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Belmont Club

The 60 Percent Solution

March 30th, 2013 - 3:17 pm

The Associated Press says that “big depositors at Cyprus’ largest bank may be forced to accept losses of up to 60 percent”. It added that “the remaining 40 percent of big deposits at the Bank of Cyprus will be “temporarily frozen for liquidity reasons.”

The raid on depositors was the latest curtailment on  taxpayer bailouts for failing banks in the Eurozone. Eurogroup head Jeroen Dijsselbloem shocked the press 5 days ago when he said it was time to begin “pushing back the risks” onto the stakeholders of the bank, including the depositors. Dijsselbloem said:

If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?’.

If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders.

Martin Sibeleu argues that Dijsselbloem ommitted the critical question of the order in which the stakeholders would be allowed to drown.  Like the sinking Titanic, it appeared to be First Class into the lifeboats. Steerage could follow as best it could.  Sibeleu maintains that  subordinated debtors were allowed to get out from under the suction first leaving unsecured depositors to go down with the ship.

In December of 2011 and February 2012, the European Central Bank (ECB) extended longer-term refinancing operations to provide liquidity to euro zone banks. The liquidity, in euros and at a below market price, was against sovereign debt held by the banks, as collateral. Part of this liquidity was used for what is called “liability management” exercises, where the banks changed the composition of their liabilities: They borrowed from the ECB to repay their subordinated debt holders. This is the reason why Cyprus should actually be a template for the rest of the Euro zone. Because across the Euro zone, subordinated debt was reduced, leaving unsecured depositors exposed….again, across the Euro zone.

If Cyprus were a template for the future, then the ticket you hold is important. The way Cyprus played out allows “unsecured depositors to be fair game across the Euro zone”.  Sibeleu believes the previous bailouts were used to pay debtholders ahead of depositors.  ”Euros loaned by the ECB, banks bought out subordinated investors … In other words, both banks and subordinated debt holders enjoyed great capital gains, leaving unsecured depositors exposed to higher risk”.

Glug. Glug. Glug.

Just how far the EU has fallen in less than a year was indicated by a Financial Times article of July 16, 2012. The article discussed Mario Draghi’s then-jolting proposal to let senior bondholders share in the losses.  In those long-ago halcyon days only a few months ago Europe shuddered at the mere thought of letting senior bondholders take the hit to permitting depositors to bite the bullet.

The European Central Bank, in a sharp turnaround, advocated imposing losses on holders of senior bonds issued by the most severely damaged Spanish savings banks—though finance ministers have for now rejected the approach, according to people familiar with discussions.

The ECB’s new position was made clear by its president, Mario Draghi, at a meeting of euro-zone finance ministers discussing a rescue for Spain’s struggling local lenders in Brussels the evening of July 9…

In the July 9 meeting, Mr. Draghi argued in favor of including senior bank creditors in burden-sharing between taxpayers and investors in the case of Spain, three people familiar with the discussions said. Two said Mr. Draghi favored forcing losses on senior bondholders only when a bank was pushed into liquidation.

But that was then. This is now. And everyone is nervously eyeing the lifeboats because they know that when the Great Ship goes down proximity matters. A Greek newspaper is reporting scandalous stories of Cypriot politicians and insiders getting paid first. This list of those who jumped the line to get theirs makes interesting reading. Ideology seemingly went by the board as Communists fought with the best of them for their advance share of the money.

According to Ethnos, Bank of Cyprus wrote off the 2.8-million-euro loan of a hotel with ties to the communist-rooted Progressive Party (AKEL) and forgave significant portions of many other loans. For instance a national labor union is said to have been forgiven 193,000 euros of a 554,000-euro loan. An unnamed company was forgiven 110,000 euros from a 1.83-million-euro loan, a prominent deputy of the centrist Democratic Rally (DISY) party saw 101,000 euros of a 168,000-euro loan written off and a company owned by the brother of a former minister of the conservative Democratic Party (DIKO) had 1.28 million euros of a 1.59-million-euro loan written off.

The list refers to several other MPs and the mayor of large city who allegedly had significant portions of their loans forgiven by Bank of Cyprus. Companies linked to a member of the bank’s board, to the daughter-in-law of a DIKO deputy and several others also appear to have been offered significant loan relief by the Bank of Cyprus.

As for Laiki Bank, it is said to have written off several loans taken out by MPs of AKEL and DISY. The bank also appears to have written off 5.8 million US dollars in debt from a company whose majority shareholder is said to be a well-known Cypriot politician. The ex wife of a senior ministry official and a company owned by a local ambassador also appear to have been facilitated.

Imagine that! Communists and unions grubbing for their money. And politicians too. Weren’t they supposed to be dedicated to equality, justice and public service? It makes one wonder how fairly the pain will be shared if the Euro crisis deepens and another bank collapse occurs.

This brings to mind an old joke. Two explorers come upon an T-Rex on a mysterious island who lunges at them. The first says, “I’m glad I wore my running shoes.” The second says, “you can’t outrun the T-Rex.” The first says, “I don’t have to outrun the T-Rex, I just have to outrun you.”

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All Comments   (26)
All Comments   (26)
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"Trust your bank. The law protects you in the case of insolvency, to make sure you won't get hurt."
Now: "Trust the finance ministers. The law protects your bank to make sure you get hurt, if necessary, to preserve the bank."

Sooo... if deposits are earning close to 0% interest, AND come with a risk of confiscation, where is the incentive to have a savings account?

1 year ago
1 year ago Link To Comment
What the world needs is a scapegoat. Someone who promised "Hope and Change" and turns out to have been lying. Someone who is deep into crony capitalism and spendthrift vacations. Someone spending OPM (Other People's Money) like there will be no tomorrow.

Where could we find such an self-referential imperial personality known around the world. Someone so slow to act he is renown for "leading from behind"?


Let T-Rex eat him.

1 year ago
1 year ago Link To Comment
Subatai, I not saying what I want to happen - I'm saying what I think will happen.

The best possible outcome for the both Cyprus and us is for them to default ASAP. No question about it. We will be on the hook in some way - through our Banks derivative exposure, or through the Fed bailing them out to some extent. And before you know the idea of taking deposits will happen here as well.

But I don't think the Aristocracy is going to let it happen. Most Yurps don't have the American Independent streak - they aren't very likely going to round up all the politicians and banksters responsible for this mess and hang em' high like they should. It would send a great message if they did, but I don't see it happening.

They are most likely going to trot out another "bailout" as cover but behind the scenes the Aristocracy are going to start taking assets to cover their losses and in the process enrich themselves.
1 year ago
1 year ago Link To Comment
I think (heh) that this Cyprus bank shakedown is one of those "black swans" that Taleb Nasim likes to write about.

The EU "project" was doomed from the start, because they put a common currency before any kind of political or fiscal unity. A common currency without a common fiscal policy was madness, and much smarter people than me predicted this many years ago. But the economic boom times (and all that imaginative banking and derivatives) of the 2002-2007 interval made that seem like grumpy scare-mongering.

The derivatives and counterparty insurance paper bonds that GS, Lehman, Bear-Stearns and AIG issued made it all seem so feasible. And the Cyprus banks were holding more of the funny paper, and then somebody (like the big Russian depositors) got wind of the "call" on the banks liquid assets, and probably yanked out a lot of their money right before the haircut.
The plebes get it in the head, the EU gets to dictate their supremacy, and soon the peasants with pitchforks will march on Brussels or whatever local capital is convenient.
Eventually, the peasants will vote in some real populist knucklehead (I'm looking at you, Italy), and the great unraveling will begin. It will be this year, 2013, The Year of the Comet.
There will be a lot of capital flight to the US (as Annoy Mouse said), and temporarily, the NYSE, Nasdaq, S & P will go up (hey, that's happening NOW!), but this is merely ephemeral. We won't be spared either from the great unraveling. Many will "blame BOOOOSH", others will wonder how Obama can save them.
Yes, the collapse of the EU economic model will certainly embolden the Left to grab more power. Kind of like failing upwards.
What a country.

How did it come to this?
1 year ago
1 year ago Link To Comment
As Wretchard says, you don’t have to be faster than the T-Rex, you just have to be faster than the next guy. That said, it is not hard to imagine the EU and the US engaging in a giant game of chicken, instead in this case, a giant T-Rex. If the EU experiment fails and the US still seems to be hanging on by its claws, capital will naturally be diverted to US banks. If the US were to fail first, it would have the opposite effect. This would be a reasonable explanation for all of the lies and deceit.

Every conman knows that one must keep ahead of their lies by making one last con. One to cash out with less the T-Rex catches up with them. So at some point, the US must be welcoming the failure of the EU project, not for any ideological reasons per se, but for survival of the fittest liar. Ironically, the collapse of the Euro would eventually vindicate the Left in the US.

Happy Easter! I saw the Chavez thing. I had one of those WTF moments. Any holiday is a good day for racialism if you're a despot.
1 year ago
1 year ago Link To Comment
Happy Easter, everybody! Have you seen Google's Easter googledoodle? It's a homage to Cesar Chavez. Google seems to be full of these Cadillac communists like we see in Cyprus. They're all for communist causes, they have published how to organize unions in you workplace, yet at their own unions are forbidden. Same move at the WaPo and others.

Why Chavez today? Obama proclaimed today as Cesar Chavez Day a while back. Google does the bidding. And they love the subversiveness of it no doubt, the coincidence with Easter. It's an insult in my book.

Bing's got a lot of pretty Easter eggs on display day, kudos to them. And there's always Duck Duck Go if you can't stomach Microsoft.

Apple's iPhone and the Windows Phone, too, are things to look hard at over Android.

It's a shame, I'm becoming like a dang leftist, making political choices about my computing!!! Seems like I'm forced to.

I'm never buying into anything from Google or Intel again as of now.

Of course this is an impossible game. Silicon Valley will worm their way in at various degrees somewhere, profit off you, and use that money against you. Maybe the best that can be done is avoid the in-your-face-with-it boys a la Google.
1 year ago
1 year ago Link To Comment
The big question is : What happens next?

The EU is now past the point where a normal bailout is possible - An Itialian Bank official last week broke from the Code of Silence and admitted there were substantial withdrawals from his bank. Have no doubt this is happening everywhere across southern Europe. The Titanic EU Ship of State is taking on water and the bulkheads have been breached. The EU contraption is going down.

There are three ways out as I see it:

Option 1: The right way is to let the banks default and begin the arduous task of rebuilding the confidence of the European banking system. Somehow I don't think this is going. This solution is not even on the EU Powers that Be radar screen I would guess. The Aristocracy, not too mention the Rothchilds and Rockefellers, would take too much of a hit. Can't have that.

Option 2 is to have the FED, hock America and bailout Europe. Have no doubt that serious discussions are under way to at least partially take this option.

Option 3: Have the TBTF take assets and property away from normal citizens and governments to cover the TBTF bad debts. This is a self reinforcing death spiral arrangement which would only lead to more bad debts and takings. But it fits perfectly into the EU thinking. The normal citizenry would then become eventually debt slave serfs to the TBTF/EU Aristocracy. I have the funny feeling this dreadful beyond belief result was the plan all along- with the new Aristocracy become supreme despots.

1 year ago
1 year ago Link To Comment

Why not? How could the results of that plan of action possible be worse than the results of what they've chosen?

If they pull out of the Euro, it means all their Euro-denominated debt are defaulted on. Which would unravel the whole EU. From our point of view, it is an amusing thing to watch. For the EU Nomenklatura the loss of power and wealth, along with their already blatant disregard for all laws means that there is an excellent chance that Cypriot government had the choice of saving their country, and having someone besides the Russian Mafia out to kill them, or betraying their country and staying part of the rich elite. These are Europeans, southern Europeans, that we are talking about here.

To add to the upcoming excitement:

Monte dei Paschi is literally the oldest bank in the world. It was the Italians who invented banking. In February just before the Cyprus rip off, they had to be bailed out by the EU for the 3rd time, due to losing their ass on derivatives again. Twice before, there was no depositor reaction. Now, in the wake of Cyprus and the seizing of depositors’ accounts; money is leaving Monte dei Paschi like water through a floodgate.

Customers' deposits at Italian bank Monte dei Paschi fell by "a few billion euros" after a scandal erupted in February over loss-making derivatives trades at the lender, the bank said in a document posted on its web site on Saturday.

And I commend this post to the attention of observers of the festivities:

Germany is trying to repatriate its gold held here. The Swiss may be pulling theirs out soon, depending on an upcoming national referendum. Even Texas wants to pull its 6,000+ gold bars back from storage at the Federal Reserve [belongs to the investment arm of the University system].

The Fed is stalling about sending the German gold back. I suspect the same will happen if the Swiss ask for theirs back. And this administration may tell Texas that they can't have theirs, just because they hate Texas.

And the concept of raiding the depositors has jumped the Atlantic. The 2013 Canadian budget contains a law specifically authorizing raids on a troubled bank's accounts.

What do you want to bet that the US government would decline to do the same?

Ask not for whose savings the government will seize, it comes for yours.

Subotai Bahadur
1 year ago
1 year ago Link To Comment
Ben Hur was playing this morning, I saw a bit (will always love that music) and it sparked a thought about the old Roman Empire. It occurs to me that virtually *All*of the parts of the old empire - all the lands around the Mediterranean - are either in flames, or are about to be. Are Spain, Italy, and Greece that far behind Egypt, Syria and Libya???

Irony of ironies - perhaps the only stable and secure country left in the entire region is Israel. What a world, what a world.
1 year ago
1 year ago Link To Comment
Found this at the Ace of Spades.

When I heard that they raised the percentage they were going to take, from 30% then 40% to 60%, I asked myself, "Why don't they just drop the pretense and just confiscate it all?"

While they haven't dropped the pretense, they have effectively confiscated all deposits over 100,000 euros.

1 year ago
1 year ago Link To Comment
I will have to admit that converting 37.5% of the deposits into shares in the Bank of Cyprus was a brilliant twist of the knife sticking in the depositors backs. "You know that you better keep doing business with us if you ever wish to see that money again."

Talk about convincing people to throw good money after bad.

1 year ago
1 year ago Link To Comment
Okay so maybe I am beginning to unmisunderstand this.

In the case of the Great Recession in the US, the banks got into trouble because they, with the urging, support, and threats of the Feral Govt, made bad loans to many real estate buyers and then made good loans to many real estate buys that were good except for being for far too much money, which made them stupid and thus bad.

In Cyprus, I understand that the banking industry grew much larger than the rest of the economy, largely due to foreign investors seeking higher interest rates as well as offshore accounts. But rather than this becoming simply a Ponzi scheme, with some investors paying money to pay off others, the real problem was that the banks were also making bad loans. Far too little has been said about this aspect, but it answers the musical question, "Where did the money go?" And the answer, which makes it musical, is "We are playing musical chairs."

And the people who got the loans forgiven were ones who were connected. But I would suspect that is only a small part of the money that vaporized. Where is the rest? Invested in German windmills and Spanish solar cells, which are not making the grade?

1 year ago
1 year ago Link To Comment
You are on the right track - recall that Cyprus has strong ties with Greece. Last year, when Greece's banks were going down, interest rates on Greek bonds soared. The Euro Central Bank promised everyone that Greece would *never* be allowed to default on its bonds, so the Cyprus banks decided all that high interest was irresistible (plus they were offering high interest to get those deposits from Russia) so guess where all the money went?

And most of it went to Greece just before the EU decided "oh, guess what, there WILL be a partial default of Greek Bonds." Ooooops.

And if that isn't bad enough, the deals between Cyprus and Greece, with the EU Central Bank arranging everything, were even dirtier and more catastrophic for Cyprus than that, although it's complicated. This article is the best I've found that lays out the case that the EU helped arrange the collapse in Cyprus in order to save themselves the embarrassment of having to deal with yet another financial and banking collapse in Greece.
1 year ago
1 year ago Link To Comment
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