Iceland

When the final "bailout" structure of the Cypriot deposit-confiscatory bail-in was revealed in late March, the implied victory for the Troika (which has since notched up its demands for the insolvent country to now sell its 14 tons of gold) was that instead of the deposit haircut passing as a tax, and thus needing a parliament ratification, it would come in the form of a bank resolution, with Laiki bank liquidating and being subsumed by the remaining Bank of Cyprus, and with uninsured depositors in both banks ending up crushed. However, as previously reported, in the interim period deposit outflows have continued and accelerated despite the assorted ineffective "capital controls" which has led to additional underfunding for the local banks, and to a second bailout of Cyprus, this one rising to €23 billion or a 35% increase from the original, as part of which the Troika has demanded that Cyprus sell their gold in the open market. Now, a month later, it appears that the Troika's initial victory may have been a Pyrrhic one, as yesterday the Cypriot attorney general announced, and today the government's spokesman confirmed, that the parliament will have to ratify the €23 billion bailout of the tiny island nation after all, thereby refocusing the popular anger from some ephemeral technocrat in Europe to the country's own elected representatives, thereby changing the calculus of the Cypriot decision by 180 degrees.

Now is the time to think about how you would live your life if your real value was appreciated and fairly compensated.

QE "is not a Buzz Lightyear policy," Dallas Fed's Fisher explains to Bloomberg TV's Stephanie Ruhle, "this will not go on forever." He admits there are limits to their (and implicitly the ECB or BoJ) policies - "we just have to figure out what they are." The always outspoken fed head goes on to explain why he believes the Fed's policy should be "dialed back... Not go from wild turkey, the liquor by the way, to cold turkey; but certainly slowing it down now." The too-big-to-fail banks are absolutely gaining from a substantial cost-of-funding advantage (over smaller banks) with their implicit government guarantee and Fisher expresses disappointment in the reams of pages that constitute new regulation adding that he would prefer "a simple statement saying they understand there is no government guarantee... It could be written by a sixth grader," as Dodd-Frank "needs repair." His fears are exacerbated by Cyprus as he notes, "[in Cyprus] you have an economy that is held hostage by bank failure and institutions that are too big to fail. We cannot let that happen in the U.S. ever again and the American people will not tolerate it."

Witches Brew: Part 4 - Reality Bites

• The Specter of Things to Come

The road to ruin is on plain display and the playbook is easily seen at this juncture. Let’s take a look at how that playbook will unfold. Contrary to popular outrage of the SOLUTION being IMPOSED it is the correct one once the insured depositors where PROTECTED.  In this edition the elites suffered FIRST followed by the private sector depositors who foolishly believed false BALANCE sheets which were POLITICALLY CORRECT but PRACTICALLY incorrect fictions approved by fiduciarily (regulations and regulators allowed ONGOING insolvent operations rather than protect the public by ending and prohibiting them) challenged governments (work for the banks and crony capitalists not for the public at large).

The overtly inflationary policy stance of the FOMC is especially significant when you consider that Fed Chairman Ben Bernanke is no longer in control of monetary policy.

We showed this chart over the weekend, but it bears repeating simply because in this case, one chart does indeed speak a thousand words. Presenting: unemployment in Iceland and Greece - pick the "just say no to the status quo" winner out.

Overview of the major central bank meetings and data preview as well as the latest from Cyprus and Italy.

Just last week Yiannakis Omirou, Cypriot House of Representatives President, was calling for the nation to accept it is "time for responsibility" as they progressed towards a final solution; and yet today, as Cyprus' Famagusta reports, he believes the 'Troika-imposed' responsibility will, "turn Cyprus into a colony of the worst possible type." His 'Icelandic' solution is to "leave the Troika and EMS behind," to ensure "national independence, national sovereignty, moral integrity, and economic independence." He may have a point; judging from the chart below of the Troika's poster-child Greece, relative to Iceland, things are not going so well. As Omirou ominously concludes, "if we remain bound by the Troika and the memorandum Cyprus’ destiny is already foretold and there will be no future."

Elon Musk - "megalomanical promoter". Ben Bernake - "befuddled academic". Janet Yellen - "career policy apparatchik". Paul Krugman - "fibber". Fred Mishkin - "preposterous".

A brief note on what to look for in the capital controls Cyprus will soon announce. The purpose is not to pass judgment on the merits of capital controls, but to discuss the implication.

The MSM and Cyprus pretend to yell victory after wiping out the business sector and upper middleclass & wealthy's liquidity stores - all to remain part of the euro. It's worth it! Depression is the new success!!!

The most positive aspect of last night’s deal was that a deal was reached at all, and that some steps have been taken to counter moral hazard. However, overall, this is a bad deal for Cyprus and the Cypriot population. Cypriot GDP is likely to collapse in the wake of the deal with the possible capital controls hampering the functioning of the economy. The large loan from the eurozone will push debt up to unsustainable levels while the austerity accompanying it (along with the bank restructuring plan) will increase unemployment and cause social tension. There is a strong chance Cyprus could become a zombie economy – reliant on eurozone and central bank funding, with little hope of economic growth. Meanwhile, the country will remain at the edge of the single currency as tensions increase between members with Germany, the ECB and the IMF now looking intent on a more radical approach to the crisis. The eurozone took this one down to the wire. But late last night, after a week of intense back and forth negotiations, a deal was reached on the Cypriot bailout. Below we lay out the key points of the deal (the ones that are known, there are plenty of grey areas remaining) and our key reactions to the deal.

Depression for Cyprus: Our Cypriot GDP forecast entails a drop of just over 20% in real GDP by 2017. This forecast had already factored in much what was agreed, but did not account for the additional uncertainty shock generated by the past week’s appalling political mess. Risks are clearly on the downside and Cyprus will in all likelihood require additional financial assistance further down the road. Accounting for less than 0.3% of euro area GDP, any downward revision to Cyprus will be barely visible on the euro area aggregate.

Given Cyprus' contentious relationship with the Eurozone... Perhaps it will consider going the full monti and taking a page out of the full Iceland playbook

With the Cypriot government still 'undecided' about what to 'take' and the European leaders very much 'decided' about what to 'give', the fact of the matter is, as JPMorgan explains in this excellent summary of the state of affairs in Europe, that because ELA funding facility is limited by the availability of collateral (and the haircuts applied to those by the central bank), and cutting the Cypriot banking system completely from ELA access is equivalent to cutting it from the Eurosystem making an exit from the euro a matter of time. This makes it inevitable that capital controls and a capital freeze will be imposed, in their view, but it is not only bank deposits that are at risk. A broader retrenchment in funding markets is possible given the confusion and inconsistency last weekend's decision created for investors relative to previous policy decisions. Add to this the move by Spain, which announced this week a tax or bank levy (probably 0.2%) to be imposed on bank deposits, without details on which deposits will be affected or timing, and the chance of sparking much broader deposit outflows across the union are rising quickly.