The Cyprus bank bail-in committed of early 2013 may seem like small deal to most US investors.
After all, most Americans probably couldn’t even find Cyprus on a globe. And with the mainstream media spreading the narrative that the Cyprus bail-in was a one-time event that was meant to support the bank while punishing tax-dodging crooks, 99% of folks won’t think twice about the situation.
However, the reality of what happened in Cyprus is a far different matter. And the reason that this reality has not been featured as headline news is because doing so would reveal the following:
1) European politicians are both corrupt and incompetent.
2) Those meant to assess the risk of any financial institutions don’t know what they’re talking about.
3) The average citizen will be screwed while politically connected insiders will be given the means to circumvent the law.
Let’s assess these issues one by one.
First off, the Cyprus bank “bail-in” was not some sudden event. The country first asked for a bail-out in JUNE 2012. Here’s the timeline.
· June 25, 2012: Cyprus formally requests a bailout from the EU.
· November 24, 2012: Cyprus announces it has reached an agreement with the EU the bailout process once Cyprus banks are examined by EU officials (ballpark estimate of capital needed is €17.5 billion).
During the period of late June 2012 until November 2012, Cyprus’s problems were allegedly being assessed and nothing more. Throughout this period, NO ONE in a position of significant political or financial power suggested to Cypriots or anyone else who had money in the Cyprus banks that their money would be STOLEN.
Instead, numerous bureaucrats came out to assure the public that this situation was under control and that the risks to the Cyprus banks would be carefully assessed.
Then, in the span of a single week, a bank holiday was declared, bank accounts were frozen, and deposits were stolen.
Here’s the specific sequence of events:
· March 16 2013: Cyprus announces the terms of its bail-in: a 6.75% confiscation of accounts under €100,000 and 9.9% for accounts larger than €100,000… a bank holiday is announced.
· March 17 2013: emergency session of Parliament to vote on bailout/bail-in is postponed.
· March 18 2013: Bank holiday extended until March 21 2013.
· March 19 2013: Cyprus parliament rejects bail-in bill.
· March 20 2013: Bank holiday extended until March 26 2013.
· March 24 2013: Cash limits of €100 in withdrawals begin for largest banks in Cyprus.
· March 25 2013: Bail-in deal agreed upon. Those depositors with over €100,000 either lose 40% of their money (Bank of Cyprus) or lose 60% (Laiki).
The most critical item to note about this timeline is that while the general public was assured that all was well, politically connected insiders were warned to get their money OUT OF THE BANKS
One hundred and thirty-two companies reportedly had inside knowledge of Cyprus’ impending levy tax as they withdrew deposits worth US$916 million in the run-up to the bailout deal.
The companies withdrew their savings in the two week period (between March 1 to March 15) leading up to the rescue deal that enforced heavy losses on wealthy depositors in Cypriot banks, according to Greek newspaper Proto Thema.
Shortly after this the EU ministers and the IMF hammered out a 10-billion-euro (US$13 billion) bailout agreement with Cyprus, which included a one-time tax on deposits held in Cypriot banks.
In the meantime all banks in Cyprus temporarily froze the amounts required to pay the tax on their clients’ deposits and stopped all transactions while the government negotiated the details of the agreement.
The companies on the list withdrew their deposits in euro, USD, GBP and Russian rubles and later transferred to banks outside of Cyprus. The total amount withdrawn comes to US$916 million.
http://rt.com/news/cyprus-companies-withdraw-money-218/ [9]
So, nearly $1 billion worth of insider money escaped the Cyprus confiscation scheme. NONE of it was retiree savings. Ordinary individuals got screwed while politically connected insiders were able to get out scot-free.
Now what’s truly amazing is that the Cyprus bank that collapsed was actually AWARDED BEST BANK for Private Banking by EUROMONEY Magazine. What was hailed as the BEST bank for private banking ended up being totally insolvent with 47% of deposits above €100,000 being converted into bank equity.
Bank of Cyprus has been named as the Best Bank for Private Banking in Cyprus, by the internationally acclaimed magazine EUROMONEY
Bank of Cyprus Private Banking ranked first among Cypriot, Greek and other international financial institutions operating in Cyprus in the Private Banking sector. This accolade classifies the Bank among the leading financial institutions offering Private Banking services and is yet another important international distinction for the Bank of Cyprus Group…
This recognition by EUROMONEY is ever more important in today’s macroeconomic environment as it reaffirms the Bank’s ability to safely and successfully respond to its clients’ financial needs and emphasizes its clients’ loyalty and trust.
http://www.bankofcyprus.com.cy/en-GB/Cyprus/News-Archive/Best-Bank-for-Private-Banking/ [10]
Now, the political and financial elite in Cyprus and the EU will argue that bank deposits were not STOLEN because they were converted into equity in the bank at a rate of €1 per share. But being forced to change cold hard cash for equity in an insolvent bank is hardly cause for excitement.
Indeed, the market, now well aware that the Bank of Cyprus is insolvent, has been dumping shares. So those depositors whose deposits were converted into equity are watching their savings evaporate as shares dive.
Moreover, it’s not as though they were given the means to get their other deposits out of the bank:
Last year, thousands of customers with money in Bank of Cyprus, including many British and Russians, became unwilling shareholders in the lender when their deposits were turned into equity as part of a controversial €10bn emergency rescue.
Depositors saw 47.5 per cent of their money above a €100,000 threshold turned into equity.
More than a third of their cash was then locked into six, nine and 12-month accounts. Shares in Bank of Cyprus have been suspended on the Athens and Nicosia stock exchanges since early 2013 and only one of the fixed term cash accounts has released all of the money due to customers.
Éxito’s Ben Rosenberger and Michele Del Bo, who have previously arranged the sale of Lehman Brothers and Icelandic bank distressed debt, said that sellers had so far been mostly international clients who wanted to extract their money from the island by selling their deposits and shares to distressed debt funds.
http://www.ft.com/intl/cms/s/0/89351ec8-f223-11e3-9015-00144feabdc0.html#axzz38Iy371O0 [11]
So when the bank wants to raise capital, which would dilute the equity holdings for former depositors. What were savings are now not only subject to the whims of the market, but can be actively diluted by capital raises.
Again, we refer to the list we began this article with:
1) European politicians are both corrupt and incompetent.
2) Those meant to assess the risk of any financial institutions don’t know what they’re talking about.
3) The average citizen will be screwed while politically connected insiders will be given the means to circumvent the law.
Cyprus matters because while countries may differ in specific cultural components, the monetary system in place is by and large the same around the world. And what happened in Cyprus should be seen as a template for what can happen elsewhere.
Indeed, this is now playing out in Greece today.
Greece’s current leadership was elected back in January. Since that time the country has been in an ongoing negotiation concerning its debt issues. Everyone knew Greece was broke, but again the process was dragged out.
Then in the span of a single weekend, a bank holiday was declared… and now suggestions of a 30% haircut on deposits are being floated. And once again, it’s ordinary citizens who are being screwed.
This process will be spreading throughout the globe going forward. Indeed, the FDIC has proposed precisely the same “bail-in” program if a “systematically important financial institution” were to go belly-up in the US.
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Phoenix Capital Research