WASHINGTON, March 23, 2013 — The two largest banks on the island country of Cyprus – Bank of Cyprus and Cyprus Popular Bank (aka Laiki bank) – are insolvent. Without a bailout, they will close their doors Monday, perhaps never to open again.
The much publicized “haircut” (just a bit off the top please) bailout proposal from the EU called for a 5.8 billion Euro “contribution” from Cypriot depositors in order to receive the 10 billion Euro (13 billion dollars) in bailout funds.
Reuters reported Saturday afternoon that a deal appears to have been brokered between the EU and beleaguered Cyprus. There are roughly 371,000 accounts in the Cypriot banking sector. 361,000 of those accounts are under 100,000 euros in value, and would therefore remain untouched. The remaining 10,000 do, of course include many wealthy citizens of Cyprus, but are primarily owned by foreign (Russian) depositors.
The terms of the deal would include a 25 percent levy on all accounts exceeding 100,000 euros from the Bank of Cyprus, and a 4 percent levy on accounts of the same size from all other Cypriot banks.
That is, all other banks with the exception of the second largest bank – Cyprus Popular Bank – which is apparently where the bulk of foreign depositors, mainly Russians, have their accounts. The accounts over 100,000 Euros held by the Cyprus Popular Bank could see as much as 70 percent of their funds seized.
The Cyprus banking system is to Russian oligarchs what the Cayman Islands are to the American oligarchs; a tax haven. Russian billionaires have long used Cyprus as their financial hub, avoiding various excise taxes imposed on international transactions.
The EU is sending an extremely dangerous signal to the global banking sector by robbing Russian billionaires to fund the Cyprus bailout: As a foreign investor, your accounts are not sacrosanct, and will be used as needed to fund bailouts.
Why is this so scary? According to JP Morgan, about fifty percent of all unsecured deposited funds in the EU banking sector are from outside the EU. Wealthy denizens from around the globe have trillions of euros parked in banks across the Eurozone.
What could possibly go wrong with telling them that should they be needed, their accounts will be frozen and levied as necessary to fund any shortcomings of the local government?
While the capital flight (international bank run) from these accounts will certainly not approach a complete withdrawal, many European banks, in Greece, Italy, Portugal and France just to name a few, are on the “bleeding edge” of solvency, and could easily be pushed over the edge should even five percent be withdrawn. Five percent is at this point a conservative estimate.
Should that push a few banks into insolvency across several nations within the Eurozone, the situation in Cyprus could very easily escalate from a six billion euro “haircut” for the small country, into a Marine Corps barber shop on payday across the Eurozone. That would cause the type of capital flight that could potentially destroy the single currency union entirely.
So how could that affect those of us on the left side of the pond?
In today’s global economy, most large US banks have branches overseas, which being part of the same company, are tied to a communal pool of collateral. If their branches in the Eurozone experience bank runs, the branches in the US must cover any losses. Thanks to wonderful fractional reserve banking system (you deposit $100, they gamble $90 away and only have $10 of your money), this could have a devastating impact on domestic banks.
This does not take derivatives into account at all. Most people’s eyes glaze over when the word is mentioned, but it is very important to have a basic understanding of derivatives and how they could affect our economy. Derivatives were instituted as an insurance policy that was available to protect your investment in a stock you owned. If the company you invested in went bust, the derivative contract would cover your losses, not unlike car or home insurance.
A couple decades ago, somebody got the bright idea to enable derivatives contracts against assets they didn’t actually own. Think of it this way: if I were able to take out an insurance policy on your house for ten million dollars at a cost of a thousand dollars per month, how long do you think it would take for me to find a way to burn your house down? The first hedge fund manager was born.
That is what happened in 2008.
The only real regulations that were added to prevent another 2008 derivatives meltdown was in Dodd-Frank, which put you and me, aka Joe Taxpayer, automatically on the hook for any derivatives losses by the big banks; no bailout legislation required. Skip Jail – go directly to go – collect as much as is needed.
Estimates for derivatives contracts outstanding range between $600 trillion and $1.5 quadrillion, and amount more than three times greater than all the world’s financial assets, all virtually invisible to regulatory bodies, with essentially no regulations except the aforementioned full faith and credit of the US debt-slave.
Hope for the best, prepare for the worst.
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