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Eurozone Roulette

Tyler Durden's picture




 

The $13 billion bailout in Cyprus is small (in 2011, France and Germany made $80 billion of loans and grants to developing countries) and as JPMorgan's CIO, Michael Cembalest, notes the situation is in many ways unique. However, he warns, the latest melodrama reinforces the inconsistent and chaotic nature of EU policy-making. Bondholders, equity investors, bank depositors and citizens of Europe are at risk of unpredictable outcomes as they play Eurozone Roulette. Here’s where they might land on any given spin:

Depositor confiscation and subordination: The EU eventually backed off, but the initial proposal for Cyprus involved a confiscatory tax on small and large Cyprus depositors, both foreign and domestic, with no loss to senior bond-holders (effectively subordinating the depositors). It was a shocking policy proposal in a region where confidence is everything: uninsured bank deposits range from 45% (Spain, Germany) to 80% (UK, Italy) of total bank deposits. Note: Laiki bank branches in the UK were not subject to deposit withdrawal restrictions, even though their branches in Cyprus were.

Zero risk weight applied to sovereign bonds: Even after Greek bonds suffered principal losses, EU banks have the flexibility to use 0% risk weights on EU sovereign debt as per “IRB permanent partial use rules”, regardless of the country’s credit rating.

Maastricht Ja/Nein!!!: From the inception of the Maastricht treaty in 1992 to 2008, there was not a single year when both France and Germany were in compliance with Maastricht debt and deficit targets.Today, Southern Europe is pushed to get in line ASAP.

Loss of tax rate sovereignty: Throughout all the difficult negotiations and bailouts, Ireland was able to keep its 12.5% corporate tax rate despite pressure from the EU to raise it. No such luck for Cyprus, which is being forced to raise its corporate tax rate from 10%. As far as I know, homogenization of EU personal or corporate tax rates was never a condition for Eurozone membership.

Changing protections for senior bank bondholders: There is nothing wrong with bondholders, uninsured depositors or other creditors suffering losses when they are owed by insolvent banks whose asset values are insufficient to cover them. In Ireland however, a bailout was structured to avoid losses on some unguaranteed senior bank bonds which were subsequently repaid (a wealth transfer from Irish citizens to bondholders). In Cyprus, some senior bank bondholders are no longer protected.

Tax Haven Designation: Germany’s Federal Intelligence Service concluded last fall that an aid program for Cyprus would benefit certain Russian depositors with billions of dollars in deposits in Cyprus, and that “Cyprus is a gateway for money laundering activities in the EU”. Fair enough; Cyprus is seen as a personal tax haven. But according to a US Congressional Research Service report in January 2013, tax havens cater to both individuals and corporations. One measure of a corporate tax haven is when foreign sourced profits are very large relative to GDP, such that in the words of the CRS, “profits in these countries do not appear to derive from economic motives related to productive inputs or markets, but rather reflect income easily transferred to low-tax jurisdictions”. On this measure, Luxembourg leads the pack at 18% of GDP, 2x higher than Cyprus and 6x higher than Switzerland, Singapore and Panama. The degree, time and place of EU concern about tax havens can vary substantially.

ECB asserts preferred creditor status: The ECB owned ~50 billion Euros of Greek sovereign debt that was not restructured along with the private sector. Typically, preferred creditor status is reserved only for entities like the IMF and World Bank.

Proposed bonus caps on stand-alone asset management firms and UCITS funds (including regulated hedge funds): Because their investment activities played such a large role in the EU sovereign debt crisis? Because they were beneficiaries of official sector deposit insurance and lots of ECB lending? I can’t find evidence of either one happening, but maybe I am not looking hard enough.

Defenestration of your Prime Minister: As in the Prague defenestration of 1618, when the imperial governor was thrown out of a window. Circumstances will never be known with certainty, but it is clear that the EU put enormous pressure on Italian Prime Minster Berlusconi. In August 2011, ECB President Trichet sent a letter to Berlusconi asking for a long list of reforms and a balanced budget in exchange for the ECB’s bond purchasing program. Berlusconi’s responses were seen as inadequate by other EU leaders, and Italian spreads widened further. Berlusconi lost the support of the Liga Norte, and was forced to resign. Circumstances were not that different in Greece, where Papandreou resigned in favor of a unity government that would execute EU-sought structural reforms, and in Spain, where Zapatero stepped aside to allow for early elections.

Source: JPMorgan (Michael Cembalest - full pdf)


 

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Mon, 04/01/2013 - 13:59 | 3396558 SemperFord
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Now I have to spend 3 hours to watch The Deer Hunter again, damn you ZH

Mon, 04/01/2013 - 14:04 | 3396570 DoChenRollingBearing
DoChenRollingBearing's picture

If Europe goes off the cliff (off hard), then 48 hours later so do we...

Mon, 04/01/2013 - 14:23 | 3396626 seek
seek's picture

I agree, but it might be slightly longer, 72 hours, perhaps. Definitely less than a week. It will be the ultimate bull trap, as people jump to USD to escape only to be sucked down.

I was reviewing the post-2008 aftermath this weekend, specifically the silient electronic bank run. The stats on that in terms of volume are astounding -- because of that I am convinced there's a red panic button that activates capital controls in minutes somewhere at the Fed or Treasury. They won't let it happen again. This will add some delay, but ultimately amplify the crash.

Mon, 04/01/2013 - 15:03 | 3396780 TheGermanGuy
TheGermanGuy's picture

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

There, now you got more time to get moar beer and hookers

Mon, 04/01/2013 - 15:17 | 3396842 Pool Shark
Pool Shark's picture

 

 

 

"MAU!!!"

 

 

 

Mon, 04/01/2013 - 15:29 | 3396889 DoChenRollingBearing
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+ 1 seek

If there is such a red panic button, best be getting cash out and buying gold ASAP.

And, if you want to get anything OUT of the country, best get started yesterday.

***

How could anyone red your post?  I found your comment re the electronic bank run nowhere else.  That red button could be hit pretty fast.  That is why so many of us "extra paranoid" ones say to act before things get too real...

Mon, 04/01/2013 - 14:33 | 3396662 forwardho
forwardho's picture

DoChen, I value your posts.

Please to reconsider your time frame.

An electron travels at speeds aproaching that of light.

The sell orders will not be delivered by fedex, it will be instantaneous.

Mon, 04/01/2013 - 15:31 | 3396893 DoChenRollingBearing
DoChenRollingBearing's picture

Bots, yes, speed of light.

Humans?  Slower.

48 hours is just my guess...

Mon, 04/01/2013 - 14:35 | 3396664 Groundhog Day
Groundhog Day's picture

Can't i just play red and black

Mon, 04/01/2013 - 14:32 | 3396655 ronaldawg
ronaldawg's picture

EPIC Christopher Walken photo - Bravo ZH!!!

Mon, 04/01/2013 - 14:39 | 3396680 McMolotov
McMolotov's picture

What a great but depressing movie. Not nearly as depressing as what's happening in Europe, though.

Mon, 04/01/2013 - 16:05 | 3397064 ronaldawg
ronaldawg's picture

Growing up in 1978-1979 was depressing too.

Mon, 04/01/2013 - 14:02 | 3396563 ParkAveFlasher
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Bust the deal.  Face the wheel.

Mon, 04/01/2013 - 14:02 | 3396567 Skateboarder
Skateboarder's picture

Thank you for playing Wheel of Bailout.

Mon, 04/01/2013 - 14:18 | 3396609 Bam_Man
Bam_Man's picture

And we have some lovely "parting gifts" for you - including 90% deposit haircuts and indefinite economic depression!

Mon, 04/01/2013 - 14:06 | 3396579 HegelianDialectic
HegelianDialectic's picture

Got Weighted Balls???

Mon, 04/01/2013 - 14:14 | 3396601 Ancona
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Hahaha! Defenestration bitchez! Why didn't I think of that?

Mon, 04/01/2013 - 14:16 | 3396603 Bam_Man
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"Mao! Mao!"

Mon, 04/01/2013 - 14:15 | 3396604 toys for tits
toys for tits's picture

As a country that benefitted tremendously from the Marshall plan after WWII, Germany sure is being a dick these days.

Mon, 04/01/2013 - 14:59 | 3396767 JR
JR's picture

In 1947, a defeated, divided, truncated, occupied Germany was a mass of rubble, its economy a desperate scratching for subsistence.

Although the Marshall Plan enabled Germany’s people to rebuild a free society and a free economy, a predecessor blueprint for genocide became the on-going principal occupation policy directive – a policy that aimed at the destruction of a nation’s people. It was the Morganthau Plan, drawn up by America’s Jewish wartime Secretary of the Treasury, Henry Morganthau and his closest advisory, Harry Dexter White, a member of a Communist espionage ring in Washington while he served as Assistant Secretary of State.

It aimed at the permanent destruction of Germany’s industrial heart and the consequent death through starvation and disease of millions and tens of millions of Germans.

Time magazine has aptly called it “history’s most terrifying peace”.

The conservative newsletter, Review of World Affairs, quotes the plight of the German people after the war as follows from a confidential memorandum prepared by an eminent European economist:

“Since the end of the war about 3,000,000 people, mostly women and children and over-aged men, have been killed in eastern Germany and south-eastern Europe; about 15,000,000 people have been deported or had to flee from their homesteads and are on the road.  About 25 per cent of these people, over 3,000,000, have perished.  About 4,000,000 men and women have been deported to eastern Europe and Russia as slaves….” Quoted by Sen. Homer Capehart in speech before U.S. Senate, Feb. 5, 1946.

Dr. Lawrence Meyer, executive secretary of the Lutheran Church, Missouri Synod, after a tour of Germany at the time stated:

“About 16,000,000 German refugees east of the Oder are being deported from their homes.  It has been estimated that already 10,000,000 have been driven out.  The human tragedy and suffering caused by this ’Volkswanderung’ are unparalleled in history…”

An authentic eye-witness reported…

“A large barge is slowly being towed across the Oder River.  In it, lying on straw, are 300 children ranging from 2 to 14 years of age.  There is hardly a sign of life in the whole group.  Their hollow eyes, their swollen bellies, knees, and feet are telltale signs of starvation.  These are merely the vanguard of hundreds of thousands—millions of homeless, shattered, hungry, sick, helpless, hopeless human beings fleeing westward – west of the Oder and Neisse rivers.

“A trust in God—in his goodness and mercy—these are the only hope of Germany today.  And thank God in many there is still faith in God against which the gates of hell have stormed in vain during the past decade.” (Capehart)

And, then, after Germany surrendered, their soldiers surrendered to the Aliies thinking that they would be treated more fairly than by the Soviet hoards. Eisenhower, however, promptly declared and designated the surrendered German soldiers as "defeated enemy forces" or DEF.

As one ZH commenter said: “Then began the liquidation of over 1 million surrendered and captured German soldiers, mostly very young or old because Germany had run out of men at the end of WWII.  They were literally starved to death in open concentration camps guarded by Allied forces, with no food, toiletries, or shelter.  Anyone who tried to bring them food or anything were shot on sight.  Some 1.2 million Germans were literally starved to death by Eisenhower after WWII.”

 

Mon, 04/01/2013 - 16:22 | 3397135 frenchie
Mon, 04/01/2013 - 14:23 | 3396630 PUD
PUD's picture

LOANS TO 3D WORLD COUNTRIES TO "HELP"?  BHWAAAAAAAA!!

Mon, 04/01/2013 - 14:37 | 3396674 JR
JR's picture

After reading “It Can Happen Here” below you will know why former U.S. Treasury Secretary and Goldman CEO Hank Paulson and Federal Reserve Chairman Ben Bernanke force-fed Merrill Lynch into Bank of America, and, ultimately, BofA’s depositors.

It Can Happen Here: The Bank Confiscation Scheme for US and UK Depositors

By Ellen Brown

Global Research, March 29, 2013

Web of Debt

Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few Eurozone “troika” officials scrambling to salvage their balance sheets. A joint paper by the US Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland (discussed earlier here); and that the result will be to deliver clear title to the banks of depositor funds.  

Now you know will know why Treasury Secretary Hank Paulson and Federal Reserve Charimsn Ben Bernanke foisted Merrill Lynch upon Bank of America, and ultimately its depositors.New Zealand has a similar directive, discussed in my last article here, indicating that this isn’t just an emergency measure for troubled Eurozone countries. New Zealand’s Voxy reported on March 19th:

The National Government [is] pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts . . . .

Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.

Can They Do That?

Although few depositors realize it, legally the bank owns the depositor’s funds as soon as they are put in the bank. Our money becomes the bank’s, and we become unsecured creditors holding IOUs or promises to pay. (See here and here.) But until now the bank has been obligated to pay the money back on demand in the form of cash. Under the FDIC-BOE plan, our IOUs will be converted into “bank equity.”  The bank will get the money and we will get stock in the bank. With any luck we may be able to sell the stock to someone else, but when and at what price? Most people keep a deposit account so they can have ready cash to pay the bills.

The 15-page FDIC-BOE document is called “Resolving Globally Active, Systemically Important, Financial Institutions.”  It begins by explaining that the 2008 banking crisis has made it clear that some other way besides taxpayer bailouts is needed to maintain “financial stability.” Evidently anticipating that the next financial collapse will be on a grander scale than either the taxpayers or Congress is willing to underwrite, the authors state:

An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution.

No exception is indicated for “insured deposits” in the U.S., meaning those under $250,000, the deposits we thought were protected by FDIC insurance. This can hardly be an oversight, since it is the FDIC that is issuing the directive. The FDIC is an insurance company funded by premiums paid by private banks.  The directive is called a “resolution process,” defined elsewhere as a plan that “would be triggered in the event of the failure of an insurer . . . .” The only  mention of “insured deposits” is in connection with existing UK legislation, which the FDIC-BOE directive goes on to say is inadequate, implying that it needs to be modified or overridden.

An Imminent Risk

If our IOUs are converted to bank stock, they will no longer be subject to insurance protection but will be “at risk” and vulnerable to being wiped out, just as the Lehman Brothers shareholders were in 2008.  That this dire scenario could actually materialize was underscored by Yves Smith in a March 19th post titled When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives.  She writes:

In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike their Cypriot confreres, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders.

One might wonder why the posting of collateral by a derivative counterparty, at some percentage of full exposure, makes the creditor “secured,” while the depositor who puts up 100 cents on the dollar is “unsecured.” But moving on – Smith writes:

Lehman had only two itty bitty banking subsidiaries, and to my knowledge, was not gathering retail deposits. But as readers may recall, Bank of America moved most of its derivatives from its Merrill Lynch operation [to] its depositary in late 2011.

Its “depositary” is the arm of the bank that takes deposits; and at B of A, that means lots and lots of deposits. The deposits are now subject to being wiped out by a major derivatives loss. How bad could that be? Smith quotes Bloomberg:

. . . Bank of America’s holding company . . . held almost $75 trillion of derivatives at the end of June . . . .

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

$75 trillion and $79 trillion in derivatives! These two mega-banks alone hold more in notional derivatives each than the entire global GDP (at $70 trillion). The “notional value” of derivatives is not the same as cash at risk, but according to a cross-post on Smith’s site:

By at least one estimate, in 2010 there was a total of $12 trillion in cash tied up (at risk) in derivatives . . . .

$12 trillion is close to the US GDP.  Smith goes on:

. . . Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. . . . Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors.

Perhaps, but Congress has already been burned and is liable to balk a second time. Section 716 of the Dodd-Frank Act specifically prohibits public support for speculative derivatives activities. And in the Eurozone, while the European Stability Mechanism committed Eurozone countries to bail out failed banks, they are apparently having second thoughts there as well. On March 25th, Dutch Finance Minister Jeroen Dijsselbloem, who played a leading role in imposing the deposit confiscation plan on Cyprus, told reporters that it would be the template for any future bank bailouts, and that “the aim is for the ESM never to have to be used.”

That explains the need for the FDIC-BOE resolution. If the anticipated enabling legislation is passed, the FDIC will no longer need to protect depositor funds; it can just confiscate them.

Worse Than a Tax

An FDIC confiscation of deposits to recapitalize the banks is far different from a simple tax on taxpayers to pay government expenses. The government’s debt is at least arguably the people’s debt, since the government is there to provide services for the people. But when the banks get into trouble with their derivative schemes, they are not serving depositors, who are not getting a cut of the profits. Taking depositor funds is simply theft.

What should be done is to raise FDIC insurance premiums and make the banks pay to keep their depositors whole, but premiums are already high; and the FDIC, like other government regulatory agencies, is subject to regulatory capture.  Deposit insurance has failed, and so has the private banking system that has depended on it for the trust that makes banking work.

The Cyprus haircut on depositors was called a “wealth tax” and was written off by commentators as “deserved,” because much of the money in Cypriot accounts belongs to foreign oligarchs, tax dodgers and money launderers. But if that template is applied in the US, it will be a tax on the poor and middle class. Wealthy Americans don’t keep most of their money in bank accounts.  They keep it in the stock market, in real estate, in over-the-counter derivatives, in gold and silver, and so forth.

Are you safe, then, if your money is in gold and silver? Apparently not – if it’s stored in a safety deposit box in the bankHomeland Security has reportedly told banks that it has authority to seize the contents of safety deposit boxes without a warrant when it’s a matter of “national security,” which a major bank crisis no doubt will be. …

http://www.globalresearch.ca/it-can-happen-here-the-bank-confiscation-scheme-for-us-and-uk-depositors/53289

As for the alternative, “nationalize megabanks that fail, writes Brown, an attorney and chairman of the Public Banking Institute: “When Americans realize that the alternative is to have their ready cash transformed into “bank stock” of questionable marketability, moving failed mega-banks into the public sector may start to have more appeal.”

Mon, 04/01/2013 - 14:43 | 3396695 Charles Wilson
Charles Wilson's picture

"Throughout all the difficult negotiations and bailouts, Ireland was able to keep its 12.5% corporate tax rate despite pressure from the EU to raise it. No such luck for Cyprus, which is being forced to raise its corporate tax rate from 10%."

Before the Cyprus Fiasco there was the Corporate Tax Problem of Ireland.

DID ANYONE ever hear ONE EU Bureaucrat advocate that the other EU Members LOWER their Tax Rates?

No.

This was never about a functioning Common Currency.  It was about the Rise of State Power.

Anything in its way will be smashed.  It is for the aggrandizement of the Technocratic Aristocracy and the Rise of a New Feudalism.

 

CW

Mon, 04/01/2013 - 14:55 | 3396752 KingdomKum
KingdomKum's picture

we few,  we happy few,  we band of silver holders  .  .  .

Mon, 04/01/2013 - 15:15 | 3396833 NoTTD
NoTTD's picture

"One shot."

Mon, 04/01/2013 - 15:21 | 3396853 robertocarlos
robertocarlos's picture

Peter puts 5 bullets in the chamber and spins the cartridge. "I'll go first." "Wait, this is crazy!" "You go first."

Mon, 04/01/2013 - 17:10 | 3397310 icanhasbailout
icanhasbailout's picture

5 out of 6 people enjoy Russian Roulette

Mon, 04/01/2013 - 16:13 | 3397104 q99x2
q99x2's picture

BitCoin at all time highs today. I couldn't resist and had to get on the CVS red phone again. Didn't see Draghi there today.

High:$105.99000

Mon, 04/01/2013 - 17:25 | 3397294 Kelley
Kelley's picture

Do we know the names of the actual thieves who are stealing depositors' money? Shouldn't there be an APB of their names?

Mon, 04/01/2013 - 18:07 | 3397477 blindman
blindman's picture

http://www.fdic.gov/about/srac/2012/2012-01-25_minutes.pdf
The Meeting of the Systemic Resolution Advisory Committee
of the
Federal Deposit Insurance Corporation
Held in the Board Room
Federal Deposit Insurance Corporation Building
Washington, D.C.
Open to Public Observation
January 25, 2012 8:45 A.M.
.
FDIC & Bank of England Create Resolution Authority for Unlimited Cyprus-Style “Bail-Ins” for TBTF Banks!
http://silverdoctors.com/fdic-bank-of-england-create-resolution-authorit...

Mon, 04/01/2013 - 18:44 | 3397591 thewayitis
thewayitis's picture

 

    The sheeple just don't understand ....It just gets worst from here on. Pull the trigger....

Mon, 04/01/2013 - 19:13 | 3397673 mt paul
mt paul's picture

long silver

Nov 2008

 

the rest will be history

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