Stagflation will Add to Cyprus, Eurozone woes

Contra to the mainstream meme that the world has been faced with deflation*, stagflation has been the current problem. 

*the definition of inflation and deflation has been mangled to mean alot of different things.

That’s according to Zero Hedge (bold and italics original)

Even more bad news for Cyprus, which now has not only a depression to look forward to but a depressionary stagflation to boot. Bloomberg has ranked countries based on their risk of stagflation based on the following methodology: First, the average real Gross Domestic Product and average Consumer Price Index was calculated for each country from 2012 to 2014. Then the Stagflation Score was determined by multiplying average real GDP by average CPI if the average real GDP was negative or by dividing average real GDP by average CPI if the average real GDP was positive. The lower the score, the greater the risk of stagflation. The winner, or loser at the case may be? Cyprus was found to be most at risk of stagflation with a Stagflation Score of -4.733, followed by Portugal (-2.671), Italy (-2.133), Spain(-1.745) and Greece (-1.366). Switzerland was ranked least at risk with a score of (7.560), followed by China (2.612) and Japan (2.446).

If stagflation becomes a real menace, then this will impact the “risk ON” phase of global financial markets.  And gold and commodities will recapture the public’s attention

Example of the Mania Phase: Awards Received by the Bank of Cyprus

Euphoric sentiment is one principal trait of the manic phase; particularly the feeling of overconfidence, grandeur,invincibility and or infallibility. 

As I previously pointed out it had been no different in Cyprus whose banking system thought they were “immune” or "decoupled" to the euro crisis such that they even passed the “stress test” conducted by the European Banking Authority in 2011.

Chris Rossini at the Economic Policy Journal enumerates the string of awards that Bank of Cyprus received during their heyday or the pinnacle/climax of the bubble cycle.

The Bank of Cyprus, which is stealing up to 40% of deposits from those with more than 100k Euros, had quite a veil of legitimacy. 

Check out the prestigious awards that the bank recently earned:

Feb 25 2011 - The Banker magazine ranked the Bank of Cyprus amongst the leading banks of the world.

Apr 4 2011 - The prestigious Global Finance financial magazine honours the Bank of Cyprus with the title of Best Bank in Cyprus.

Jun 15 2011 - The Bank of Cyprus has succeeded in being included in the category of «Best Banking Organizations» worldwide at the annual World Finance Banking Awards of the internationally acclaimed financial magazine World Finance.

Sept 13 2011 - In the framework of its annual “Awards for Excellence 2011”, the Bank of Cyprus was named Best Bank in Cyprus by the international financial magazine EUROMONEY.

Nov 1 2011 - The Bank of Cyprus was awarded the ‘JP Morgan Chase Quality Recognition Award’ for its funds transfer operations for the eleventh consecutive year.

Dec 1 2011 - The Bank of Cyprus was named “Bank of the year 2011” in Cyprus by the prestigious international financial affairs publication The Banker, during its annual “Bank of the Year Awards 2011.”

Feb 9 2012 - Bank of Cyprus has been named as the Best Bank for Private Banking in Cyprus, by the internationally acclaimed magazine EUROMONEY.

Mar 23 2012 - The international financial magazine ‘Global Finance’ has named the Bank of Cyprus the best banking institution in Cyprus in the Developed Markets category of “World’s Best Banks Awards”.

Sep 26 2012 - Bank of Cyprus has been awarded the ‘2011 Citi Performance Excellence Award’ by the world-renowned financial organization Citibank, for global electronic payments leadership and excellence.

Notice that the accolades flowed from 2011 until September of 2012, which was only a few months back.

Then events unhinged or unglued pretty fast.

It has been part of the mainstream’s propaganda to say that current system based on fiat money has been hunky dory and functioning well. The reality is that it hasn’t.

Yet when aura of superiority, augustness and opulence have been propped up by a credit bubble, watch out. 

This applies to any country or region, Asia and the Philippines notwithstanding.

How Money Oozed out of Cyprus during Negotiation of Bailout Deal

And almost everyone thought that the public’s money froze in Cyprus as ATMs went out of cash and banks were officially closed while local politicians haggled with unelected eurocrats for a bailout deal which was concluded right before the deadline.

Well, reports say that money had oozed out of Cyprus during the weekend.

From Reuters: (bold mine) 

In banknotes at cash machines and exceptional transfers for "humanitarian supplies", large amounts of euros fled the east Mediterranean island before and after Cypriot lawmakers stunned Europe by rejecting a levy on all bank deposits.

EU negotiators knew something was wrong when the Central Bank of Cyprus requested more banknotes from the European Central Bank than the withdrawals it was reporting to Frankfurt implied were needed, an EU source familiar with the process said. "The amount the Cypriots mentioned... on a daily basis was much less than it was in reality," the source said.

Confusion over just how much money was pulled out of Cyprus' banks is illustrative of the confusion surrounding the negotiations as a whole. Representing just 0.2 percent of the euro zone economy, Cyprus nevertheless threatened to reignite the bloc's debt crisis. Cyprus' problems began in Greece - it is heavily exposed to the euro zone's first bailout casualty.

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.

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.

Companies that had to meet margin calls to avoid defaulting on deals were granted funds. Transfers for trade in humanitarian products, medicines and jet fuel were allowed.

Chris Pavlou, who was vice chairman of Laiki until Friday, said while some money was withdrawn over a period of several days it was in the order of millions of euros, not billions.

German Finance Minister Wolfgang Schaeuble said the bank closure had limited capital flight but that the ECB was looking closely at the issue. He declined to provide figures.

Two angles here. 

One, people always search for alternatives by exploiting on legal or regulatory loopholes. As indicated above, some took advantage of the London branches of Cyprus banks to withdraw their money.

On the other hand, aside from the controversy where the Cyprus president warned his friends of the imminence of the crisis, in the world of politics, there will always be exceptions to the rule. This applies most especially in favor of the politically connected. What would be needed are "valid" justifications for such actions.

As George Orwell once wrote in Animal Farm: All animals are equal, but some animals are more equal than others

Cyprus, Troika Reach Bailout Deal

So a midnight deal was struck between the Cyprus government and the “troika” consisting of unelected bureaucrats before the deadline.  

From Bloomberg:

Cyprus agreed to the outlines of an international bailout, paving the way for 10 billion euros ($13 billion) of emergency loans and eliminating the threat of default.

The accord between Cyprus and the “troika” representing international lenders was reached in overnight talks in Brussels and ratified by finance ministers from the 17-nation euro area.

“It’s in best interest of the Cyprus people and the European Union,” Cyprus President Nicos Anastasiades told reporters.

It’s really in the best interests of those in the seat of power and connected to them. and not for Cyprus

The content of the deal, again from Bloomberg:

The agreement calls for Cyprus Popular Bank Pcl (CPB) to be shut down and split. The Bank of Cyprus Plc would take over the viable assets of the failed bank along with 9 billion euros in central bank-provided emergency liquidity aid, according to three EU officials who asked not to be named because talks are ongoing.

Deposits below the EU deposit-guarantee ceiling of 100,000 euros will be protected, and a loss of no more than 40 percent will be imposed on uninsured depositors at the Bank of Cyprus, two EU officials said. Uninsured depositors at Cyprus Popular would largely be wiped out, two other officials said.  

Wow. 40% losses for uninsured deposits above 100,000 euros for Bank of Cyprus while total losses uninsured deposits for Cyprus Popular!

Who determines this? The eurocrats from the troika. They will play "god" here. They will ascertain whose assets are “viable” or assets that would be taken over by Bank of Cyprus, and whose assets will be condemned for total losses. They will decide on who are the winners and the losers. They will play the judge, jury and executioner.

I wonder how much under the table deal is going on right now for deposit accounts of 100,000 euro and above? There will a lot of grease money out there to bargain for survival.

And I also wonder how the Russians will be taking this.

Ah but while deal is reached this is subject to approval.

Again from Bloomberg:

It was the second time in nine days that Cyprus struck a deal with European creditors and the IMF. The first accord, reached in the early hours of March 16, fell apart three days later when the Cypriot parliament rejected a tax on all bank accounts on the island.

Perhaps we should pay heed to the advice of Mises Institute's founder, Lew Rockwell:

Your money is not safe in a bank..If the bank is in trouble the government will take your money…Mattress will be a better place to keep your money

Cyprus: The Mouse that Roared

Unfolding events in Cyprus may or may not be a factor for the Phisix or for the region over the coming days. 

This will actually depend on how the bailout package will take shape, and importantly, if these will get accepted by the “troika” (IMF, EU and the ECB), whose initial bid to force upon a bank deposit tax indiscriminately on bank depositors had been aborted due to the widespread public opposition.

So far, the Cyprus parliament has reportedly voted on several key measures[1] as nationalization of pensions, capital controls, bad bank and good bank. Reports say that the Cyprus government has repackaged the bank deposit levy to cover accounts with over 100,000 euros with a one-time charge of 20%[2]!

The troika demands that the Cyprus government raise some € 5.8 billion to secure a € 10 billion or US $12.9 billion lifeline.

If there may be no deal reached by the deadline on Monday, then Cyprus may be forced out of the Eurozone. Then here we may see uncertainty unravel across the global financial markets as a Cyprus exit, which will likely be exacerbated by bank runs and or social turmoil, may ripple through the banking system of other nations.

However, if Cyprus gets to be rescued at the nick of time, then problems in the EU will be pushed for another day.

Nonetheless unfolding events in a 1 million populated Cyprus, but whose banking system has been eight times her economy[3] has so far had far reaching effects.

The Cyprus “bail in” has already ruffled geopolitical feathers.

Germans are said to been reluctant to provide backstop to Cyprus due to nation’s heavy exposure to the Russians, where the latter comprises about a third of deposits of the Cyprus banking system. Much of illegal money from Russia has allegedly sought safehaven in Cyprus.

The Cyprus-Russia link goes more than deposits. They are linked via cross-investments too.

Some say that the Germans had intended to “stick it to the Russians”[4].

On the other hand, Russians have felt provoked by what they perceive as discrimination.

Meanwhile events in Cyprus have also opened up fresh wounds between Greeks and the Turkish over territorial claims[5].

The other more important fresh development is of the bank deposit taxes.

Where a tax is defined[6] as “a fee levied by a government on income, a product or an activity”, deposit taxes are really not taxes, but confiscation.

Some argue that this should herald a positive development where private sector involvement takes over the taxpayers. Others say that filing for bankruptcy would also translate to the same loss of depositor’s money.

Confiscation is confiscation no matter how it is dressed. It is immoral. Private sector involvement is forced participation.

Bankruptcy proceedings will determine how losses will partitioned across secured and unsecured creditors and equity holders. Not all banks will need to undergo the same bankruptcy process. Yet confiscation will be applied unilaterally to all. For whose benefit? The banksters and the politicians.

And one reason bondholders have been eluded from such discussion has been because Cyprus banks have already been pledged them as collateral for target2 programs at the ECB[7].

The more important part is that events in Cyprus have essentially paved way for politicians of other nations, such as Spain and New Zealand[8], to consider or reckon deposits as optional funding sources for future bailouts.

With declining deposits in the Eurozone[9], the assault on savers and depositors can only exacerbate their financial conditions and incite systemic bankruns.

So confidence and security of keeping one’s money in the banking system will likely ebb once the Cyprus’ deposits grab policies will become a precedent.

This is why panic over bank deposits have led to resurgent interest on gold and strikingly even on the virtual currency the bitcoin[10]. The growing public interest in bitcoin comes despite the US treasury’s recently issued regulations in the name of money laundering[11].

Such confiscatory policies will also redefine or put to question the governments’ deposit insurance guarantees. Not that guarantees are dependable, they are not; as they tend increase the moral hazard in the banking system as even alleged by the IMF[12]. 

Deposit guarantees are merely symbolical, as they cannot guarantee all the depositors. Given the fractional reserve nature of the contemporary banking system, if the public awakens to simultaneously demand cash, there won’t be enough to handle them. And obliging them would mean hyperinflation. That’s the reason the dean of the Austrian economics, Murray Rothbard calls deposit insurance a “swindle”[13].

The banks would be instantly insolvent, since they could only muster 10 percent of the cash they owe their befuddled customers. Neither would the enormous tax increase needed to bail everyone out be at all palatable. No: the only thing the Fed could do — and this would be in their power — would be to print enough money to pay off all the bank depositors. Unfortunately, in the present state of the banking system, the result would be an immediate plunge into the horrors of hyperinflation.

So governments will not only resort to taxing people’s savings implicitly (by inflation), they seem now eager to consider a more direct route: confiscation of one’s savings or private property. Note there is a difference between the two: direct confiscation means outright loss. Inflation means you can buy less.

Finally, losses from deposit confiscation, and its sibling, capital controls will lead to deflation.

Confiscatory deflation, as defined by Austrian economist Joseph Salerno, is inflicted on the economy by the political authorities as a means of obstructing an ongoing bank credit deflation that threatens to liquidate an unsound financial system built on fractional reserve banking.  Its essence is an abrogation of bank depositors' property titles to their cash stored in immediately redeemable checking and savings deposits[14]. 

The result should be a contraction of money supply and bank credit deflation and its subsequent symptoms. This will be vented on the markets if other bigger nations deploy the same policies as Cyprus.

That’s why events in Cyprus bear watching.

---

[1] See Cyprus President Warned Friends of Crisis March 23, 2013

[2] New York Times Cyprus Makes Plan to Seize Portion of High-Level Deposits, March 23, 2013

[3] Constantinos Stephanou The Banking System in Cyprus: Time to Rethink the Business Model? 2011 World Bank

[4] Investopedia.com The Cyprus Crisis 101 March 19, 2013

[5] See Will Events in Cyprus Trigger a War? March 22, 2013

[6] Investorwords.com Tax

[7] Mark J Grant Why Cyprus Matters (And The ECB Knows It) Zero Hedge March 23, 2013

[8] John Aziz Guest Post: Whose Insured Deposits Will Be Plundered Next? Zero Hedge March 21, 2013

[9] The Economist Infographics March 23, 2013

[10] See Bitcoins: Safehaven from Cyprus Debacle and Officially Recognized by the US Treasury March 21, 2013

[11] International Business Times, US Treasury Department: Virtual Currencies (Read: Bitcoins) Need Real Rules To Curb Money Laundering March 22, 2013

[12] Buttonwood What does a guarantee mean? The Economist March 19, 2013

[13] Murray N. Rothbard Taking Money Back January 14, 2008 Mises.org

[14] Joseph Salerno Confiscatory Deflation: The Case of Argentina, February 12, 2002 Mises.org

The Anatomy of the Cyprus’ Bubble Cycle

The following article from the Reuters has a concise chronicle of the boom bust cycle which today has been plaguing Cyprus via a banking crisis and which I dissect.

(all bold highlights mine, occasional side comments of mine in italics)

1. The Pre-EU setting.

Before joining the euro, the Central Bank of Cyprus only allowed banks to use up to 30 percent of their foreign deposits to support local lending, a measure designed to prevent sizeable deposits from Greeks and Russians fuelling a bubble.

2. The Moral Hazard from EU’s economic convergence policies

When Cyprus joined the single European currency, Greek and other euro area deposits were reclassified as domestic, leading to billions more local lending, Pambos Papageorgiou, a member of Cyprus's parliament and a former central bank board member said.

"In terms of regulation we were not prepared for such a credit bubble," he told Reuters.

Banks' loan books expanded almost 32 percent in 2008 as its newly gained euro zone status made Cyprus a more attractive destination for banking and business generally, but Cypriot banks maintained the unusual position of funding almost all their lending from deposits.

3. How bubble policies reshaped the public’s behavior.

"The banks were considered super conservative," said Alexander Apostolides an economic historian at Cyprus' European University, a private university on the outskirts of Nicosia.

When Lehman Brothers collapsed in the summer of 2008, most of the world's banks suffered in the fallout, but not Cyprus's.

"Everyone here was sitting pretty," said Fiona Mullen, a Nicosia-based economist, reflecting on the fact Cypriot banks did not depend on capital markets for funding and did not invest in complex financial products that felled other institutions.

Note of the "this time is different" mentality and the attitudes of "invincibility".

4. Overconfidence and Mania

Marios Mavrides, a finance lecturer and government politician, says his warnings about the detrimental impact on the economy of so much extra lending fell on deaf ears.

"I was talking about the (property) bubble but nobody wanted to listen, because everyone was making money," he said. (sounds strikingly familiar today—Prudent Investor)

The fact that the main Cyprus property taxes are payable on sale made people hold onto property, further fuelling prices, Papageorgiou added…

Michael Olympios, chairman of the Cyprus Investor Association that represents 27,000 individual stock market investors, said he too criticized the central bank for "lax" regulation that facilitated excessive risk taking.

Ex-post, people always look for someone to pass the blame on. They forget the responsibility comes from within.

The Cyprus General Index from Tradingeconomics.com

Notice: The losses from the bust had been more brutal than the gains from the boom

5. The yield chasing dynamic fueled by monetary-credit expansion

A depositor would have earned 31,000 euros on a 100,000 euros deposit held for the last five year in Cyprus, compared to the 15,000 to 18,000 euros the same deposit would have made in Italy and Spain, and the 8,000 interest it would have earned in Germany, according to figures from UniCredit.

Bulging deposit books not only fuelled lending expansion at home, it also drove Cypriot banks overseas. Greece, where many Cypriots claim heritage, was the destination of choice for the island's two biggest lenders, Cyprus Popular Bank -- formerly called Laiki -- and Bank of Cyprus.

6. The Knowledge problem: Regulators didn’t see the crisis coming. Also the transmission mechanism: From the periphery (Greek crisis) to the core (Cyprus crisis)

The extent of this exposure was laid bare in the European Banking Authority's 2011 "stress tests", which were published that July, as the European Union and International Monetary Fund (IMF) were battling to come up with a fresh rescue deal to save Greece. (reveals how bank stress tests can’t be relied on—Prudent Investor)

The EBA figures showed 30 percent (11 billion euros) of Bank of Cyprus' total loan book was wrapped up in Greece by December 2010, as was 43 percent (or 19 billion euros) of Laiki's, which was then known as Marfin Popular.

More striking was the bank's exposure to Greek debt.

At the time, Bank of Cyprus's 2.4 billion euros of Greek debt was enough to wipe out 75 percent of the bank's total capital, while Laiki's 3.4 billion euros exposure outstripped its 3.2 billion euros of total capital.

The close ties between Greece and Cyprus meant the Cypriot banks did not listen to warnings about this exposure…

Artificial booms are often interpreted as validating the policies of the incumbent political authorities. It's only during fait accompli where people recognize of the failures of politics. This is an example of time inconsistency dilemma

Yet the blame will always be pinned on the victims (private sector, e.g. depositors, the speculators) rather than the promoters of the bubble.

 

7. More regulatory failure.

Whatever the motive, the Greek exposure defied country risk standards typically applied by central banks; a clause in Cyprus' EU/IMF December memorandum of understanding explicitly requires the banks to have more diversified portfolios of higher credit quality.

"That (the way the exposures were allowed to build) was a problem of supervision," said Papageorgiou, who was a member of the six-man board of directors of the central bank at the time.

The board, which met less than once a month, never knew how much Greek debt the banks were holding, both Papageorgiou and another person with direct knowledge of the situation told Reuters.

Note that imbalances accrued swiftly and where hardly anyone saw the imminence of today's crisis.  What used to be "Conservative" banks suddenly transformed into aggressive banks.

Yet another interesting point is that the events in Cyprus proves my thesis that crisis are essentially "unique". There is no definitive line in the sand for credit events. Cyprus had its own distinctive thumbprint or identity, particularly her "unusual position" of reliance on deposits, compared to their peers.

 

Wonderful learning experience

Cyprus President Warned Friends of Crisis

Events in Cyprus have been demonstrative of the wide distinction between how the pubic perceives governments are supposed to operate (the romantic view where government looks after the interest of the general welfare) with how governments truly operate (self interests).

In reality governments operates around the cabal of insiders, again take it from the events in Cyprus.

From the Daily Mail, (hat tip lewrockwell.com)

Cypriot president Nikos Anastasiades 'warned' close friends of the financial crisis about to engulf his country so they could move their money abroad, it was claimed on Friday.

The respected Cypriot newspaper Filelftheros made the allegation which was picked up eagerly by German media.

Germans are angry at the way their country has been linked to the Nazis and Hitler by Cypriots angry at the defunct rescue deal which called for a levy on all savings.

The Cyprus newspaper did not say how much money was moved abroad but quoted sources saying the president 'knew about the possible closure of the banks' and tipped off close friends who were able to move vast sums abroad. 

Italian media said the 4.5 billion euros left the island in the week before the crisis.

As an update on the swiftly unfolding events in Cyprus, Russia has rejected a deal with Cyprus.  Also the Cyprus parliament approved of instituting capital controls aside from other measures passed.

From Reuters:

As hundreds of demonstrators faced off with riot police outside parliament late into Friday night, lawmakers inside voted to nationalize pension funds, pool state assets for a bond issue and peel good assets from bad in stricken banks.

We live in very interesting times.

Cyprus: From Deposit Taxes to Capital Controls; Russian Intervention Next?

After the botched attempt by scheming unelected Eurocrats to impose bank deposit levies in order to bail out the banking system, which had been foiled by the Cyprus Parliament, the EU now threatens to kick Cyprus out of the Union, followed by proposed measures to impose capital controls.

From Reuters

The European Union gave Cyprus till Monday to raise the billions of euros it needs to secure an international bailout or face a collapse of its financial system that could push it out of the euro currency zone.

In a sign it was at least preparing for the worst, the Cypriot government sought powers on Thursday to impose capital controls to stem a flood of funds leaving the island if there is no deal before banks reopen following this week's shutdown.

So same dog but with a different collar.

Principally, capital controls would represent the same assault on property rights.

Notes the Zero Hedge: (bold and italics original)

As Europe wakes up to what could be a tumultuous day, Handelsblatt reports that the ECB has decided that, due to the "great danger" of a bank run once they reopen next week, it will enforce capital controls independently of Cypriot (elected) officials. With perhaps a nod towards negotiating some ELA funding for Cypriot banks next week (if the government accepts this ECB-enforced 'program'), the rather stunning restrictions on people's private property include:

-Freezing Savings - no time-frame (it's not your money anymore)

-Make bank transfers dependent on Central Bank approval (a money tzar?)

-Lower ATM withdrawal limits (spend it how we say?)

The capital controls will be designed "so that citizens have access to sufficient cash to go about their lives." So, there it is, a European Union imposed decision on just how much money each Cypriot can spend per day. Wasn't it just last week, we were told Europe is fixed?

Another interesting aspect the geopolitical consequence from the unfolding events in Cyprus.

While I have earlier noted that unresolved ethnic rivalries, conflicting territorial claims that covers energy resources with neighbors, and the realignment of alliances and rivalries within east Mediterranean region may trigger a regional military conflict, Russia’s heavy stake in Cyprus could also spark a military conflagration.

Nearly a third or $19 billion of the 70 billion euros in deposits in Cyprus banks are reportedly held by Russians (supposedly from oligarchs to alleged mafias to political money). 

According to CNBC

One Russian bank, Alfa Bank, estimates that $70 billion of illegal capital flight from Russia in the past two decades may have found its way to Cyprus.

Moody's rating agency said last week Russian banks had about $12 billion placed with Cypriot banks at the end of 2012 and has estimated that Russian corporate deposits at Cypriot banks could be around $19 billion.

"We think that the $19 billion exposure is mostly wholesale - ie corporate," Eugene Tarzimanov, Senior Credit Officer at Moody's in Russia, told Reuters.

Some of Russia's largest banks have some credit exposure to Cyprus. VTB, Russia's second-largest bank by assets, had $13.8 billion in assets and $374 million through its Cypriot subsidiary, Russian Commercial Bank, at the end of 2011.

Political pressure has allegedly been building up for the Russian government to intervene

From Investmentwatch.com

From latest reports, the Cypriot banks might open on March 26th at the earliest. That’s two weeks after being shut down. That’s two weeks of unmet financial obligations, ie government employee salaries, public works financing, unpaid pensions etc etc…Expect unrest on the streets of Moscow

The EU/Germany are certainly aware that 95% of all Russian money goes through the Cypriot banks. Certainly they were well aware of the consequences this would lead to. Is this the first salvo in the new world war??

Dennis Gartman of the eponymous The Gartman Letters made a recent germane comment at the CNBC “Don’t Mess with the Russian Mafia”.

Next week will be very interesting.

Will Events in Cyprus Trigger a War?

The Cyprus bank deposit tax fiasco could turn out to be more than just a domestic financial and economic morass; it could morph into a regional geopolitical quagmire or a potential tinderbox for an outbreak of military confrontation or war. 

Such are based on the Cyprus’ unresolved ethnic rivalries, conflicting territorial claims that covers energy resources with neighbors, and the realignment of alliances and rivalries within east Mediterranean region.

Here is a snapshot from historian Eric Margolis at the lewrockwell.com:

But there’s much more to the Cyprus crisis than its dubious banks. Cyprus has bedeviled Europe and world diplomacy since 1974, then Greek Cypriot far rightists staged a coup and sought union – or "enosis" – with mainland Greece. Turkey promptly intervened with 30,000 troops to protect Turkish Cypriots in the north. Many Greeks fled or were expelled to the south.

Europe and the UN have been trying to sort out the Cyprus mess ever since. After decades of mind-numbing negotiations, former UN chief Kofi Annan proposed a sensible deal in 2004 for a Greek-Turkish federation. Turks accepted, but Greek Cypriots blocked it. Britain, which has two important air bases in Cyprus, backed the status quo.

In the same year, the EU committed the grave error of admitting Cyprus as a member without first insisting that Greek Cypriots agree to a peace deal and Greek-Turkish federation.

Northern Cyprus was left in limbo while the south became part of the EU, assuring the island’s ugly dispute would be come part of the European Union. Cyprus should never have been admitted to the EU.

Europeans who opposed Turkish membership in the EU used Cyprus as a pretext to delay admission, infuriating Turkey.

After decades of patient work developing normal relations after centuries of conflict, Greece and Turkey are again up in arms again over Cyprus. Their dangerous problem of overlapping air and sea claims in the Aegean has revived - just when Greece must slash its bloated military budget.

Read the rest here

All political efforts to save and preserve the interests of the political class and their cronies have only opened up old wounds and continues to fan the flames of social enmity.

Bitcoins: Safehaven from Cyprus Debacle and Officially Recognized by the US Treasury

I questioned yesterday the wisdom of mainstream’s assault on bitcoins, where the Economist calls bitcoins a “bubble”.

Well it figures that the recent spike in the public's interests on bitcoins has partly been a ramification or an offshoot to the Cyprus savings grab debacle

Here is Businessweek/Bloomberg,

Since Sunday, a trio of Bitcoin apps have soared up Spain’s download charts, coinciding with news that cash-strapped Cyprus was planning to raid domestic savings accounts to pay off a $13 billion bailout tab. Fearing contagion on the other end of the Mediterranean, some Spaniards are apparently looking for cover in an experimental digital currency.

“This is an entirely predictable and rational outcome for what’s happening in Cyprus,” says Nick Colas, chief market strategist at ConvergEx Group. “If you want to get a good sense of the stress European savers are feeling, just watch Bitcoin prices.”

The value of the virtual currency has soared nearly 15 percent in the last two days, according to the most-recent pricing data. “One hundred percent of that is due to Cyprus,” says Colas. “It means the Europeans are getting involved.”

So aside from gold, bitcoins appear to be a major beneficiary from the Euro crisis. So which shows more signs of a bubble: bitcoin or fiat money?

Yet for those who claim bitcoin lacks the widespread acceptance, well, they fail to take account that even the US Treasury now officially recognizes bitcoins.

From Bradley Janzen of Freebanking.org

Financial Crimes Enforcement Network (FinCEN) is the bureau of Treasury that enforces the Bank Secrecy Act (which requires banks to spy on their customers for the government).

FinCEN Issues Guidance on Virtual Currencies and Regulatory Responsibilities

To provide clarity and regulatory certainty for businesses and individuals engaged in an expanding field of financial activity, the Financial Crimes Enforcement Network (FinCEN) today issued the following guidance: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. The guidance is in response to questions raised by financial institutions, law enforcement, and regulators concerning the regulatory treatment of persons who use convertible virtual currencies or make a business of exchanging, accepting, and transmitting them. Convertible virtual currencies either have an equivalent value in real currency or act as a substitute for real currency. The guidance considers the use of virtual currencies from the perspective of several categories within FinCEN's definition of MSBs.

News Release: http://www.fincen.gov/news_room/nr/pdf/20130318.pdf

Guidance: http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2013-G001.pdf

Welcome to the mainstream bitcoin.

Well, my favorite iconoclast Nassim Taleb has great words to say about bitcoins at the reddit.com: (hat tip Zero hedge)

Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.

A sentiment I share. 

Bitcoins could herald the epoch of decentralization or the information age and importantly perhaps a transition to F. A. Hayek's denationalization of money

Video: Humor: Hitler on Cyprus Bailout

War on Savers: Cyprus’ $13 Billion Bailout to be Funded by Taxing Depositors

In Cyprus, abetted by the IMF, increasingly desperate politicians will now tax depositors in order to bailout banksters.  This is financial repression at its finest.

From Bloomberg,

Euro-area finance ministers agreed to an unprecedented tax on Cypriot bank deposits as officials unveiled a 10 billion-euro ($13 billion) rescue plan for the country, the fifth since Europe’s debt crisis broke out in 2009.

Cyprus will impose a levy of 6.75 percent on deposits of less than 100,000 euros -- the ceiling for European Union account insurance -- and 9.9 percent above that. The measures will raise 5.8 billion euros, in addition to the emergency loans, Dutch Finance Minister Jeroen Dijsselbloem, who leads the group of euro-area ministers, told reporters early today after 10 hours of talks in Brussels. The International Monetary Fund may contribute to the package and junior bondholders may also be tapped in a so-called bail-in, the ministers' statement said.

Officials have struggled to find an agreement that would rescue Cyprus, which accounts for just half of a percent of the euro region’s economy, without unsettling investors in larger countries and sparking a new round of market contagion. Finance Minister Michael Sarris said the plan was the “least onerous” of the options Cyprus faced to stay afloat.

The Cyprus government is supposed to vote on this today. However, such plan has already incited incidences of panic.

From Reuters,

The decision prompted a run on cashpoints, most of which were depleted by mid afternoon, and co-operative credit societies closed to prevent angry savers withdrawing deposits.

Almost half Cyprus's bank depositors are believed to be non-resident Russians, but most queuing on Saturday at automatic teller machines appeared to be Cypriots.

This is monumental. Governments today have become more brazen. They are not content with imposing implicit taxation channeled through inflation, but now take on the recourse of outright confiscation of private property. With inflation, lost purchasing power means lesser quantity of goods or services to acquire. With taxation, people simply lose money and the attendant services derived from it.

True, Cyprus maybe small, but this serves a trial balloon on what governments will resort to, as today’s crisis deepens or remains unresolved.

Yet politicians forget that when you tax something you get less of it. Incipient signs of consternation may translate to potential bank runs, not limited to Cyprus but to crisis stricken Euro nations. Depositors from the PIIGs could express fear of the same policies that could be implemented on them.

And since the deal was forged while the financial markets has been closed for the weekend, I expect some volatility in the marketplace at the week's opening.

Moreover, ravaging depositors will increase political risks that may escalate into social unrest. This also amplifies the sundering or progression the demise of the EU project.

Of course when people become distrustful of the institutions that are supposed to underwrite the safety of their savings, gold and precious metals will function as the main beneficiaries. 

EU Summit Faces Political Deadlock, Cyprus Seeks Bailout

Political impasse at the EU, amidst a global economic slowdown, continues to hound the markets…

From Bloomberg,

Chancellor Angela Merkel hardened her resistance to euro- area debt sharing, setting Germany on a collision course with its allies at a summit starting on June 28.

In signs the debt crisis is worsening, Cyprus said it will seek a financial lifeline from the euro area’s firewall funds, and Greek Prime Minister Antonis Samaras consented to the resignation of his finance minister, Vassilios Rapanos.

Moody’s Investors Service downgraded 28 Spanish banks, citing the country’s sovereign debt and rising losses on real- estate loans. The lenders’ long-term debt and deposit ratings were cut by one to four notches, Moody’s said yesterday in a statement. The New York-based rating company also downgraded 16 Spanish banks on May 17.

Italy and Spain will sell debt today amid concern Europe’s fiscal crisis is infecting bigger economies.

The EU crisis adds a new victim: Cyprus. This only translates to the worsening of the crisis in the face of internecine political squabbling.

Political stalemate has also been a scourge to China and the US.

I have been saying that political pledges will eventually yield to the law of diminishing returns and that financial markets will eventually DEMAND real action.

It appears that financial markets are beginning to see through the façade of political fables or seems to have initiated the discounting of these phony promises.

Be careful out there.