The controlled demolition of Cyprus
By Adam B. Levine
Contributing writer for End the Lie
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.
Edited by End the Lie
Did I forget anything or miss any errors? Would you like to make me aware of a story or subject to cover? Or perhaps you want to bring your writing to a wider audience? Feel free to contact me at [email protected] with your concerns, tips, questions, original writings, insults or just about anything that may strike your fancy.
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