Cypriots Stunned by Forced Savings Cuts

[unlucky]

Re: the Kill Shot - Greek Bond Write-down ?

I assume that at 9:00 AM the next morning of Oct 2011, the bank was then insolvent. Was it left to operate in that state? was some mystery capital infusion made?
Did it take about 15 months for the market to wake up and take action? Question B: what is the next bank that is stuffed with Greek bonds, and by transitivity what is the next bank stuffed with Cypres bonds?

The Cypriots received a 2.5 Bn euro loan from the Russians that allowed them to postpone the evil day.

[don]

Re: the Kill Shot - Greek Bond Write-down ?

The Cypriots received a 2.5 Bn euro loan from the Russians that allowed them to postpone the evil day.

it pays to be in the know . . .

wealthy Russians hurry money from Cyprus to US


On the west side of Manhattan, a strange sight greets the tourists and natives who happen to be walking, running or cycling by Pier 90. Pearly and serene amid the beeping and bustle of highway traffic, a 536ft, bulletproof yacht called the Eclipse has been anchored in the freezing water of the Hudson for over a month. It is the world's largest yacht, owned by Roman Abramovich, a secretive Russian oligarch whose net worth, at Forbes' last count, was about $10.2bn.

It's no coincidence that Abramovich's glistening ship is anchored in New York. The city has been a haven for wealthy Russians for at least three years, as oligarchs and demi-oligarchs moored their money far away from the political whims of Vladimir Putin or the growing fiscal fiasco of the eurozone. "In Russia, whether you're friendly with the government is a very important thing, and that changes like the wind changes," said David Newman, a partner with Day Pitney who has represented the ex-wife of former potash magnate Dmitry Rybolovlev in a prominent divorce case. Evidence of Russian wealth has been everywhere.




The European crisis has forced more and more money out of the bank accounts of wealthy Russians in Cyprus and elsewhere and into the US. "This past year, we've been seeing a shift in investments in the United States as a result of the financial state of the European Union," said Ed Mermelstein, a New York real estate lawyer who advises wealthy Russians.

The meltdown of the Cypriot financial system came as no surprise to well-connected, wealthy Russians, who bundled some of their money to the United States. "Many of our clients had a heads-up on this issue," said Mermelstein. "Cyprus had started having the conversations about what it was intending, and that's been going on for half a year."

That's why some wealthy Russians seemed insulted by the insinuation that the collapse of the Cypriot banking system this week caught them by surprise. Cypriot banks were suffering "substantial outflows" for weeks before the meltdown, according to the country's finance minister, Michael Sarris.

Igor Zyuzin, a Russian oligarch, nearly bit off a reporter's head when asked whether his finances would suffer from the debacle in Cyprus. "You must be out of your mind!" Zyuzin reportedly barked.

He wasn't the only one who had hustled most of his money out. Gennady Timchenko, the head of commodity trading firm Gunvor, only had a "few hundred thousand euros" in Cypriot banks, he boasted to a Swiss newspaper. Alfa Capital Holdings, a Cyprus-based investment firm owned by Russians, informed visitors to its website that its subsidiaries "are not and will not be affected by any levy on deposits imposed by the Government of Cyprus."

The financial woes of Cyprus may have become the blessings of New York. Large chunks of Russian cash started falling into the New York real estate market – larger, that is, than usual. Wealthy Russians haven't just been buying apartments as individual investments; according to investment bankers, lawyers and wealth advisers, over the past six months to a year – as the eurozone crisis intensified with elections in Greece and Italy as well as the debacle in Cyprus – those Russians have been looking to build real estate. Lawyers and advisers have been making construction loans and sinking money into the concrete foundations of the big real estate developments in Manhattan as well as other centers of east coast glamor, including Miami.



Still, while many wealthy Russians pulled some of their money out, there are still billions belonging to "the little guy", or mini-oligarchs, or those who left Russia to escape the financial prying of Putin's government. That's the money that, ultimately, will help fund Cyprus's bailout.

http://www.guardian.co.uk/commentisf...sians-new-york

[GRG55]

Re: the Kill Shot - Greek Bond Write-down ?

it pays to be in the know . . .


...

Do you think any of them are iTulip subscribers?

[don]

Re: the Kill Shot - Greek Bond Write-down ?

Do you think any of them are iTulip subscribers?

'tulipers are in the know, all knowledge being relative (and leave my family out of this!)

[don]

Re: the Kill Shot - Greek Bond Write-down ?

and they ain't even Russians . . .

Laiki Bank: Some Depositors Are More Equal Than Others

WEDNESDAY, MARCH 27, 2013 8:57 PM

Zero Euro Bill

Yeah, some things in life are inevitable. That's why it was no surprise, though still endlessly amusing, to find that while depositors of Laiki Bank (aka Cyprus Popular Bank) on the island itself have been unable to get to their money for 10 days now, Laiki's 4 branches in the UK have all that time simply remained open for business.

Which also means that richer clients in Cyprus will lose between 40% and 100% of their savings above €100,000, unless they were smart enough to fly to Britain in time and transfer it all to another bank. Still, Laiki Bank UK is simply a branch of the mothership Laiki Bank on Cyprus, with the difference that deposits fall under UK deposit "compensation" laws. Unlike Bank of Cyprus UK, Laiki is not incorporated under UK law.

And I had been wondering why everyone was talking about Russian depositors in Cyprus, but nobody mentioned the Brits, who must have tons of bank accounts there, the island being a former colony and all. I guess perhaps I have my answer now.

Laiki has had UK branches since 1974, nothing strange there, long running ties (though never incorporation). But it also has majority interests in banks in Russia, Ukraine, Estonia, Malta and other countries. Maybe someday we'll find out what happened there since March 16. For instance, how much money was taken out at Laiki Moscow in the past 10 days?

For the moment, I'd be satisfied with details on what went on in its UK branches. What remains at Laiki will need to be used to pay off debt. But if the ship has been leaking like a sieve all the time, how much is left to do that with? And whatever has been taken out will come at the expense of what has not: it could easily be the difference between losing 40% or 100%. Just a guess, to be sure, but that's all anybody has right now.

UK Chancellor of the Exchequer George Osborne (who today sent another plane carrying €13 million in cash for British soldiers stationed in Cyprus) says he's working on a plan to exempt British branches - and their clients - of Cypriot banks from the worst of the Laiki mess, i.e. make all British citizens whole.

Leaving the UK branches open for business, and not telling the outside world, would seem to be a firm step in that direction. Think maybe the 4 branches have called their (best) clients with a warning or two? After a friendly call from Osborne's office? Barclays has "offered" to speed up opening accounts especially for the purpose. Good patriots...

Holland and Britain made 340,000 savers at Iceland's Landesbanki whole when it collapsed in 2008. Will they do the same this time? For all those people who moved their money and accounts to Cyrpus to avoid domestic tax schemes? This has the makings of a good story. Unless you're simply a hard working Cypriot living on Cyprus. Then you're simply screwed.

http://www.theautomaticearth.com/Fin...an-others.html

[don]

Is the EU Politically Bankrupt?

The Lesson From Cyprus: Europe Is Politically Bankrupt

TUESDAY, MARCH 26, 2013 9:18 PM

Over the past week, Europe, or rather the present EU leadership, has done damage to itself it will never be able to repair.

It seems to escape everbody, but that doesn't make it any less true: people from Portugal to Spain to Italy to Greece to Cyprus and Ireland are worse off today than they were when they first adopted the euro. Moreover, their economies are all getting worse as we speak and projected to plunge further. The once highly touted blessings of the common currency are by now lost on most of southern Europe; for them, the euro has been a shortcut to disaster.

Until Cyprus, the EU had always maintained two prime objectives (and spent €5 trillion over 5 years to prove it): keeping all members in the eurozone, and guaranteeing all bank deposits under €100,000. These objectives exist from now on only in words. Brussels has threatened to both grab deposits of small savers and throw Cyprus out of the monetary union. Two watershed moments in one.

The membership of the European Union, the subsequent introduction of the euro and the seemingly endless flow of credit that came with these "privileges" provided the region with a temporary illusion of increasing wealth and new-found prosperity. Today it knows that none of it was real, or earned; it was all borrowed. It's time to pay up but there's no money left. It needs to be borrowed. From the European core and its banking system.

The EU's financial scorched earth strategies have left its Mediterranean members with highly elevated unemployment rates, fast rising taxation levels, huge cuts to pensions, benefits and services and above all insanely high debt levels, personal, corporate and sovereign. And now, as ironic as it is cynical, their savings. The only thing that keeps the nations from going bankrupt is more debt, largely in the form of ECB loans.

What sets Cyprus apart from the other victims of Brussels' expansion hunger is the timing. The country (actually only the Greek-Cypriot 59% of the island of Cyprus) was only allowed entry in the EU in 2004, and it didn't introduce the euro until 2008. At that point, total bank assets were already well over €80 billion, or a very unhealthy 450% of GDP, and kept on rising with a vengeance. Four years later, in early 2012, the EU/ECB/IMF troika forced €4.5 billion in losses on the Cyprus banking system through the haircut on Greek sovereign debt. Now, one year after that, the same troika forces Cyprus to cough up €5.8 billion. No great math skills required: Cyprus was essentially pushed under the bus in order to - temporarily - save Greece.

The EU, with all its 1000s of highly paid employees and its multiheaded leadership structure, time and again fails to do its overseeing job, and then conceals this by turning around and bullying the victims of its failures. Of course they knew what state Cyprus was in when it switched to the euro, and the country should never have been allowed to enter. And of course the EU and ECB leadership knew all along what happened in Cyprus between 2008 and now, or at least should have. It's their job to know. Hence, the leaders should be fired either for not knowing or for knowing and not acting. They just cost taxpayers yet another grab bag full of billions, and they should be held accountable for that.

The problem is they're not accountable to anyone for anything they do, other than in name. Or put it this way: people like Van Rompuy, Barroso and Olli Rehn are not accountable to anyone but themselves, each other and Angela Merkel's entourage. There's a great word in the English language to describe their attitude; the ancient Greek "hubris". Add a side dish of arrogance and incompetence and you have a lethal combination.

By the way, here's how European democracy works: when the whip comes down, everybody will do what Berlin wants. Germany has some 24% of the EU population, and Angela Merkel's ruling party (through a coalition) has maybe a third of all votes. That means perhaps 20 million Germans, or at best 6% of the 332 million people in the Eurozone, decide what goes and what does not.

Hubris makes stupid (or, granted, it could be the other way around). That's why we saw the following over the past week:

1) The announcement of the initial Cyprus plan, the one that included a 6.75% tax for all deposits below €100,000. It doesn't matter that it's no longer in the final plan, the "deposit grab" genie has left the bottle and will never return. It's like breaking an egg; restoring confidence is no longer an option. No European small saver will feel safe again for decades, and many will take much of their deposits out of their banks, which will push banks over the edge, requiring more bailouts, rinse and repeat.

The troika, joined by German finance minister Schäuble, went out of their way to put all the blame for this on the Cyprus government (the ball was in their park), but given the obvious potential consequences (the devastating loss of trust), they should never have allowed either the responsibility or the blame to be there; it was theirs to take. That they didn't, leads to point 2:

2) Brussels and Frankfurt can neither oversee nor control the consequences of their actions. The trust issue is just one of many topics that have made this clear. And as long as the present leadership structure remains in place, what happened in Cyprus will keep on happening, because:

3) They don't care. They don't care that the entire southern part of their union is falling over the edge. They don't care what happens to the people in the streets of Nicosia, or Porto, or Sevilla, their jobs, their savings, their well-being, their children. They're not accountable to those people. They're untouchables as far as democracy goes in all but the most cynical definition.

Imagine you're a cleaning lady or a primary school teacher, or you have a small grocery store or a bakery, in a town somewhere in Spain or Italy or Portugal. At home, you've already been hit with huge tax rises and budget cuts. But there's one thing you can count on to stand between you from things getting real bad: the savings in your bank. And then you see on TV what's happening in Cyprus. Where people had the same deposit guarantee you had, until from one day to the next they didn't. What would you do with what's left in your bank account?

People with bank accounts in Cyprus no longer have access to their money. They'll be stuck in a repeat of Argentina's early milennium capital controls for months. People in Spain and Portugal still have a choice. Maybe not for long, because at the first hint of capital flight to the backyard bank, control over your own money will very rapidly become a thing of the past.

The only reason for Europe's Mediterranean nations to remain in the eurozone and the EU will be bullying from Brussels and Berlin. It's this bullying from the core, from those who preach union above all else, which will be the undoing of the entire project, but after a lot more pain of the same kind that now hit the Cypriots will have spread north (the rot won't stop).

Unless first one country and then inevitably others - soon - decide to leave, say thanks for all the fish, and (re-)build their own nation. That would be by far the best choice for all of southern Europe. Staying in the union has nothing positive to offer anyone anymore, except for those presently in power in Brussels and in the capitals of the rich core nations. The dissolution of the union is inevitable. Unfortunately, given the hubris in the core, so is the pain and bloodshed that will pave the way there.

http://www.theautomaticearth.com/Fin...-bankrupt.html

[don]

Thar She Blows!

will the White Whale ever be brought to heel . . .

[c1ue]

Re: Thar She Blows!

“We now have a loan portfolio in Greece of about €12 billion and funding of €6-7 billion,” Sarris was reported to say. “There is a lot of smoke, which means there is some fire but how much of it, and to what extent can it be justified, I am not sure.”

And the Russians are to blame?

[Southernguy]

Re: Is the EU Politically Bankrupt?

here, there, and everywhere...

March 28, 2013
S




The Confiscation Scheme Planned for US and UK Depositors

by ELLEN BROWN
Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few Eurozone “troika” officials scrambling to salvage their balance sheets. A joint paper by the US Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland (discussed earlier here); and that the result will be to deliver clear title to the banks of depositor funds.
New Zealand has a similar directive, discussed in my last article here, indicating that this isn’t just an emergency measure for troubled Eurozone countries. New Zealand’s Voxy reported on March 19^th:

The National Government [is] pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts . . . .
Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.

Can They Do That?

Although few depositors realize it, legally the bank owns the depositor’s funds as soon as they are put in the bank. Our money becomes the bank’s, and we become unsecured creditors holding IOUs or promises to pay. (See here and here.) But until now the bank has been obligated to pay the money back on demand in the form of cash. Under the FDIC-BOE plan, our IOUs will be converted into “bank equity.” The bank will get the money and we will get stock in the bank. With any luck we may be able to sell the stock to someone else, but when and at what price? Most people keep a deposit account so they can have ready cash to pay the bills.
The 15-page FDIC-BOE document is called “Resolving Globally Active, Systemically Important, Financial Institutions.” It begins by explaining that the 2008 banking crisis has made it clear that some other way besides taxpayer bailouts is needed to maintain “financial stability.” Evidently anticipating that the next financial collapse will be on a grander scale than either the taxpayers or Congress is willing to underwrite, the authors state:

An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution.

No exception is indicated for “insured deposits” in the U.S., meaning those under $250,000, the deposits we thought were protected by FDIC insurance. This can hardly be an oversight, since it is the FDIC that is issuing the directive. The FDIC is an insurance company funded by premiums paid by private banks. The directive is called a “resolution process,” defined elsewhere as a plan that “would be triggered in the event of the failure of an insurer . . . .” The only mention of “insured deposits” is in connection with existing UK legislation, which the FDIC-BOE directive goes on to say is inadequate, implying that it needs to be modified or overridden.

An Imminent Risk

If our IOUs are converted to bank stock, they will no longer be subject to insurance protection but will be “at risk” and vulnerable to being wiped out, just as the Lehman Brothers shareholders were in 2008. That this dire scenario could actually materialize was underscored by Yves Smith in a March 19th post titled When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives. She writes:

In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike their Cypriot confreres, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders.

One might wonder why the posting of collateral by a derivative counterparty, at some percentage of full exposure, makes the creditor “secured,” while the depositor who puts up 100 cents on the dollar is “unsecured.” But moving on – Smith writes:

Lehman had only two itty bitty banking subsidiaries, and to my knowledge, was not gathering retail deposits. But as readers may recall, Bank of America moved most of its derivatives from its Merrill Lynch operation [to] its depositary in late 2011.

Its “depositary” is the arm of the bank that takes deposits; and at B of A, that means lots and lots of deposits. The deposits are now subject to being wiped out by a major derivatives loss. How bad could that be? Smith quotes Bloomberg:

. . . Bank of America’s holding company . . . held almost $75 trillion of derivatives at the end of June . . . .
That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

$75 trillion and $79 trillion in derivatives! These two mega-banks alone hold more in notional derivatives each than the entire global GDP (at $70 trillion). The “notional value” of derivatives is not the same as cash at risk, but according to a cross-post on Smith’s site:

By at least one estimate, in 2010 there was a total of $12 trillion in cash tied up (at risk) in derivatives . . . .

$12 trillion is close to the US GDP. Smith goes on:

. . . Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. . . . Lehman failed over a weekend after JP Morgan grabbed collateral.
But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors.

Perhaps, but Congress has already been burned and is liable to balk a second time. Section 716 of the Dodd-Frank Act specifically prohibits public support for speculative derivatives activities. And in the Eurozone, while the European Stability Mechanism committed Eurozone countries to bail out failed banks, they are apparently having second thoughts there as well. On March 25^th, Dutch Finance Minister Jeroen Dijsselbloem, who played a leading role in imposing the deposit confiscation plan on Cyprus, told reporters that it would be the template for any future bank bailouts, and that “the aim is for the ESM never to have to be used.”

That explains the need for the FDIC-BOE resolution. If the anticipated enabling legislation is passed, the FDIC will no longer need to protect depositor funds; it can just confiscate them.

Worse Than a Tax

An FDIC confiscation of deposits to recapitalize the banks is far different from a simple tax on taxpayers to pay government expenses. The government’s debt is at least arguably the people’s debt, since the government is there to provide services for the people. But when the banks get into trouble with their derivative schemes, they are not serving depositors, who are not getting a cut of the profits. Taking depositor funds is simply theft.
What should be done is to raise FDIC insurance premiums and make the banks pay to keep their depositors whole, but premiums are already high; and the FDIC, like other government regulatory agencies, is subject to regulatory capture. Deposit insurance has failed, and so has the private banking system that has depended on it for the trust that makes banking work.
The Cyprus haircut on depositors was called a “wealth tax” and was written off by commentators as “deserved,” because much of the money in Cypriot accounts belongs to foreign oligarchs, tax dodgers and money launderers. But if that template is applied in the US, it will be a tax on the poor and middle class. Wealthy Americans don’t keep most of their money in bank accounts. They keep it in the stock market, in real estate, in over-the-counter derivatives, in gold and silver, and so forth.
Are you safe, then, if your money is in gold and silver? Apparently not – if it’s stored in a safety deposit box in the bank. Homeland Security has reportedly told banks that it has authority to seize the contents of safety deposit boxes without a warrant when it’s a matter of “national security,” which a major bank crisis no doubt will be.

The Swedish Alternative: Nationalize the Banks

Another alternative was considered but rejected by President Obama in 2009: nationalize mega-banks that fail. In a February 2009 article titled “Are Uninsured Bank Depositors in Danger?“, Felix Salmon discussed a newsletter by Asia-based investment strategist Christopher Wood, in which Wood wrote:

It is . . . amazing that Obama does not understand the political appeal of the nationalization option. . . . [D]espite this latest setback nationalization of the banks is coming sooner or later because the realities of the situation will demand it. The result will be shareholders wiped out and bondholders forced to take debt-for-equity swaps, if not hopefully depositors.

On whether depositors could indeed be forced to become equity holders, Salmon commented:

It’s worth remembering that depositors are unsecured creditors of any bank; usually, indeed, they’re by far the largest class of unsecured creditors.

President Obama acknowledged that bank nationalization had worked in Sweden, and that the course pursued by the US Fed had not worked in Japan, which wound up instead in a “lost decade.” But Obama opted for the Japanese approach because, according to Ed Harrison, “Americans will not tolerate nationalization.”
But that was four years ago. When Americans realize that the alternative is to have their ready cash transformed into “bank stock” of questionable marketability, moving failed mega-banks into the public sector may start to have more appeal.
ELLEN BROWN is an attorney and president of the Public Banking Institute. In Web of Debt, her latest of eleven books, she shows how a private banking oligarchy has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://WebofDebt.com, http://EllenBrown.com, and http://PublicBankingInstitute.org.

[don]

Re: Is the EU Politically Bankrupt?

What are the capital controls being introduced in Cyprus?

• All savings accounts must run until their expiry date – no early withdrawals allowed.
• No cheques will be cashed, although cheque deposits will be allowed.
• Payments out of the country are suspended. Individuals will only be allowed to take €3,000 (£2,500) in cash on each trip out of the country.
• Unlimited use of credit cards is allowed within Cyprus, but there's a spending limit of €5,000 a month abroad.
• Import payments will be allowed when 'the relevant documents' are provided to the authorities and Cypriots can only transfer up to €10,000 a quarter for fellow citizens who are studying abroad.
• The measures will apply to all accounts, regardless of the currency used.

unless of course . . .

[GRG55]

Re: Is the EU Politically Bankrupt?

What are the capital controls being introduced in Cyprus?

• All savings accounts must run until their expiry date – no early withdrawals allowed.
• No cheques will be cashed, although cheque deposits will be allowed.
• Payments out of the country are suspended. Individuals will only be allowed to take €3,000 (£2,500) in cash on each trip out of the country.
• Unlimited use of credit cards is allowed within Cyprus, but there's a spending limit of €5,000 a month abroad.
• Import payments will be allowed when 'the relevant documents' are provided to the authorities and Cypriots can only transfer up to €10,000 a quarter for fellow citizens who are studying abroad.
• The measures will apply to all accounts, regardless of the currency used.

unless of course . . .

1

Finally, your money is safer under your mattress.

[lakedaemonian]

Re: Is the EU Politically Bankrupt?

1

I wonder if it's worth discussing the safest countries/banks to keep dry powder?

At the moment I'd agree with your previous mention of cash likely to flow to destinations like Dubai and Singapore.

With the increasing frequency of NZ being mentioned with it's Open bank Resolution.......I'm wondering if I should shift my NZ cash to Hawala.

[don]

Re: Is the EU Politically Bankrupt?

[jabberwocky]

Re: Is the EU Politically Bankrupt?

Jonathan Weil, at Bloomberg, has an interesting article on the subject, but, as usual, I find myself tooooooo stupid to post it.
Rumblings in Canada of bank deposit bail-ins (only in extremis, of course) in their very safe institutions. I wonder if all that "fracking" (as in fractional reserve banking?) is beginning to set off tremors, even in the last redoubts of credibility (tongue deeply imbedded in cheek).
I know I feel darn tremors ALL THE TIME!!!

[jabberwocky]

Re: Is the EU Politically Bankrupt?

There is much to quibble with in this NYT's narrative, but it adds to the story fed to us by a generally credible writer, from the "fountainhead" of truth!



NControls on Capital Come Late to CyprusBy FLOYD NORRIS

Published: March 28, 2013

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Capital controls came to Cyprus this week, a few years after they should have arrived — when it needed controls to stem the flow of hot money into the country’s banks.


High & Low Finance

Floyd Norris writes the High & Low Finance column for the Friday Business section.
Author Bio »
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Related

• Edgy Calm as Banks in Cyprus Reopen (March 29, 2013)
  
  
• In Cyprus, Feeling the Pain of a Bailout (March 29, 2013)
  
  

The new controls are aimed at stopping that hot money from fleeing Cyprus too rapidly. They limit how much cash anyone can take out of the country. Electronic transfers are banned. So is check-cashing. The controls are supposed to be temporary. But they sure don’t look like one-week wonders. There are limits on how much cash can be sent abroad each quarter for a student’s overseas education. There are monthly limits on how much any Cypriot can run up in credit card charges abroad.
That something like this was necessary seems clear. That it will work is not.
During 2008 and 2009, as it became obvious that the Irish banking system was imploding, Cyprus became the new euro zone locale for hot money. Cypriot banks paid higher interest rates on euros and — by some accounts — were not too picky about the provenance of the money coming in.
In 2008, according to a study by the McKinsey Global Institute, $40.7 billion was funneled into Cyprus through loans and bank deposits. In the context of world capital flows, that was a blip. But it amounted to 161 percent of Cypriot gross domestic product that year.
During the Asian currency crisis of the late 1990s, the world learned just how vulnerable a country can be to hot money. If it seems nice on the way in, it can be very nasty on the way out. It is one thing for international capital flows to take the form of direct investment, in factories and companies, or even portfolio investment, through the purchase of corporate stocks and bonds. The nature of that investment does not involve a promise to repay it on demand. But loans and deposits can be demanded just when a country and its banking system can least afford to repay them.
During that crisis, Malaysia broke from the consensus that capital controls were always bad, that the free market knew best. It proved to be a wise decision, although it was endorsed at the time by few economists.
What is happening in Cyprus now bears more than a little similarity to what happened in Ireland earlier. The Irish also enjoyed capital inflows that were a multiple of G.D.P., and the country’s oversize banking system eventually collapsed. There the largest part of the problem was a housing bubble, brought on by lenient lending. When that bubble burst, foreigners wanted their money immediately, and Ireland decided to stand behind its banks, virtually bankrupting the country’s government.
Most of the capital that flowed into Ireland during the good times was not bank deposits. And Ireland had enough of a real economy — absent banking and real estate — that it has continued to attract some foreign direct investment every year since the collapse.
But it used to be said of Cyprus that it had only banks and beaches. It got little in the way of foreign direct investment during the good times. When money flowed in, it took the form of demand deposits that were supposed to be available at any minute.
Luckily for those who had put money into Irish banks, or bought senior bonds from those banks, the Irish banks failed early, before governments realized they could not afford to do bailouts. In Cyprus’s case, the European institutions that were making the decisions first came up with the idea of “taxing” all bank deposits, whether they were insured or not. Fortunately, the Cypriot Parliament balked at that, and the eventual plan makes more sense.
Shareholders and bondholders at the worst bank are wiped out. Deposits up to the 100,000-euro limit for insured deposits are protected, although the capital controls may mean it will be a while before depositors can get their hands on the money. Deposits over that limit in the most troubled bank could be wiped out. At best, those depositors are likely to wait years before they get back a small fraction of their money. The central bank estimates large depositors in the largest bank will do a little better, perhaps getting most of their money back. But such estimates could prove wildly optimistic if banks lose most of their deposits when, or if, capital controls come off.
Capital controls were once standard fare in the world, and they had a chance of working because the government could control transactions into and out of the country’s currency. (An exception to that was the United States, whose capital controls in the 1960s could not stop the buildup of dollars around the world. The Eurodollar market came to exist because of those controls.)
But Cyprus, of course, has no currency of its own. Euro notes and coins in circulation there are identical to such notes and coins in all the other countries using the currency. Euros that were in circulation before the bank holiday can leave if they can be smuggled. “Cyprus is an island, and has a fortified border with North Cyprus, which poses a substantial natural barrier to capital flight,” said Jacob F. Kirkegaard, a senior fellow at the Peterson Institute for International Economics. But, he added, “I don’t think it will work. There will be plenty of leakage.”
It will not help that the euro has become the currency of choice for drug smugglers, who appreciate that there are 500-euro notes — worth about $640 — while the United States no longer issues any currency over $100. “You can,” Mr. Kirkegaard noted, “fit a lot of money in a suitcase if you do it in 500-euro notes.”
Getting those big notes now will not be easy. The banks are supposed to limit daily withdrawals. But even as those limits slow the smuggling, they will also threaten to severely damage the local economy.
Even if the controls succeed, the concept of the euro has taken another hit. “If you prevent depositors from moving from one area to the next,” said Olivier Jeanne, an economist at Johns Hopkins University, “it means you don’t have one euro.”
“Let’s assume,” he added, that at some point in the future “people are concerned that France will impose capital controls, as they did in the early 1980s. You will try to switch your deposits to German banks,” possibly creating a run on French banks.
Cyprus would be much better off now if the lure of a large banking industry had not led Cypriot governments to be pleased about all the hot money that was flowing into the country. Capital controls on the way in would have outraged Cypriot bankers — and possibly saved those very banks from their fate. Had Cyprus not allowed all that money to flow into the banks in 2008 and 2009, they presumably would have bought fewer Greek bonds, and lost less money on them.
The fact the hot money stayed even after it became clear the Cypriot banks were in trouble — in large part because of all the Greek bonds they owned — is a testament to the false security the euro provided even after the Greek crisis erupted. That security has faded, at least a little. The cost of credit-default swaps on European banks has been rising since Cyprus got into trouble, suggesting the market thinks bank defaults have grown more likely. That cost continued to rise after the latest plan was announced. It does not help that European leaders seem unable to decide whether the Cypriot deal would set a precedent if banks in other countries get into trouble. It does, whatever they say, or at least it could.
A few months ago, Europe was supposed to be on the way to a banking union, an arrangement that it was hoped would prevent what has now happened in Cyprus. What happens to those plans will be an indication of whether Europe can continue to hold the euro zone together.
It may help that Cyprus is so insignificant. Its economy is about one-tenth the size of Ireland’s, which itself is among the smaller economies in the euro zone. It is even smaller than Vermont’s, which is smaller than that of any other state. We can only shudder at what might happen if banks in a big euro zone country got into a lot of trouble.