March 25, 2013

Russian Depositors use loophole to take billions out of Cyprus

Another very disturbing piece of news has emerged today, it appears that large amounts of money in the order of billions have been withdrawn from Laiki and Bank of Cyprus during the one week blockade; should this be confirmed the hole in the two banks could be much larger than thought; which in exchange would guarantee a total wipe out of the two banks' deposits.
If the purpose of all this was to punish dirty Russian capitals in Cyprus well it seems it failed miserably.

From FAZ, Google translation edited:
Despite the closed banks and a lock for payments in the past week, more money flowed out of Cyprus than in previous weeks, Frankfurter experts report.

Prior to the escalation of the crisis in Cyprus accruing on the payment system targetting liabilities of Cypriot central bank to the European Central Bank (ECB) had increased daily at approximately 100 to 200 million euros. In the days after Parliament rejection of the stabilization program, the daily risk has risen to more than double.
Just in the last week so cash assets have been withdrawn from Cyprus in the billions, regardless of the fact the Cypriot central bank had issued a lock.

Cyprus Central Bank Board nonetheless left exemptions from capital controls
such as transfers for humanitarian aid reasons and "special payments", which are not defined in detail.
The unusually high outflows from Cyprus in recent days indicates that the central bank of Nicosia has interpreted this capital control rather liberally.

From Reuters:
While ordinary Cypriots queued at ATM machines to withdraw a few hundred euros as credit card transactions stopped, other depositors used an array of techniques to access their money.

No one knows exactly how much money has left Cyprus' banks, or where it has gone. The two banks at the centre of the crisis - Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus - have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks' largest depositors.

Euro Template to Confiscate European Bank Accounts

As reported in my previous post, signals are there already that Cyprus will not be an isolated case and that similar confiscations will be applied to other nations in the Eurozone.
Of course having the luxury of the Eurogroup leader to agree with you and stating it publicly the day after is something unexpected.
Mr. Dijsselbloem, Leader of the Eurogroup and Dutch Finance Minister stated that Cyprus will become the new template for resolving Eurozone banking problems.
Markets did not appreciate the candour of Mr. Dijsselbloem (apparently it is pronounced Diesel-BOOM), his explosive remark did not take long to bring down the markets and put an end to the insane optimism following the Cyprus bailout deal.


Talking with Reuters, on the resolution model just put in place in Cyprus:
A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors, the head of the region's finance ministers said.

"What we've done last night is what I call pushing back the risks," Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times hours after the Cyprus deal was struck.

"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'. If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders," he said.

After 12 hours of talks with the EU and IMF, Cyprus agreed to shut down its second largest bank, with insured deposits - those below 100,000 euros - moved to the Bank of Cyprus, the country's largest lender. Uninsured deposits, those accounts with more than 100,000 euros, face losses of 4.2 billion euros.

Uninsured depositors in the Bank of Cyprus will have their accounts frozen while the bank is restructured and recapitalised. Any capital that is needed to strengthen the bank will be drawn from accounts above 100,000 euros.

The agreement is what is known as a "bail-in", with shareholders and bondholders in banks forced to bear the costs of the restructuring first, followed by uninsured depositors. Under EU rules, deposits up to 100,000 euros are guaranteed.

Translation:

It is now officially dangerous to have a big bank account in Europe. In other words being an Uninsured Depositor.


After the not so amiable reaction of the financial markets Mr. Dijsselbloem (Diesel BOOM) has clarified his remarks on the Eurogroup's website:
Statement by the Eurogroup President on Cyprus

25/03/2013 - Statement

Cyprus is a specific case with exceptional challenges which required the bail-in measures we have agreed upon yesterday.

Macro-economic adjustment programmes are tailor-made to the situation of the country concerned and no models or templates are used.
I'm sure now all the Ininsured Depositors feel very reassured, Thank you sir!


Post-Rescue Cyprus Depression

So the rescue of Cypriot troubled banks has been finally approved after 1 week of absolute lunacy in Cyprus, for those not aware yet a quick recap on the key points approved yesterday night:

Key points of the deal:
Laiki bank will be fully resolved – it will be split into a good bank and bad bank. The good bank will merge with the Bank of Cyprus (which will also take on Laiki’s circa €8bn Emergency Liquidity Assistance – a last-resort funding system outside the usual ECB operations). The bad bank will be wound down over time with all uninsured depositors (over €100,000) taking significant losses (no percentage yet but some could lose all their money above the threshold).
The Bank of Cyprus will be recapitalised using a debt to equity swap and the transfer of assets from Laiki. Uninsured depositors will take large hits in this process – again no percentage but reports suggest up to 40%.
These actions will be taken using the new bank restructuring plan passed in the Cypriot Parliament on Friday. Crucially, no further vote will be needed in the Cypriot parliament since there is no direct deposit levy.
The banks will not receive any of the €10bn bailout money, the entire recapitalisation will be done using the tools outlined above.
Significant capital controls are likely to be in place when banks reopen, creating a risk of Cypriot euros being “localised”.
Further tax increases may be included in the detailed plan to be drawn up between the two sides.

  and as a consequence an entire country will be sliding very fast in a Great Depression:


From SocGen:
Depression for Cyprus: Our Cypriot GDP forecast entails a drop of just over 20% in real GDP by 2017. This forecast had already factored in much what was agreed, but did not account for the additional uncertainty shock generated by the past week’s appalling political mess. Risks are clearly on the downside and Cyprus will in all likelihood require additional financial assistance further down the road. Accounting for less than 0.3% of euro area GDP, any downward revision to Cyprus will be barely visible on the euro area aggregate.

Cyprus’ position as a financial centre is over. There are few other alternatives for growth. One option that remains is tourism, but with a significantly overvalued currency it is not clear to what extent Cyprus can take advantage of this.
The capital controls will severely hamper liquidity in the economy, while it will be very difficult for the small island to trade with the rest of the world (it is far from self-sufficient, importing almost everything). The collapse in GDP could be anywhere between 5% and 10% this year, depending on how long capital controls are imposed and the resulting collapse in tax revenue could make the government’s position worse. There is a strong chance Cyprus could become a zombie economy – reliant on eurozone and ECB funding to function, possibly requiring further bailouts.

Capital controls are severe and could de facto lead to Cyprus being seen as out of the euro. Ultimately, money is no longer fungible between Cyprus and the rest of the Eurozone and, at this point in time, it’s hard to argue that a Euro in Cyprus is worth the same as a Euro elsewhere. The real problem though may not be imposing the controls but removing them – Iceland still has capital controls in place, five years after it installed them (despite having the advantage of a devalued currency).

The €10bn bailout will push Cypriot debt to GDP to 140% - if Cypriot GDP falls by just 5% this year, that rises to 148%.

In the meanwhile the bailout deal is already rising anti-Euro sentiments all over the country,  one of the most influential voices speaking against the Euro and the EU is the Orthodox Church Leader Archbishop Chrysostomos II who commented on TV that "with the brains in Brussels... the Euro can't last," certainly the fact that the Orthodox Church of Cyprus lost over 100 million euro holdings in the Bank of Cyprus must have contributed to his anger toward the EU and the Cyprus politicians: "those that brought the place into this mess, should sit on the stool. " (blaming the outgoing government, Ministers of Finance, the Central Bank, and the Executive Directors of Banks).
May his prayer be accepted! When the full scale of social devastation inflicted on Cyprus will be apparent a chopping block would be more suitable than a stool!




March 23, 2013

After Cyprus levy; are Italy and Spain next?

Cyprus crisis is reaching his climax this weekend but regardless of how it will develop served well in distracting the media and the EU population from the bigger fishes frying in the EU pan, Italy and Spain.
So despite dimmed lights on the Italian political disaster and the Spanish banking Armageddon it is worth highlighting the following news:

Via El Pais (Via Google Translate),
The Minister of Finance and Public Administration, Cristobal Montoro, has advanced on Tuesday that the government will impose a type "moderate" to bank deposits to compensate communities that saw their tax autonomy canceled after the Executive created a state tax 0% rate.  This tax on bank deposits, which has nothing to do with Cyprus, does not affect savers but requires credit institutions to pay for that capture deposits. 

"The autonomous communities receive timely and therefore financially compensation shall implement a moderate rate in the state tax on bank deposits," said the minister, adding that this kind "will not be much higher than 0%" . 

The Minister of Finance has clarified that such "moderate" will have no tax collection effort, "but that these regions serve to offset the revenue loss to see."  So, he assured that the amount will correspond to the amount "exact has been undermined by the cancellation of regional taxes". 

Subsequently the Spanish Minister of Finance & Public Administration announced a tax or bank levy (probably 0.2%) to be imposed on bank deposits, without details on which deposits will be affected or timing.

and on Italy:
In an article on Handelsblatt the chief economist of Commerzbank says: Italy should bring a unique wealth tax.

It is a myth to talk of crisis-strapped states. Even the German Institute for Economic Research (DIW) and the chief economist of Commerzbank, Joerg Kraemer says the numbers suggest a different view.

Kramer relies on surveys of the European Central Bank. Net financial assets of the Italians are 173 percent of gross domestic product (GDP). This is significantly more than the net financial assets of the Germans, which corresponds to 124 percent of GDP, said Kramer for Handelsblatt Online.

"So it would make sense, in Italy for 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."

March 17, 2013

Cyprus Levy and Europe plan B to reduce debt



In light of the forced levy of Cyprus it is worth reading the following article from September 2011, "The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis", which predicted what is happening now in Europe. The study concludes that such mandatory, coercive wealth tax (aka Levy) 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 not showing up to inflate away the accumulated debt, Europe is finally moving to Plan B, and is using Cyrprus as its Guinea Pig.
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.



For most countries, a levy on deposits 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.
 To ensure a socially acceptable sharing of the burden, politicians would no doubt decide to tax financial assets only above a certain threshold—€100,000, for example. Given that any such tax would be meant as a one-time correction of current debt levels, they would need to balance it by removing wealth taxes and capital-gains taxes. The drastic action of imposing a tax on assets would probably make it easier politically to lower income taxes in order to stimulate further growth. (See Exhibit 4.)


Curiously, not even BCG expected the initial shot across the bow to be so bad that everyone, not just those above the €100,000 threshold would be impaired. Alas, that is the sad reality in Europe, where as the chart above shows, a total of €6.1 trillion in additional wealth (confiscation) tax is coming.
 



Cyprus bailout update

For those who thought that a forced levy on bank accounts was unthinkable in Europe, the recent bail out has been a call to reality on the seriousness of the European crisis.
Everyone is already wondering who will be next and if Cypriots are complaining of a 9.9% levy on bank deposits they can find consolation in knowing that the initial request was for a 40% levy as told by Ekathemerini.


Report from Ekathemerini,

This is the first time in the eurozone that a levy has been imposed not on the interest of bank accounts but on the capital itself. In addition to that there is a levy on interest, too, and an increase in the 10 percent corporate tax that has been one of the main driving forces behind Cyprus’s financial progress after the 1974 Turkish invasion, generating growth by attracting foreign direct investment.

Tax on interest will amount to between 20 and 25 percent.

...

Cyprus state broadcaster CyBC reported on Saturday that German Finance Minister actually entered the Eurogroup meeting on Friday proposing a 40 percent haircut on Cypriot bank accounts. Sarris stated on Saturday that this had also been the proposal of the International Monetary Fund.

Sarris stated in Brussels that in view of the threat from the European Central Bank for banks in Cyprus to shut down and chaos to ensue, the increase in interest taxation and the haircut to bank accounts became necessary. “A disorderly default, that was a genuine possibility, has been averted,” he said.

Worth reading as well the official statement of the Cypriot president:


Statement by the President of the Republic of Cyprus,
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. Tomorrow I will address the Cypriot people.

March 7, 2013

Italian Debt Highest since Mussolini


Italian debt is up in 2012 to 127 percent of gross domestic product from 120.8 percent a year earlier. As Bloomberg notes, that's the most since 1924, when Mussolini won 64 percent of the popular vote in elections. It seems that austerity is not working at all or has not been addressing the real culprit since spending has risen almost 3% in the last three years and taxes have not kept pace.

The reality is that austerity has been hitting only the soft target of an impoverished salaried middle class which is an easy target but has been largely ignoring the cronies, lobbies and potentates which are still corruptly and voraciously living of rent while stalling any real reform of the country.

March 2, 2013

Zona Velha de Funchal


“Arte de Portas Abertas” is a public art program that aims in transforming Funchal´s Old town (Zona Velha) into a permanent outdoor art gallery by displaying over 200 works of art, by guest artists, painted on the doors of Rua de Santa Maria.Below some of the highlights of this unique urban art experiment.

For a full list of the artists and info on the project visit: http://www.arteportasabertas.com/
















Esther Perel: The secret to desire in a long-term relationship

In long-term relationships, we often expect our beloved to be both best friend and erotic partner. But as Esther Perel argues, good and committed sex draws on two conflicting needs: our need for security and our need for surprise. So how do you sustain desire? With wit and eloquence, Perel lets us in on the mystery of erotic intelligence.



Poverty in Europe


Italy is now worse than Spain, its poverty rate has climbed to 28.2%, even though the unemployment rates in the two nations are vastly different (Spain 26% and Italy 11.2%) reasons for such a higher poverty rate despite lower unemployment rates range from higher corruption levels compared to Spain to lack of unemployment benefits in Italy. Hardly surprising then that people voted en masse for Grillo and his MS5 which supports creating a dole system for those unable to find a job.