollow points, private safety deposit box companies, and still bullish on tight waists with big tits!

Mon, 03/18/2013 - 16:07 | Link to Comment Bear
Bear's picture

I don't understand ... the Fed ponied-up 940 billion to support 'European Banks' over the last year ... why couldn't they kick some chump change the Cyprus way. It must be absolutely true that this was a test case to see what the rats would do in the maze.

Mon, 03/18/2013 - 16:09 | Link to Comment monopoly
monopoly's picture

 

Who are we to believe??? Sinclair – All Hell Is Breaking Loose After Cyprus Catastrophe

 

 

MARK HULBERT
Cyprus crisis will soon blow over

 

 

 

 

 

 

How can anyone make light of what happened this weekend. Just amazing.

 

Mon, 03/18/2013 - 16:08 | Link to Comment Mountainview
Mountainview's picture

Europe was once a project of prosperity. It's turning in a nightmare. Brussels punishes, imposes rules and kills hope of citizens...

Mon, 03/18/2013 - 16:08 | Link to Comment toys for tits
toys for tits's picture

 

 

That'll teach'em to let people vote.

Mon, 03/18/2013 - 16:08 | Link to Comment tony bonn
tony bonn's picture

"...doing whatever it takes to protect investors’ interests:..."

yes - trillions for banksters - not one red cent for people....

this proves the rapacious nazi rule of the elite....the investors should be fucked for making a bad investment.....depositors are not investors!

investors own bonds and stocks; depositors own money! and so we come to caveat emptor for all.

Mon, 03/18/2013 - 16:08 | Link to Comment Iocosus
Iocosus's picture

coordinated euro buying today at 10, 12, and 4, each move good for 30 pips. The blatant manipulation is pathetically predictable.

Mon, 03/18/2013 - 16:09 | Link to Comment Withdrawn Sanction
Withdrawn Sanction's picture

Governments everywhere are desperate for cash.  Without growth, there are limited avenues for income taxation.  So they resort to confiscating (and eating) the seed corn.

Cyprus is a test bed ...to see if they can get away w/it.

Man alive, Im glad Im not a Cypriot politician.  If the measure doesn't pass, you've pissed off a lot of well connected banksters.  If it does, you've pissed off a lot of well-healed gangsters (of the Russian variety mostly).  Both groups play for keeps and they dont cotton to be ripped off....that's for the little guys.

 

Mon, 03/18/2013 - 18:31 | Link to Comment SDShack
SDShack's picture

That's why I think the best thing the bankers can hope for coming out of this fiasco is 0 levy on insured accounts <$100,000E, and 9.9% on uninsured accounts >$100,000E. If I understand the math, that means they will be about $3B Euro short on what the target was. That will be easy enough for some slush fund to be pilfered, or even a one page print job by the Bernak. No way they let the great unwind begin over $3B Euro. The big learning will be the bankers will understand they can't retroactively steal INSURED deposits without a fight. They may still win the war of attrition, but the moral hazard is much greater than $3B Euro, so I think they will cave on insured accounts. On un-insured accounts, the levy could even be higher than 9.9%, but in this case it looks like the Russians have said Nyet on that. The next time, with the next country, though... who knows how much the take could be. I wouldn't be surprised at 15-25% of uninsured deposits in the next test case.

Mon, 03/18/2013 - 16:10 | Link to Comment Diogenes
Diogenes's picture

Decision #3 They could have appointed a bankruptcy trustee when the bank first became insolvent, before they went 30 billion Euros in the hole. In that case they could have paid out the depositors, creditors, bond holders, and only the shareholders would have taken a small loss.

The bankers would have lost their jobs and been disgraced forever, and possibly sent to prison.

This was the rule in banking law for hundreds of years. Everyone knew it and bankers were very careful, very conservative, consequently very seldom was there a problem and it was usually possible to deal with it without upsetting financial markets.

By ignoring the rules they created a situation where the slightest breeze will knock over the biggest house of cards in the world.

Mon, 03/18/2013 - 16:33 | Link to Comment SDShack
SDShack's picture

Yep, that's what should have happened, but those rules all died in 2008, if not long before. Greed is the only rule today. It's why they keep kicking the can. They will rewrite the rules over and over, pushing the masses to their breaking point, over and over, until they get what they want. It is war of attrition. If they push too far, like in this case, don't worry, they will back off and re-write the rules yet again to protect themselves. The bankers never lose because they write the rules. The only way to beat them, is to not play their game. Iceland got it right.

Mon, 03/18/2013 - 19:26 | Link to Comment Day_Of_The_Tentacle
Day_Of_The_Tentacle's picture

I fundamentally agree with your common sence.

In this case, I think that the Cypriots bankers were caught up in the last debt debacle, and were as unprepared as the rest of the bunch, when the ECB suddenly changed the rules retroactively and imposed collective clauses on everybody else but themselves, while awarding the ECB senior creditor status - if I remember correctly.

They imposed a haircut of some 70% on greek bondholders in a "gun to the head deal" (talk about deja vu) and the Cypriot banks were apparently heavily invested in said bonds.

This implies the the banks became insolvant "overnight" (or that they couldn't off load once the process was in motion), but it also implies that they have been insolvant since the greek debt restructure in October 2011/ratified Feb 2012. They applied for aid 9 months ago without a result before now, so they did not just sit on their hands, it would appear. 

The EU on the other hand has been diddling. One has to wonder if this was all planned that way - but we will see.

Mon, 03/18/2013 - 16:17 | Link to Comment They Tried to S...
They Tried to Steal My Gold's picture

CALL ICELAND AND GET THE BLUEPRINT..............PRETTY DAMN SIMPLE.

Mon, 03/18/2013 - 16:45 | Link to Comment MoreLiver
MoreLiver's picture

The banking losses in Cyprus largely arise from the banks' holdings of Greek debt, which the ECB and the Commission gave the haircut trearment in early 2012. First they push banks to own government bonds, then they default the bonds, then they blame the banks and force the citizens of the banks' jurisdiction to pick up the bill.

Europe. Fuck'em.

Mon, 03/18/2013 - 16:47 | Link to Comment Diogenes
Diogenes's picture

But I thought the Greek bailout was supposed to solve the problem? (Sark)

Mon, 03/18/2013 - 17:09 | Link to Comment pashley1411
pashley1411's picture

You would think any GOP politician would have the good sense to ask the Administration whether, in light of actions of the EU, the FDIC will honor its obligations.   Would be a great opportunity to examine US deposit insurance.

But no.   

Mon, 03/18/2013 - 19:49 | Link to Comment SKY85hawk
SKY85hawk's picture

Reinstate Glass-Stegall.  Isn't that what helped send Keating to jail in the S&L crisis of 198x?

Glass-Stegal was done to protect the people from scurrilous bone-head bankers that only shoot for the moon with Other-Peoples-Money!

Oh yeah, the politicians that allowed these travesties are TBTF (Too Bought To Function),  duhhhhhh.

 

Stop talking about new legislation and reactivate that which is proven to be effective!

 

Mon, 03/18/2013 - 19:35 | Link to Comment Lordflin
Lordflin's picture

.

Do NOT follow this link or you will be banned from the site!