Guest Post: Why Mr. Dijsselbloem Is Right And Cyprus Is A Template For The Eurozone

Tyler Durden's picture

Submitted by Martin Sibileau of A View From The Trenches blog,

...Far from being a unique situation, the fragile exposure of unsecured depositors across the Euro zone is the norm...

At the end of my last letter, I anticipated I would devote the next one to explain why, in my view, the European Central Bank is hypocritical on the Cyprus situation and why the rest of the periphery has to expect the same fate than Cyprus. Fortunately for me, Mr. Jeroen Dijsselbloem who is both Dutch Finance Minister as well as the leader of the Eurogroup of Finance Ministers, confirmed my second point in a press conference 24 hours later, making my work easier…

A quick view of a bank’s capital structure

There are multiple issues on the Cyprus event. Perhaps the most relevant is the fact that unsecured depositors were sacrificed because their banks did not have enough subordinated debt to bail in. For this reason, the official story goes, Cyprus is a special case. Let me explain this point. In the figure below, I show the stylized version of the capital structure of a bank. From top to bottom, every portion of it is subordinated to the one immediately above it. It is clear that the least subordinated should be the deposits that finance a bank.

 Mar 29 2013 1

What is clear to us was not clear to leaders of the European Union. At closed doors, they first decided that deposits above EUR100M would arbitrarily lose 9% (in spite of existing subordinated debt to bail in) and put the matter to vote….only to revise this figure a week later up to 40% and without voting. It was hardly an ordinary bankruptcy proceeding; banks did not go through an ordinary liquidation and nobody could see an actual market appraisal of recovery values across the capital structure. The portion of such structure, which was supposed to be the most protected, saw its recovery value fluctuate between 9% and 40% within days because folks who live far away from this drama decided so over a weekend. On the other hand, those who held deposits of amounts below EUR100M are only entitled to them nominally. Effectively, they cannot withdraw their monies, let alone send them outside Cyprus. If they hold demand deposits believing that they can serve as medium of indirect exchange and they cannot use them precisely for that function, their property was affected, regardless of what the official story says.

Let’s return then to the thesis that Cyprus is a special case because the subordinated debt of its banks did not provide with enough cushion in the liquidation. As you can see from the figure above, the thicker the subordinated debt tranche is they lower the likelihood that unsecured senior debt and depositors will be affected. If Cyprus is a special case and it is not a template for the rest of the Euro zone banks, then it must be true that the rest of the Euro zone banks have stronger tranches below that of depositors. The sections below will show that during the last year (since March 2012):

a)   The same Euro zone authorities that imposed the loss on unsecured depositors were the ones who enabled a cash-out of subordinated debt holders, leaving depositors exposed to the firing squad,

b)   The Fed has been the ultimate enabler of this situation, and

c)    The fate of the US dollar is indirectly coupled with the fate of the Euro zone = There is no place to hide.

How the ECB financed the exit of subordinated debt holders

In December of 2011 and February 2012, the European Central Bank (ECB) extended longer-term refinancing operations to provide liquidity to euro zone banks. The liquidity, in euros and at a below market price, was against sovereign debt held by the banks, as collateral. Part of this liquidity was used for what is called “liability management” exercises, where the banks changed the composition of their liabilities: They borrowed from the ECB to repay their subordinated debt holders. This is the reason why Cyprus should actually be a template for the rest of the Euro zone. Because across the Euro zone, subordinated debt was reduced, leaving unsecured depositors exposed….again, across the Euro zone. The figure below, with the aggregate balance sheets of the main players, should help visualize what happened during the last twelve months:

In step 1, we see the focused balance sheet of the Euro zone banks and their subordinated investors (i.e. holders of subordinated debt), with regards to the subordinated debt. The same is a liability to the banks and an asset to the investors.

In step 2, we see the aggregate change caused by the extension of the LTRO Loans (i.e. loans issued under longer-term refinancing operations, by the ECB). These loans are an asset of the ECB and a liability to the banks.

 Mar 29 2013 2

Against these loans, the ECB issued Euros, which are an asset of the banks and a liability to the ECB.

In step 3, we see the transaction that I hold responsible for allowing unsecured depositors to be fair game across the Euro zone. With the Euros loaned by the ECB, banks bought out subordinated investors. Unfortunately, I have not had the time to quantify the exact impact of this transfer to date. However, reviewing past research notes released at that time (March 2012), my point will be clarified. (ADDENDUM: I HAVE BEEN GENEROUSLY FORWARDED TO THIS LINK, WHERE ZEROHEDGE.COM DID THE MATH ON THIS POINT, PROVIDING AN UPDATED STATUS OF THE ISSUE)

On March 28th, 2012, Barclays’ Credit Research team had published a report titled “European Banks: Liability management shrinks the bank capital market”. In it, it was estimated that at the end of March (only one month after the second LTRO), about 20% of the subordinated debt (equivalent to EUR97BN) had been targeted for exchange. The average exchange ratio of the transactions had been calculated at 82% of par (74% for Tier 1 and 89% for Lower Tier 2).  The reductions were split as follows: Close to 35% of cash out in the Tier 1 market (EUR54BN), 12% reduction of the Lower-Tier 2 (EUR37BN), and 18% reduction in Upper-Tier 2 (EUR6BN).

According to Barclays too, all the transactions had been bondholder-friendly, with an average 7pt (i.e. 7%) premium to secondary market across all issues (9pts for Tier 1, 5pts for Lower Tier 2). The main motivation behind all the transactions was capital optimization. They created capital gains to the banks. Except for two transactions in which the subordinated debt was exchanged for common stock or new Lower Tier 2, the rest were all tenders for cash. Greek banks in particular (i.e. National Bank of Greece, EFG Eurobank and Piraeus Bank) also participated in this liability management exercise; in some cases (i.e. Piraeus’s Prefs at 37 and LT2 floater at 50, announced on Mar 7/12) at premiums ranging 10 to 17pts.

In other words, both banks and subordinated debt holders enjoyed great capital gains, leaving unsecured depositors exposed to higher risk. This played out in the context of a virtuous cycle, where the cheaper funding improved the risk profile of the financial institutions and attracted capital back to the Euro zone. In the process, both the Euro appreciated and the EURUSD basis tightened, which furthered strengthened the equity of the financial system. The depositors of course, continued to receive mere basis points for their trust. On May 29th and later on June 25th, I had warned about the danger of this outcome.

But the story did not end here. In steps 4 and 5 of the figure above, I show the impact the Fed had in all this with its quantitative easing policy. By literally printing money in US Treasuries purchases, it added fuel to the fire, because Euro zone banks took advantage of the situation to borrow cheap US dollars, helping them repay their LTRO loans. has explained this with more detail than I can provide in this note, (in chronological order) here, here and here. I recommend that you read these articles in detail, if you want to understand how the game is going to end.

Step 6 seeks to show the status quo after the party. If the Cyprus situation is contained (which I doubt), going forward we should see the reduction in both assets (i.e. LTRO loans) and liabilities (i.e. Euros) at the balance sheet of the ECB and the banks, with banks replacing LTRO repaid loans with unsecured USD funding.

The Fed as the ultimate enabler tied the fate of the USD to the Euro

If you noticed, I circled the US Dollars held at the balance sheet of the Euro banks in step 6 of the figure above, as an asset. I did this because I want to emphasize a point I have been making for a long, long time: The collapse of the Yankee bond market (i.e. the market for bonds denominated in US dollars, where the borrowers are non-US resident corporations), caused by corporate defaults in the Euro zone will unmask the exposure that the Fed has to the fate of the Euro zone.  The dollars that end up with the Euro zone banks get recycled in multiple ways and one of them is via the Yankee market (another one is of course the USD loan market).

It should be clear therefore that this whole transfer of wealth will ultimately (and irresponsibly by the Fed) end up exponentially (through leverage) affecting those holding their savings in US dollars.

 Mar 29 2013 3

Final words

I am confident that the story above shows that far from being a unique situation, the fragile exposure of unsecured depositors across the Euro zone is the norm; and that their fragility was further increased in the last twelve months thanks to policies created by the same authorities who now refuse to honor their promise of a banking union, and instead impose capital controls, which have effectively destroyed any credibility on the safety of capital in the Euro zone.

One last word of caution: I think it would be wrong to interpret from the process depicted above that there was a premeditated conspiracy on the part of policy makers to weaken the position of depositors. This outcome, I believe, was simply an unintended consequence in their efforts to sustain the Euro zone. However, even if one accepts my view, the unintended outcome begs the following question: Why was there cheap money available for subordinated debt holders to cash out, but there is none now to protect the savings of depositors? Nobody can answer that question but with speculation, and as such, intellectual honesty demands that I keep mine to myself, because as Mark Antony said in Shakespeare’s “Julius Caesar”: “…You are not wood, you are not stones, but men; and being men, it will inflame you, it will make you mad”.

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Badabing's picture

"I think it would be wrong to interpret from the process depicted above that there was a premeditated conspiracy"Martin Sibileau he forgot Sarc/


On this day in history thirty pieces of silver paid for a contract on an important political person.

The same thirty pieces of silver bought a large parcel of land in a world center city.

The pieces of silver probably used, where the shekel because it came from the temple.

This coins weight is around 22 grams. 22 x 30 = 660 divided by 32 = 20.625 oz or around $582 in today’s money. Does this sound like the correct price to you? Cursed is the man that uses faulty weights and measures!

Happy Easter ZH

Fuck you Bernanke

McMolotov's picture

It's difficult to tell whether it's maliciousness or pure idiocy, so I've taken to calling it a "conspiracy of dunces." That phrase can serve as a place-holder until their intentions become more clear.

Zer0head's picture

"not a premeditated conspiracy on the part of policy makers to weaken the position of depositors"



rather it was/is

"a premeditated conspiracy on the part of policy makers to transfer/steal from depositors to the benefit of the eurocracy"

Pinto Currency's picture


The bail-in plan is included in Canada's 2013 budget. 

See pg. 144 and 145 of this document:

This is not something that just "happened" with Cyprus.

So much for blaming it on Germany.

Stackers's picture

Mathew 21:12 - 13

Jesus entered the temple courts and drove out all who were buying and selling there. He overturned the tables of the money changers and the benches of those selling doves. It is written,” he said to them, “‘My house will be called a house of prayer,’ but you are making it ‘a den of robbers



redpill's picture

The difference between Cyprus and other EU banks is not that the other EU banks are that much better capitalized, rather its that most other EU banks are in larger countries with larger economies and the Troika's first choice is to compel the populace to bail out the banks or nationalize them. THAT is the template. It couldn't work in Cyprus because there are not enough Cypriots. The Cyprus situation is more likely to repeat on similarly small countries with large amounts of foreign deposits like Luxembourg or Malta.

Pinto Currency's picture


Redpill - the acid test will be when interest rates start to rise.  We will then see how well capitalized these banks are.


On an associated point, the range of steps considered in this Bank of England speech by Andrew Gracie (BofE Director) from Sept 2012 include taking deposits and converting them to bank equity. 

From the front of the line to the back of the line.

LawsofPhysics's picture

" when interest rates start to rise."  --  LMFAO.  This will not be allowed to happen.  The Dollar will die completely first and all the important people will have long since left the currency ahead of "joe six-pack".  history is very clear on this.

Pinto Currency's picture


Let's see how long people stay in the financial system now that the conversation about expropriating wealth has started. 

Bonds will be sold and gold, oil, gas, timber, copper, and other durable real assets will all start to move. 

The bond market is $100 Trillion in size.  Can the c.b.'s buy fast enough without accelerating the run is the question. 


LawsofPhysics's picture

As 2008/2009 demonstrated.  No they cannot. This run will be much, much, worse.

SafelyGraze's picture

must keep mister Sibileau's writings out of the hands of future historians. or economists. or depositors. or serfs. 


Pinto Currency's picture


If you look at most banks' balance sheets, they hold about 5% of their assets in cash accounts and 95% is deployed in investments such as government bonds, money market funds, loans, etc.. 

As people pull money out of the banking system, the banks are forced to sell assets to raise capital for those who are withdrawing - that can drive interest rates higher quite quickly.


fiftybagger's picture

10% of that into bitcoin, 1 million per coin.  Above ground silver, ten thousand per ounce :-)


Silver For The People

The Bitcoin Channel

GtownSLV's picture

Uninsured capital is flying out of Hellenic and Spanish banksl. There will be no money uninsured money to confiscate by the end of next week. The capital flight will render these struggling banks insolvent in days. The fascists will have to confiscate the insured deposits. But the banking system will have collapsed by the time they make that annoncement. Insolvency is here NOW.

toys for tits's picture

Amazingly, Jesus put up with a lot of shit from Satan, the Pharisees, his murderers, and his apostles, who were bickering about who's the greatest, but the money-changers (bankers) are the only group that he demonstrated righteous anger towards.


fiftybagger's picture

The scribes and pharisees didn't make out so well either:


29 Woe unto you, scribes and Pharisees, hypocrites! because ye build the tombs of the prophets, and garnish the sepulchres of the righteous, 30 And say, If we had been in the days of our fathers, we would not have been partakers with them in the blood of the prophets. 31 Wherefore ye be witnesses unto yourselves, that ye are the children of them which killed the prophets. 32 Fill ye up then the measure of your fathers. 33 Ye serpents, ye generation of vipers, how can ye escape the damnation of hell?

Matthew 23
King James Bible

Pseudo Anonym's picture

no coincidence.  it gets better.  the catholic church invites the money changers back just to piss jesus off.  for confirmation of this fact, open encyclopedia judaica, look up the list of titles the rothschilds', one of the hofjuden banking families, hold and wonder why the fuck  rothschild would bear the title "guardians of the vatican treasury".  how fucked up is that?  after these money changers were kicked out of the premises for usury, the vatican entrusts their treasure to them.  like, really, who the fuck, in their right mind, would trust these characters with their gold and wealth when it is in plain site what type of fraud against humanity these banking families wont shy away from.  it only starts making sense if we accept the fact that those two work together .

the question remains - why would vatican be in cahoots with hofjuden bankers?  we know that vatican is the oldest and most profitable corporation; and as such, it will have a mission statement and critical goal to achieve.  Contrary to the popular belief, world domination is not the goal of hofjuden. vatican wants it since 1302 - on 18 November 1302, Boniface issued the bull unam sanctam which declared that both spiritual and temporal power were under the pope's jurisdiction, and that kings were subordinate to the power of the Roman pontiff; then the unam sanctam ends with this:

Furthermore, we declare, we proclaim, we define that it is absolutely necessary for salvation that every human creature be subject to the Roman Pontiff

if that is not a forward looking, corporate mission statement, then i dont know what is.  in any case, it would appear that jesus was angry only with the money changer because he anticipated that the money changers will corrupt even his own church

August's picture

An important perpective, well worth remembering over this Easter weekend.


Fuck you, Bernanke.

Silver Bug's picture

There is no going back now. Policy makers have shown their hand. This blunder will be remembered in history as one of the greatest fiascos of all time.

MayIMommaDogFace2theBananaPatch's picture

How 'bout  "Conspiracy of Crackheads"?

granolageek's picture

PMs must have been worth more then. The same 30 coins were later used to purchase a field. That wouldn't happen for $582 either these days.

IridiumRebel's picture

Thieves never stop. Give them a nickel and they'll take the whole account. Bankers are no exception, but they collude with lawmakers to make it legal. Get your money out.

SheepDog-One's picture

Sure economies are collapsed and everyones broke, but that's OK we got record high stawks! Turn dat frown de other way 'round mon!'s picture

Bit coin up 1500% in 9 months....I'm sure it will keep up that pace and the Cypriots will make up all their loses, what a system

Quintus's picture

You'll know the authorities are taking Bitcoin seriously when Comex creates a Bitcoin futures contract and the Feds grant one or two TBTFs complete exemption from normal exchange rules so that they can short the sh*t out of the contract with total freedom, flooding the market with billions of imaginary bitcoins that nobody can take delivery of in any size.

Then people can buy as many bitcoins as they like but the price will never go up - thus proving that all is well in fiat land and trust in unbacked Fed money is at all-time highs.

RSBriggs's picture

I'm not a Bitcoin guy, but I do know enough about it to know that one of its main strengths is that it's absolutely NOT possible to "flood the market" with imaginary bitcoins.   They can't be counterfeited like that, or at all - you can't sell one that doesn't already exist.  Period.

Quintus's picture

Yes - it was a slightly frivolous remark on my part. 

It is interesting, is it not, that bitcoin has performed so well recently and gold has not - even though the exact same factors are driving demand in both cases and official figures show that demand for gold from official and private sources is at record highs.

I think it is reasonable to assume that gold's performance over the past year or two would have closely mirrored that of Bitcoins were it not for the ever-more-obvious paper price suppression.

Anyway gold can't be counterfeited either - but a promise to deliver it can.  If people were willing to treat a promise to deliver Bitcoins in a month or two as though that were the same thing as actually having bitcoins, then it is entirely possible to flood the market with promises to deliver without ever counterfeiting one.  Last time I checked, JPM weren't in the gold mining or alchemy business.  Doesn't stop them selling what they don't have to those willing to accept their promises as a 1:1 equivalent for the real thing.

Badabing's picture

"If people were willing to treat a promise to deliver Bitcoins in a month or two as though that were the same thing as actually having bitcoins"

forget settling in bitcoins they'll settle in cash, at which they just print.

giggler123's picture

and further the OP point.  You are right in that they are limited in numbers which means they can't print, individually.  However this is only the case as rogue currency, if the controllers turn out to be central bankers, they can then print because they all as central bankers agree to levitate.  Then you are as screwed as paper, if not worse since it's all digital.  I half expect the NWO to evolve from this, IMHO...


Beam Me Up Scotty's picture

Exactly, Quintus.  They couldn't figure out how to turn lead into gold, but they have figured out how to turn paper into "paper gold".  Too many fools believe an ounce of "paper gold" = an ounce of gold.

To bad the holders of "paper gold" are going to find out the hard way that what they have isn't any different from lead, or tungsten.  Its still another form of "not gold". 

Its the new alchemy!!

pvzh's picture

Gold cannot be counterfeit either that does not preclude shortselling of ungodly amounts of contracts to drive price down... You counterfeit not the real thing, but contract to deliver it and then settle for cash, silly ;-)

XitSam's picture

Yes. I don't think the Bitcoin defenders take into account the machinations and pure evil of modern bankers.

Badabing's picture

i agree

Never underestimate the powers that be. They do it with real gold and silver.

McMolotov's picture

Any minute now, we'll learn from "the authorities" that the North Koreans have funded their imminent nuclear attack* against the US with bitcoins.


* It's all over the news, so prepare yourselves to rally behind Uncle Sam. And get to da bunka.

Sudden Debt's picture




dontgoforit's picture

Mirrors and the bent light of heavy gravity; peek-a-boo, I see you.

Jim in MN's picture





What, you talkin' to ME???



willien1derland's picture

This is NOT simply a template for Europe - Apparently Canada has enacted a bail-in scheme for its systemically important banks...Mish also posted about this..Bail-in(s) simply not exclusive to Europe - Plan accordingly

fuu's picture

EKM is that you?

LawsofPhysics's picture

"The fate of the US dollar is indirectly coupled with the fate of the Euro zone = There is no place to hide." -  An ounce is an ounce is an ounce.  From where I sit I see plenty of "stores of value".  Just remember, when fraud is the status quo, possession is the law.

Skateboarder's picture

The last word you used, LoP, I don't think it has earned a place to stay in the English language, or any language for that matter. It's a joke of a word and there is no respect for it anywhere on this planet.

I would revise the statement to "when fraud is the status quo, possession is truth."

LawsofPhysics's picture

Either way, if you possess food and water, you live, if you don't, you die.  Truth indeed.

Iam Yue2's picture


Decontextualisation involves the removal of all contextualisation from a story. It is foremostly a protection against learning and change, and is is instituted primarily through fear of integrating traumatic or potentially destructive information.

We exist at a time in which the world's tame and compliant media is prepared to go along with Draghi and his cohorts as they seek to decontextualise just about everything. Slovenian two year at almost 7%: not to worry, Slovenia is not Cyprus....blah, blah

If you are Slovenian and lucky enough to have 100K in the bank, you know what you should be doing.

Jim in MN's picture

OT but interesting:  Google Street View has a new special look at the Fukushima disaster zone.

Google offers glimpse of Japan nuclear no-go zone

Google has released panoramic images of a nuclear no-go zone in northeastern Japan.

The Internet giant's Street View service started offering 360-degree digital photos of Namie Town in Fukushima Prefecture on Thursday.

Google took the photographs at the town's request to let people of the world know that there is still a long way to go before the town will recover from the effects of the 2011 nuclear accident. The photo shoot started on March 4th and is the first of its kind in Japan's nuclear no-entry zone.

Google officials had previously said it would take several months to release the imagery. But the company accelerated the process to offer the photos much earlier.

The images show a shopping mall in the heart of the town littered with collapsed buildings even 2 years after the earthquake and tsunami. There is no human or vehicle traffic in the area.

The tsunami devastated the town's coastal areas. Street View photos show a fishing boat swept onto land and roadsides piled with rubble.

Google officials say the firm will record and make public images of areas affected by the nuclear accident in order to contribute to the reconstruction of the disaster-hit zones.

Mar. 28, 2013 - Updated 20:02 UTC (05:02 JST)

Urban Redneck's picture

The cute graphics on capital structure are INCORRECT....

1) The deposit base needs two be divided between "insured" and uninsured deposits (roughly in half)

2) what Cyprus has demonstrated in that in the "best" case for depositors the ECB places itself above ALL the uninsured depositors, and is perfectly willing to also place itself above "insured" depositors 

ergo- the LTRO needs to be moved UP the chart (above at least half of the deposit base)

Ban KKiller's picture

"I remember, we were flying along, 
And hit something in the air... "

brodix's picture


 Half the time, you are saying the system has to clear of bad debt and the other half of the time you are apocalyptic about lost wealth. They are two sides of the same "coin." Yes, the bankers are a bunch of crooks, but they have been given a logically impossible task, of creating and maintaining the value of enormous amounts of notational wealth, far above and beyond the value of the real economy. Capitalism has devolved from a system of efficient allocation of resources, to a factory for generating paper assets. The same laws of nature will always apply and when the wave is mostly foam and bubbles, it is topping out, so look for a good path down.

 The bankers should remember that when they crash the money, they are no longer necessary and it's the stooges they gave the most guns to, who will run things.

 Of course, they know this and that is why they will do anything to keep it going.....