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| The Axe is in Position, Only the Timing of the Swing is in Question Posted: 26 Mar 2013 11:50 AM PDT It has been amusing listening to the hypocrisy from Brussels regarding the leverage in Cyprus. Jeroen Dijsselbloem, president of the eurogroup led the charge that Cyprus had an unsustainable problem with deposits over 700% of GDP. Here is a little perspective courtesy of the Financial Times. European Bank Assets as Multiple of GDP  Somehow we are supposed to believe that 7-1 ratio of deposits to GDP is a problem but the 22-1 ratio in Luxembourg is not. And what about the 4-1 ratios in France and the Netherlands? What sunk Cyprus now rather than later was Cyprus was dumb enough to be in Greek bonds. So why did Cyprus stay in Greek bonds so long? The answer is Cypiot banks were foolish enough to believe ECB president Jean Claude Trichet when he insisted there would be no haircuts on Greek bonds. Trichet Hails Success of Cyprus Those looking for an amusing flashback should consider this glowing speech by Jean-Claude Trichet on the successful entry of Cyprus into the euro area, in January of 2008. Today's euro celebrations are the result of the successful macroeconomic policies that the Cypriot authorities have pursued in recent years. Cyprus has made significant progress in both nominal and real convergence, owing to successful policies – namely, well-managed monetary and exchange rate policies combined with a range of structural reforms. ... The ECB and the Central Bank of Cyprus, together with the National Changeover Board, the European Commission and national and international authorities cooperated closely in many ways to prepare the introduction of the euro. ... It included public opinion polls, advertising and direct marketing. Over 900,000 copies of different publications were distributed by the Central Bank of Cyprus - this is more than one copy per Cypriot! ... As a result of these efforts, today we can celebrate a successful cash changeover. ... intimate cooperation between the members of the team, the national central banks of the Eurosystem, and the ECB is the key for the success of the single monetary policy in the euro area.Somehow, distributing over one pamphlet per Cypriot on the benefits of the euro was an insufficient formula for success. Shocking. Four years and two Greek bond restructurings later, Cyprus was ruined but did not realize it yet. The second Greek bond haircut did Cyprus in, but the axe was yet to fall. The ECB waited until the Cypriot election a month ago when their communist president was ousted by the pro-euro Nicos Anastasiades. The ECB then dropped a bomb on the new president. For those of you who think Cyprus is "one off" and this will never happen again, please let me point out a few recent things.
Timing the Axe on Spain and Italy Cypriot banks may be the first to suffer a forced bail-in but they will not be the last. Recall the "success" of Mario Draghi's LTRO program? Yes, it brought down yields on Italian and Spanish bonds, I believe temporarily. The LTRO program was also an open invite for German banks to dump Spanish and Italian bonds and for Spanish and Italian banks to snap them up. Was LTRO really a "success"? For who? The answer is Germany, not Spain or Italy. Economists hailed Draghi a genius. Yet, LTRO further concentrated bond risk. Spanish banks are now more leveraged to Spanish bonds and Italian banks more leveraged to Italian bonds. It was concentrated risk that brought down Cyprus. Groundwork Laid for Additional Forced Bail-Ins Groundwork for further forced bail-ins has been laid: A model is in place, regulations are in place, and German sentiment is in place. Spaniards are supposedly more wealthy than Germans, and the "men in black" demand an audience in May. Solidarity, be damned. It's every country for itself. Arguably, that is the way it should be, but that certainly wasn't the promise. It's too late now for Spain, Portugal, and Italy. The axe is in position. Only the timing of the swing is in question. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Wine Country Conference I am hosting an economic conference on April 5 in Sonoma, California. Proceeds go to the Les Turner ALS Foundation (Lou Gehrig's Disease). Please see My Wife Joanne Has Passed Away; Stop and Smell the Lilacs for my association with the disease. To learn about the economic conference with world-class speakers including John Hussman, Michael Pettis, Jim Chanos, John Mauldin, Mike "Mish" Shedlock, Chris Martenson with guest moderator Lauren Lyster and other Special Guests, please visit Wine Country Conference April 5, 2013 |
| EU Pushes Bail-In Regulations on All Deposits Above €100,000; Run on Banks Coming Up? Posted: 26 Mar 2013 10:01 AM PDT Cyprus was such a "success", EU to push for losses on big savers at failed banks. The European Parliament will demand that big savers take losses if their banks run into trouble, a senior lawmaker told Reuters, adding momentum to a policy unveiled as part of a Cypriot bailout.Step in Right Direction Such regulation is a step in the right direction actually. There should be no deposit guarantees at all, no bondholder guarantees, and people should have to pay attention to where they put their money. For a detailed explanation, please see Fraudulent Guarantees; Fictional Reserve Lending; Comparison of US to Cyprus; What About New Zealand? Here are the key ideas from the article Five Key Points
That said, note how bondholders and the ECB have been protected so far. Bondholders did not suffer losses on Irish bonds, and the ECB did not even take a hit on its Greek bonds. Cyprus bondholders were not protected, primarily because the big European banks were not involved so they had nothing to lose. Run on Banks Coming Up? Looking ahead, the implication is that no one should place more than €100,000 in any bank. So no one will, especially in questionable Southern European banks. Instead, expect capital flight to presumed "too big to fail" Northern European banks, and also expect people to park more money directly at the ECB, where it will be safe. Might such legislation then, spur a run on banks? Seems that way to me. My advice for European depositors is simple "Please don't wait until 2015 to find out." Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com |
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