Why Cyprus Matters (And The ECB Knows It)
Via Mark J. Grant, author of Out of the Box,
WHEN THE RED QUEEN IS AFTER YOUR HEAD
When Zig turns to Zag and the Red Queen is after your head then extraordinary care is necessitated. To quote Holmes, "The game is afoot" on the Continent.
I have been asked, with some frequency, why the bondholders have not been tagged in the Cyprus fiasco. That answer is simple. Most of Cyprus's bonds are pledged as collateral at the ECB or in the Target2 financing program. Then one may also ask why the bonds of the two large Cypriot banks are not being hit. The answer is the same; most are held as collateral at the ECB or Target2. In both cases, remember uncounted liabilities, the government of Cyprus has guaranteed the debt. Consequently if the two Cyprus banks default it is of small matter as the sovereign has guaranteed the debt. However if the country defaults and leaves the European Union then it will matter and matter significantly as the tiny country of Cyprus would wipe out the entire equity capital of the European Central Bank. While it is not a matter of public record it is estimated that Cyprus has guaranteed about $11.6 billion of collateral at the ECB.
On Friday Cyprus made provisions for the re-structuring of its banks. They also imposed capital controls. However what they have not done yet is decide how they will reach the funding demanded by Europe. That decision was postponed until after a meeting with the Troika that will take place today and a meeting of the EU Finance Ministers that will take place on Sunday.
The last go-round on this issue, as you may recall, resulted in not one single vote for the imposition of the expropriation of people's bank accounts or what Europe misguidedly calls a tax. Taxes are legislated, paid from people's checkbooks and not removed from their bank accounts by a government. Taking money from a citizen's bank account by fiat is little more than theft as it is delineated as private property and is the person's own money and not a bond or stock or a security of some sort with the normal risks appended to any sort of an investment. Even in the case of a bank closure where there is a bankruptcy proceeding there is the "due process of law" where decisions are made by the Judiciary and not mandated by a session of Parliament. Further, not all of the deposits in Cyprus are in troubled banks. There is UBS, several Israeli banks, a number of French banks et al that are not troubled and still Europe wants to demand that the bank accounts in those relatively healthy banks have depositor's money taken out of them to pay for the woes of the government.
Equally troubling to me has been the European process. The ECB gave Cyprus four days to come up with the funding demanded by Germany before they turn off the lending to Cyprus. I am reminded of Mr. Draghi's, "We will do whatever it takes" speech but this was not what I had thought it meant. The word "bullied" comes to mind as well as the word "vengeance." There is some discussion to be had about deposit guarantees as part of this drama but, setting that aside for a moment, to even take one Euro from a person's bank account strikes me as a precedent that will have long lasting effects on all the people in Europe as the seizure of private property is no longer protected by law. Then to offer shares in a bankrupt institution as compensation is an attendance at the Theatre of the Absurd while I wonder how they are going to force UBS or BNP to issue shares for the money taken from those banks.
In the Press, on this Saturday morning, they are discussing a European proposal to expropriate 25% of all bank accounts in the entire country of Cyprus to help pay the bills. This would be from normal citizens, Russians, other foreigners, British expats, American corporations and any one at all with money in any Cyprus bank. This would include not just the banks of Cyprus but also the French, Swiss, Emirates and Israeli banks et al with offices there. There is a long history of bank robbery in the world but this is one heist that makes John Dillinger or Jessie James a small fry by comparison.
(Reuters) German Chancellor Angela Merkel told lawmakers that while she wanted to keep Cyprus in the euro zone, it must first recognize it had no future as an offshore financial center.
Given what Europe is attempting to do to Cyprus she might as well have said, "that it must first recognize that it had no future" and left it there. Bank accounts expropriated, a future expropriated and the reputation of the European Union tossed into the Rhine and drowning.
I think that about sums it up.