Guest Post: Why Cyprus 2013 Is Worse Than The KreditAnstalt (1931) And Argentina 2001 Crises

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Submitted by Martin Sibileau of A View from the Trenches blog,

Why Cyprus 2013 is worse than the KreditAnstalt (1931) and Argentina 2001 crises

The Cyprus 2013, like any other event, can be thought in political and economic terms.

Political analysis: Two dimensions

Politically, I can see two dimensions. The first dimension belongs to the geopolitical history of the region, with the addition of the recently discovered natural gas reserves. The historical relevance goes as far back as 1853, the year the Crimean War began. The Crimean War took place in the adjacent Black Sea, but the political interest was the same: To avoid the expansion of Russia into the Mediterranean. The relevance of this episode was the break-up of the balance of power established after the Napoleonic Wars, with the Congress of Vienna, in 1815. From then on, a whole new series of unexpected events would lead to a weaker France, a stronger Prussia, new alliances and a final resolution sixty years later: World War I.  It is within this same framework that I see Cyprus 2013 as a very relevant political event: Should Russia eventually obtain a bailout of Cyprus (as I write, this does not seem likely) against a pledge on the natural gas reserves or a naval base, a new balance of power will have been drafted in the region, with Israel as the biggest loser.

The second political dimension refers to a point I made exactly a year ago, precisely inspired in the KreditAnstalt event of 1931. In an article titled: “On gold, stocks, financial repression and the KreditAnstalt of 1931” I wrote:

“(The KreditAnstalt event) was triggered because France, a public sector creditor, introduced a political condition to Austria, in exchange for a bailout of the KreditAnstalt. Today, like in 1931, in the Euro zone, the public sector is increasingly the creditor of the public sector. In 1931, England and France were creditors of Austria and demanded conditions that no private investor would have demanded.

 

Private investors live and die by their profits and losses. Politicians live and die by the votes they get. Private investors worry about the sustainability and capital structure of the borrower, the collateralization and the funding profile of their credits. Politicians worry about the sustainability of their power. It’s a fact and we must learn to live with it.

 

In 2012, Greece and increasingly other peripheral EU countries owe to other governments, the IMF and the European Central Bank. Private investors have been wiped out and will not return any moment soon. We fear that just like in 1931, when the next bailout is due either for Greece again or Portugal or Spain, political conditions will be demanded that no private investor in his/her right mind would ever have demanded.

 

Think of it... What in the world had the customs union between Austria and Germany in 1931 had to do with the capitalization ratio of the KreditAnstalt??? Nothing! Yet, millions and millions of people worldwide were condemned to misery in only a matter of days as their savings evaporated! Ladies and gentlemen, welcome to the world of fiat currencies! You have been warned! If months from now you read in the papers that the EU Council irresponsibly demands strange things from a peripheral country in need of a bailout, remember the KreditAnstalt. Remember 1931.

 

Please, understand that this is not a tail risk. The tail risk is precisely the opposite. The real tail risk here is that when the next bailout comes due, politicians think like private investors and give priority to economic rather than political considerations. That’s the tail risk! If such a crisis occurred, the media will speak of increased correlations and tell you that everything is actually fine on this side of the Atlantic. But if you read us, you will know that all that led to such a situation was perfectly foreseeable and nothing is really fine on this side of the Atlantic either. You will have remembered 1931…”

At this point, I think all is said and I have nothing else to add. My worries a year ago are proving too correct.

Economic analysis: Confiscation and two broken promises

Cyprus 2013 is worse than the KreditAnstalt and Argentina 2001 crises because it has an element of confiscation and two broken promises that were absent in the latter.

Confiscation

Neither in 1931 or in 2001 were the depositors in Austria or Argentina subject to an explicit and arbitrary confiscation of their savings by their fellow representatives, meeting at a Parliament. This is a totally new element of violence in the drama. Back in 1931 and in 2001, depositors simply run against their banks for price discovery: to discover the true value of holding US dollar bills –physical- vs. their respective fiat currencies (shillings and pesos). That was all what these exercises (i.e. runs) were about. The governments did not intervene to distort the final discovery. In the ‘30s, through contagion to the US, such discovery allowed depositors to realize that their US dollars were worth a lot less than 1/20.67th of an ounce of gold. In the 21st century, the final act of the same game will see holders of fiat gold realizing that there is a premium for physical gold.

Both in 1931 and 2001, governments intervened only to slow down the process of price discovery. But could not change the outcome of the same. In the case of Argentina, with a credit multiplier for US dollars of 1/0.3 (30% was the reserve ratio), the US dollar ended trading at 3 pesos by 2003. Nobody should have been surprised in Argentina therefore, that the peso lost 2/3rds of its value vs. the US dollar. The devaluation was not a confiscation. Depositors did not bail out their banks or the government. Depositors simply suffer a market priced transfer of wealth that benefited those who held physical US dollars. And neither the banks nor the government had physical US dollars. That’s why they both went bankrupt.

In Cyprus 2013, depositors have no clue as to what the final recovery of their capital will be. The expected losses have no connection with a public credit multiplier (In Argentina everyone and their grandmothers knew that as of March 1995, by regulation of the central bank, for every three fiat US dollars circulating there was only 1 real US dollar as backup). In Cyprus, the final recovery is being “debated” at this moment by members of Parliament and is consulted to powers outside the country, in Brussels, in Berlin, in Washington DC and in Moscow. This is far worse. This will bring an element of social conflict, of resentment, that will not be easy to appease.

Broken Promise no. 1: The promise of a banking union

During 2012, real efforts were made by policy makers to convince the public that the Euro zone was shifting towards a banking union first, as the stepping stone to a political union. The cornerstone of that promise was the role of the European Central Bank as lender of last resort. It had to be an unanimous promise; a promise to every jurisdiction. For all practical purposes, it should matter very little what the GDP or population of a member of the union is. In fact, if the European Central Bank can not come up with the EUR5.8BN package that is claimed to be minimally needed to kick the Cypriot can down the road….what can we expect when this problem gets to Italy, which doesn’t even have a government to negotiate with yet???

In 1931, the promise of international support for Austria was only implicit. In 2001, the promise of a lender of last resort was explicitly absent in Argentina. Nobody in either Austria or Argentina had never expected anything. Nobody was promised anything. Nobody was let down. This is not the case in 2013.

 

Broken Promise no. 2: The promise that deposits below EUR100,000 are guaranteed

Perhaps I missed something here, but as far as I know, I never saw Mario Draghi calling for a press conference to say: “Dear depositors of Euros in the Euro zone: As long as this central bank I preside exists, regardless of geography or political circumstance, any deposit up to EUR100M is guaranteed by my institution”. If I missed such message, please, accept my apologies and be kind enough to send me the link to watch it online (I cut my cable tv subscription last year, in the interest my kids’ education).

The promised EUR100M deposit guarantee has not been openly defended in Cyprus 2013. To my knowledge, there was never such a promise either in 1931 or in 2001. Therefore, Cypriot depositors were left in the cold far worse than their counterparts in Austria or Argentina, whose expectations had never been high.

Final thoughts

If you look at the case of Argentina 2001, you will realize that it was a pretty clean bet. In Argentina, the reserve ratio on US dollars was known: 30%. We all knew that the USD deposits had been loaned out to the government and that the government faced a significant probability of default. Banks however offered depositors of US dollars a 20% p.a. interest rate. Therefore, an Argentine depositor was faced with a clean bet: Earn 20% p.a. vs. the probability of losing 2/3rds of capital. If you thought that the probability of default of the Argentine government was beyond four years, you would play the bet with a chance of winning it.

What are depositors of Euros faced with today? Anything but a clean bet! They don’t know what the expected loss on their capital will be, because it will be decided over a weekend by politicians who don’t even represent them.  They don’t really know where their deposits went to and they also ignore what jurisdiction they really belong to. Finally, depositors are paid mere basis points for their trust in the system vs. the 20% p.a. Argentina offered in 2001 (thanks to the zero-interest rate policies of the 21st century). In light of all this, I can only conclude that anyone still having an unsecured deposit in a Euro zone bank should get his/her head examined!

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Sun, 03/24/2013 - 11:35 | 3368448 jonjon831983
jonjon831983's picture

edit: oops - disregard this post

Sun, 03/24/2013 - 11:37 | 3368456 mikla
mikla's picture

EMU: oops - disregard this monetary union.

There-- fixed it for ya.

Sun, 03/24/2013 - 11:39 | 3368461 AlaricBalth
AlaricBalth's picture

Crisis! What Crisis?

Now they're planning the crime of the century
Well what will it be?
Read all about their schemes and adventuring
It's well worth a fee
So roll up and see
And they rape the universe
How they've gone from bad to worse
Who are these men of lust, greed, and glory?
Rip off the masks and let's see.
But that's no right - oh no, what's the story?
There's you and there's me
That can't be right

http://www.youtube.com/watch?v=vJJ7p5qZIU4

Sun, 03/24/2013 - 11:45 | 3368475 BaBaBouy
BaBaBouy's picture

PUTIN Enemy "Suicides" In London Over Weekend ?????????????

Russians To Lose 70% In Cyprus ???

Shot Accross The Bow ???

Sun, 03/24/2013 - 11:47 | 3368484 fudge
fudge's picture

New movie comin' out ... 'The Perfect Hit' 

Putin has a cameo :)

Sun, 03/24/2013 - 11:54 | 3368497 BaBaBouy
BaBaBouy's picture

"In light of all this, I can only conclude that anyone still having an unsecured deposit in a Euro zone bank should get his/her head examined!"

 

Remember, its not even "Printed" Fiats!

It's Just Data On Some Large Banksters HARD-DRIVE!

ONE CLIC, And Its Gone...

 

Run To Physical GOLD, Bitchies...

Sun, 03/24/2013 - 12:00 | 3368518 fudge
fudge's picture

Run To Physical GOLD, Bitchies...

Got no need to run .. I just pour another rum and and walk to the low water mark ;))

 

Sun, 03/24/2013 - 12:04 | 3368532 Randall Cabot
Randall Cabot's picture

"Failure to reach a deal for a bailout would mean that U.S. stocks "will open down pretty big on Monday," said John Canally, chief market strategist at LPL Financial, who expects Cyprus to reach a deal. "If we don’t get a deal done there, it does reintroduce some risk," that could lift gold prices and the dollar, pull Treasury yields lower, and result in "anything associated with risk being sold off.""

 

 

 

 

http://www.marketwatch.com/story/cyprus-bailout-failure-would-shake-stocks-2013-03-23   

Sun, 03/24/2013 - 12:25 | 3368588 Rip van Wrinkle
Rip van Wrinkle's picture

It's gonna fall 'big' at some point. Monday is as good a day as any.

Sun, 03/24/2013 - 13:02 | 3368719 pkea
pkea's picture

i would expect rather the blow off top in the next 2 weeks with the following collapse 

Sun, 03/24/2013 - 12:05 | 3368533 Ahmeexnal
Ahmeexnal's picture

Berezovsky might have been a critic of Putin.
But more important, he had billions in Cyprus and would not allow his money to be confiscated by the anglo-franco-teutonic sociopathic oligarchs.
Make no miskate. The MI6 offed him.

Sun, 03/24/2013 - 12:12 | 3368549 fudge
fudge's picture

and I got a koala that says his accounts are now stripped bare. Him and his $$ are nothin' but mondays memories.

 

Sun, 03/24/2013 - 12:17 | 3368563 Randall Cabot
Randall Cabot's picture

"Make no miskate. The MI6 offed him."

But the Western press is pointing the finger at Putin.

Sun, 03/24/2013 - 13:10 | 3368744 Kirk2NCC1701
Kirk2NCC1701's picture

And this contradicts Ahmen.. How???

Sun, 03/24/2013 - 13:19 | 3368750 e-recep
e-recep's picture

"Make no miskate. The MI6 offed him." But the Western press is pointing the finger at Putin.

 

Never let a murder go to waste.

Sun, 03/24/2013 - 12:26 | 3368595 max2205
max2205's picture

Sunday night deals is all the EU does well.  No dip monday

Sun, 03/24/2013 - 16:43 | 3369396 zipit
zipit's picture

Kick the can until their heads are on sticks.

Sun, 03/24/2013 - 13:10 | 3368746 e-recep
e-recep's picture

i agree. it was an obvious government job. first went his lawyer, then boris.

Sun, 03/24/2013 - 13:34 | 3368828 Winston Churchill
Winston Churchill's picture

Why would MI9(wet work dept,) not mI6 need to do anything ?

Just wait for someone else,there seems to have been quite a queue.

Sun, 03/24/2013 - 17:07 | 3369519 Jack Burton
Jack Burton's picture

"Ahmeexnal" You may indeed be on to something there! While the talk on the street is that Putin took him out, this is way off the mark. Putin had no reason to take this guy down, he was no threat at all to Putin. If anything, the British Elite Rulers who use MI6 as their own personal Mafia would have been more likely to have done the killing. Then they send in their puppet police forces to investigate the MI6 hit. What a joke that is. MI6 has a long string of killings of anyone on British soil who may prove inconvinient to the Iron Fisted British Ruling Class and their alliance with the USA's criminal elements. By criminal elements, I mean US Banks, Hedge Funds and Military Contractors.

If Britian's elite want you gone, MI6 will suicide anyone. They have done it in the past, and the fake police investigations always come up with suicide as the result.

Russia had Zero to gain at this point. If they had cause to kill him, then that would have been som,e years ago, not at all today as he became increasingly less rich and powerful.

But he deserved to be killed. His theft robbed Russian people of massive wealth which he stole and left the country with. As those familiar with him say, he never produced a rubel of wealth, every kopek was stolen from the Russian people. Let this bastard rot in hell for all the poverty he left behind when he stole the wealth that working people had produceduinder their communist slave masters.

Sun, 03/24/2013 - 12:14 | 3368543 TeamDepends
TeamDepends's picture

En garde,  LaGarde!

Sun, 03/24/2013 - 12:00 | 3368517 q99x2
q99x2's picture

Nah you left off the "ler". It's a movie about Merkel.

Sun, 03/24/2013 - 12:01 | 3368522 fudge
fudge's picture

 

ROfLMFAO

+10 to you bud

Sun, 03/24/2013 - 12:10 | 3368546 toys for tits
toys for tits's picture

With the bank runs that will be happening, I'm happy to announce:

SHORT BANKS, BITCHEZ.

Sun, 03/24/2013 - 13:04 | 3368730 pkea
pkea's picture

short in a week or two

Sun, 03/24/2013 - 14:57 | 3369079 Buck Johnson
Buck Johnson's picture

Can't wait to read the article about Russia wanting Cyprus out of the EU.  Trust me even Putin most likely has money via Cyprus, he'll make the EU pay for sure.  Also the article is correct, you have to have your head examined if yo still have money in an euro account that is unsecured (even secured it seems).

Sun, 03/24/2013 - 21:43 | 3370621 StychoKiller
Sun, 03/24/2013 - 12:33 | 3368630 JOYFUL
JOYFUL's picture

What an amazing world we live in...when even on the west's premiere truth-tellin site, with regards to an article all about KreditAnstalt & it's times, we just cannot get down to ummm, truth-tellin.

Given the fact that the bank was a creature of the Rothschilds Empire...the fact that branches of the same families' banks existed in all the other major players of the European spectrum of the time...operating as power brokers and practically parallel governments - in terms of influence - and the fact that the $76 million that the bank was short of was easily accessible from within this power nexus...were it politically desirable for it to be accessed,

one might think we might be talkin about the strange synergy between that event and the current low level financial problem which appears to be insuperable to the masters of the Euroverse...whose will seems to be absent a 'solution' ....

but no. We cannot do that. Nor talk about the possible connection with another event of 31...goin offa the gold standard.

Don't ask me why...I just read here. So many words...so little truth.

Sun, 03/24/2013 - 14:19 | 3368986 Ghordius
Ghordius's picture

+1 it's such a small detail, eh? ;-) as little as the customs union, btw

Sun, 03/24/2013 - 11:35 | 3368451 Silver Garbage Man
Silver Garbage Man's picture

Anybody saving their wealth in fiat needs their head examined.

Sun, 03/24/2013 - 11:37 | 3368455 The Watchman
The Watchman's picture

What is this "wealth" you speak of???

Sun, 03/24/2013 - 12:14 | 3368557 orez65
orez65's picture

Wealth = production minus consumption.

Money is "a medium of exchange and A MEANS TO STORE WEALTH"

"FIAT MONEY" is a PROMISE, WRITTEN ON A NOTE, that a Government will STORE your wealth.

Act appropriately.

Sun, 03/24/2013 - 13:09 | 3368745 disabledvet
disabledvet's picture

how do i "act appropriately"? and since no one can do that wouldn't it be better to ACT inappropriately..."but well"? http://www.youtube.com/watch?v=A8X2SM0ioJ4

Sun, 03/24/2013 - 14:08 | 3368947 ebear
ebear's picture

Yo, I got your "inappropriate" right here:

http://www.youtube.com/watch?v=PKE_6OmBijk

Sun, 03/24/2013 - 13:12 | 3368754 Imminent Crucible
Imminent Crucible's picture

I'll edit that: ""FIAT MONEY" is a PROMISE, WRITTEN ON A NOTE, that a Government will" CONSUME your wealth and give you a piece of paper, which you can take to the Treasury and exchange for another piece of paper just like it.

A Federal Reserve Note is NOT an irredeemable currency. It can be redeemed at any time for another FRN.

Sun, 03/24/2013 - 21:46 | 3370639 StychoKiller
StychoKiller's picture

Look up U.S.C. Title 12, section 411.

What is "Lawful Money?"

Sun, 03/24/2013 - 18:37 | 3369803 All Risk No Reward
All Risk No Reward's picture

That's a decent summation of the false narrative that leaves out the poison pill reality.

The reality is that money is all of the above and more, when it is created through debt, as it is in our system.  This makes debt money a covert, societal asset stripping mechanism from society to the people that defined money as debt and who control the debt money system.

The reality is mapped out beyond all doubt in here:

Debt Money Tyranny

http://www.keepandshare.com/doc/4768883/debtmoneytyranny-6-1-pdf-60k?tr=77

The Debt MOney Tyrants are the sovereigns and the nation states are the subjects - this is made clear by both a tyrant and a manager for the tyrant class:

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
~ Napoleon Bonaparte

"If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in
circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon."
~ Robert Hemphill
Credit Manager of Federal Reserve Bank, Atlanta, Ga.
Source: In the foreword to a book by Irving Fisher, entitled 100% Money (1935) How to be a Crook http://www.youtube.com/watch?v=2oHbwdNcHbc Poverty: Debt is not a Choice http://www.youtube.com/watch?v=juQc0rLdB-E Share the data and the logic...  and then spend some time searching "the trivium" and learning why grammar, logic and rhetoric were removed from your schooling / Biggest Finance Capital social conditioning process.

 

 

Sun, 03/24/2013 - 11:40 | 3368463 The Abstraction...
The Abstraction of Justice's picture

I always keep my Deutsche Bank account in the red. Let them confiscate the debt if they so will.

Sun, 03/24/2013 - 11:52 | 3368495 One of We
One of We's picture

I'm not understanding why anyone would keep any more in a bank than they needed for monthly living expenses. With ZIRP giving negative real returns why would anyone leave their money in a bank?

Sun, 03/24/2013 - 11:56 | 3368509 Going Loco
Going Loco's picture

Undertaking a building project using cash, not debt. Have to keep cash for this to pay the contractors. Sick feeling at the moment.

Sun, 03/24/2013 - 12:08 | 3368541 MsCreant
MsCreant's picture

I know the feeling. My house got wacked by a tornado. Needed the money in the bank to pay the contractors. I had ice in the pit of my stomach the whole time. We are done and good.

Many contractors prefer cash over checks.  

Sun, 03/24/2013 - 14:21 | 3368989 DosZap
DosZap's picture

I know the feeling. My house got wacked by a tornado. Needed the money in the bank to pay the contractors. I had ice in the pit of my stomach the whole time. We are done and good.

Many contractors prefer cash over checks

Sure they do, so they do not pay taxes on ONE dime. Hope you negotiated a special dealer for the tax evader.

Sun, 03/24/2013 - 18:03 | 3369736 dunce
dunce's picture

I hate the govt. and like tax evaders, i like to pay cash and not ask questions hoping that they do not report the income. I get what i pay for, and his taxes are none of my business.

Sun, 03/24/2013 - 12:01 | 3368521 RobD
RobD's picture

I started my bank jog yesterday. Stopped by the credit union and tried to withdraw $300 and the damn machine only gave me $240. It was only Saturday mid morning but it seems the machine was out of cash.

Sun, 03/24/2013 - 12:17 | 3368565 orez65
orez65's picture

I'm getting all my cash out of banks.

For my business I plan to open a credit line.

They can confiscate it if they wish.

Sun, 03/24/2013 - 12:28 | 3368604 max2205
max2205's picture

Check the receipt. The bank kept $60. 20% haircut

Sun, 03/24/2013 - 11:40 | 3368464 ziggy59
ziggy59's picture

Dont know what people in the other EU countries are doing but their ATMs should have lines on em too

Sun, 03/24/2013 - 13:58 | 3368905 DosZap
DosZap's picture

Dont know what people in the other EU countries are doing but their ATMs should have lines on em too

 

The UK has apready told their people if they have funds on deposit in Spain to get it out.

Sun, 03/24/2013 - 11:40 | 3368467 BurningFuld
BurningFuld's picture
Cyprus 2013 is worse than the KreditAnstalt (1931) because ........

It is still built on top of it! Yes the fiat ponzi has been running that long.

Sun, 03/24/2013 - 11:41 | 3368469 hampsterwheel
hampsterwheel's picture

.......and here it is 2013 - 12 years past Argentina's major event and what has happened...bankers hanged...nope, a break out of widespread freedom? a revolution that overthrew the corrupt government enslaving them? Widespread police and military revolt in favor of the people? .......no what has happened is more of the same but worse -- what makes anyone think these Western Black Swans will result in another other than what those in Argentina are enduring... again - TPTB dine on fried black swan - today is as close to freedom and decentrailzed government as one will get over the next decade - and each day it slips a bit further away - check mate -

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