BANKING: High Finance and Investment
Cyprus has killed the myth that European Monetary Union is benign and Prosperous
Profound lessons from the debacle in Cyprus:
“1) That ultimately, given the leveraged nature of the global financial system, deposit insurance is just another social promise that won’t be able to be kept.
“2) That the regulators are completely incapable of balancing their own budgets, never mind managing a business as complex as banking.
“3) You need to have some of your tangible assets outside of the system. (Remember that commodities are still in the System, such as petroleum, Big-Farming, Gold/precious metals, etc.) Thus physical possession is a important consideration.
“Cyprus Is The Homage Europe Pays For The Denial Of A Systemic Crisis”
Submitted by Tyler Durden on 03/24/2013
http://www.zerohedge.com/news/2013-03-24/cyprus-homage-europe-pays-denial-systemic-crisis
Three months ago, Yanis Varoufakis explained Europe’s bogus growth pact and the papering over the cracks that was being done by the IMF and ECB, “The idea here is that, yet again, the Eurogroup-ECB-IMF alliance is not ready, politically, to reveal the truth to its various constituencies.” He was, obviously, correct. This weekend, in a brief BBC Radio interview (below), as Cyprus erupts and brings the European circus back into town, Varoufakis exclaims, “every bailout agreement, beginning with Greece’s in May 2010, seems less logical and more toxic than the previous one.” In three minutes, the Greek economist illustrates how the leaders are laying waste to the supposed pillars upon which the European Union was founded.
Here are some unedited thoughts I just shared with the BBC’s Radio 4 on Cyprus while we are all waiting for the new deal to shape up:
Cyprus’ banking sector must shrink. As did Ireland’s, the hard way. What is essential, as every Irishman and woman will tell you, is that the politicians do not load up the weaker citizen’s/taxpayers’ shoulders with enormous debts on behalf of bankers that refuse to wither.
Every bailout agreement, beginning with Greece’s in May 2010, seems less logical and more toxic than the previous one. The culmination was of course Cyprus this past week. Think about it: In one short week, Europe has managed to put in jeopardy:
- The hitherto sacrosanct concept of state guaranteed deposit insurance
- The monetary integrity of the Eurozone
- The European Union’s single market principle according to which capital controls are a no-no.
If only the agreement reached at last June’s EU Summit to de-couple the banking crisis from the public debt crisis had been implemented, we would not be having this conversation now.
The Cyprus debacle is the homage that denial of the systematic nature of the euro crisis pays to a systemic crisis.
Cyprus parliamentarians offered the Eurozone a reprieve from the stupidest and most potentially destructive Eurogroup decision since this Crisis began three years ago. It now remains to be seen whether, scared by the sound of their own NO, they will now succumb to an even less rational deal.
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A Word Out Of Place Sends Europe Tumbling
Submitted by Tyler Durden on 03/25/2013
http://www.zerohedge.com/news/2013-03-25/word-out-place-sends-europe-tumbling
Perhaps the best example of a “word out of place” comes from the new Eurogroup head, Dijsselbloem, also phonetically known as Diesel-BOOM, who just may have ushered in the next, next wave of the Eurozone crisis:
- “Cyprus a Template For EU“
Er… wasn’t it a special case, inside a unique case, wrapped in a one-time case? We will ignore the rather hilarious Freudian slip, and focus on what he was explicitly talking about with Reuters, which is the resolution model which was 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.
The punchline:
The approach marks a radical departure for euro zone policy after three years of crisis in which taxpayers across the region have effectively been on the hook for resolving problem banks and indebted governments via multiple rescue programmes.
That process, with governments and taxpayers bearing the costs and providing the back stop, had to stop, Dijsselbloem said. Recent financial market calm meant now was the time to make the change, although he conceded there was some concern that it could unsettle markets again.
If adopted by the euro zone, Dijsselbloem’s template could also sound a death knell for a plan hatched nine months ago when the euro zone debt crisis was threatening to blow the currency area apart.
Then, euro zone leaders agreed that the bloc’s future rescue fund should be allowed to recapitalise banks directly, thereby breaking the debilitating link between teetering banks and weak governments forced to bail them out. That may now never happen.
Asked what the new approach meant for euro zone countries with highly leveraged banking sectors, such as Luxembourg and Malta, and for other countries with banking problems such as Slovenia, Dijsselbloem said they would have to shrink banks down.
“It means deal with it before you get in trouble. Strengthen your banks, fix your balance sheets and realise that if a bank gets in trouble, the response will no longer automatically be that we’ll come and take away your problem. We’re going to push them back. That’s the first response we need. Push them back. You deal with them.”
Translation: it now officially sucks to be an unsecured creditor in Europe. In other words: an uninsured depositor.
Why this ad hoc dramatic shift in the European approach to bank solvency, which if anything makes the link between bank and sovereign closer than ever, and crushes all that Draghi achieved in the summer of 2012?
Simple: because what Cyprus allowed was the effective usurpation of democracy – the only reason the Cypriot bailout “passed” (at least so far) is because it was structured as a bank restructuring, a financial system “resolution”, not a tax, and thus not in need of a parliamentary, democratic vote. Because as Cyprus also showed, votes to deprive depositors of cash, whether insured or uninsured, simply won’t fly.
Hence the shift.
However, there is a problem: it means that depositors are now fair game everywhere, and that the ESM or EFSF, with their unlimited scope but “democratic” impleention pathway, are on the backburner.
And now, the scramble to pull uninsured deposits out of banks everywhere begins. Thanks to the new Eurogroup head.
“You ask for miracles, Theo. I give you Diesel-BOOM”
And now, every European depositor is going to their local financial dictionary to look up the definition of General Unsecured Claims, only to see a picture of… themselves.
v
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By Luke Baker BRUSSELS | Mon Mar 25, 2013 2:40pm GMT
http://uk.reuters.com/article/2013/03/25/uk-eurogroup-cyprus-dijsselbloem-idUKBRE92O0IL20130325
(Reuters) – 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.
The approach marks a radical departure for euro zone policy after three years of crisis in which taxpayers across the region have effectively been on the hook for resolving problem banks and indebted governments via multiple rescue programmes.
That process, with governments and taxpayers bearing the costs and providing the back stop, had to stop, Dijsselbloem said. Recent financial market calm meant now was the time to make the change, although he conceded there was some concern that it could unsettle markets again.
“If we want to have a healthy, sound financial sector, the only way is to say, ‘Look, there where you take on the risks, you must deal with them, and if you can’t deal with them, then you shouldn’t have taken them on,'” he said.
“The consequences may be that it’s the end of story, and that is an approach that I think, now that we are out of the heat of the crisis, we should take.”
If adopted by the euro zone, Dijsselbloem’s template could also sound a death knell for a plan hatched nine months ago when the euro zone debt crisis was threatening to blow the currency area apart.
Then, euro zone leaders agreed that the bloc’s future rescue fund should be allowed to recapitalise banks directly, thereby breaking the debilitating link between teetering banks and weak governments forced to bail them out. That may now never happen.
Asked what the new approach meant for euro zone countries with highly leveraged banking sectors, such as Luxembourg and Malta, and for other countries with banking problems such as Slovenia, Dijsselbloem said they would have to shrink banks down.
“It means deal with it before you get in trouble. Strengthen your banks, fix your balance sheets and realise that if a bank gets in trouble, the response will no longer automatically be that we’ll come and take away your problem. We’re going to push them back. That’s the first response we need. Push them back. You deal with them.”
ESM
The marked change in attitude, which Dijsselbloem agreed was a shift in strategy for EU policymakers, has consequences for how banks are recapitalised and for how financial markets react.
One of the major steps the euro zone has taken over the past three years has been to set up a rescue mechanism with guarantees and paid in capital totalling up to 700 billion euros – the European Stability Mechanism.
The expectation was that the ESM would be able to directly recapitalise euro zone banks that run into trouble from mid-2014, once the European Central Bank has full oversight of all the region’s banks.
The goal of the ESM and direct recapitalisation was to break the so-called “doom loop” between indebted governments and their banking sectors. Now, Dijsselbloem says the aim is for the ESM never to have to be used.
“We should aim at a situation where we will never need to even consider direct recapitalisation,” he said.
“If we have even more instruments in terms of bail-in and how far we can go on bail-in, the need for direct recap will become smaller and smaller.
“I think the approach needs to be, let’s deal with the banks within the banks first, before looking at public money or any other instrument coming from the public side. Banks should basically be able to save themselves, or at least restructure or recapitalise themselves as far as possible.”
Dijsselbloem, 46, who took over as Eurogroup president only in January, said he had discussed the new approach with financial market participants and said he expected that they would adjust to the new regime over time.
“Now we’re going down the bail-in track and I’m pretty confident that the markets will see this as a sensible, very concentrated and direct approach instead of a more general approach,” he said.
“It will force all financial institutions, as well as investors, to think about the risks they are taking on because they will now have to realise that it may also hurt them. The risks might come towards them.”
(Writing by Luke Baker, editing by Mike Peacock)
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GATA
Zero Hedge: Dutch bank won’t let gold customers take their metal away
Submitted by cpowell on Mon, 2013-03-25 00:49. Section: Daily Dispatches
8:47a HKT Monday, March 25, 2013
Dear Friend of GATA and Gold:
ZeroHedge reports today that the Dutch bank ABN Amro has told its gold customers that they no longer will be able to take delivery of their supposed metal but that if they want to liquidate, they’ll get the “bid price” — which maybe will be the price offered by people who would like to buy gold but won’t be allowed to take delivery either. And so the paper gold game gets even sillier and more desperate. The Zero Hedge report is posted here:
http://www.zerohedge.com/news/2013-03-24/another-gold-shortage-abn-halt-physical-gold-delivery
Another Gold Shortage? Dutch ABN To Halt Physical Gold Delivery
Based on a letter to clients over the weekend, it appears Dutch megabank ABN Amro is changing its precious metals custodian rules and “will no longer allow physical delivery.” Have no fear, they reassuringly add, your account will be settled at the bid or offer price in the ‘market’ and “you need to do nothing” as “we have your investments in precious metals.”
Via Google Translate,
Changes in the handling of orders in bullion
On 1 April 2013,. ABN AMRO to another custodian for the precious metals gold, silver, platinum and palladium. This we your investments in precious metals otherwise handle and administer. In this letter you can read more about it.
What will change?
With the transition to the new custodian will include the following from 1 April 2013 for you to change.
• You can have your precious metals to your investment account no longer physically let us extradite
• Gives you order in precious metals via the giro ABN AMRO? Then the settlement of orders that henceforth performed at bid prices or at the offer prices prevailing on the market for precious metals. No longer based on the mid-price, as you used to.
• The bid price is the price that merchants offer for precious metals that are offered for sale, so if you sell.
• The ask price is the price at which traders want to sell precious metals, so if you buy.
• We are the positions in these precious metals in your investment statements against future bid prices appreciateYou can read more about investing in precious metals in Chapter 4 (Supplementary conditions for investing in precious metals) of the Conditions Beleggersgiro. You can find these at abnamro.nl / Conditions invest
Should I do anything?
You need do nothing. We ensure that we have your investments in precious metals now the new way to handle and administer.
>>>
GATA
New Cyprus plan may wipe out large depositors
Submitted by cpowell on Mon, 2013-03-25 00:20. Section: Daily Dispatches
Cyprus and EU Agree on Draft Proposal to Rescue Banks
By Annika Breidthardt and Jan Strupczewski
Reuters
Monday, March 25, 2013
BRUSSELS — Cyprus, the European Union, and the International Monetary Fund have agreed on a new plan to resolve the island’s bank and finance a rescue of the country, an EU official said early on Monday.
The proposal, which will now be presented to euro zone finance ministers for discussion, will involve setting up a “good bank” and a “bad bank” and will mean that Popular Bank of Cyprus, known as Laiki, will effectively be shut down.
Deposits below 100,000 euros in Laiki will be transferred to Bank of Cyprus. Deposits above 100,000 euros, which under EU law are not insured, will be frozen and will be used to resolve debt. It remains unclear how large the writedown on those funds will be.
The EU spokesman said there would be no “levy” imposed on any Cypriot banks, with the package requiring a full “bail-in” of uninsured depositors, which is likely to mean heavy losses for those with large holdings in Laiki and potentially Bank of Cyprus, where many Russians hold bank accounts.
Cyprus reaches last-minute deal on 10 billion euro bailout
By Jan Strupczewski and Michele Kambas
BRUSSELS/NICOSIA | Mon Mar 25, 2013 12:52pm EDT
http://www.reuters.com/article/2013/03/25/us-cyprus-parliament-idUSBRE92G03I20130325
(Reuters) – Cyprus reached a last-ditch deal with international lenders on a 10 billion euro ($13 billion) rescue plan to avoid economic meltdown, agreeing to close down its second-largest bank and inflict heavy losses on big depositors.
The agreement came hours before a deadline to avert a collapse of the banking system in fraught negotiations between President Nicos Anastasiades and heads of the European Union, the European Central Bank and the International Monetary Fund.
Without a deal, Cyprus’s banking system would have collapsed and the country could have become the first to crash out of the European single currency.
Backed by euro zone finance ministers, the plan will spare the Mediterranean island a financial catastrophe by winding down the largely state-owned Popular Bank of Cyprus, also known as Laiki, and shifting deposits below 100,000 euros to the Bank of Cyprus to create a “good bank”.
Deposits above 100,000 euros in both banks, which are not guaranteed under EU law, will be frozen and used to resolve Laiki’s debts and recapitalize Bank of Cyprus, the island’s biggest, through a deposit/equity conversion.
The raid on uninsured Laiki depositors is expected to raise 4.2 billion euros, Eurogroup chairman Jeroen Dijssebloem said.
Laiki will effectively be shuttered, with thousands of job losses. Officials said senior bondholders in Laiki would be wiped out and those in Bank of Cyprus would have to make a contribution.
An EU spokesman said no across-the-board levy or tax would be imposed on deposits in Cypriot banks, although the hit on large account holders in the two biggest banks is likely to be far greater than initially planned. A first attempt at a deal last week collapsed when the Cypriot parliament rejected a proposed levy on all deposits.
It was unclear if banks would reopen for business on Tuesday, but an announcement, if any, was anticipated to be accompanied by restrictions on capital movements to prevent a run on banks.
UNFORESEEABLE CONSEQUENCES
Cyprus government spokesman Christos Stylianides said: “We averted a disorderly bankruptcy which would have led to an exit of Cyprus from the euro zone with unforeseeable consequences.”
Asked about the level of losses on uninsured depositors in Bank of Cyprus, he told state radio: “The assessment is that it will be under or around 30 percent.”
The Cyprus central bank said the agreement had also avoided the disorderly default of Laiki Bank.
Russia signaled it would back the bailout even though it would impose big losses on Russian depositors, who have billions in Cyprus banks.
President Vladimir Putin ordered officials to restructure a loan Moscow granted to Cyprus in 2011 – having rejected Nicosia’s request for easier terms in crisis talks last week.
Prime Minister Dmitry Medvedev – who ranks below Putin – earlier criticized the bailout, voiced the anger expressed by Russian depositors, saying: “The stealing of what has already been stolen continues.”
Among Cypriots, there was a mood of wariness about the deal.
“How long will it last?” asked Georgia Xenophontos, 23, a hotel receptionist in Nicosia. “Why should anyone believe anything this government says?”
But many in the capital appeared intent on enjoying a sunny holiday morning, drinking coffee at pavement cafes and watching camera crews filming people drawing money from bank machines.
German Chancellor Angela Merkel said the deal was right for Cyprus because it ensured that those who contributed to the crisis were required to pay towards its resolution.
“I am very pleased that a solution was found last night and that we have been able to avoid an insolvency,” Merkel said.
Anastasiades is expected to make a live televised statement at 1.00 p.m. EDT, after his return to Cyprus from Brussels.
Lefteris Christoforou, vice-chairman of the ruling Democratic Rally party, said it was important that Cyprus had avoided a chaotic bankruptcy. “It is a bad deal, but the extreme scenario we had to contend with was worse.”
RESIGNATION THREAT
A senior source in the Brussels talks said Anastasiades threatened to resign at one stage on Sunday if pushed too far.
The Conservative leader, barely a month in office and wrestling with Cyprus’s worst crisis since a 1974 invasion by Turkish forces split the island in two, was forced to abandon his efforts to shield big account holders.
Diplomats said the president had fought hard to preserve the country’s business model as an offshore financial center drawing huge sums from wealthy Russians and Britons but had lost.
The EU and IMF required that Cyprus raise 5.8 billion euros from its banks towards its own rescue in return for 10 billion euros in international loans. The head of the EU rescue fund said Cyprus should receive the first emergency funds in May.
IMF chief Christine Lagarde said the agreement was “a comprehensive and credible plan” that addresses the core problem of the banking system.
“This agreement provides the basis for restoring trust in the banking system, which is key to supporting growth,” she said in a statement.
With banks closed for the last week, the Central Bank of Cyprus imposed a 100-euro daily limit on withdrawals from cash machines at the two biggest banks to avert a run.
The euro gained against the dollar on the news in early Asian trading.
Analysts had said failure to clinch a deal could have caused a financial market sell-off, but some said the island’s small size – it accounts for just 0.2 percent of the euro zone’s economic output – would have limited contagion.
Cyprus’s banking sector, with assets eight times the size of the economy, has been crippled by exposure to Greece, where private bondholders suffered a 75 percent “haircut” last year.
Without a deal by the end of Monday, the ECB said it would have cut off emergency funds to the banks, spelling certain collapse and potentially pushing the country out of the euro.
Under the bailout agreement, Laiki’s ECB funds will pass to Bank of Cyprus, and the central bank will “provide liquidity to BoC in line with applicable rules”.
The tottering banks held 68 billion euros in deposits, including 38 billion in accounts of more than 100,000 euros – enormous sums for an island of 1.1 million people that could never sustain such a big financial system on its own.
($1=0.7694 euros)
(Additional reporting by Luke Baker, John O’Donnell, Robin Emmott, Philip Blenkinsop and Rex Merrifield in Brussels, Michele Kambas, Karolina Tagaris, Costas Pitas in Nicosia and Lionel Laurent in Paris. Writing by Paul Taylor, editing by Giles Elgood and Anna Willard)
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