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[Demeter]

8. Remember Cyprus? The First Domino in the Euro Collapse? From March 2013

This Crazy Cyprus Deal Could Screw Up A Lot More Than Cyprus...

http://www.businessinsider.com/cyprus-bailout-risks-europe-bank-runs-2013-3#ixzz3auTlEqUa

You can be forgiven for thinking that you don't need to give a hoot about what's going on in Cyprus this weekend. After all, it's just a little island somewhere in the Mediterranean. But what's going on in Cyprus could actually matter — not just to the rest of Europe, but to the rest of the world. Here's the short version of what's happening:

Cyprus's banks, like many banks in Europe, are bankrupt.

Cyprus went to the Eurozone to get a bailout, the same way Ireland, Greece, and other European countries have.

The Eurozone powers-that-be gave Cyprus a bailout — but with a startling condition that has never before been imposed on any major banking system since the start of the global financial crisis in 2008. The Eurozone powers-that-be (mainly, Germany) insisted that the depositors in Cyprus's banks pay part of the tab. Not the bondholders. The depositors. The folks who had their money in the banks for safe-keeping. When Cyprus's banks reopen on Tuesday morning, every depositor will have some of his or her money seized. Accounts under 100,000 euros will have 6.75% of the funds seized. Accounts over 100,000 euros will have 9.9% seized. And then the Eurozone's emergency lending facility and the International Monetary Fund will inject 10 billion euros into the banks to allow them to keep operating.

Cyprus's government tried to explain this deal by observing that it was better than the alternative: Immediate bankruptcy and closure of the major banks. In that scenario, depositors would lose a lot more of their money. Businesses would go bankrupt. And tens of thousands of people would be instantly thrown out of work. But, still, not surprisingly, news that deposits in Cyprus's banks would be seized triggered an immediate run on the banks. Depositors rushed to ATMs and tried to withdraw their money before it could be seized. But the ATMs weren't working. And the government has now made it impossible to transfer money out of the country. So, assuming Cyprus's government approves the deal (still pending), depositors will have some of their money seized on Tuesday morning.

Now, half of these depositors are said to be Russian oligarchs and other non-residents. And unless you happen to have the misfortune of having an account in a Cyprus bank, you may not care much whether these depositors have their money seized. After all, that was the risk they took for storing their money in bankrupt banks, right? Well, yes, that was the risk they took. But ever since the Great Depression wiped out a big percentage of the world's banks, vaporizing the bank depositors' savings in the process, banking system regulators have tried to do everything they can to protect bank depositors. And they are smart to do so. Because the moment depositors think that there is risk to their savings, they rush to banks to yank their money out. That's called a run on the bank. And since no bank anywhere has enough cash on hand to pay off all its depositors at once, runs on the bank cause banks to go bust.

That's what happened to hundreds of banks in the Great Depression.

And it's what happened to Bear Stearns, Lehman Brothers, and other huge banks during the financial crisis (though, with Bear and Lehman, the folks who yanked their money out weren't mom and pop depositors but other big financial institutions). It's what threatened to bring the entire U.S. financial system to its knees. And it's why the U.S. and European governments have been frantically bailing out banks ever since. But now, thanks to Eurozone's bizarre decision in Cyprus, the illusion that depositors don't need to yank their money out of threatened banks because they'll be protected has been shattered. Depositors in Cyprus banks will lose some of their deposits. They will be furious about this. And they will, rightly, feel that it is grossly unfair — because depositors in the bailed-out banks in Ireland, Greece, etc. didn't lose their money. And they will feel like fools for not having taken their money out.

And ... here's the important part ...

Other depositors at weak banks all over Europe, in places like Spain, Italy, and Greece, will rightly wonder whether this is the beginning of a new era of bank bailouts, an era in which bank depositors are going lose some of their money. What do you think those other depositors in Spain, Italy, Greece, etc., are going to feel like doing when they realize that, if their banks ever need a bailout, they might have their deposits seized? That's right. They're going to feel like yanking their money out of their banks. And if some of them yank their money out of their banks, well — then the financial condition of those banks will go from weak to insolvent. And the banks will go rushing to their governments and the Eurozone for help.

And if, god forbid, the Eurozone decides to seize the deposits of more bank depositors ...
Well, then, a good portion of Europe is going to suddenly experience a good old-fashioned bank run. That, to put it mildly, could be a disaster. It could bring the European financial crisis, which has lurched from one flare-up to another for most of the past five years, to a rather sudden head. How much would it cost for the powers-that-be to bail out all of Europe's weak banks at once? A lot. More than the Eurozone has in its emergency lending facilities, certainly. And more than the International Monetary Fund has on hand. So the U.S. would probably have to get involved. And, regardless of whether the U.S. needed to get involved, the European economy would likely suffer the equivalent of a heart attack. That wouldn't be good for the U.S. economy. Or the Chinese economy. Or any other economy that sells things to Europe.

So, you can see, this little decision to seize a little money from bank depositors in the little island of Cyprus could be a much bigger deal than you think. It could conceivably precipitate a run on weak European banks. And a run on weak European banks could hammer the European economy and then the economy of Europe's trading partners. And it could cause global markets to crash. So keep an eye on what's going on over there in Cyprus. It's potentially much more important than it seems.

CYPRUS PRESIDENT: Nation Faces Total Financial Collapse And Euro Exit Without Bailout

http://www.businessinsider.com/cyprus-bailout-statement-by-the-president-of-the-republic-mr-nicos-anastasiades-2013-3#ixzz3auVGXWYr

Ekathimerini has this report:

The Cypriot government is now sweating over a possible rejection by the island’s parliament of the shocking set of measures imposed on Nicosia for the eurozone to bail its economy out of a likely default, announced in the early hours of Saturday.

The Cypriot government is preparing the bill to be tabled in Parliament probably on Sunday in an emergency session, as everything will have to be voted by Monday night for Cypriot banks to open on Tuesday.

The stakes are incredibly high. Here's a statement from Cypriot President Nicos Anastasiades warning of total financial collapse and euro exit if there's no deal (via @dsquareddigest).

Full statement from President Anastasiades below the dotted line

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It is well known that the deep economic crisis and the state of emergency in which the country has found itself did not come about in the last fortnight since we have undertaken the administration of the country.

The state of emergency and critical nature of the times do not allow me, as they do not allow anyone, to embark on a blame game.

In the extraordinary meeting of the Eurogroup, we faced decisions that had already been taken and came across faits accomplis through which we were faced with the following dilemmas:

On Tuesday, March 19 we would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis, which would put a definitive end to the uncertainty and restart our economy.

A possible choice of the catastrophic scenario option would have the following consequences:

1. On Tuesday, March 19, immediately after the holiday weekend, one of the two banks in crisis would cease to operate, since the European Central Bank, following the decision already taken, would terminate the provision of liquidity. The second bank would suspend its work, and neither could avoid collapse. Such a phenomenon would instantly lead 8.000 families to unemployment.

2. The State would be obliged to compensate depositors in response to the obligation regarding guaranteed deposits. The capital required in such a case would amount to about 30 billion euros, which the State would be unable to pay.

3. A proportionate amount corresponding to the deposits of thousands of depositors for deposits over 100.000 Euro, would be led to a vicious cycle of asset liquidation, and these depositors would suffer losses of over 60%.

4. Such an uncontrolled situation would push the whole banking system into collapse with all the attendant consequences.

5. Thousands of small and medium enterprises, and other businesses would be driven to bankruptcy due to their inability to trade.

As a result of the above, the service sector would be led to a complete collapse with a possible exit from the euro. That, in addition to the national weakening of Cyprus, would lead to devaluation of the currency by at least 40%.

The second choice was the controlled management of the crisis, through the decisions taken and which can be summarized as follows:

1. Ensuring the liquidity of the banks and the rescue of the banking system through their recapitalization.

2. Rescuing 8.000 jobs in the banking sector and thousands of others which would be lost as a corollary of not maintaining the operations of banks.

3. Total rescuing of deposits, with just the exchange of a small percentage of savings with shares of the two banks. Currently, these shares do not have their full value, but with the economic recovery they will repay most it not all of the amount that will be cut.
4. This option results in a drastic reduction of public debt, makes it manageable and sustainable and relieves future generations from the burden of repayment.

5. It saves provident and pension funds and avoids taking other tough measures such as wage and pension cuts that were put on the negotiations table.

6. It avoids further recession and the risk of the vicious circle of a second memorandum.

We are not aiming to gloss over the situation. The solution chosen may be painful, but it was the only one that would allow us to continue our lives without adventures. It's a decision that leads to the historic and permanent rescue our economy.

In the next few hours we will all have to take responsibility. Tomorrow I will address the Cypriot people.

Cyprus’ Stability Levy: Another sad euphemism (updated on 18th March)

Posted on March 17, 2013 by Yanis Varoufakis, current finance minister of Greece

They called it a ‘stability levy’, when they meant a tax on Cypriot depositors (including the savings of poor widows and small children) so that they spare the holders of Cypriot government bonds (including hedge funds who are now having a party in Mayfair and New York) as well as minimise potential long-term losses by the European taxpayers. In effect, faced with the prospect of lending to Cyprus a sum equal to its GDP, so as to bail out its banks Ireland-style, the Eurozone balked. They realised, post-Greece and post-Ireland, that something has to give (beyond the minimum working conditions and social welfare provisions of common folk) in order to minimise the size of the aggregate loan. And they chose to hit depositors directly (at a rate of 9.9% if their deposits exceed 100 thousand euros and 6.75% for smaller deposits) before the oncoming austerity-driven plague eats into them instead (as it did in Greece, Ireland and Portugal where savings were used up by stressed households in the daily struggle to survive after jobs and benefits disappeared).

What was astonishing is that, while the peoples of Europe are sick and tired of the gross inequities and regressivity of austerity-fuelled bailouts, they did not set a threshold below which poorer depositors would be untouched. And that they left unaffected the banks’ bondholders (even though the sums involved in these bonds were small, it was utterly unprincipled to spare them). I have no doubt that this decision will haunt them/us for decades.

What alternatives did the Eurogroup ministers have? Several, is the answer. In the context of their own accounting-like logic (i.e. of ‘hitting’ depositors) they could discriminate between bank accounts that are insured by Cypriot law and those which are not: So, any account by a citizen of an EU-member state with less than 100 thousand euros (the maximum account insured by the Cypriot state; the equivalent of the FDIC deposit insurance protection) should be left alone. All the other accounts could then be hit by a percentage that would deliver the sum of six to seven billions EU finance ministers wanted to reduce the bailout loan sum by. If Berlin was serious about its willingness to curtail Cyprus’ banks money laundering activities, while avoiding a tax on the hard earned savings of the poorer Cypriots (that a Lutheran German should see as an ally in restoring puritan ethics), that is what they would have done. But, it is now clear, they were not serious about their own ethics (indeed, had they been serious about Russian money laundering, they would have raised questions about Latvia’s banks, which are awash with mafia funds).

Of course, while hitting uninsured deposits only (as suggested by the previous paragraph) would have been preferable, it would still not be a solution to the Cypriot drama. The Cypriot economy is in the familiar tail spin that we witnessed in Greece, Portugal, Spain, Ireland and now unfolding in Italy. Even if the bank levy, or bail in, were fairer, the recession would still be fuelled by large scale public expenditure cuts and substantial tax hikes which, taken together, will most certainly lead Cyprus to a dead end. But none of this is specific to Cyprus. In this sense, an alternative strategy for dealing with the island’s fall from grace must involve a Gestalt Shift that will allow Europe a different approach throughout the monetary union. Precisely the Shift that Europe seems unwilling to contemplate, thus resorting to ill-conceived decisions like the recent one on Cyprus.

Summary

The Cyprus deal, although marginally better than forcing (Greece/Ireland-style) all of the burden willy-nilly on the taxpayers, is highly destabilising in the medium term. The notion that one sacrifices Cyprus depositors in order to save the depositors in, say, Spain, is of questionable purchase. Moreover, despite the reduction in Cyprus’ new debt (achieved by bailing in depositors), its debt-recessionary cycle will proceed with increasing ferocity as austerity strings (with which the bailout comes attached) begins to bite.

Europe seems to have only partly learnt its lessons from Greece and Ireland. Europe’s leaders at least understood that they cannot pile a gigantic loan on an insolvent entity (i.e. an insolvent state that is intertwined with an insolvent banking sector) and expect, through austerity, to stabilise its debt-deflationary spiral. Some haircuts are necessary (although never sufficient) ex ante. What they have not understood is that limiting the bailout loan’s size is insufficient to prevent the free-fall, even if it buys them some extra time in the short run especially when the ‘limiting’ is achieved through sacrificing what bonds of trust remain between the EU and its citizens. That they will have to learn the hard way in the months to come.

In short, the recent decision on Cyprus is a touch more realistic than that which was imposed upon Greece, Ireland and Portugal, in the sense that Europe took some (however unfair and inefficient) steps to reduce the loan’s size. However, by remaining in denial about the true causes of the Eurozone’s (and Cyprus’) instability, and by resorting to euphemisms involving the word ‘stability’, they are giving the Crisis another vicious spin.

Postscript

Last time Europe invoked ‘stability’ in one of its summit decisions was when it created the European Stability Mechanism (ESM). It proved anything but stabilising (as without Mr Draghi’s ECB and its LTRO-OMT interventions, there would be no Eurozone today). Now we have a ‘stability’ levy in Cyprus. Its effect will prove equally destabilising in the medium term. It is high time we take another look at stability in the Eurozone and to do so in terms of a closer look at the ESM and how it should be reconfigured. My next post will address the ESM and how to put the S-for-genuine-stability into it for the first time!