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Ollie Rehn – Depositors To Take Hit If An EU Bank Fails Under Planned Law

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Hey, here’s a great idea, let’s make the Cyprus solution official. Ollie Rehn has disclosed that the EU plans to make it official in law for governments to steal your money when banks go bankrupt. Looks like the Dutch Finance Minister wasn’t alone in thinking this was a great idea after all.

(Reuters) – Big bank depositors could take a hit under planned European Union law if a bank fails, the EU’s economic affairs chief Olli Rehn said on Saturday, but noted that Cyprus’s bailout model was exceptional.

“Cyprus was a special case … but the upcoming directive assumes that investor and depositor liability will be carried out in case of a bank restructuring or a wind-down,” Rehn, the European Economic and Monetary Affairs Commissioner, said in a TV interview with Finland’s national broadcaster YLE.

“But there is a very clear hierarchy, at first the shareholders, then possibly the unprotected investments and deposits. However, the limit of 84,890 pounds is sacred, deposits smaller than that are always safe.”

The European Commission is currently drafting a directive on bank safety which would incorporate the issue of investor liability in member states’ legislation.

To secure a 10 billion euro EU/IMF bailout last month, Cyprus forced heavy losses on wealthier depositors. Initially it had also pledged to introduce a levy on deposits of less than 84,890 pounds – even though they are supposedly protected by state guarantees – before reneging in the face of widespread protests.

Source: Reuters

 

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Looks Like European Banks Were Given the Nod Over A Year Before Cyprus Went Bust

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Core European banks made a lot of money leaving money on deposit in Cyprus. While locked in for a year a nice profit could be made at 4.9%. Bit of coincidence then that this money made it out in time suggesting that most of them knew over a year in advance of when the collapse would come. Charles Hugh Smith takes a look at what led up to the Cyprus Banking collapse.

Longtime correspondent David P. (proprietor of Market Daily Briefing) charted some very interesting data that enables us to follow the money–specifically, Eurozone money in the “foreign deposit sources” (deposits in Cyprus banks that originated from outside Cyprus).

It appears the key preliminary step of the Real Cyprus Template is that money-center banks in Germany and other “core” Eurozone nations pull their money out of the soon-to-implode “periphery” nation’s banks before the banking crisis is announced.

As David observed, “I think this explains a lot about something that has always puzzled me: why the delay in resolving Cyprus after the Greek haircut?”

Here is David’s explanation and two key charts:

“The Cyprus situation had been simmering for at least a year when in March of 2013 it finally broke; Cyprus had a week to take care of its banking situation or else face a cutoff of access to the eurosystem by the ECB. This brought matters to a head; the Cyprus Bail-In was finally settled upon, where uninsured depositors in the two largest banks in Cyprus took major haircuts, and must wait for return of their money until the assets of the banks are run down.

The banking problems in Cyprus had their roots in the Greek Sovereign Default, and were known by the general public for about a year prior to the recent default; a New York Times article dated April 11, 2012 lays out the particulars.

Looking at Cyprus bank security assets in data provided by the ECB, the problems were visible earlier – right after the first Greek haircut in mid 2011, and a second haircut finalized in early 2012. This was a 11 billion euro hole in a system with 100 billion in assets total, centered upon two banks that held half the deposits in the system.

Greek Crisis Timeline

Date Event
April 2010 Greek Sovereign Bonds Declared Junk
May 2010 110 Euro bailout, no haircut
July 2011 “Private Sector Involvement” decided at EU Summit
Oct 2011 130 Euro bailout, 53% face value haircut
Mar 2012 Haircuts take effect; actual haircut 85%

You can see the effects of the increasing haircuts in the chart below. The chart lists all types of bonds owned by all the banks on Cyprus. The red line is the important one. It shows “all off-island Eurozone Government Bonds.”

Put more simply, that red line represents Greek Government debt owned by the two banks on Cyprus that failed. It went from a 12 billion euro value in mid 2011, down to a 1 billion euro value in early 2012. That’s an 11 billion haircut – all due to the Greek Default.

So why did the eurozone wait so long to resolve the problematic Cypriot banks with their 11 billion euro hole that was clearly serious in the middle of 2011, and becoming blindingly obvious by 2012? Therein lies a story – it has to do with banking, and how banks make money. The explanation is a bit complicated, but bear with me.

Bank deposits are grouped into 3 primary categories: deposits from households, from corporations, and from other banks. Households and corporations typically have a long standing relationship with their bank; they only move their deposits slowly, and most of this sort of depositor uses time deposits to maximize their interest income. Deposits from other banks are what we might term “hot money.” They arrive quickly, and depart just as fast. But why would a bank deposit money with another bank? The simple explanation is: interest rate spreads.

Let’s imagine you ran a German bank, and you paid very low rates to your overnight depositors. You have a great deal of really cheap money on your hands. What are your options to make money? You can either loan money to German homeowners one by one, but there are only so many German homeowners, and they only want to borrow so much money. So after loaning all you can loan, you search the world to try and find another bank that is advertising high rates for deposit money, and you stumble on the banks in Cyprus.

Rate Deposit Type & Location
0.55% German Overnight Deposit
1.1% Cyprus Overnight Deposit
2.8% Cyprus Savings Deposit (1 year)
4.9% Cyprus Time Deposit (1 year)

Now then, if the Bank of Cyprus doesn’t go under, this is free money. How much are we talking about? Subtract the rate for the overnight deposit in Germany from the time deposit on Cyprus (4.9 – 0.55) then multiply by 60 billion euros. That ends up being 2.61 billion euros in profit. Per year! Cost? One guy at a computer hitting the “transfer” button on his keyboard in Dusseldorf!

This sure beats trying to loan money to a bunch of German homeowners one by one! But the key to this free money is, your bank must be able to get its money out of Cyprus prior to any trouble.

And the barrier to getting the bank’s money back is those Time Deposits (the deposits paying the most interest) are stuck in Cyprus for a year. So in order to avoid loss, you have to see into the future one year and stop rolling your bank’s time deposits one year before those Cyprus banks go under. Otherwise you will have collected that 4.9%, then suffered a 30-60% uninsured depositor haircut. And a haircut is not a good way to ensure your banker bonus for the year.

So with this hypothetical strategy in mind and being mindful of the dangers of default and the timeline of when things occurred, take a look at the following chart of “foreign deposit sources” (deposits in Cyprus banks that originated from outside Cyprus) and see for yourself how well each foreign participant did in anticipating the eventual banking system crisis.

 

  • Black: Eurozone [German & French] Banks
  • Red: Cyprus people and businesses
  • Blue: Cyprus Banks
  • Green: Banks outside the Eurozone
  • Orange: Russian “Mobsters” & Brits

Looking at the timeline, even as late as the end of 2011, when it was clear Greece would default and the banking regulator had to know the banks in Cyprus were doomed, the amount of Eurozone-bank derived deposits in Cyprus was over 20 billion euros, a good portion of which would be subject to massive losses if the Cyprus Template were to be applied at that moment.

[Note that 20 billion euros was – at that time – the same size as the “Russian Mobster” Money.]

But at that moment, as a result of the “collecting the spread” strategy, some big chunk of that money were likely in time deposits, unable to be withdrawn. That money couldn’t flee, not just yet.

But as time passed, those Eurozone bank deposits were slowly reduced down to 10 billion euros, a reduction of 50%. Presumably, as the time deposits expired, the money was brought back to the fatherland.

And then suddenly the President of Cyprus was informed he had 1 week to solve the banking situation that had been pending for more than a year.

In looking at the movement of capital prior to the default, we can give a grade to each participant, as a result of their apparent ability to assess the the danger to their deposits.

The clear winner: Eurozone Banks. Those guys were geniuses. They were the only participant to seriously reduce holdings prior to the default.

Participant Grade
Eurozone [German & French] Banks B+/A-: almost perfect
Cyprus People & Businesses F: completely unaware
Cyprus Banks C-: slightly more aware
Banks Outside Eurozone F: completely unaware
Russian Mobsters F: completely unaware

So it is expected (and a bit sad) that households and businesses don’t leave their banks readily, so its not surprising they stayed on board right up until the end.

What is fascinating to me is that the banks that were NOT in the eurozone clearly had no idea what was coming, and the banks actually ON Cyprus only had an inkling, and that only at the last minute. Given both the timing and the form of the Cyprus bank resolution was in the hands of the ECB, as well as French and German politicians, is this astounding ability of the Eurozone banks to avoid losses truly a surprise?

One question that might be asked is, if the Eurozone banks knew what was going to happen, why not withdraw all their money from the banks on Cyprus?

First, only half the banking deposits on Cyprus were involved in the bail-in. Perhaps the 10 billion euros in remaining Cyprus-EZ bank deposits are in other healthy Cyprus banks. Another explanation is that only a subset of the eurozone banks were well-connected enough to receive advance information.

One last point. Since now we understand how perfectly the well-connected eurozone banking establishment identifies issues in member nation’s banks, and how adept it is at avoiding uninsured depositor haircuts, we might find it useful to watch deposit flows of these Eurozone banks going forward.

They might well provide us insight as to where the next set of banking issues might arise, and perhaps more importantly, what the timing of these issues.”

Thank you, David, for sharing your finding with us. We can now see there are two Cyprus Templates:

1. The public-relations/propaganda model

2. The real one, that enables “core” eurozone banks to pull their deposits out of periphery banks before the deposit expropriation and capital controls kick in.

Why are we not surprised the entire charade and expropriation is rigged to benefit the core banks? For more on the core/periphery structure of the Eurozone, please read The E.U., Neofeudalism and the Neocolonial-Financialization Model (May 24, 2012)

To fully understand the Eurozone’s financial-debt crisis, we must dig through the artifice, obfuscation and propaganda to the real dynamics of Europe’s “new feudalism,” the Neocolonial-Financialization Model.

Source: OfTwoMinds

Ways Around Cyprus Capital Controls

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It looks like the Cypriot banks are going to be in a lot worse shape when they open than first thought. Cypriot capital controls don’t apply to branches in foreign countries and this is being used by people to withdraw deposits from the struggling banks. This will necessitate a much bigger haircut when the dust settles.

Then this morning the 20%-40% seizure of the depositor’s money, which was the range that had been discussed, was now admitted by the Finance Minister in Cyprus today to be more like an 80% expropriation and a timeline to get any money back of six to eight years. This is, I suspect, because while the banks were closed in Cyprus that they were still open in Greece and Britain so that certain monies crept out during the night, and probably big money, so that the banks in Cyprus are in far worse condition than previously thought or admitted.
 
Then, of course, because the EU Finance Ministers were not going to meet again and re-open this fiasco; more money had to be seized from the depositors. Now the Dutch Finance Minister chaired the meeting on Cyprus. He was the one that directed the entire affair on Cyprus and the template that he revealed was fist denied then admitted, then denied by the ECB and confusion reigned supreme. Now here comes the first pig; the representatives of the Eurozone finance ministries released a document this morning stating that Cyprus was not the template for future bail-outs. I suppose it was initially written in German and translated into English however they must have forgotten to translate it into Dutch. This is because when the Dutch Finance Minister was asked about this document, and he is the Chairman of the Finance Minister group remember; he said he knew nothing about the document.

…………

the banks of Cyprus just re-opened in Greece this morning. I don’t know, the flights from Moscow to Athens must be jammed. There are no capital controls in Greece so you can take out what money you like while the banks in Cyprus are still closed and now subject to capital controls. “Sense” and her brethren “logical,” “rational” and “coherent” must have all departed from Europe in a huff. No one could make this up; no one.

Source: ZeroHedge

Cyrpus Deposit Grab Solution To Be Adopted In New Zealand

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It appears that the solution to the Cyprus banking crisis is appealing to TPTB. A few days ago Hanbelsblatt reported Commerzbank CEO Joerg Kraemer as saying the Italians should pay for bank robbery bailouts through their savings.

translationed version

net financial assets of the Italians therefore amounts to 173 percent of gross domestic product (GDP). This was significantly more than the net financial assets of the Germans, which corresponds to 124 percent of GDP, said Kramer Handelsblatt Online. “So it would make sense, in Italy a one-time property tax levy,” suggested the Bank economist. “A tax rate of 15 percent on financial assets would probably be enough to push the Italian government debt to below the critical level of 100 percent of gross domestic product.”

Now it appears that the New Zealand government are also liking this idea of resolving banking debts by getting its citizens paying for it via their deposits as reported in the Green Party press release.

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, the Green Party said today.

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.

“Bill English is proposing a Cyprus-style solution for managing bank failure here in New Zealand – a solution that will see small depositors lose some of their savings to fund big bank bailouts,” said Green Party Co-leader Dr Russel Norman.

“The Reserve Bank is in the final stages of implementing a system of managing bank failure called Open Bank Resolution. The scheme will put all bank depositors on the hook for bailing out their bank.

“Depositors will overnight have their savings shaved by the amount needed to keep the bank afloat.

“While the details are still to be finalised, nearly all depositors will see their savings reduced by the same proportions.

“Bill English is wrong to assume everyday people are able to judge the soundness of their bank. Not even sophisticated investors like Merrill Lynch saw the global financial crisis coming.

“If he insists on pushing through this unfair scheme, small depositors can be protected ahead of time with a notified savings threshold below which their savings will be safe from any interference.”

Dr Norman questioned the Government’s insistence on pursuing Open Bank Resolution when virtually no other OECD country uses it.

“Open Bank Resolution is unprecedented in the world. Most OECD countries run deposit insurance schemes which protect people’s deposits up to a maximum ranging from $100,000 – $250,000,” Dr Norman said.

“OBR is not in line with Australia, which protects bank deposits up to $250,000.

“A deposit insurance scheme is a much simpler, well-tested alternative to Open Bank Resolution. It rewards safe banks with lower premiums and limits the cost to taxpayers of a bank failure.

“Deposit insurance will, however, require the Reserve Bank to oversee and regulate our banks more closely – a measure which is ultimately the best protection against bank failure.”

Even in the US there has been noise made in that line too last month as reported by Bloomberg. The U.S. Consumer Financial Protection Bureau is looking at gaining more power over retirement savings. After all there is over $19 trillion that can be tapped in an emergency.

The U.S. Consumer Financial Protection Bureau is weighing whether it should take on a role in helping Americans manage the $19.4 trillion they have put into retirement savings, a move that would be the agency’s first foray into consumer investments.

“That’s one of the things we’ve been exploring and are interested in in terms of whether and what authority we have,” bureau director Richard Cordray said in an interview. He didn’t provide additional details.

 

Source: Green Party (New Zealand)Handelsblatt, Bloomberg,   New Zealand Government’s Open Bank Resolution

Cyprus Should Default, Devalue, And Decouple

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eussrno1Eventually someone is going to make the first move and leave the ill fated eurozone. Daniel Hannon UK MEP gives wise advise to Cyprus on how to resolve the crisis :-

“but if I were a Cypriot member of Parliament, I would vote now to go back to an independent currency as the least painful of the various difficult options.” Hannan then makes a fantastic point, “in the rest of Europe, we have measured the cost of monetary union in unemployment, deflation, poverty, and emigration; in Cyprus that wasn’t enough, they have had to gouge the savers directly,” and so the Cypriots who claim to want to stay in the Euro can now quantify the cost of that shackle, as he reminds us that , “you don’t have to be a Russian oligarch to have EUR 100,000 in the bank,” as he concludes, “the really interesting question is – who’s next?”

Source: ZeroHedge

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