More on Cyprus bank run

This is the weekend. Wait for Monday!

Max Keiser: Two yrs ago I told you the banksters were never going to stop and that they needed to be hung. For the people of Cyprus it’s too late.

Why today’s Cyprus bailout could be the start of the next financial crisis

It is a bad day to have your money deposited in a bank in the Mediterranean island nation of Cyprus. And it may just mean some bad days ahead for the rest of us.

Washington Post,

16 March, 2013

Early Saturday, the nation reached an agreement with international lenders for bailout help. Part of the agreement: Bank depositors with more than 100,000 euros ($131,000) in their accounts will take a 9.9 percent haircut.

Even those with less in savings will see their accounts reduced by 6.75 percent. That’s right: Anyone with money in a Cypriot bank will have significantly less money when the banks open for business Tuesday than they did on Friday. Cypriots have reacted with this perfectly rational reaction: lining up at ATM machines to try to get as much money out in the form of cash before the money they have in their accounts is reduced.

What makes this important for people who couldn’t locate Cyprus on a map is this: It is one of the 17 nations using the euro currency, the fact that it’s a lot closer to Beirut than to Paris notwithstanding. European officials have spent the past six years moving heaven and earth to ensure that no depositors with the continent’s banks suffer a loss despite the financial strains the banks have been under.

Most dramatically, the Irish government in the fall of 2008 backstopped its banks, putting its public finances through a wringer. Even as the Greek economy has fallen into depression and Spanish bank losses on real estate have reached dangerous levels, the European Central Bank and the continent’s government have ensured that bank deposits were safe. They have feared that if depositors in any country were forced to take losses, it would spark a destructive cascade of withdrawals across Europe.

So is Cyprus different?

In a lot of ways, it is separate from the rest of the euro zone, and not just geographically. Its population is a mere 1.1 million (the Greek population is 10 times as large). It has an unwieldy banking system with liabilities equal to eight times its economic output, versus 3.5 times for the euro zone as a whole. Many of those deposits are held by wealthy Russians who use Cyprus as a convenient place to park money.

Those are the reasons the IMF has insisted on losses for depositors — those, and the fact that rescuing Cyprus’s finances without the 5.8 billion-euro contribution represented by depositors’ losses would have meant a bailout approximately equivalent to the country’s annual economic output, too much for the fund to stomach.

“The challenges we were facing in Cyprus were of an exceptional nature,” said Jeroen Dijsselbloem, the Dutch finance minister who helped engineer the plan, according to the Financial Times. “Therefore, unique measures were determined to be necessary.”

The European Central Bank will now be on high alert, monitoring activity in Greece, Spain and beyond for evidence that the Cyprus precedent will result in new runs on those nations’ banks. Expect a flood of central bank liquidity into those nations if there is any hint that depositors across Europe seem to be thinking that Cyprus is the new normal and that their seemingly safe bank deposits could be reduced 10 percent without warning.

The best the rest of the world can hope for is that Cyprus’s case is sufficiently unique that it won’t spark panic in Athens and Madrid (or in Lisbon, Dublin and Rome).

For the past six months, the global financial markets have become increasingly complacent, convinced that the euro-zone crisis is, for practical purposes, over. Cyprus is the test of whether that is correct, or whether the complacency was instead misplaced.

In other words, if there is going to be a new wave of crisis in Europe, historians will be able to trace its starting point back to today’s Cyprus bank bailout.

Contagion-Begging Actions; Expect Bank Runs Following Cyprus Idiocy; Have Money in a Spanish Bank? Take It Out Now!

“Mish” Shedlock

In Cyprus, a decision was made to screw savers with a 6.75% to 9.9% "Tax" on deposits.

Supposedly this move was made to "avoid unsettling investors in larger countries and sparking a new round of market contagion."

In reality, the action was mandated theft, imposed by EU officials to protect senior bondholders.

How can such an action do anything but cause contagion?

The move is expected to raise a mere 5.8 billion euros according to Dutch Finance Minister Jeroen Dijsselbloem, leader of the euro-area ministers. Fallout from this action will cost far more than that.

Contagion-Begging Actions

What is someone in Greece, Spain, or Italy supposed to think?

Consider Spain. By a 526 to 86 vote, the nannycrats in Brussels just passed a regulation that will require a country to accept a bailout if offered. (Please see An Offer You Cannot Refuse; EU Passes Law Forcing Countries to Take Bailout; Is Spain the First Target?)

Also note that EU Court Strikes Down Spain’s Eviction Law.

Think the parlay of EU contagion-begging actions for a second. 

1. Spanish banks will not be able to evict homeowners, who in turn will be give reason to default. Losses will soar at Spanish banks and they are insolvent already.
2.  The "Offer You Cannot Refuse" action by the EU is sure to arouse suspicion of a forced bailout in Spain.
3. Cyprus actions will heighten fears of bank takeovers, capital controls, and theft of deposits via confiscation. 

Expect Bank Runs

Why would any rational thinking Spanish person keep any money in Spanish banks? They shouldn't and I suspect they won't.

Moreover, this is bound to further inflame the situation in Italy, where Beppe Grillo's Five Star Movement is already the largest party.

In short, this action was one of the single stupidest things the EU could have done and they crammed it down the throats of all Cyprus citizens, hoping to stop the spread of contagion.

My friend Bernd who lives in Germany had these comments. "Judging by the German forums on Focus, Der Spiegel, SZ, FAZ and Die Zeit, there is hardly any support for this action. The name calling and swearing is rather blunt. These guys did not study their Machiavelli. He said roughly if you hurt people, you must never hurt all of them at once."

The closest Machiavelli quote I can find is "If you need to injure someone, do it in such a way that you do not have to fear their vengeance."

Rest assured there is going to be vengeance over this action. The Cyprus 

government will fall, and deposit fear will spread everywhere.

 http://globaleconomicanalysis.blogspot.com/#z6eViAmKCqtuqI4J.99