Cyprus is the Template for How to Fail

April 5, 2013

By: Kelly Diamond, Editor

In the wake of the Cypriot Bank “bail-in”, Troika officials allude to the fact that Cyprus is a template or model for future Eurozone countries.

Despite the hasty assurances from politicians, not only is Cyprus more exemplary than exceptional, plenty of other western countries already have similar directives in place, in the event of similar circumstances.

Cyprus EU Template for How to FailWhile political leaders scramble about, putting their spin-machines in high gear, the folly of the Troika is rather obvious, and the people know the truth: no bank is safe in the Eurozone.  On March 25th, the new President of the Eurogroup, Jeroen Dijsselbloem, called Cyprus a template for how future crises could be handled in other countries:

“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 recapitalize 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 recapitalizing the bank, and if necessary the uninsured deposit holders.”

Realizing that was an unusual and dangerous act of candor, the EuroGroup hustled to back-peddle out of that statement, insisting, once again, Cyprus was a unique and exceptional case.  Spain, France, Portugal and Luxembourg rushed out to use the strongest most emphatic words they could find to deny that any such thing could happen in their countries.

Well, that’s just false.  This “template” is likely to become a full-scale EU law.  A law created by a bunch of unelected officials in the Super-National Troika.  Spain already made preparations to rob their own small depositers by first selling them “preferred stock” in their largest bank, Bankia.  Who do you suppose is the first group to take the hit?  The “preferred stockholders”!  After the 30 – 70% write-down and the conversion into common stock, their stock will literally only be worth 0.5% of its original value.

Canada and New Zealand have provisions in their policies to implement this very measure in the event of a bank crisis.  These protocols were in place LONG before anyone even knew Cyprus was a country!  Canada didn’t even bother hiding their intentions, but rather published it in their budget:

“The Government proposes to implement a “bail-in” regime for systemically important banks.  This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital.  This will reduce risks for taxpayers.  The Government will consult stakeholders on how best to implement a bail-in regime in Canada.  Implementation timelines will allow for a smooth transition for affected institutions, investors, and other market participants.”

New Zealand has an Open Bank Resolution which allows insolvent banks to recapitalize by skimming off depositors’ accounts as well.  Guaranteeing the money would be too expensive no matter who shouldered the cost: the depositors or the taxpayers.  And evidently, by allowing a “haircut” to the existing accounts, it allows the banks to open immediately the next day while giving the government time to come up with a solution.

Even the United States is murmuring similar directives like Cyprus and Spain.  In a paper released by the FDIC-BOE entitled “Resolving Globally Active, Systemically Important, Financial Institutions”, describes a protocol not much different from the Eurozone:

“An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution.”

I’m not seeing the part where insured deposits are exempt from these measures.  Are you?  It sheds a little light on facts most American depositors don’t know: When we deposit money into a bank, that money becomes the legal property of that bank, and we become unsecured creditors, holding IOUs.  Imagine if those IOUs were converted into bank stock?  What’s to prevent a similar scenario to that of Spain in the US?

No.  This measure of going after the depositors is anything BUT unique to Cyprus.  In fact, Cyprus just brought it out to the forefront for all to see… contemplate… and ultimately understand that no measure is beneath a central planning commission to prop itself up.

The fact that these policies are in place shows where the central planners’ heads are at.  They can call it “unlikely” or “extreme”.  They can marginalize the idea of banks failing or collapsing.  But someone sat down and wrote this anticipatory policy.  This shows foresight on the part of the central planners.  It’s time for depositors to show a little foresight of their own.

Some folks, like those in the La Rouche PAC, are clear on their assessment of the Eurozone situation, but are all over the map when it comes to solutions.  On the one hand, they resent the uber-centralized super nation: the EU.  They vilify the Troika as nothing more than a bunch of one-world utopian oligarchs.  They condemn their efforts as agenda driven, and having no regard for human life.  They call for a dismantling of the European Union.  I read that as: DECENTRALIZING.

Decentralizing is a FANTASTIC idea!  The problem is, they want these countries to revert back to their respective national currencies issued by their respective central banks.  Compound that with the cries for something comparable to the Glass-Steagall Act of 1933, and you have the makings of new banking problems.  All that did was create an unaccountable banking cartel whereby making commercial banking ridiculously profitable with mitigated risk.

The Glass-Steagall Act assumed that it was “too much competition amongst banks” that, in part, lead to the collapse in 1929.  That couldn’t be further from the truth!  While the world economy was suffering, U.S. policies certainly did nothing to extenuate the problem.  High tariffs and a Federal Reserve are the major contributors to the Great Depression.  First the Fed raised the fund rate… mandating that banks lend MORE.  They did.  And folks borrowed and over speculated with that money.  When stocks fell, people turned to currency.  Our currency was backed by gold, and there was a run on the dollar.  The Fed decided to raise interest rates to preserve the value of the dollar, which made it that much harder to borrow money.

Glass-Steagall introduced the FDIC.  Turns out even that isn’t enough to prevent these “haircuts”, “tax levies”, and “stockholder write-downs.”  If anything, the United States economic history of the past century is a 100 year case against central banking and government interference in the market place.  Included in that 100 year volume is the chapter on the 1920 Depression where Warren Harding refrained from any macroeconomic interferences, slashed the government, its spending and its debts drastically, and allowed the market to recuperate.  And recuperate it did: in ONE year!

It appears that individuals are in fact clamoring for decentralization.  Look at the gravitation toward BitCoin!  A currency without politics or government.  A totally decentralized monetary unit.  No central banks manipulating it.  No “Bank of Bitcoin” going into your accounts and skimming some arbitrary amount from your account because of some irresponsible activity.  Just an algorithm and a virtual account.  Isn’t it amazing how a virtual currency, generated out of thin air and backed only by a formula, has gained MORE faith and trust than tangible government currencies?

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Comments

  1. Michel Leduc says

    In your text, you do not mention the banks’ responsibilities in this economic disaster. Blaming governments is cheap. The real culprit is the banking system, whose leaders decided it was more important to give dividends to stock holders instead of thinking of their depositors.
    Ok, I live in a place that could be considered as “socialist” in its values. ( I live in the province of Quebec in Canada) I have no problems with the fact that people can invest and make a profit. I would like to encourage these people to continue. Where I have a problem is that some people think of themselves as being more “important” than others, investment wise. That they can have a bigger portion of the pie because of their investment. Because of this so-called self-importance and the financial voracity of these people and organisations, banks have forsaken their responsibily to those that are their basic investor, the depositor. Some governments encouraged this because it was good for the economy. In some countries there are control mechanisms that (partially…) protect the little guy. Let’s say that in Cyprus, there were no controls. The banks did make lots of money over the years; where is it now ?
    The minister of finance of Cyprus is going to resign; have the banks’ CEOs resigned ? Is there someone who is going to assume responsibility or is there a small group of people going to run away to a fiscal paradise and enjoy their “sting” ?

    • Kelly Diamond says

      Blaming the government isn’t cheap. It’s proper, and quite appropriate. The government won’t LET the banks fail. In fact, they won’t even let them compete based on financial stability and responsibility because we insure their depositors. Governments have literally turned banking into low risk (risk which is mitigated by tax payers) cartels. Why is the government putting protocols into place to STOP banks from failing? Canada has no controls in place. I read your budget for this year. It’s online for all of creation to see. Their directives are the same as Cyprus: skim depositor accounts to buy time for the government to come up with another solution to a failed bank. How is the government forcing itself into the banking industry the bank’s fault?

      I absolutely agree with your sentiment that banks should be allowed to fail, and that they should own their failures. I don’t think that bank executives should get their golden parachutes. But here in the US, we have politicians literally urging and incentivizing banks to extend loans to HIGH RISK, LOW CREDIT individuals… AGAIN. During the 1929 depression, our central bank instructed banks to lend MORE money out to speculators. THIS is the government’s doing. Can the banks say no? Why would they when the government says they’ll catch their fall? No different than any other welfare recipient: you’ll pay for my mistakes? Okay! Why be responsible?!

      I share your indignation 110%. But I am enraged that government won’t allow the banks to own their mistakes. This is not a cop out or a cheap shot. Nor is it any absolution or indemnification for the banks. But if we want responsibility to fall on the shoulders of the culprits, then government should get out of the way and allow it!

  2. Christian says

    Hey Guys;
    There seems to be a world wide problem for individuals wanting to place their money in a safe place. It appears that the last bastion to put your money is Switzerland, or convert your assets to different size gold & silver coins. This is a sad reality we seem to live in. To bad 90 % of the US population let alone the rest of the world doesn’t see this coming. But in reality 90% don’t have anything left after these last rounds devaluations, housing and stock market bubbles pop !!!
    There will be riots in the streets when this all comes down. Sad ….. everyone has been so busy watching dancing with the stars, the Voice, and all the ball games to see this train coming. That’s part of the dumbing down of the education system here in the US. It not that the whole population is stupid, although many are, or lazy, although too many are, thinking that the government will take care of them. the problem is the money has to come from somewhere, and printing only can go so far.
    Ok, so where can I safely place my money other than gold & silver, to keep it safe & be able to take it with me ?

    Love your daily posts & insight on how the world turns …..
    Christian

    • Kelly Diamond says

      Thank you for the kind words! You’re right, a good chunk of the general public have scales on their eyes.

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