Most Read
Image 01 Image 02 Image 03

Cyprus loco Euro-problem gone wild

Cyprus loco Euro-problem gone wild

I was reviewing World War I history with my son yesterday.

The global-scale conflict started with the assassination of Archduke Franz Ferdinand, heir to the Austro-Hungarian throne, on June 28, 1914.  This event set in motion a series of diplomatic incidents that led inexorably to the outbreak of war in Europe within a few weeks.

Then I began contemplating the possible repercussions of the Cyprus bank bailout, and asked my San Diego compatriot and economics expert W.C. Varones for his opinion on its impact on the world economy.  He says:

The new deal in Cyprus is fairer to insured depositors, but just having floated the idea of deposit confiscation will do permanent damage to faith in the financial system.  Cyprus will be a wreck when the banks open and Societe Generale, a major French bank, is already calling for a depression there.  And anyone with money over the insured limit in Spain, Greece, Portugal, or Italy would be crazy not to pull it out now.  Heck, I’d be nervous about money even under the insured limit.

To underscore his thoughts, Varones offers a piece from the Economist with the following quote from Jeroen Dijsselbloem, the Dutch finance minister and head of the “Eurogroup” of euro-zone finance ministers:

A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors…

This new template will surely have rich Spaniards, wealthy Italians, and other EU citizens considering their options, in terms of moving money in excess of deposit guarantee limits elsewhere.

The reminded me of a scene from a “South Park” episode that seems most apt.

In fact, Tyler Durden of Zero hedge notes that Cyprus serves as a reminder that a bank deposit is not risk-free (hat-tip Ed Driscoll).

  1. A deposit in a bank is not a riskless form of saving.We may not see eye to eye with the FT’s Martin Wolf on many aspects of modern economics and central banking in particular, but he described banks well last week:
  2. Banks are not vaults. They are thinly capitalised asset managers that make a promise– to return depositors’ money on demand and at par– that cannot always be kept without the assistance of a solvent state.”
  3. When states become insolvent, the piper must ultimately be paid. Fatal, embarrassing insolvency is not a problem that can be perpetually or painlessly deferred.

Cyprus matters..because the inept handling of its crisis last week threw one facet of modern banking into sharp relief: if a deposit guarantee is seen to be fraudulent or sufficiently fragile to be easily smashed by politicians, then confidence in banks, and in unbacked paper currency itself, will be vulnerable to an unpredictable run.

Frankly, a run on Cypriot banks seems inevitable, which is why they are now closed until Thursday  — giving the regular people time to embrace the levy and understand all the awesome goodness in the new bailout plan.

What is the impact here? As Professor Jacobson noted, the American stock markets fell in response.  And I would like to note that Varones was one of the first to opine that our government’s manipulation of interest rates has led to something resembling confiscation in this country already.

Finally, the Russians cannot be pleased that the accounts of their citizens were trimmed more severely by this solution.  The following statement from Dimitry Afanasiev, chairman of a law firm in Moscow, brings to mind another famous global war:

“These people thought their savings were safe in the EU and now they are caught in the pincers of the German blitzkrieg, with Cyprus unable and Russia unwilling to protect them,” he said.

I suspect, like the1914 assassination in Sarajevo, its going to take the world a few weeks to process the consequences of the Cyprus plans.

DONATE

Donations tax deductible
to the full extent allowed by law.

Comments

You can pretty much rest assured that the CEO of any multinational has had a frank conversation with their international fund manager to move their banking to London. Can you imagine any company being willing to risk payroll with a possible 20-40% haircut waiting in the wings???

BannedbytheGuardian | March 26, 2013 at 9:08 am

Russia might like to see a halt in its’ citizens loose monies going abroad. Less to accrue to fund home oppositions. Less power for expats & oligarchs.

While I typically refrain from commenting on issues like this, I’ve found this whole Cyprus fiasco fascinating. The media has portrayed this as no big deal; it could never happen here; who cares, it’s just Russian mobsters, etc…

The Archduke analogy makes sense, but a parallel to Kreditanstalt of Vienna is probably a bit more fitting. Kreditanstalt was the first major bank bankruptcy in 1931 and could be considered the first domino to fall that kicked off the Great Depression in earnest. Cyprus 2013 = Kreditanstalt 1931

We’ll see what happens in a few weeks for sure.

Illustrating Chicago’s Murders, Homicides, Violence and Idiocy at heyjackass.com

I don’t care what anyone says! If it can happen in the EU, there’s no reason it can’t happen here!

http://www.telegraph.co.uk/finance/financialcrisis/9952979/Cyprus-bail-out-savers-will-be-raided-to-save-euro-in-future-crises-says-eurozone-chief.html

And somewhere, out there, George Soros has a silly grin on his face…!

“…inept handling of its crisis last week…”

This was far from “inept”. It was a smashing success, getting the concept of wealth confiscation on the table, forcing people to discuss it and starting the conditioning process necessary for them to accept it.

We have not seen the last of these proposals. This was, in fact, only the beginning.

2nd Ammendment Mother | March 26, 2013 at 10:02 am

Considering that the US Treasury has already held hearings on the confiscation of Americans retirement accounts (August 26, 2010), I have trouble understanding why there is so much “meh” on the subject. Even the conservative media feels that FDIC Insurance would make depositors whole, without realizing that it is also a Federal program. The same signature that confiscates the cash from your bank account will most likely deny FDIC indemnification.

Cyprus and the EU are advocates of the “Dire Straights” school of economics:

http://www.youtube.com/watch?v=lAD6Obi7Cag

only instead of guitars, they are simply taking it.

I R A Darth Aggie | March 26, 2013 at 10:50 am

The Russians would be foolish to leave their money there. They will pull out, and go some were safer. I’m not sure were that is, tho.

This business will get out of control. It will get out of control and we’ll be lucky to live through it.

A slightly more understandable version of the clip:

http://www.youtube.com/watch?v=NmFo-LKHGY0

Henry Hawkins | March 26, 2013 at 1:23 pm

Man, the backrooms of Washington DC and the state capitals must be awash with the drool of lefty statists, all rubbing their grimy little hands together as they plot and plan to act on this precedent.

    TrooperJohnSmith in reply to Henry Hawkins. | March 26, 2013 at 4:22 pm

    …only to find out that they cause a run on under-capitalized banks, which collapse in record numbers, taking whole financial systems with them, and by extension, those same left-wing governments. Then, no telling what beasts begin slinking towards Jerusalem…

    “Nice going, you stupid lefties!”

[…] Cyprus loco Euro-problem gone wild – Leslie Eastman, Le·gal In·sur·rec·tion. “In fact, Tyler Durden of Zero hedge notes that Cyprus serves as a reminder that a bank deposit is not risk-free (hat-tip Ed Driscoll)…A deposit in a bank is not a riskless form of saving.We may not see eye to eye with the FT’s Martin Wolf on many aspects of modern economics and central banking in particular, but he described banks well last week: “Banks are not vaults. They are thinly capitalised asset managers that make a promise– to return depositors’ money on demand and at par– that cannot always be kept without the assistance of a solvent state.”..When states become insolvent, the piper must ultimately be paid. Fatal, embarrassing insolvency is not a problem that can be perpetually or painlessly deferred…Cyprus matters..because the inept handling of its crisis last week threw one facet of modern banking into sharp relief: if a deposit guarantee is seen to be fraudulent or sufficiently fragile to be easily smashed by politicians, then confidence in banks, and in unbacked paper currency itself, will be vulnerable to an unpredictable run.” […]

Redistributive change is exploited by a minority interest to purchase favor with a majority. It’s unfortunate that it is processed through involuntary exploitation or theft, and, in this case, also through fraud or willful deception. This can only lead to a Tutsi slaughter Hutu slaughter Tutsi retributive change cycle.

The only thing a bank (or a country’s currency) has going for it is the confidence of the people. Ask yourself why a political or financial system would commit an act that appears to be suicidal. It’s not logical! So then ask the next questions. Who will gain from the chaos that is being fomented? Who has worked to engineer a breakdown of the current world order.

TrooperJohnSmith | March 26, 2013 at 4:19 pm

By comparison, this could make the so-called housing bubble look like a fart in the ocean.

Yes, deposits are backed up by assets. No assets. No money.

Oops.

Henry Hawkins | March 26, 2013 at 5:56 pm

I would like to point out that absolutely nothing was done to avert or fix this by George W. Bush. That BASTARD.

    beladnj in reply to Henry Hawkins. | March 27, 2013 at 4:06 pm

    Henry,
    Although I didn’t like GW he was not a Monarch that does what he wants when he wants. The banking system is governed by legislation from Congress.

    Speaking of Monarchs, I haven’t seen any action from our current Monarch yet. When does he fall into the category of BASTARD?

Font Resize
Contrast Mode
Send this to a friend