Late last night, after markets closed for the weekend, following an
extended discussion the European finance ministers announced their
"bailout" solution for Russian oligarch depositor-haven Cyprus: a €13
billion bailout (Europe's fifth) with a huge twist: the implementation
of what has been the biggest taboo in European bailouts to date -
the impairment of depositors, and a fresh, full blown escalation in the status quo's war against savers everywhere.
Specifically, Cyprus will impose a levy of 6.75% on deposits of less
than €100,000 - the ceiling for European Union account insurance,
which is now effectively gone following this case study - and 9.9%
above that. The measures will raise €5.8 billion, Dutch Finance
Minister Jeroen Dijsselbloem, who leads the group of euro-area
ministers, said.
But it doesn't stop there: a partial "bail-in" of junior bondholders
is also possible, as for the first time ever the entire liability
structure of a European bank - even if it is a Cypriot bank - is open
season for impairments. The logical question:
why here, and why now?
And what happens when the Cypriot bank run that has taken the country
by storm this morning spreads everywhere else, now that the scab over
Europe's biggest festering wound is torn throughout the periphery as all
the other PIIGS realize they too are expendable on the altar of
mollifying voters and investors in the other countries that make up
Europe's disunion.
Bloomberg's take on the sacrifice of Cyprus' savers:
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. Policy makers began meeting
at 5 p.m. yesterday in a hastily convened gathering, seeking to
overcome differences on bondholder losses
while financial markets were closed.
“Further measures concern the increase of the withholding tax on
capital income, a restructuring and recapitalisation of banks, an
increase of the statutory corporate income tax rate and a bail-in of
junior bondholders,” according to a communique released by ministers
after the talks. It didn’t specify whether bank or sovereign bond
holders could be affected.
The European Central Bank will use its existing facilities to make
funds available to Cypriot banks as needed to counter potential bank
runs. Depositors will receive bank equity as compensation.
Finance Minister Michael Sarris said the plan was the “least onerous” of the options Cyprus faced to stay afloat.
“It’s not a pleasant outcome, especially of course for the people
involved,” said Sarris. The Cypriot parliament will convene tomorrow to
vote on legislation needed for the bailout.
Needless to say, the locals are delighted:
In the coastal town of Larnaca, where irate depositors
queued early to withdraw money from cash machines, co-op credit
societies that are normally open on Saturdays stayed closed.
"I'm extremely angry. I worked years and years to get it
together and now I am losing it on the say-so of the Dutch and the
Germans," said British-Cypriot Andy Georgiou, 54, who returned to Cyprus in mid-2012 with his savings.
"They call Sicily the island of the mafia. It's not Sicily, it's Cyprus. This is theft, pure and simple," said a pensioner.
For the real response, look to Russia:
The island's bailout had repeatedly been delayed amid
concerns from other EU states that its close business relations with
Russia, and a banking system flush with Russian cash, made it a conduit
for money-laundering.
"My understanding is that the Russian government is ready to make a
contribution with an extension of the loan and a reduction of the
interest rate," said the EU's top economic official, Olli Rehn.
Almost half of [Cyprus'] depositors are believed to be non-resident Russians, but most of those queuing on Saturday at automatic teller machines to pull out cash appeared to be Cypriots.
While "saving", pardon the pun, yet another insolvent country merely
has the intent of keeping it in the Eurozone, and thus preserving
Europe's doomed monetary block and bank equity for a little longer,
this idiotic plan will achieve two things: i) infuriate not just
Russians but very wealthy, and very trigger-happy Russians.
The revenge
of Gazpromia will be short and swift, and we
certainly would not want to be Europeans next winter when the average
heating level of Western European will depend on the whims of Russian
natural gas pipeline traffic; ii) start a wave of bank runs first in
Cyprus and soon everywhere else that has the potential of being the next Cyrpus.
Sure enough, here come the bank runs:
While the tax on deposits will hurt wealthy Russians
with money in Cypriot banks, it will also sting ordinary citizens. Some
ATMs in the country have run out of cash, Erotokritos Chlorakiotis,
general manager of the Cooperative Central Bank, told state-run CYBC.
Forzen assets and "national bank holidays" are baaaaack:
Funds to pay the levy were frozen in accounts immediately, ECB Executive Board Member Joerg Asmussen said. The levy will be assessed before Cypriot banks reopen on March 19 after a March 18 national holiday. Sarris said electronic transfers will also be limited until then.
Europe's response: this is a unique situation. Just like the Greek
bailout was unique; just like the Irish and Portuguese bailouts were
unique; just like the bailout of Spanish banks was unique.
“As it is a contribution to the financial stability of
Cyprus, it seems just to ask a contribution of all deposit holders,”
Dijsselbloem said, noting the country’s financial industry was five
times the size of its economy. The plan includes “unique measures” that
address the “exceptional nature” of Cyprus and show “inflexible
commitment to financial stability and the integrity of the euro area.”
Curiously, even everyone's favorite liar, former Eurogroup
president, Jean-Claude Juncker, has a warning that this "bailout" is
the worst thing Europe could have done:
Skeptics including Luxembourg’s Jean-Claude Juncker had
said that imposing investor losses in Cyprus risked reigniting the
financial crisis that has so far pushed five of the euro zone’s 17
members to seek aid. Last year, the euro area took what officials
called a unique step to ask Greek bondholders to absorb losses.
But fear not: Europe has promised this absolute resolution taboo won't repeat itself...
When asked if a deposit assessment could be ruled out
for future rescues, Rehn said in an interview: “It can and there is no
concrete case where it should be considered.”
... Until it does repeat itself of course - after all the
fundamental problem for Europe has never been resolved: the continent
is still broke, and it still is running out of good, unencumbered
assets (which as being repledged by the banking oligarchy) with every
passing day.
Now the only thing unknown is Russia's response:
Corporate tax rates in Cyprus will rise to 12.5 percent
to 10 percent as part of the deal, Dijsselbloem said. Rehn told
reporters that Russia, whose banks have loaned as much as $40 billion
to Cypriot companies of Russian origin, would ease terms on its
existing loans to Cyprus as the rescue unfolds. Cyprus’s finance
minister is scheduled to fly to Moscow on March 20.
What is known, however is that Cypriots have taken the news in
stride.... and to their local ATM machine, which sadly is showing the
following message: "Your transaction has been cancelled due to a technical issue. This ATM cannot complete withdrawals at this time" (courtesy of Yannis Mouzakis).
