What the government seizure of deposits in Cyprus really means for the US and Europe

Rick Moran
The blogger who calls himself Tyler Durden at Zerohedge:

Today, lots of people woke up in shock and horror to what happened in Cyprus: a forced capital reallocation mandated by political elites under the guise of an "equity investment" in insolvent banks, which is really code for a "coercive, mandatory wealth tax." If less concerned about political correctness, one could say that what just happened was daylight robbery from savers to banks and the status quo. These same people may be even more shocked to learn that today's Cypriot "resolution" is merely the first of many such coercive interventions into personal wealth, first in Europe, and then everywhere else.

For the benefit of those people, we wish to point them to our article from September 2011, "The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis", which predicted and explained all of this and much more. What else did the September BCG study conclude? Simply that such mandatory, coercive wealth tax is merely the beginning for a world in which there was some $21 trillion in excess debt as of 2009, a number which has since ballooned to over $30 trillion. And with inflation woefully late in appearing and "inflating away" said debt overhang, Europe first is finally moving to Plan B, and is using Cyrprus as its Guniea Pig.

For those who missed it the first time, here it is again. Somehow we think many more people will listen this time around:

Restructuring the debt overhang in the euro zone would require financing and would be a daunting task. In order to finance controlled restructuring, politicians could well conclude that it was necessary to tax the existing wealth of the private sector. Many politicians would see taxing financial assets as the fairest way of resolving the problem. Taxing existing financial assets would acknowledge one fact: these investments are not as valuable as their owners think, as the debtors (governments, households, and corporations) will be unable to meet their commitments. Exhibit 3 shows the one-time tax on financial assets required to provide the necessary funds for an orderly restructuring. 

Here's an idea of how much of our deposits would be needed to restructure our debt:

For most countries, a haircut of 11 to 30 percent would be sufficient to cover the costs of an orderly debt restructuring. Only in Greece, Spain, and Portugal would the burden for the private sector be significantly higher; in Ireland, it would be too high because the financial assets of the Irish people are smaller than the required adjustment of debt levels. This underscores the dimension of the Irish real estate and debt bubble.

Cyprus is reeling from a bank crisis caused, in part, by massive deposits of Russian oligarchs keen to take advantage of the favorable tax system:

Russian companies and individuals have $31 billion of deposits in Cyprus, according to Moody's Investors Services. A double-tax avoidance treaty and low tax rates have made Cyprus the conduit of choice for Russians moving money into and out of their country. Including loans to companies registered in Cyprus, Russia's exposure is about $60 billion, Moody's estimates.

Cyprus President Nicos Anastasiades will try to persuade lawmakers Monday to back the plan to impose losses on the island nation's depositors as part of a 10 billion-euro (US$13 billion) bailout aimed at preventing a financial collapse and a possible departure from the euro area.

The one-time levy, designed to raise 5.8 billion euros, means a smaller bailout for the east Mediterranean island nation than the 17.5 billion euros envisaged at one point. Under the EU plan, Cyprus will impose a levy of 6.75% on deposits of less than 100,000 euros and 9.9% for 100,000 euros or more. Cyprus is seeking to soften the impact, Antenna TV reported.

For the first time, a country has reneged on deposit insurance. They may claim it's only a one-time thing, but who can believe them? And what does it mean for citizens in Greece, Italy, Spain, and Portugal who may need bailouts from the EU? Would it not be prudent to get your money out of those country's banking systems before their governments decide to solve their debt problem by giving you a 10% haircut?

The fear that grips Europe today is that government has crossed a line and that everybody's money is at risk. What that does to the bond markets as well as the possibility of bank runs is unknown, but some experts are predicting catastrophe:

Tim Duy:

The bigger question is what does this mean for the European financial system as a whole? Will depositors across the Eurozone view Cyprus as a unique situation? Or will Greek citizens come to believe that the next tranche of bailout funds might come with a new conditions to shore up government finances? Will taxes on deposits be an element of any future bailouts? If so, Italian and Spanish depositors might come to view their mattresses as safer than the bank.

Perhaps expectations of a broader bank run are premature. Early reports from Spain claim that no such run is in the making (of course, what else would they say?). But I suspect this is still a game-changing event, sure to make the financial system more unstable by aggravating the negative feedback loop that surrounds financial crises. What else could be the case when you remove a basic safeguard against panic in the banking system?

Late word has it that the Cypriot government is looking to exempt deposits of under 20,000 euros. But it may be too late. Bond markets on the continent are jittery but not in freefall - yet.

Europe may be taking a wait and see attitude toward the bank crisis in Cyprus. But today was a bank holiday in that country and when the banks open tomorrow, we'll see if the government has been able to restore a little trust, or whether we are witness to a modern day financial meltdown.



The blogger who calls himself Tyler Durden at Zerohedge:

Today, lots of people woke up in shock and horror to what happened in Cyprus: a forced capital reallocation mandated by political elites under the guise of an "equity investment" in insolvent banks, which is really code for a "coercive, mandatory wealth tax." If less concerned about political correctness, one could say that what just happened was daylight robbery from savers to banks and the status quo. These same people may be even more shocked to learn that today's Cypriot "resolution" is merely the first of many such coercive interventions into personal wealth, first in Europe, and then everywhere else.

For the benefit of those people, we wish to point them to our article from September 2011, "The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis", which predicted and explained all of this and much more. What else did the September BCG study conclude? Simply that such mandatory, coercive wealth tax is merely the beginning for a world in which there was some $21 trillion in excess debt as of 2009, a number which has since ballooned to over $30 trillion. And with inflation woefully late in appearing and "inflating away" said debt overhang, Europe first is finally moving to Plan B, and is using Cyrprus as its Guniea Pig.

For those who missed it the first time, here it is again. Somehow we think many more people will listen this time around:

Restructuring the debt overhang in the euro zone would require financing and would be a daunting task. In order to finance controlled restructuring, politicians could well conclude that it was necessary to tax the existing wealth of the private sector. Many politicians would see taxing financial assets as the fairest way of resolving the problem. Taxing existing financial assets would acknowledge one fact: these investments are not as valuable as their owners think, as the debtors (governments, households, and corporations) will be unable to meet their commitments. Exhibit 3 shows the one-time tax on financial assets required to provide the necessary funds for an orderly restructuring. 

Here's an idea of how much of our deposits would be needed to restructure our debt:

For most countries, a haircut of 11 to 30 percent would be sufficient to cover the costs of an orderly debt restructuring. Only in Greece, Spain, and Portugal would the burden for the private sector be significantly higher; in Ireland, it would be too high because the financial assets of the Irish people are smaller than the required adjustment of debt levels. This underscores the dimension of the Irish real estate and debt bubble.

Cyprus is reeling from a bank crisis caused, in part, by massive deposits of Russian oligarchs keen to take advantage of the favorable tax system:

Russian companies and individuals have $31 billion of deposits in Cyprus, according to Moody's Investors Services. A double-tax avoidance treaty and low tax rates have made Cyprus the conduit of choice for Russians moving money into and out of their country. Including loans to companies registered in Cyprus, Russia's exposure is about $60 billion, Moody's estimates.

Cyprus President Nicos Anastasiades will try to persuade lawmakers Monday to back the plan to impose losses on the island nation's depositors as part of a 10 billion-euro (US$13 billion) bailout aimed at preventing a financial collapse and a possible departure from the euro area.

The one-time levy, designed to raise 5.8 billion euros, means a smaller bailout for the east Mediterranean island nation than the 17.5 billion euros envisaged at one point. Under the EU plan, Cyprus will impose a levy of 6.75% on deposits of less than 100,000 euros and 9.9% for 100,000 euros or more. Cyprus is seeking to soften the impact, Antenna TV reported.

For the first time, a country has reneged on deposit insurance. They may claim it's only a one-time thing, but who can believe them? And what does it mean for citizens in Greece, Italy, Spain, and Portugal who may need bailouts from the EU? Would it not be prudent to get your money out of those country's banking systems before their governments decide to solve their debt problem by giving you a 10% haircut?

The fear that grips Europe today is that government has crossed a line and that everybody's money is at risk. What that does to the bond markets as well as the possibility of bank runs is unknown, but some experts are predicting catastrophe:

Tim Duy:

The bigger question is what does this mean for the European financial system as a whole? Will depositors across the Eurozone view Cyprus as a unique situation? Or will Greek citizens come to believe that the next tranche of bailout funds might come with a new conditions to shore up government finances? Will taxes on deposits be an element of any future bailouts? If so, Italian and Spanish depositors might come to view their mattresses as safer than the bank.

Perhaps expectations of a broader bank run are premature. Early reports from Spain claim that no such run is in the making (of course, what else would they say?). But I suspect this is still a game-changing event, sure to make the financial system more unstable by aggravating the negative feedback loop that surrounds financial crises. What else could be the case when you remove a basic safeguard against panic in the banking system?

Late word has it that the Cypriot government is looking to exempt deposits of under 20,000 euros. But it may be too late. Bond markets on the continent are jittery but not in freefall - yet.

Europe may be taking a wait and see attitude toward the bank crisis in Cyprus. But today was a bank holiday in that country and when the banks open tomorrow, we'll see if the government has been able to restore a little trust, or whether we are witness to a modern day financial meltdown.