Ok folks, if you live in Cyprus and are one of the common people there, perhaps a "wealthy" person such as a businessowner but not one of the "connected few", now it has come out how you were screwed.
Laiki Bank customers in the UK face no restrictions on access to their cash and have been told it is "business as usual" at the firm's four British branches, despite an overnight decision to close its Cyprus parent.
Ruth Harvey of Laiki Bank in the UK said that although not all of the details of the impact of the agreement were known, there was no need for the 13,000 UK customers to panic. "We are open, it's business as usual, and there are no restrictions on our client's accounts," she said. "The message we want to get over to our customers is to keep calm and carry on."
So if you knew this and had the capability, you apparently could have moved all your money out of this Cyprus bank during the freeze.
I am willing to bet that if you are a Russian oligarch with a lot of money (formerly) in Cyprus you did exactly that.
I'm also willing to bet that if you're a Cypriot citizen you probably didn't know this and as a result you got screwed since you could only get a couple hundred -- or even €100 -- at a time from an ATM.
And before you scream "but those rich people deserved it!" let me point out that business people with payroll accounts in these banks are utterly screwed and so are their workers, who worked in good faith and now there is no money to pay them with.
The details of this "program" are as yet not entirely certain, but history is that there is always a way by which the common man gets rooked and the privileged few do not. This time it was blatantly "in your face"; along with the ECB and TARGET2 pledges of which there is no evidence that they will be zeroed along with common holders of bonds or stock it also appears that if you happened to be one of the "privileged few" you were also able to escape being "bailed in."
Rule of law?
Incidentally, as a former "largish" small-business CEO of a few dozen employees, there is not a snowball's chance in Hell that I will ever consider setting up another such enterprise until and unless the people who have gotten this unfair advantage are clawed back from and jailed and the rule of law is restored.
Since I do not expect that to happen my response to those who would like me to deploy capital and set up another employment-producing business is best-expressed by this:
It's over folks.
The Euro clowns have now said out loud that the Cyprus model is how banks will be resolved in the future as a "template."
Now what is Deutsche Bank's leverage ratio? The real one, not what they claim?
Oh, and the rest of the banks in Europe too.
How many are still running at 50:1 or even 100:1 leverage -- 1-2% reserve ratios in fact despite their claims, when one looks at actual values of assets and not mark-to-fantasy and uncollateralized derivatives?
That would be virtually all of them.
Do you have your money in a European bank or own their bonds?
This is what is about to be done to you as demonstrated in Cyprus.
A senior Cypriot official suggested late on Saturday that his government was not close to an agreement with the troika over a range of measures aimed at securing a 10-billion-euro bailout for his country.
“We are not in touching distance of an agreement,” the official, who preferred to remain anonymous, told the Cyprus News Agency.
Of course it's all the IMF's fault. And the ECB's.
But the fault isn't now, that they're being "inflexible" and "ratcheting up the demand."
It was months and even years ago -- remember that when Greece was forced through its restructuring it was known at the time that Cyprus banks held Greek bonds, and it was further known that they were pledged to the ECB.
So the real question remains as it has since this entire charade began: Why is it that after refusing to haircut those bonds at the time Greece restructured it is now Cyprus' responsibility to deal with this when the ECB and EU generally knew damn well those bonds were not worth crap and yet did nothing about it?
I continue to be amazed that the government of Cyprus doesn't throw this straight back into the ECB's and IMF's face and tell them: "You knew damn well these instruments were worthless -- or nearly so -- a year ago, and in fact knew this was going to be the outcome a year or two prior to that! You were the ones who in fact demanded and got the restructuring in question. Yet you intentionally took, at par, worthless paper. You weren't tricked, you took it willingly and intentionally. It's yours.
NOW EAT IT."
Let the ECB decide -- either swallow or destroy their claim to a "monetary union." Let them make the choice; if they cut off the banks then they will precipitate an exit from the Euro, but the fact of the matter is that if you certify that something is good paper by accepting it while knowing full well it's trash you're just as responsible as is the party that tendered it to you, especially when you, as the recipient, caused it to become trash!
And while they're at it Cyprus should level criminal indictments along with letters of Marque and Reprisal against the entire body of the ECB and IMF.
A couple of points.
All lending to a sovereign is inherently unsecured. Contracts aside, there's the problem of guns, and the government always seems to have more of them than the creditors do. Never mind that it's relatively rare for lending to a sovereign to be backed by anything more than the "full faith and credit" of the government itself, which it can (of course) disavow. Remember that no Congress can bind the next one; this generally applies across the globe.
Alliances are always available should you find yourself in serious trouble. Cyprus, in particular, has suspected (but unproved) massive gas reserves and happens to have territorial waters through which people may wish to pass pipelines and similar things. Europe has a wee problem with this at present in terms of its energy infrastructure and requirements, and is largely dependent upon Russia. Cyprus has quite the whip hand, should it choose to exercise it following a departure from the EU.
Sovereigns have the privilege -- and duty -- of seigniorage. Duty? Why, yes. Privilege in that they have the right to issue into an expanding economy in order to balance output and keep the monetary unit stable, duty in that they have the responsibility to remove same during economic contractions so as to also keep the monetary unit stable. The EU is a failed system because it does not recognize this balance of right and responsibility and due to structural imbalances creates a forced subsidy model instead. This is an inherently unstable situation but neither Brussels or the periphery want to deal with it. The periphery has enjoyed quite a bit of these effects for years, but now the costs are biting hard.
IMHO the proper action is for Cyprus to tell the EU and ECB to bite it. Germany says:
“Cyprus has it in its own hands to prevent the state’s bankruptcy but time is running out,” said Hans Michelbach, a German lawmaker and ally of Chancellor Angela Merkel.
Germany has no right to dictate anything to Cyprus. Indeed, Germany and the ECB, along with the machinery at the EU, is at least as responsible for this problem as is the government of Cyprus, if not more so, as they have all failed in their supervision of these banking institutions for sufficient capital.
Let us not forget that these banks passed "Stress Tests" from the ECB; they were thus claimed to be sound. The ECB should be told to suck it up and eat the consequence of their claimed "soundness", in this case to the tune of the required €7 billion or so, for they did not flag the banks as unsound or demand they be closed before they exhausted their bondholder capital.
More to the point is that there is yet more gaming going on in this regard with the capital structure with the incessant reports that the real problem isn't that the bondholder equity is exhausted -- it is that with the deterioration that has occurred resolution of the institutions would cause the bondholders to take losses and that's unacceptable. This, however, is at odds with the very capital structure and its definition.
In short this is the case of the ECB and certain EU members putting a gun to the head of a sovereign nation and demanding that they rob their people to protect those who invested knowing there was a risk of loss from the consequences of their bad investment.
Cyprus' response to that ought to be exactly this:
And if the ECB and EU want to press the issue then do what Iceland did; tell the ECB and EU to stick it where the sun doesn't shine, issue indictments against the Troika's members for extortion and criminal fraud (prohibiting them from entering Cyprus -- ever -- unless they'd like to spend the rest of their lives in prison) and resolve the institutions forcing the losses on the bondholders but protecting the depositors.
Then trace all the criminal activity in these banks and where there is evidence of fraud or other criminal activity by other financial institutions interconnected with Cyprus issue criminal indictments against both the banks and the executives.
This has a decent shot at winding up with Cyprus leaving the EU. So what? Cyprus would get their national sovereignty back and given that they're sitting on a bunch of natural gas deposits while the short-term pain would be considerable in the intermediate term they would wind up the winner, much as Iceland has.
The latest tidbit is that capital controls are tightening and withdrawl limits on ATMs are being cranked down materially.
One of their banks is reported to have just "hours" of liquidity left (how many hours, may I ask?)
There were demonstrations that looked a lot like a riot to me, with attempts to come after members of the Parliament (you're getting warmer folks.)
There are also rumors that they're going to try to "haircut" Russian (mobster) deposits by 40%. How thick is the kevlar vest you're wearing, and do you have a food taster? Another way to put this: Do your prefer your poisioning by high-speed lead or polonium?
Remember the original claim when Cyprus was admitted to the EU -- that it would "prevent" shocks to their economy due to various macro-level events. How's that working out for 'ya?
Here's the reality behind all of this: The various arms of government and its regulatory apparatus, including the ECB, is directly, proximately and should be held civilly and criminally responsible for this.
Because those arms of government put forward a capital structure that looked like this, as we did here in the United States:
======== <<< Government regulatory oversight barrier
Equity (stock) holders
And then they formalized that structure with a published and formal guarantee that deposits were safe.
The claim was predicated on the right to monitor an institution to guarantee that it could always "cram down" the subordinated levels in the capital structure, one at a time, and that the government would step in and close the institution before any deficit reached the top Depositor level.
They didn't do their job and that is the proximate reason that there is now an embedded loss, and worse is that they're trying to protect some of the bondholders while screwing people who are senior to them!
We did that here, incidentally, with GM's bankruptcy. The UAW got "protected" while bondholders got screwed, despite the fact that the UAW had no legal standing be first in line. The government didn't care and you didn't act to stop it.
Having gotten away with this sort of crap repeatedly it is now being done again.
I have no problem, by the way, with a bank system that intentionally exposes depositors to the risk of loss of their funds as investors. But in order for that to be the case there must be explicit disclosure when you open an account and the capital structure and how it works must be disclosed and agreed to. Stop calling things "deposits" (or even worse, demand deposits) if they are in fact bonds.
Words matter and so do what people agree to. If you emblazon deposit guarantees on your window you better honor it or those responsible for abrogating that guarantee deserve to hang.
What ultimately destroys all polite and rational societies is abrogation of the rule of law. There are many who want to laud people like Sheila Bair, but in fact she was part of the problem here. How else can you explain the outrageous haircut that was ultimately taken on Colonial Bank's assets, a publicly-traded firm, when BB&T acquired them after they failed? Either BB&T robbed the bank or the claimed asset values just a couple of months previous were fantasy material and thus rank violations of both civil SEC regulations and the criminal portion of SarBox, and in addition they document the FDIC's and OCC's failure to do their respective jobs in regulation.
Yet nobody went to jail.
We will never have financial stability again until that problem is fixed and the rule of law once again matters. There is only one way to stop people from behaving badly in this regard, and that is to hit those who do so with severe criminal penalties -- seeing one of your compatriots locked in a box with Bubba for a nice long date has a tremendous impact on focusing your mind on the risk:reward profile of intended future actions.
With a formal "drop dead" date of Monday things are going to heat up a bit over the weekend, I suspect. You might want to think about protection from a market perspective, although I remain convinced that this is not the domino that sets off the mess -- we're playing the "Bear Stearns" game here, and this is the warning flag that despite the claims of all those pumpers in the market all is not well and the excessive leverage problems are starting to leak to the surface once again.
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