The controlled demolition of Cyprus

By Adam B. Levine

Contributing writer for End the Lie

(Image credit: Images_of_Money/Flickr)

(Image credit: Images_of_Money/Flickr)

The Bank is closed.

The ATMs are all empty.

You heard it on the news but couldn’t believe it.   The internet is unreliable; surely it’s against the law for the federal government to just take money out of your bank account along with every other one in the state, right?

Note: be sure to read Adam’s previous article, “Financial crisis revealed and resolved in the world of Bitcoin” and “Ulterior motives behind the Copyright Alert System

Funny thing – it is illegal, at least it used to be.  But things are bad! The situation is serious, surely any rational person can see that, and the need for all to contribute.  And you are rational, aren’t you?

So you rushed down to your usual ATM, only to find the line stretching around the block.  You try the local branch and find there are armed men and police surrounding it.  A ray of hope!  The Police have heard and they’re going to help us get our money back!

Reality sets in: they’re guarding the bank from you.

Listen to Adam read the article below:

Things are bad all over, but if you bank in Cyprus chances are good this was part of your day yesterday.  As part of a 14 billion euro “bailout” package, the EU and IMF demanded a “wealth tax” that will be deducted directly from the bank accounts of any person, citizen or not, who has a bank account under Cyprus’s legal system.

For accounts larger than 100,000 euros the confiscation is 9.9%, for smaller it is 6.7%.

Editor’s note: the confiscation may actually be raised to 12.5% for larger accounts and lowered to 3% for smaller ones, according to the latest reports.

Confiscation is expected to raise 5.6 billion euros, which along with 1.5 billion euros from the IMF (US taxpayers contributed 64 billion USD last year) and another few billion from the ECB (European taxpayer backstopped), the total bailout winds up being entirely financed by taxation or direct confiscation.

We’ve all bought this thing if it goes through – which right now looks like a big question mark – so what are we buying?  Why is this happening now?

The Banks are out of money.  Again.  The president of Cyprus, currently searching for the votes to pass the confiscation into law wrote this letter to his constituents:

It is well known that the deep economic crisis and the state of emergency in which the country has found itself did not come about in the last fortnight since we have undertaken the administration of the country.

The state of emergency and critical nature of the times do not allow me, as they do not allow anyone, to embark on a blame game.

In the extraordinary meeting of the Eurogroup, we faced decisions that had already been taken and came across faits accomplis through which we were faced with the following dilemmas:

On Tuesday, March 19 we would either choose: the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis, which would put a definitive end to the uncertainty and restart our economy.

A possible choice of the catastrophic scenario option would have the following consequences:

1       On Tuesday, March 19, immediately after the holiday weekend, one of the two banks in crisis would cease to operate, since the European Central Bank, following the decision already taken, would terminate the provision of liquidity. The second bank would suspend its work, and neither could avoid collapse. Such a phenomenon would instantly lead 8.000 families to unemployment.

2       The State would be obliged to compensate depositors in response to the obligation regarding guaranteed deposits. The capital required in such a case would amount to about 30 billion euros, which the State would be unable to pay.

3       A proportionate amount corresponding to the deposits of thousands of depositors for deposits over 100.000 Euro, would be led to a vicious cycle of asset liquidation, and these depositors would suffer losses of over 60%.

4       Such an uncontrolled situation would push the whole banking system into collapse with all the attendant consequences.

5       Thousands of small and medium enterprises, and other businesses would be driven to bankruptcy due to their inability to trade.

As a result of the above, the service sector would be led to a complete collapse with a possible exit from the euro. That, in addition to the national weakening of Cyprus, would lead to devaluation of the currency by at least 40%.

The second choice was the controlled management of the crisis, through the decisions taken and which can be summarized as follows:

1       Ensuring the liquidity of the banks and the rescue of the banking system through their recapitalization.

2       Rescuing 8.000 jobs in the banking sector and thousands of others which would be lost as a corollary of not maintaining the operations of banks.

3       Total rescuing of deposits, with just the exchange of a small percentage of savings with shares of the two banks. Currently, these shares do not have their full value, but with the economic recovery they will repay most it not all of the amount that will be cut.

4       This option results in a drastic reduction of public debt, makes it manageable and sustainable and relieves future generations from the burden of repayment.

5       It saves provident and pension funds and avoids taking other tough measures such as wage and pension cuts that were put on the negotiations table.

6       It avoids further recession and the risk of the vicious circle of a second memorandum.

We are not aiming to gloss over the situation. The solution chosen may be painful, but it was the only one that would allow us to continue our lives without adventures. It’s a decision that leads to the historic and permanent rescue our economy. In the next few hours we will all have to take responsibility.

The situation is bad, no doubt about it, but how did we get here?  The world has been embroiled in a global financial crisis for more than five years, so how can something like the banking sector of little Cyprus (simple from a macro sense due to its small size when compared to any other EU economy), blow up over a holiday weekend with no advance notice?

It was, of course, known well in advance by participants that this would be necessary.   Maybe not the magnitude, maybe not the specific conditions, but the inevitability of this bailout is what makes its sudden-crisis nature so difficult to swallow.

Cyprus has been described as having an “outsized banking system,” which in this case (as with Iceland and Ireland) loosely translates to, “It was used as an off-shore investment and banking hub by the rest of the worlds mega-wealthy.”

But why now?

The admission is right there in the President’s statement.  Here it is again;

“…since the European Central Bank, following the decision already taken, would terminate the provision of liquidity.

This is happening because the ECB is arbitrarily pulling the plug.  Could this wait a month for a rational conversation to be had?  Of course!  The 14 billion euros is only required because this is an attempted “fix” after years of month-to-month support from the ECB.

To put it another way, the drug dealer wants his smallest customer to pay the bill for years of product right now or say hello to some cold turkey.

This is happening because the only way it will be tolerated is when it is presented as the sole alternative to losing it all. Rational is the last thing the affected citizens can be allowed to be.

Because by any rational standard, this isn’t a rescue at all, it’s a ransom call for the depositors’ money.  Eurozone politicians wring their hands, crying about the necessity of paying the extortion then turn back to the project at hand: finishing the assembly of their next list of demands out of words cut from magazines.

The banks in Cyprus are already dead, have been for some time now.  The initial financial crisis didn’t cause it – it was their support of the first Greek Bailout.  Good EU corporate citizens, they bought Greek government debt at face value even as the bottomless-pit nature of the bailouts became apparent.

When in subsequent bailouts those same bonds were heavily discounted, the good corporate citizens found themselves with a huge hole in their balance sheets.  Whose money were they investing?  Nearly all of it was depositor funds, and it’s gone.

And that’s the crux of it, the money just isn’t there and everybody knows it.

This quote, from the president’s letter above, shows what happens if the confiscation does not go forward:

“A proportionate amount corresponding to the deposits of thousands of depositors for deposits over 100.000 Euro, would be led to a vicious cycle of asset liquidation, and these depositors would suffer losses of over 60%...

….That, in addition to the national weakening of Cyprus, would lead to devaluation of the currency by at least 40%”

The whole bailout game is one of maintaining the illusion of solvency (actually having enough capital to conduct normal business) by confusing it with liquidity (having access to enough capital usually through borrowing to conduct normal business) while slowly and quietly writing down the obviously inflated ledger values of the “assets.”  Somebody has to pay the difference.

Does this sound familiar?

Despite being described by officials as “A One Time, Extraordinary Stability Levy” there really is nothing one time or extraordinary about it – the banking sector in virtually every major economy has been poisoned by balance sheets still loaded with bad assets balancing enormous, leveraged debts that can never be paid.

Bad assets cannot be sold under normal circumstances because although they are valued by the bank’s balance sheet at face value (what they paid), the market would not pay that price.

What is a price if not a measure of what you can sell a thing for?  In our current banking paradigm, these false valuations are only a tool for faking balance among the debts and maintaining that illusion of solvency.

The effort is to maintain the illusion that the money you deposited with the bank is still there, that it was even yours at all once you gave it to the bank.  The illusion that the bank is a safe place to put your money; that somehow they know what they’re doing, despite all the evidence we’ve seen these last few years to the contrary.

Things are bad in Cyprus, and looking to get worse before this is decided.  At the time of writing, the president has only 20 of the 29/55 votes required to make this legal, the vote was supposed to be held Sunday afternoon (UDT) but delayed until Monday over concerns it would fail.

The plan was to vote on Sunday, take the money on Monday and return the banking system to normal with full recapitalization (kindly provided by the bank’s customers) on Tuesday.

The new plan is to (hopefully) vote on Monday, extend the banking holiday through Tuesday, and return to normal towards the end of the week.

Things are moving fast, and the events of the next 72hrs are likely to be seen as a turning point (one way or the other) as we look back years from now.

If the law passes, Cyprus should stabilize but we’ll likely see bank runs in Spain, Italy, Greece, Portugal, and Ireland – everyone knows the rules are subject to change when things get bad, it’s common sense that sometimes you have to cut off the leg to save the patient.

Similarly, anyone paying attention for the last few years knows that the folks in Brussels and Berlin view those “PIIGS” as exactly that, gangrenous limbs taxing the whole body with their disease.

On the other hand, if the ECB overplayed their cards and the confiscation is defeated by Cypriot politicians rightly terrified of their constituents, we’ll likely still see bank runs because banking’s “4th wall” has been  broken – that implicit assumption that your money is safe in the bank has been proven false.

The government wants your money, they’re coming for it, and they’re happy to change the law to get what they want.

It’s important to keep in mind that Cyprus is tiny as a portion of the EU – with an estimated 2012 nominal GDP of about 24 billion, Cypriots contributes literally 0.00136% of the estimated 17 trillion combined Eurozone GDP

Is Europe’s financial webbing so fragile that even little Cyprus is systemically important? The 2% “sequester” in the US had politicians screaming fire-and-brimstone on every media outlet, yet we’re weeks into it and outside obviously politicized cuts the impact has been muted.

Perhaps this is the same from the ECB, and they want to stop financing more than they need to.

On the other hand, what if the Euro Monetary Union system really can’t handle the default and reckoning of 0.00136%?  That seems almost worse.

Right now the story is built of maybe – one thing however, is certain: now is an excellent time to be paid in Bitcoin.

Adam writes about new technology at Mind to Matter and curates The Minufacturist, You can contact Adam here.

Edited by End the Lie

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14 Responses to The controlled demolition of Cyprus

  1. kevorbi7 March 18, 2013 at 10:02 AM

    The word outrageous is not strong enought to utterly condemn this sick liitle policy to save the Bankers of the Satanic, undemocratic EU and their longed for desires of total control over the people without a vote for them.
    They knew this unbelievable attack on peoples savings was coming weeks ago, and so they waited very deliberately for this to atke palce during the Bank Holiday weekend when People couldn’t get their money out. Then they extend the holidat by another day and the debate and even have armed guards at bank machines to stop people withdrawing their money.
    Absolutely unbelievable and we rae flabbergasted.
    These money elites are evil men.

    Reply
    • Adam B. Levine March 18, 2013 at 10:20 AM

      As Jean-Claude Trichet, former head of the ECB once said
      “When the situation becomes serious, you must lie”

      Reply
  2. Nora March 18, 2013 at 2:24 PM

    The whole point of the private banking cartel is to transfer all risk for their greed and gambling onto the backs of taxpayers. I can’t recall a time when they robbed us so blatantly, however. Their very model is unsustainable, which means we are going to be robbed to pay for their losses as long as they can keep it rigged that way. Banks are always going to be subject to runs, because they lend out 300 times more than they should. They use deposits to make more loans, having used that model for hundreds of years, but when EVERYBODY withdraws their money at once, boom goes da bank. So they have cleaned us out to the point that we will no longer sign onto their bad behavior. Sink and cease to exist, you evil, too-big to shore-up anymore banks.

    Reply
    • Adam B. Levine March 18, 2013 at 4:35 PM

      Nora,
      That’s what we’re seeing here – The system eating itself, starting with the least important and moving up the list.

      This is the beginning of something big – It now looks like the scheme won’t pass into law at all, which has some big implications from a criminal perspective.

      The plan to grab the funds involved some things that are de-facto illegal, notably freezing the funds in private banks so you can steal some of it without the legal authority to do so. When governments do things that are illegal but undisguisable they need to change the laws afterward to retroactively make it OK.

      Thats what happened here, and now that it a) can’t be called a tax because it applies to so few people, or b) won’t be made legal

      Its a *big* mess, this story isn’t over by a longshot even within Cyprus, not even getting into the knock-on effects in the larger region

      Reply
  3. DDearborn March 19, 2013 at 2:57 AM

    Hmmm

    This is a criminal act. The fact that the EU (the leadership of which is NOT an elected body) orders this does not make it legal.

    In simple terms about a dozen years ago the Banking laws in the Western World were changed to allow banks to essentially gamble with depositors money. Naturally the banks did this. And the results were spectacular. A small group of very very very rich criminals got a lot lot lot richer. The problem was and still is they are getting richer by stealing other people’s money.

    Now the merry go round has stopped because these criminals have taken all the money and there is no more. The rub is of course that the banks now have to pay the depositors their money. And the banks don’t have have it because they a gave it all out to their crooked buddies.

    Now those very ver very rich criminals have stolen every penny they possibly could from the banks. The only money left to steal is what is left of the individual customers bank deposits. So the governments of the Western world which answer only to those same very very very rich criminals are trying to convince the depositors that it was really partly their fault for putting their money in the bank in the first place. And the government is therefore justified in taking a portion of their deposits to give to very very very rich criminals.

    Now once what remains of the individual depositors money has been given to the very very very rich criminals (it should be noted that the banks only have a tiny fraction of the total amount of their customers original deposits) then the banks will be allowed to close.

    Now remember it is all your fault for gambling with your money by putting in the bank in the first place.

    Reply
    • Adam B. Levine March 19, 2013 at 4:02 PM

      We actually have lots of laws on the books, the problem is they’re selectively enforced. What needs to happen is when someone breaks the law, they’re tried before a jury of their peers and then punished according to the law.

      Seems basic, but when you stop treating people fairly, the ones who can’t be punished break the law more and more, and the privileged group gets bigger.

      Reply
  4. Joe Dirt March 19, 2013 at 9:57 AM

    So the people of Europe let the communists take their weapons, That turned them into “subjects” Now they will let the communists take thier money. They should be getting weapons from the Russians and storming the government buildings and banks and strining the politicians and money changeers from lamp posts and trees and bridges. If they do not, they will loose more than just their money now.

    Reply
    • Adam B. Levine March 19, 2013 at 4:00 PM

      The people of europe just want to live in peace, the creep of pervasive government has come along under the guise of “If we don’t all band together, there will be another war”

      I think by the time this is through people will wish it had been a war.

      Reply
  5. Aal March 19, 2013 at 11:57 AM

    its very simple;
    Big fish eats small fish,
    By joining to EU you think you will grab the rich countries money?
    Don’t be fool, here is their reply…..

    Reply
    • Adam B. Levine March 19, 2013 at 3:58 PM

      You’re right there; The national governments have almost no power in the EU as it currently functions

      The president of Cyprus repeatedly said they arrived to find the decision already made, and they were merely left with the choice between the bad and the catastrophic.

      It’s been the same in nearly every election in recent years won by reformer parties, they get in and suddenly the promises are forgotten because “we just didn’t know how bad it was, there is no option”

      Reply
  6. Charles Ponzi March 19, 2013 at 12:13 PM

    Nice how you tack on the bitcoin ponzi to the the end of your story to get some fish suckered in to the game and drive up the price of your bitcoins….

    and after such a good article, what a disservice to yourself.

    and before yoi say its not a ponzi it is, the early adopters got bitcoins for nothing and are now selling these lines of numbers for 47 dollars each, classsic ponzi dressed up in p2p, encryption ect

    Reply
    • Adam B. Levine March 19, 2013 at 1:15 PM

      As much as I’d like to think I have some effect on the price of Bitcoin, that doesn’t really make sense. I mentioned Bitcoin because after doing a article on it last week for EndTheLie.com it seems like the only currency you can transact in right now that *does not* have the sovereign risk element (besides gold or silver, which despite my efforts is very ackward to transact in even person to person)

      I’m glad you liked the article, part 2 is should be up by tomorrow.

      Reply
  7. Martin N March 21, 2013 at 3:41 PM

    God is taking his 10% from those who robbed him… one way or the other.

    Reply

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