World View: Cyprus Banks Remain Closed as Bailout Crisis Continues
This morning's key headlines from GenerationalDynamics.com
- Cyprus banks remain closed as bailout crisis continues
- Russia calls the Cyprus bailout 'Armed robbery by Brussels'
- The Cyprus bailout and the 'Kick the Can Theory'
- For the first time, a major Chinese company goes bankrupt
- Syria's conflict may be spreading into Lebanon
Cyprus banks remain closed as bailout crisis continues
Cyprus' bailout crisis deepened on Monday, as the Parliament
put off for the second day a vote on whether to accept the
European bailout terms. The terms are that the European
Central Bank would supply a 10 billion euro loan, but require
that Cyprus come up with 5.8 billion euros by "taxing" its
savings bank depositors 6.7% for accounts under 100,000 euros,
and 9.9% for larger accounts.
Cyprus has announced that its banks will remained closed at
least until Thursday, in order to prevent bank runs while
the government tries to resolve the crisis.
A vote is now scheduled for Tuesday evening. If the bailout
terms are rejected, then the ECB will cut off all liquidity
to Cyprus, forcing it to leave the euro currency, according
to a number of analysts.
The bailout terms have caused worldwide anxiety over the banking
system. Reading various comments on blogs and in media interviews,
I've read and heard things like the following:
- "I've withdrawn every penny from my bank account. I just
don't trust them."
- "People who have saved their entire lives are now learning
that the government can take their money at any time."
- "The people who spent all their money are OK. The people who
saved money are being hurt."
- "If they can do it here in Cyprus, they can do it anywhere."
- "Deposit insurance is worthless, everywhere in the world."
- "Lock and load. Stock up on canned goods, and be ready
to defend yourself when the government shows up."
- "The government can now track every penny you have in every
account in the world. This gives them the power to confiscate
it at any time."
- "If there's a financial crisis in the United States, the
government will do the same it did in 1933, when it confiscated
everyone's gold and closed the banks."
There has been pressure on the Europeans to soften the terms, but on
Monday they told Cyprus that the terms hadn't changed, but they
suggested that it's not necessary to raise the 5.8 billion euros from
small bank depositors.
According to one report I heard, there is a proposal to increase the
tax on accounts above 500,000 euros to 15%, and to remove the tax from
accounts under 100,000 euros. Bloomberg
Russia calls the Cyprus bailout 'Armed robbery by Brussels'
Russia's president Vladimir Putin is calling the bailout plan "unfair,
professional and dangerous." Prime minister Dmitry Medvedev said the
decision was strange and controversial, and that it "looks like a
forfeiture of other people’s money." According to various reports,
Russian banks and private individuals have some $30-40 billion
in Cyprus banks, and so they will lose $3-4 billion -- assuming
that the tax isn't is raised to 15% as some have proposed.
If the tax on Russian depositors is increased to 15%, it will
cause a real crisis in Russia, according to some commentators.
Another commentator suggested that a more dangerous scenario
for Russia would be if Cyprus enacts a moratorium on loan
repayments to Russia. This would cost Russia tens of billions
There are various unconfirmed reports floating around that the
Russians were tipped off in advance of the bailout plan, and that
Putin and some of his advisors transferred funds out of the Cyprus in
the days before the announcement. Once again, these reports are
unconfirmed. Russia Today
and Russia Today and Business Insider
The Cyprus bailout and the 'Kick the Can Theory'
Long-time will recall that several years ago I proposed the
"Kick the Can Theory" with regard to the financial debt crisis
in Greece. The theory said that the Europeans will never take
any action until the very last minutes, and then they'll only
"kick the can down the road," meaning that they'll do the
minimum necessary to solve the immediate problem, leaving the
underlying causes unchanged, only to get worse. Thus, each
crisis would be worse than the last one.
The Kick the Can Theory has been correct every time with respect
to the Greek crisis, but it seemed that the Europeans violate
the rules when it came to the Cyprus bailout.
The "pure" kick the can decision would have been for the ECB
to loan the entire bailout amount to Cyprus, so that no
depositors would be hurt. However, the Germans and others
objected to this, because they didn't want to bail out
So the ECB refused the "pure" kick the can decision, and so
Cyprus had to come up with billions of euros.
Contrary to initial assumptions, it wasn't the Europeans or the
Germans who insisted that Cyprus "tax" small savings accounts. It was
the Cyprus government that made that decision. Cyprus was left to
find a can-kicking solution on its own -- either tax small depositors
or tax the Russians. Either way, they were going to be blamed. They
tried to take a middle road and tax both, but now they're getting
dumped on from both sides.
The experience this weekend shows what happens when the Kick
the Can Theory is violated. There was no way to "kick the
can down the road," since the Europeans have reached the
end of their patience in bailing countries out.
There are now crisis talks going on across Europe to find a
One possibility is that Russia may bail Cyprus out in return
for exclusive contracts to Cyprus's rich offshore oil and
natural gas fields.
Another possibility, already suggested, is that small depositors
would be protected, and the entire burden would be on large
depositors, including Russians and other foreign depositors.
Another possibility, also already mentioned, is that the ECB
back-pedal and agree to provide the entire 17 billion euro bailout
loan. This would deal a fatal blow to austerity drives in Greece,
Italy, Spain and other countries.
Another possibility is that Cyprus can leave the eurozone, and
return to its old currency, the pound, which was their currency
until the adopted the euro in 2008.
Each of these solutions has serious obstacles. What's interesting is
that the Europeans are "running out of road," in the sense that you
can only kick the can down the road so far.
The next 24-48 hours are crucial, and a compromise of some sort
will be reached. However, that won't end the crisis. Europe
has crossed a red line, and everyone from widows and orphans
to oligarchs are now fully aware that their bank accounts are
As I've written many times, Europe is trending into a deflationary
spiral, and Generational Dynamics predicts that there will be a major
global panic and financial crisis, worse than the panic and crash of
1929, and it will be triggered by something. Perhaps the Cyprus
decision will be the trigger, perhaps something else will. But the
Cyprus decision has already raised anxiety among savers around the
world, and moved the world one step closer to full scale panic.
For the first time, a major Chinese company goes bankrupt
A major Chinese company, the world's biggest maker of solar panels, is
declaring technical bankruptcy and going into default, after failing
on Friday to repay $541 million in debt repayments. The company,
Suntech Power Holdings Co. Ltd. (STP), had been supported by China's
state organizations. As I've said in the past, as bad as America's
economy is, China's is much worse, with huge ghost cities and massive
air and water pollution. Bloomberg and Zero Hedge
Syria's conflict may be spreading into Lebanon
Jets and helicopters from the regime of Syria's president Bashar
al-Assad fired rockets into targets inside Lebanon on Monday. The
al-Assad regime has threatened to take war into Lebanon, targeting
"concentrations of armed gangs inside Lebanese territory in order to
prevent them from crossing into Syrian territory." The Mideast as a
whole continues step by step to become destabilized, and the Syrian
conflict continues to turn into a regional war between Sunni and Shia
Muslims. Daily Star (Lebanon)
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