Tag Archives: Bank run

Eurozone confiscation of Cyprus bank deposits: Fallout & Analyses

Two days ago, on Saturday, March 16, 2013, the people of Cyprus were told by the grand poobahs of the eurozone that as much as 10% of the deposits in their personal bank accounts would be “levied” confiscated, in exchange for a $13 billion bail-out of their heavily indebted country.
Cyprus is a small island country in the Eastern Mediterranean Sea to the east of Greece, and a member of the European Union (EU). The eurozone is an economic and monetary union of 17 EU member states that have adopted the euro (€) as their common currency and sole legal tender.

Cyprus parliament expected to vote on bailout tax measureA man with his child protests against the levy in front of the Cypriot parliament in the capital, Nicosia. Photo by Flip Singer/EPA

Here’s the fallout from that stunning news:

  • Reuters reports that the government of Cyprus declared that the bank “holiday” (closure) that began yesterday will continue through today (Monday) and tomorrow (Tuesday), pending a decision by the country’s parliament to approve the levy. The real reason for the bank closures is, of course, to prevent a bank run.
  • In the U.S., stocks closed in the red Monday, with the S&P 500 moving further away from its all-time high, amid worries over the bailout news in Cyprus and over fears the euro zone’s bigger troubled economies such as Spain and Italy may follow suit.

Eurogroup president Eurogroup Chairman Jeroen Dijsselbloem. Photo by Eric Vidal/Reuters

  • President of Eurogroup and Dutch finance minister Jeroen Dijsselbloem says in an official statement: “I reiterate that the stability levy on deposits is a one-off measure. […] The Eurogroup continues to be of the view that small depositors should be treated differently from large depositors and reaffirms the importance of fully guaranteeing deposits below €100,000. The Cypriot authorities will introduce more progressivity in the one-off levy compared to what was agreed on 16 March, provided that it continues yielding the targeted reduction of the financing envelope and, hence, not impact the overall amount of financial assistance up to €10bn.” (Translated into plain English, what Dijsselbloem means is that in the end, those with larger bank accounts will have a larger percentage of their deposits confiscated, as long as the Cypriot government contains their bailout request to no more than €10bn instead of the originally sought €17bn.)

Here are some expert analyses and opinions:

Financial Times‘ Wolfgang Münchau writes:
“On Saturday morning, the finance ministers of the eurozone may well have started a bank run.
With the agreement on a depositor haircut for Cyprus – in all but name – the eurozone has effectively defaulted on a deposit insurance guarantee for bank deposits. That guarantee was given in 2008 after the collapse of Lehman Brothers. It consisted of a series of nationally co-ordinated guarantees. They wanted to make the political point that all savings are safe. […]
The Germans rejected a loan which they were certain Cyprus would invariably default on. So the sum was cut to €10bn. A depositor haircut was the only way to co-finance this. When they did the maths, they found the big deposits would not have sufficed.
So they opted for a wealth tax with hardly any progression. There is not even an exemption for people with only very small savings.
If one wanted to feed the political mood of insurrection in southern Europe, this was the way to do it. The long-term political damage of this agreement is going to be huge. In the short term, the danger consists of a generalised bank run, not just in Cyprus. […]
Unless there is a last-minute reprieve for small savers, most Cypriot savers would act rationally if they withdrew the rest of their money simply to protect them from further haircuts or taxes. It would be equally rational for savers elsewhere in southern Europe to join them. The experience of Cyprus tells them that the solvency of a deposit insurance scheme is only as good as that of the state. In view of Italy’s public sector debt ratio, or the combined public and private sector indebtedness of Spain and Portugal, there is no way that these governments can insure all banks’ deposits on their own.
The Cyprus rescue has shown that the creditor nations will insist from now that any bank rescue must be co-funded by depositors.
The really puzzling thing is why did people not withdraw their money before? Did they not read the newspapers? Maybe they trusted the new president of Cyprus, who had promised them that he would never accept this? […]
There are some institutional impediments against bank runs within the eurozone. Some countries impose daily withdrawal limits, ostensibly as a measure against money laundering. […] But I would not take too much comfort from those impediments. Once fear reaches a critical mass, people will act, and then a bank run becomes a self-perpetuating process.”
Analysts at J P Morgan: Financial markets have underestimated the risks posed by Cyprus. Investors could be wrong to think that the current deadlock over the bailout will be resolved, or that the eurozone’s long-term “crisis management framework” remains intact. Cyprus’s fundamental problem is that it is “politically impossible to impose the extent of losses on insured depositors [those with less than €100,000 in the bank] that the weekend agreement envisaged”. This leaves Cyprus with three options, none very pleasant:

  • Option A: Recalibrate the pain so that insured depositors do not need to pay anything, while uninsured depositors pay around 15.4% of their deposits.
  • Option B: Go straight to requesting additional support from the Troika of lenders — the European Commission, the IMF and the European Central Bank.
  • Option C: Tweak the current pain distribution so that less of the burden falls on those with insured bank deposits, e.g., 3% levy on deposits of less than €100,000; 10% levy on deposits of less than €500,000; 15% on deposits of over €500,000.

Phoenix Capital Research: “Confiscated… as in stolen. To fund a bailout that Cyprus citizens have no interest in funding. In exchange, they, like the Spanish, will receive shares in the garbage banks that were bailed out.
Why does this matter? Cyprus is a tiny country of only 1.1 million people right?
This matters because it indicates what we’ve been saying since June 2012, the entire European “fix” was one enormous lie. NOTHING was fixed in Europe at all. On top of this, your SAVINGS in Europe can be seized at any time if things get bad.
Reread that last sentence… people in Europe just woke up and found that the IMF without their consent, can SEIZE their savings during a bailout.
What do you think will be the end result of this?
BANK RUNS and systemic failure.
The deep dark secret of the entire European Mess is that the minute a real legitimate bank run begins, it’s game over. Spain got a taste of this last year when a bank-run brought the country to its knees in less than six months.
Now that Cyprus has revealed that deposits are not safe in Europe, you better buckle up because the bank-runs are coming. And when they do, the European Crisis will hit overdrive. Once deposits flee, banks have to sell assets to meet the capital flight. When banks have to sell assets to meet deposit flight, they need capital.
And European banks don’t have any extra capital. They’re leveraged at 26 to 1 and would need to raise over €1 trillion AT LEAST.
The failure of European banks, in turn, will most decidedly affect the United States. See “Confiscation of bank deposits: Can it happen in America?,” March 19, 2013.
Update: Activist Post says riots are now being reported in Cyprus.
Update (Mar. 19): Cyprus parliament rejected the levy.
~Eowyn

Please follow and like us:
error0
 

Why Eurozone's Fiscal Crisis Should Concern You


For several weeks now, the government leaders of West Europe grappled with what to do as, beginning with Greece, country after country approaches insolvency, buried under mountains of debt.  But Americans seem oblivious, with half of the U.S. population going on a giddy buying spree on Black Friday after Thanksgiving, in stubborn denial of the European fiscal meteor that can and will impact the United States.
One after another, alarm bells are sounded.
The Economist says on Nov. 26, 2011:

A euro break-up would cause a global bust worse even than the one in 2008-09. The world’s most financially integrated region would be ripped apart by defaults, bank failures and the imposition of capital controls (see article). […] The survival of the EU itself would be in doubt.[…]

The panic engulfing Europe’s banks is no less alarming. Their access to wholesale funding markets has dried up, and the interbank market is increasingly stressed, as banks refuse to lend to each other. Firms are pulling deposits from peripheral countries’ banks. This backdoor run is forcing banks to sell assets and squeeze lending; the credit crunch could be deeper than the one Europe suffered after Lehman Brothers collapsed.

Add the ever greater fiscal austerity being imposed across Europe and a collapse in business and consumer confidence, and there is little doubt that the euro zone will see a deep recession in 2012—with a fall in output of perhaps as much as 2%. That will lead to a vicious feedback loop in which recession widens budget deficits, swells government debts and feeds popular opposition to austerity and reform. Fear of the consequences will then drive investors even faster towards the exits.”

Agustino Fontevecchia writes in Forbes, Nov. 28, 2011, that the Eurozone crisis is spreading to the private sector:

“The European situation continues to deteriorate and has now spread even to Germany, the eurozone’s economic engine, as evidenced by a failed bond auction last week.  As sovereign debt markets deteriorates, the risk of a credit crunch looms, raising the stakes for policymakers and the private sector alike.”

Wolfgang Münchau warns in the Financial Times, Nov. 27, 2011, that the Eurozone has only days to avoid a collapse:

“With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function. The banking sector, too, is broken. Important parts of the eurozone economy are cut off from credit. The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens.”

As a matter of fact, quiet or not, there was a bank run in the Baltic country of Latvia on September 24, 2011.
The event that triggered the bank run was the arrest of two former shareholders of Bankas Snoras AB, for embezzlement, document forgery, accounting fraud and abuse of authority. Kinda like what New Jersey’s former Democratic governor and senator Jon Corzine did as CEO of MF Global.
In Latvia, the arrests precipitated a bank run. The Latvian government stepped in. Depositors could withdraw only 50 lati (about $95) a day, as the government moved to liquidate the bank.

Indeed, Europe’s banking sector is broken.
More than a month ago, on September 21, 2011, just when European banks and their regulators were trying to reassure investors and customers that lenders have enough capital to withstand a default by Greece and slowing economic growth caused by governments’ austerity measures, Lloyd’s of London, the world’s oldest insurance market, abandoned those banks.
Lloyd’s pulled deposits from European banks because of concerns that European governments may be unable to support lenders in a worsening debt crisis. As Lloyd’s finance director Luke Savage explained,

“There are a lot of banks who, because of the uncertainty around Europe, the market has stopped using to place deposits with. If you’re worried the government itself might be at risk, then you’re certainly worried the banks could be taken down with them.”

I didn’t know about that, did you? I only learnt of what Lloyd’s of London did, two days ago. Some news media we have in the United States!
And if you think what happens in the Eurozone doesn’t affect us, think again.
Already, the Eurozone debt and banking crisis has led to the 8th biggest bankruptcy in U.S. history — that of the giant financial derivatives broker MF Global. The brokerage had used its clients’ funds to invest in European government bonds. But the investments went bust and MF Global went bankrupt, taking hundreds of millions of its clients’ dollars with it.
Who knows how many other U.S. brokerages, banks, and credit unions have invested in European government bonds?
Meanwhile, we in the United States have our own humongous national debt to worry about. The news today is that Fitch, the credit-ratings company, just downgraded its outlook for the United States to “negative.”

Update (Nov. 29, 2011):

Fox Business reports that yesterday, Standard & Poor’s cut its credit ratings (from A to A-) for many of the world’s largest banks, including Citigroup, Goldman Sachs, Bank of America, JPMorgan Chase, Wells Fargo, and Morgan Stanley.
The move follows S&P’s shift, announced earlier this month, in the methods it uses for rating the banks. Dozens of other banks were also affected by S&P’s new criteria and many of the downgrades stemmed from the affected banks’ exposure to the European debt crisis. S&P cited weaker confidence in governments’ ability to bail out struggling banks.
~Eowyn

Please follow and like us:
error0
 

Warning!! Duct Tape recommended. Racist Tea Party again.

Warning, 2 rolls of Duct Tape needed.   ~  Steve~

This is WAR’ Congressional Black Causes’ Travels American Cities Using Dangerous Violent Rhetoric: Declares ‘War’ on Racist Tea Party, Says Tea Party Wants To Lynch Blacks, Calls for Bank Runs, Civil Unrest in Their Neighborhoods and Homes
[youtube=https://www.youtube.com/watch?v=tG8x6X8xn3c&feature=player_embedded]
Yup, gotta watch those racist Tea Partiers.

Damn little Racists.

Please follow and like us:
error0