Last week I posed the question "Is The Cypriot Government Crazy Or Do They Really Fear Bankers That Much? [16]" The country even considering imposing loses on bank depositors over creditors seemed absurd at best. Even the faux consolation of compensating holders of pure liquidity (or at least what was formerly believed to be pure liquidity - banks have been closed for a week now and ATM withdrawals have been limited to 100 euro per day due to the capital controls I clearly warned of last year [17]) was a scheme born out of lunacy, and unlikely to compensate anyone for anything [18]. Well, this is the latest from Bloomberg [19]:
The revised accord spares bank accounts below the insured limit of 100,000 euros.
I was curious to see how they could impose losses on insured accounts in the first place, after all the accounts were insured basically (through implied backstop) by the same entities (EU/EC/ECB) that were attempting to force the loss, no?
It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc [20], the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB) [21], the second biggest.
Losses of 40% are outrageous, particularly considering this is the most liquid and presumably the most sacrosanct tier of the capital structure. How can one assume that this will not have extremely negative repercussions?
Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.
Here we see the bondholders, both junior and senior taking losses. This is interesting, like in Ireland, all of the market risk takers are assuming losses, many of these losses are absolute. Of even greater interest is what happens when the depositors are added into the fray. Now, junior and senior bondholders, as well as depositors are on guard. The ONLY likely scenario to occur when these banks re-open is capital flight, capital controls or not!
Banks in Cyprus, which have been shut for the past week, will remain closed until further notice. Lawmakers in Cyprus voted last week to impose capital controls [22] to prevent a run on deposits when they reopen. “This solution we reached tonight doesn’t have the downsides that the solution of last week did,” said Dutch Finance Minister Jeroen Dijsselbloem, chairman of the euro ministers’ panel.
Yeah, they can try to prevent the run on deposits, and even with some limited success, but now that you have wiped out (or nearly wiped out) junior and senior creditors as well as depositors, you have a lot more holes to plug in that liquidity dam, don't you? Again, from The Anatomy of a European Bank Run [23]!
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Using this European bank as a proxy for Bear Stearns in January of 2008, another bank collapse situation that I warned of months in advance (see Is this the Breaking of the Bear? [25]). The tall stalk represents the liabilities behind the bank's illiquid level 2 and level 3 assets (including the ill fated mortgage products). Equity is destroyed as the assets leveraged through the use of these liabilities are nearly halved in value, leaving mostly liabilities. The maroon stalk represents the extreme risk posed by capital flight through a depositor run, which Cypriot officials feel they have controlled through capital controls, still there is the excessive reliance on very short term liabilities to fund very long term and illiquid assets that have depreciated in price. Wait, there's more!
The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style [26]":
The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors. In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!
[27]image006
I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? Well, with the bondholders getting fully wiped out and the primary rung on the capital structure remaining simply because it is forcibly locked in against its will - at least whats remained if it since uninsured depositors face losses of up to 40%, if it were your money opposing Cypriot banks as counterparty, wouldn't it be pretty much guaranteed.This was clearly demarcated in my piece last week,Liar, Liar Banking System On Fire! Watch As I Spit Fact That Burns Down The Sham Formerly Know As The EU Banking System. [28]
And back to that Bloomberg article...
On the creditors’ side, parliaments in Germany [29], Finland [30] and the Netherlands may hold votes to approve loans to Cyprus from the European Stability Mechanism, the 500 billion-euro rescue fund.
Klaus Regling, managing director of the rescue fund, said approval by creditor governments in mid-April will pave the way for the first payouts to Cyprus in early May.
This is interesting. The first payments are due out in early May, and the capital will flee from these banks early TUESDAY morning, or as soon as the bank holiday is over and the banks reopen. Damn, that was a good plan if I ever heard one!!!
Lagarde said she will recommend that the IMF provide loans, without giving a figure. “There might have been a bit of friction here and there,” she said.
And on top of it, the IMF hasn't even guaranteed a loan amount. The Cyprus banks gutted the confidence of its banking system and robbed its wealthiest depositors for an IOU of an unspecified amount and time frame. Damn, that was a good plan if I ever heard one!!!
The next step lies with the ECB, which needs to keep funds flowing to solvent Cypriot banks to enable them to open. While Draghi and Executive Board member Joerg Asmussen left Brussels without commenting to reporters, a statement by the ministers said the bank will channel liquidity to the Bank of Cyprus “in line with applicable rules.”
... The effort to go after insured deposits, while abandoned, may have harmful repercussions, said Moody’s in a note early today. “Policy makers’ recent decisions raise the risk of deposit outflows, capital flight, increased bank and sovereign funding costs and broader financial-market dislocation throughout the euro area in the future,” Moody’s said.
No shit, Sherlock! And it is uncanny insight such as this that has spawned documentaries such as this....
In closing, I will also like to add that the 100k euro limit will likely hit the small businesses and middle class ex-pat community considerably harder than it hits the Russian oligarchs 0who are wealthy enough to have some geographic diversification. The small businesses are the ones who employ the vast amount of the population (them, and the now extra broke government, that is). Wiping out 40% of a small to medium business's liquid assets over 100k is tantamount to corporate genocide. Add to that the extreme taxation to come from attempting to pay back the Troika and the guaranteed spike in unemployment stemming from all of those broken companies, the breakdown economic activity from those missing businesses and the near guaranteed counterparty run whenever those banks open up again (if ever), and you have a austerity-imposed depression on your hands. This is a depression that's currently occurring in Greece and was forecast 3 years ago, see The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! [31] That's actually good news compared to what's likely to happen to those other countries' bank depositors who feel that their liquid assets, at one time thought to be actually liquid and sacrosanct, are at risk like those of the Cyrprians.
Ready! Set! Bank Run!!!
[32]Cyprus contagion raw
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