Tuesday, March 26, 2013

Cyprus—the big money lies come undone

There is really no reason why the failure of the Cypriot banks should signal anything particularly important.  Cyrus is a little island with minimal involvement in the global real economy so how are their bank's failures qualitatively any different from those in Iceland, Ireland, or Greece?  It's probably just another stumble on the Euro's road to oblivion.  In fact, given the hatred of governments in northern Europe for offshore tax havens, there are probably many who are cheering the Cypriot banking collapse.

In fact, I would be cheering the collapse of those crooked Cypriot Banks were it not for all the innocent bystanders who will get swept away in the tides of economic damage.  Besides hosting a couple of British Navel installations, Cyprus has very little going for it.  They have been torn apart by a civil war and the island seethes with residual hatreds.  And even before all the troubles, their economy was pretty primitive.  Let's put it this way, no one was buying Cypriot computerized machine tools.  They were into being a tax haven because it was what they could do.

Of course, what has everyone chattering is that this time, the depositors in Cypriot Banks are going to have to take a haircut—a least those with deposits over 100,000 Euros.  This is new territory.  And considering the sorts of people who had a lot of money in those banks—Mediterranean drug dealers, Russian kleptocrats, arms traders, and other assorted bad guys—the bankers may be needing extra security for pulling this off.  It's one thing to screw over the world's poor—the banksters have been doing this for decades.  It's quite another to screw over folks who are armed and dangerous.

Is Cyprus in Our Future?

The Plague of Wall Street Banking


The economic news this week highlights what happens when governments are unable to confront the root cause of the financial collapse – the risky speculation and securities fraud of the big banks. What happens? They blame the people, cut their benefits, tax their savings and demand they work harder for less money.

In the United States there have been no criminal prosecutions for securities fraud in the big banks. Just as the Justice Department has made it clear that the big banks are too big to jail because doing so jeopardizes the stability of the banking system; financial fraud investigator Bill Black points out that the SEC cannot institute fines that are too big for the same reason. “The art is to make the number sound large to fool the rubes, but to insure that the fine poses only a modest inconvenience to our ‘most reputable’ fraudulent banks.” So, the SEC trumpets “more than 150 firms and individuals, with sanctions totaling $2.7 billion.” Black points out that this number sounds big, but it isn’t compared to the losses caused by the fraud epidemic in the US which are well in excess of $15 trillion. A trillion is a thousand billion. Are we, ‘the rubes’ or do we know that our government is in cahoots with big finance?

In fact, the big banks have been engaged in all sorts of nefarious activity for a long time, asWashington’s Blog points out with this jaw-dropping list of crimes, and are rife with fraud. And, this week the biggest of the too big to prosecute, JP Morgan, had its financial fraud and disrespect for government on display when the Senate Banking Committee issued a massive 300 page indictment, errr report, documenting the $6.2 billion “London Whale” scandal. The report traces the scandal right to the top, CEO Jamie Dimon, and shows how the bank lied to bank examiners and investors. Experts state the obvious from this evident fraud; investigations and fines, and possibly a large monetary settlement are possible but a prosecution by DOJ remains unlikely. Obvious because everyone knows the game in Washington is one of no criminal prosecutions.

Although, another too big to jail bank, Goldman Sachs did have a loss in court this week, when the US Supreme Court refused to overturn a Court of Appeals decision requiring the bank to defend a civil suit by investors claiming securities fraud. There are lots of hurdles ahead, but this provides a glimmer of hope.

This week our too big to prosecute philosophy of the (lack of) Justice Department was shown to apply to foreign banks as well. The second largest bank in Germany got a pass when it offered a job to an IRS agent who cut its tax burden. Again, the rubes were told that Commerzbank paid $210 million in tax liability, sounds good, but it was only 62% of what it owed. The day after the agreement the IRS officer was offered a job at Commerzbank. The agent pled guilty to charges this week, but the bank and the officers involved were not prosecuted.

Europe is showing us what happens when government fails to confront the big banks – the people pay and the economy collapses into depression. Is this our future?

The horror story of the week for struggling workers and poor countries has to be Cyprus. The country was being built up as a big banking area but when it all went sour, they went to the EU for a bailout. The EU hemmed and hawed and finally agreed, but with a very big requirement which takes structural adjustment to a new level of abuse – they required “a one-off 10 percent tax on savings over €100,000 and a 6.75 percent tax on small depositors (since dropped). Senior bank bondholders and investors in Cyprus’ sovereign debt will be left untouched.”

This is causing a run on the banks in Cyprus, but is also raising red flags in many other struggling Euro countries. Can bank accounts in Greece, Italy, Spain, Portugal or any other country in Europe be safe? Are more and more people going to take their money out of the banks and keep it under their mattress? It may seem like the sane thing to do but a run on the banks will just weaken shaky banks further.

Leaders of the EU, IMF and Germany are all staying with their demand for more austerity and greater productivity (i.e. lower wages for greater output). At the same time they are urging bailout of the banking system which remains weak. This same leadership recognizes their approach may lead to a “social explosion” and Standard & Poors is also warning that the situation is socially explosive. The reality is that southern Europe is essentially in a depression and Germany, EU and IMF are demanding that they squeeze more money out of impoverished people.

In Washington, DC, the two Wall Street parties keep talking about cuts to the budget – austerity measures that will hurt the old, the poor, the young and working class – and disregard the fact that government spending is actually not the problem. While they push austerity, they remain silent as big business interests go into their sixth year of big tax avoidance. Paul Buchheit summarizes “For over 20 years, from 1987 to 2008, corporations paid an average of 22.5 percent in federal taxes. Since the recession, this has dropped to 10 percent – even though their profits have doubled in less than ten years.” He highlights the worst of the worst. On top was Obama’s jobs czar, General Electric. more
Considering the arrogant bullshit that Herr Juncker has be slinging around about how everyone must be responsible for their debts, it's nice to know that Luxembourg's status as a tax haven could crumble very rapidly.  Considering how exposed they are, it is probably inevitable.

Luxembourg Has A Very Serious Case Of 'Money Center Debt Syndrome'

Bruce Krasting, My Take On Financial Events | Mar. 23, 2013

What an interesting week. Monday brought a wave of righteous indignation over the thought of a haircut for Cypriot depositors, on Friday everyone is cheering the idea that deposits over E100k are going to gets ‘faced’ for 40%. The Cyprus story is far from over, but there are some lessons so far:

- European leaders have shown their hand. They are more than willing to stiff depositors when pushed to the wall.

- The deposit level of +/- E100k has been reinforced at the benchmark for haircuts.

- All Deposits < E100k in European banks are safe.

- All Deposits > E100k are unsafe.

- One would have to be oblivious to these facts (or a complete idiot) to have greater than E100k in an EU bank deposit.

- European Money Centers are at risk.

One consequence of being a money center is that there has to be huge foreign liabilities. Looking at what is owed to external creditors provides some information on what I call the Money Center Debt Syndrome (MCDS). The following numbers on External Debt come from the CIA (Link). The numbers are external debt owing to other countries, minus external debt of other countries held. (The CIA presents all numbers in dollars.) The numbers are only the liabilities, there are foreign assets held against these liabilities. I want to focus on just the debt side of this picture.

The two biggest money centers in Europe are Zurich and London. The MCDS is very obvious:

Switzerland – External Debt = $2.2T. External Debt to GDP = 210%

UK – External Debt = $9.8T. External Debt to GDP = 400%

Again, there are real assets behind most of this debt, so these ratios are not really as scary as they appear. In addition, these money centers are outside of the Euro Zone. I don’t think there is an issue with these. Now consider Germany, a country with a large GDP and a relatively small function as a money center:

Germany – External Debt = $5.6T. External Debt to GDP = 150%

Italy/Spain are not money centers at. As a result, they do not suffer from MCDS:

Italy – External Debt = $2.5T. External Debt to GDP = 110%

Spain – External Debt = $1.4T. External Debt to GDP = 93%

The following are 2011 numbers for Cyprus:

Cyprus – External Debt = $106B. External Debt to GDP = 440%

Clearly there was a red flag with external debt/GDP in Cyprus two years ago. The ratio was higher than all the other EU countries. It was higher than Switzerland. Cyprus was an accident waiting to happen.

Now to the point of this article; consider the ratio for this European money center:

Luxemburg – External Debt = $2.2T. External debt to GDP = 3,700%

Yes, yes, I know. Luxemburg is different than Cyprus. Luxemburg is just a booking center, there are assets behind all of this debt. But at the same time, this looks like a very unstable situation.

I end with where I started, only an idiot would leave more than E100k in a Luxemburg bank (any EU bank for the foreseeable future). I believe that the deposits that are behind Luxemburg’s external debt are measured in the trillions, the vast majority of those deposits exceed E100k. It would not take much for this situation to slide out of control. more
Here James Kunstler makes an interesting argument that the real problem is compound interest.  I cover the same subject in Elevator Speech #2.

Money Worries

By James Howard Kunstler  March 25, 2013

Of course, everybody should have been worried a lot sooner than last week because the basic operating system of global banking is accounting fraud, and has become that stealthily, insidiously, for about fifteen years now. Nothing is what it appears to be anymore. Compound interest has not really been working since 2008 because the world can't increase its energy production enough to generate the additional surplus wealth needed to cover the aggregate interest due all around the world.

What remains are games of musical chairs, Ponzi schemes, frauds, swindles, stonewalls, ruses, ploys, scams, dodges, bluffs, subterfuges, QE martingales, interventions, rehypothecations, pretenses and other modes of evading or disguising reality. The reality is that there is not enough real wealth to go around, certainly not enough to cover the giant web of obligations that masquerades as "money." So, now whenever somebody or some company or government or entity is called upon to put up or shut up, the danger arises that the whole web will disintegrate, since all the participants are broke. You want "your" money? Wait three days. Make that four days. Check that, let's say next week. How about two months from now? Oh, forget about it.... No wonder folks are spooked.

This is really getting out of hand. That's why the ills of the poor, untoward, tiny crypto-nation of Cyprus have got everyone's knickers in a twist. Cyprus is everybody writ small. Cyprus ran out of pretense. It's banks are toast. It can't take care of itself. It is too poor to be a "modern" economy. It failed trying to be a money laundromat for the brigands of Russia and the dope merchants of the Eastern Mediterranean. The tourists and retirees may even have to pack up and leave now because there will be no access to ready cash for day-to-day living.

The terms of the latest bailout announced Sunday night are curious. The New York Times reports that, "the deal would scrap the highly controversial idea of a tax on bank deposits, although it would still require forced losses for depositors and bondholders." Say, what? In fact, there is no material difference between the so-called "tax" and the "forced losses." That was just semantics. The word tax had been bandied about two weeks ago when the EU first proposed that the Cyprus government might pass a legislative act skinning its bank depositors. That didn't go down, of course, so now its just an EU mandated haircut on deposits over E-100,000 and bank bondholders. As for the deposits under E-100,000... you're welcome to them, the catch being that the banks aren't open for business... and the EU bailout money will not arrive in Cyprus until May. They are sending it by packet boat from Antwerp and hoping for fair winds.

Cyprus has to become somebody's ward again. Cyprus was either Turkey's or Great Britain's ward for most of the past 400 years. The population is ethnically split about 60 / 40 Greek / Turkish making for chronically uncomfortable governance. The island remains physically divided into two separate and hostile north-south zones. If you look at it on the map, it is nowhere near Greece, but rather tucked right up under Turkey's bosom. It is strategically a naval hub of the Middle East and is occupied both by NATO troops and by two remaining British military bases - a convenience given the ongoing deterioration in Middle East geopolitics, as nation after nation melts down, and threatens to impinge on much of the world's oil supply. My guess is that Turkey will eventually recover administration of Cyprus by dint of sheer geographical proximity. It is said to possess considerable offshore gas, but the politics there are so problematic that the stuff may not be logistically recoverable, especially with the rest of the Middle East in flames.

The current bailout deal with its confiscations and haircuts is the first time in the multi-year melodrama of the wobbling EU that big-shot EU officials had voiced the idea that they had any authority to snatch private property (money) of a member's citizens. So, instantly the notion reverberated around Europe that they could easily do the same thing in Italy, Spain, Portugal, Ireland, Greece - the usual broke suspects - if the EU was pushed too hard. And a few nervous nellies stateside began to wonder out loud when the US government might try some confiscational monkey business, such as the much-blogged-about notion of forcing retirees to put all their money in US Treasury instruments.

More to the point perhaps was the additional notion that the money was not there in the first place. Or anywhere. It was not snatchable. The banks were insolvent. They had pissed their meager reserves away on bad paper - like every other financial enterprise around the world - and the collateral was a joke. Depositors in Cyprus banks might indeed lose their money, but the EU would not collect any theoretical plunder either, so the whole bailout exercise was just another empty bluster. Even more to the point was the additional notion that no money in any bank in any sovereign EU member would be plunderable because there is no money in any of them, and the fiasco in Cyprus was leading to the recognition of the utter bankruptcy of the system. more
Nothing like Teutonic self-rightousness.  Nothing.  By beating up on the Cypriot bad guys, Ms. Merkel has probably ensured her re-election.

Bailout Insights: What Cyprus Tells Us about Germany's Character

A Commentary by Tyson Barker

The Cypriot government was willing to do anything to save its banking industry. Yet Berlin, driven by a deep-seated fear of tax havens, sought the opposite. The resulting deal may have driven a stake through the heart of the euro-zone's much ballyhooed banking union.

The architects of the euro had one primary strategic goal. It was, to play on Lord Ismay's famous quip about NATO, to keep the Americans out, the Germans in and the Mediterranean states down -- at least as far as monetary policy was concerned. The Cypriot bailout package, which Dutch Finance Minister and Euro Group chief Jeroen Dijsselbloem said should be a model for future rescue packages, certainly holds true to this dictum.

Cyprus will now have to find a new trade. With its banking sector halved, the country faces a difficult if not impossible challenge to re-establish its status as a financial oasis. The high-risk political economy that fueled the tiny island-nation since 1974 has ended. Iceland, facing a similar calamity in 2008, re-discovered fishing.

The deal with the European Union and the International Monetary Fund that emerged on Monday grants Cyprus a €10 billion ($13 billion) loan that will not be used for bank re-capitalizations. In return, Cyprus will wind down the state-owned Laiki Bank and shift its salvageable components (along with €9 billion of European Central Bank debt) to the Bank of Cyprus. Laiki's uninsured depositors and bondholders will be wiped out. Bank of Cyprus depositors will also be heavily hit, allowing the country's debt-to-GDP ratio to remain at a sustainable level that can be brought down to 100 percent by 2020, according to the IMF.

The story behind the deal played out for months in Berlin. The Cypriot government originally lodged its request for an aid package in June 2012. While then-Cypriot President Demetris Christofias delayed negotiating formal terms for an assistance package, German parliament -- primed by four previous debates on bailout packages involving the European Stability Mechanism (ESM) -- had fierce discussions on the issue.

'Cesspool of Profligacy'

Germans have long had a deep-seated antipathy to tax havens and have sought to correct the arbitrage in the financial system that gives rise to them. This intolerance has been a mainstay of the German approach to global governance for the last five years. Berlin's 2008 pursuit, via the purchase of stolen data, of uncollected taxes on accounts held at LGT Bank by some 600 prominent "Davos men", including former Deutsche Post CEO Klaus Zumwinkel, led to a diplomatic incident between Germany and Liechtenstein. In 2010 the German government pursued tax evaders in Switzerland with a similarly shadowy data acquisition. Germany joined France in 2009 to push for G-20 sanction mechanisms, and Berlin has used domestic laws to compel tax havens to adhere to rules set out by the OECD in its codex of uncooperative offshore banking centers.

For the Germans, the Cypriot saga played into political tropes about moral hazard and free-riding tax havens. One German public intellectual described Cyprus in the Financial Times as a "cesspool of profligacy and haven for tax-dodging Russian oligarchs." German media are providing detailed analyses of other tax havens to which their countrymen might be exposed. The daily Die Welt declared recently that the tax haven as an economic model has been "exhausted." Luxembourg, with a financial sector more than five times the size of its €44 billion GDP has come under particular scrutiny. With a financial sector twice the size of its GDP, the United Kingdon could also become a point of interest.

How did the inclusion of wealthy foreign depositors in the Cypriot bailout become such an issue for Germany? Politics and polls. Despite its international critics, the euro-zone crisis management of Chancellor Angela Merkel's government has been virtually unassailable at home. The chancellor's personal approval rating is 68 percent and that of her government, just six months before national elections, hinges on her measured approach to the currency crisis. Given the general Teutonic hostility to tax havens and indignation about using taxpayer money to aid Russian oligarchs, it was clear that Berlin would insist on putting some proportion of uninsured deposits towards Cypriot debt repayment. more

1 comment:

  1. Depositors in Cyprus banks might indeed lose their money, but the EU would not collect any theoretical plunder either, so the whole bailout exercise was just another empty bluster.

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