While Europe in general remains stuck in a structural recession, there are signs of hope on the horizon. Some political leaders are beginning to think outside the box to find a way out of the economic wasteland created by the austerity hurricane.
One of these new promising leaders is Finance Minister Georgiades of Cyprus. In a recent speech he pledge allegiance to austerity – a political must for a European – but his ambitions actually go beyond that. From Cyprus Mail:
The [Cyprus] government aims to reduce state spending by 10 per cent in 2014, and reduce the public deficit without imposing new taxes, Finance Minister Harris Georgiades told an audience of overseas Cypriots yesterday. Speaking at the 17th annual conference of Greek and Cypriot organisations abroad, Georgiades said this amounted to savings of around €700 million. The aim is to reduce the public deficit to around €500m next year and ensure a primary surplus by 2016, a step closer towards Cyprus returning to international markets for capital. He assured overseas Cypriots that the government’s policy focused on curbing spending, not imposing new taxes, adding: “We will secure taxation stability.”
Before we get to the good news in what Georgiades has in mind, let us first get a little bit of a background. The Cypriot government debt increased rapidly during the first four years of the crisis, from 48.9 percent of GDP in 2008 to 84.2 percent in 2012. One reason was that the nation’s banks were in struggling after having invested heavily in Greek treasury bonds. Partly as a result of the losses the Cypriot banks took on its loans to the Greek government, in the spring of this year the Cypriot government was strong-armed by the EU-ECB-IMF troika into stealing deposits from customers of the country’s banks. The Cyprus Bank Heist was sold as a rescue plan for the entire banking industry. In reality, there was never a need for that egregious an assault on private property rights, especially not when it came to helping the Cypriot government avoid yet more debt. The banks were, simply put, never in as bad of a situation as the EU-ECB-IMF troika suggested.
Back to Cyprus Mail:
“We lived beyond our means” both in the public and private sector, he told the audience. The Cypriot state was spending more than it earned, and not on development projects, creating continual deficits and a growing debt, said the minister. At the same time, banks were lending money beyond the means of the real economy, with the money directed towards consumption. “In just three years from 2005 to 2007, private lending doubled.”
Again, this sounds more like politically mandated rhetoric than anything else. From 2005 to 2009 private consumption in Cyprus grew by an average of 3.9 percent per year, adjusted for inflation. That is a healthy rate, though not exceptional. Poland experienced 4.1 percent consumption growth during that same period. Other countries saw even higher growth rates, such as Romania (5.8 percent per year), Slovakia (5.0) or Serbia (4.6). It is worth noticing that all these countries are emerging European economies, which during the years after 2000 reaped the harvests of deregulation and still having a relatively limited government. It is hardly surprising that Cyprus would be in the same group.
In other words, whatever consumption boom that generous bank lending could have led to, it did not cause any exceptional growth in private consumption. The prime minister’s point is therefore a moot one unless he can specify what the lending went to, if it created a mortgage crisis, etc.
The problem is if the Cypriot government now resorts to sustained austerity measures. It is understandable that they try to focus entirely on spending cuts: there are suggestions in current public policy literature that austerity packages with at least two-to-one spending cuts are much more successful than packages with more tax hikes in them. However, the evidence that such suggestions rest on is shaky in some cases and in other cases very limited in policy application. Overall, the current experience from Greece, Spain, Italy and Portugal (as well as Sweden in the ’90s) is that austerity in general is actually quite bad for the private sector.
This is not an argument for keeping big government. It is an argument for doing away with it entirely, not trying to save it by means of austerity.
And now for the good news. Attached to his pledge to austerity, Finance Minister Georgiades, according to the Cyprus Mail, made promises to match spending cuts with tax cuts down the road. This is a first on the European scene since the austerity assault began:
Once government got a grip on public finances and reduced expenditures it would also lower the tax burden, he said. The government also planned to make significant structural changes, referring to the new social welfare policy, new healthcare plan and “ambitious” reform of the public sector. Regarding Cyprus’ battered banking sector, the minister argued that it was stabilising day by day.
If the Cypriots do indeed move beyond mere austerity, there is a brighter tomorrow on the horizon for them. Let’s keep an eye on them and see what they come up with.
The rule of law is a cornerstone of Western Civilization. The rule of law means that government protects the life, liberty and property of its citizens.
Another cornerstone of Western Civilization is accountable government. It goes hand in hand with the rule of law, such that the protection of life, liberty and property is executed with the consent of the governed.
The two remaining cornerstones of Western Civilization are individual and economic freedom. A necessary (but not sufficient) condition for economic freedom is the protection of private property.
Remember the Cyprus Bank Heist? If you had money there, I am sure you won’t forget it for as long as you live. Under the auspices of wanting to save the nation’s banks and rid them of allegedly widespread money laundering, the Cypriot government and the European Union seized up to 40 percent of people’s bank deposits. On May 25, though, I reported that the portion about money laundering was a complete fabrication: a whopping 0.000049 percent of all bank transactions in 2008-2012 were possibly illegitimate.
That is a rate of compliance with the law that maybe Mother Teresa can match. If government can seize private property – yours or others’ – because you violate a law once for every 20,344 things you do every day, then there would be no private property left in this world.
The Cyprus Bank Heist was a floodgate of authoritarianism, opened to unleash hitherto not-seen government powers against private citizens. Even the creatively constitutional Russian government was astounded and compared the entire scheme to actions taken by Communist thugs in the old Soviet Union.
Needless to say, this assault on one of the cornerstones of a free, civilized society has had decisively negative influence on the banking industry in Europe, with shrinking deposits and lost faith in the safety and security of what people still have in their savings accounts.
To make matters worse, soon after the heist we learned that this was not a one-time, one-country deal. On the contrary, other governments followed Cyprus with pledges or laws to allow the same confiscatory scheme to be applied within their jurisdictions. The Canadian government, e.g., announced in its federal budget bill this spring that it wanted the authority to save what it called “systemically important” banks by permitting those banks to “convert liabilities into assets”, i.e., take people’s bank deposits.
It is bad enough that we have a widespread tax system in all Western countries, allowing governments to seize property on a regular basis. At least in terms of taxation there is a sense of stability and predictability that allows people some foresight and opportunity to plan their economic activities based on the confiscatory scheme. But bank deposit confiscation is an entirely new instrument for governments to grab people’s money. It is unpredictable in time – the Cyprus Bank Heist happened after the banks suddenly closed and refused to open for days – and it is arbitrary in size. Even after the Cypriot government ordered the banks closed (how they could do that is another interesting question) there was still a great deal of uncertainty and debate among the Eurotarians who made this happen as to exactly how much of people’s money they were going to take.
All in all, the Cyprus Bank Heist dealt a serious blow to one of the cornerstones of the Western world. But perhaps it would be possible to repair the damage if there was some kind of economic logic to all this? Maybe, if the confiscation saved Cyprus from some kind of cataclysmic macroeconomic event, it would make sense?
As an economist by training and unstoppable habit I cannot find any such event, even remotely conceivable, that would justify what the Cypriot government and their Eurotarian co-conspirators did. Perhaps if I kept looking I’d find that justification, but I doubt it would be worth it, especially since the Cyprus Mail reports that nothing good came out of the Cyprus Bank Heist:
Rating agency Fitch on Monday cut Cyprus’ rating further into junk and warned more cuts could be on the way as an EU/IMF rescue programme could fail. The agency cut Cyprus’ long-term foreign currency issuer default rating to B-minus from B with a negative outlook due to the country’s elevated economic uncertainty.
One of the motivating factors behind the Cyprus Bank Heist was to remove a critical threat to the country’s economy, namely a bank collapse. If the confiscation was so necessary, then why did it not even make a dent in the downward spiral of the Cypriot economy?
Cyprus Mail again:
“Cyprus has no flexibility to deal with domestic or external shocks and there is a high risk of the (EU/IMF) program going off track, with financing buffers potentially insufficient to absorb material fiscal and economic slippage,” Fitch said in a statement. The local currency issuer default rating (IDR) was cut to `CCC` from `B`. … The downgrade of the foreign currency IDR to `B-` reflects the elevated uncertainty around the outlook for the Cypriot economy due to the high implementation risks on the agreed programme and the restructuring of the banking industry.
And listen to this:
Fitch acknowledges that the programme improves the immediate position of the sovereign from both a liquidity and solvency perspective, however, it notes that Cyprus has no flexibility to deal with domestic or external shocks and there is a high risk of the programme going off track, with financing buffers potentially insufficient to absorb material fiscal and economic slippage.
In plain English: the Cyprus Bank Heist provided a one-time replenishment of bank balance sheets but did not change anything at all in the rest of the economy. The Cypriot GDP is still forecast to shrink by 1.7 percent this year and 0.7 percent next year – and that’s on a good day. Youth unemployment was 27.8 percent last year, up from nine percent in 2008. And the banks’ balance sheets are still full of junkyard-grade treasury bonds from Greece – and Cyprus.
Government debt was 54 percent of GDP in 2008 and is now, according to Cyprus Mail…
likely to peak higher than the 126 per cent of GDP by 2015 assumed under the programme, reflecting Fitch`s view a deeper recession in the later years of the programme is possible and that there is little sign at this stage of the potential for Cyprus to transform its economy successfully away from sectors associated with the shrinking financial sector.
So the financial sector is shrinking, huh? What a confounding surprise. The one industry that had given the Cypriot economy a real boost is now bruised, battered and shattered by authoritarian government intervention.
There is little doubt that the real purpose behind the Cyprus Bank Heist was to politically “legitimize” an entirely new form of taxation. By starting off in a small country, wrongfully vilified as the home of rampant tax evasion and money laundering, the EU was able to get the precedent it needed for the future. Never mind that they left an entire nation’s economy in even worse shape than before. Never mind that they dealt a serious blow to the faith in the rule of law in the EU.
All that mattered was that the Eurotarians in Brussels could expand their power.
There is no other conclusion to draw from this than that the EU is indeed a threat to democracy, freedom and the very essence of what Western Civilization represents. The sooner it is dissolved, the better.
Remember the Cyprus Bank Heist? The troika formed by the European Union, the European Central Bank and the International Monetary Fund strong-armed the Cypriot government into seizing parts of people’s bank deposits. One of the arguments for this was that Cyprus was a haven for shady banking, most of which allegedly coming out of Russia. As late as May 17, the Wall Street Journal reported:
There are plenty of reasons why Cyprus’s bailout took so long and came with such tough terms. But one is very clear: Cyprus’s reputation as a site for money laundering and tax avoidance made its rescuers loath to prop up its bulging banks.
By stirring up these sentiments, the EU-ECB-IMF troika was able to push the Cypriot government into an unprecedented assault on private property. The only problem is that the talk about money laundering was mixed with generous portions of hot air. Cyprus Mail reports:
Cyprus yesterday accused the troika of distorting information in a document purportedly summarising the island’s status vis a vis anti-money laundering (AML) measures by “drawing inferences” where none existed in the original reports. … Yesterday the Central Bank of Cyprus (CBC) said the summary did not give a synopsis of the main findings “but rather a description of the perceived weaknesses of the system, drawing inferences where none exist in the original reports.”
How about that – “drawing inferences where none exist”! In short: building a castle on clouds.
“The lack of consultation with the authors of the reports and the failure to refer to any of the positive aspects mentioned therein, has resulted in erroneous and distorted conclusions in the media, especially the international press,” the CBC said in a statement. “A summary of the reports cannot be considered balanced if it omits to mention that they reveal a number of strengths both in the Cypriot AML framework and in the effective implementation of customer due diligence by Cypriot banks.”
So why has the Troika omitted this from their report summary? Well, here is one clue:
An independent audit of Cyprus’ implementation of AML measures was set as a precondition for an international bailout. Cyprus initially resisted the idea, arguing it had already been cleared in a prior assessment by [EU money laundering agency] Moneyval. The government later backed down and agreed to a fresh review, one by Moneyval and a parallel one by private auditor Deloitte. The summary said that between 2008 and 2010, Cypriot banks reported not a single suspicious transaction under anti-money laundering regulations, and flagged only one in 2011 and “a few” in 2012.
The report on money laundering sampled 590,000 transactions and found a full 29 – twenty nine – that could be deemed suspicious. In other words, 0.000049 percent of all bank transactions could possibly be illegitimate.
That is a legal compliance rate that would make any government agency in Europe or the United States green with envy. I doubt that a single employee of the EU-ECB-IMF troika can prove that only 0.000049 of their daily activities violate some law.
Among the positive aspects the CBC listed as being absent from the troika summary was the fact that Deloitte also said Cyprus had a stricter legal framework beyond normal EU standards. “In the audit for compliance with the CDD (customer due diligence) requirements of the Cyprus legal framework, it is worthy of note that these requirements are more detailed, and to a certain extent prescriptive, than in many other jurisdictions, including other EU Member States that similarly have implemented the requirements of the Third Money Laundering Directive,” the CBC quoted Deloitte as saying. Cyprus also had a solid level of compliance on CDD across the sector and displayed strong compliance in the identification of customers, it said.
Long story short: Cyprus was not a haven for illicit banking. It was simply a low-tax jurisdiction that attracted more investments because of that than banks in larger, higher-taxed countries. For two reasons the Troika decided to use Cyprus as a vehicle for their outrageous scheme to seize people’s bank deposits:
1. Its low taxes were a sore spot for tax-greedy governments elsewhere in the EU, including over-bloated welfare states in north and central Europe. They wanted an opportunity to crush the economy of a “tax haven” and set an example so as to prevent others from breaking the tax-to-the-max ranks.
2. Cypriot banks had invested heavily in Greek treasury bonds. When the Greek government and the Troika forced the creditors of the Greek government to forgive a good part of their loans – prosaically referred to as a debt “haircut” – banks in Cyprus were among the hardest hit. Since the Cypriot government, like every other government in the EU, wanted to prevent its banks from failing as a result of bad investments in bad treasury bonds, they had to consider a bailout scheme. The Troika took the chance to blackmail the Cypriot government into being the first to steal money from bank customers, using unfounded accusations of shady banking practices to twist the arm of the Cypriot government.
The impression that Cyprus was singled out for reasons unrelated to the unfounded accusations of money laundering is reinforced by a concluding statement from the Cypriot government:
Echoing the [Central Bank of Cyprus] CBC, a statement from the finance ministry said the nature and depth of the assessments done on Cyprus were “unique and have never been carried out in any other jurisdiction”. “The outcome of the assessments … indicates a solid level of compliance across the sector,” the ministry said.
In other words, all the other countries that have passed, or are considering passing, deposit confiscation schemes as part of a legal way to “save” their banks have done so based on a false premise, namely that the Cypriot Bank Heist was legitimately motivated by bad banking practices.
Will this make any legislators in Europe or Canada rethink their support for this kind of authoritarian assault on property rights? Probably not. What reasons would those legislators have to reverse the growth of government power?
Never bark at the big dog. The big dog is always right.
To begin with, I have said all the way that the European crisis is a welfare-state crisis, not a financial crisis. The blow to the banks from the financial-market problems of 2008 would never have caused the ripple effects it did, had it not been for the fact that banks in Europe had invested so heavily in government treasury bonds.
The banks thought – for obvious reasons – that those bonds were the safest investment they could make, that large investments in treasury bonds would provide them with a rock-solid low-risk platform for their portfolio management. But then the welfare states in Europe kept on spending on their entitlements, despite the fact that scores of taxpayers were either unemployed or earning fractions of what they would in a strong economy. They started having problems paying their creditors – i.e., the banks.
Low-risk treasury bonds became high-risk assets. Bank portfolios were totally upset, leaving them with much more of mid-to-high risk assets than was healthy for them.
Today the British news site The Commentator confirms my analysis, using Cyprus as an example:
When the European Union (with German money) mounted its most recent bailout of Greece, one of the conditions was a 75 percent write down of Greek government debt. For the Cypriot banks, which had made loans to the Greek government totalling 160 percent of Cyprus’s GDP, this was disastrous.
I was also right about the true purpose behind the Cyprus bank heist. Yesterday I explained that the plan to confiscate bank deposits was not going to be a one-time exceptional event, but was instead intended to set a new precedent for future bank-deposit confiscation raids:
Again, the two-fold goal of the Cyprus bank heist is to secure the euro zone as it is and to cause a long-term depreciation of the euro. In order to accomplish the latter, the Eurotarians have to create a certain, calculated level of capital flight from the euro zone. There are several ways to do this, but the instrument they have chosen – seizing bank deposits above a certain level – is devious enough to work. However, to cause a “right-sized” exodus you cannot limit the scheme to one country. You need others to follow.
British daily newspaper The Guardian has a story that confirms my analysis:
Fears that bank accounts could be raided in any future eurozone bailouts spooked markets on Monday, as Cypriots prepared for their banks to reopen for the first time in over a week on Thursday following a deal to secure a €10bn lifeline. Markets took fright after the head of the group of eurozone finance ministers indicated that the Cyprus rescue could be a template for similar situations.
And then the question is: what is a similar situation? Again, the Cyprus bank heist was not about taking deposits from individuals to rescue the banks where they had their money. The purpose was instead to take depositors’ money to give to government, which then used it to prop up ailing and failing banks.
The difference may seem like a technicality, but it is not. The fact that government is the middle man is crucial: it is right there that you find the precedent in this confiscation scheme. Government took money from large-balance accounts because it did not have enough cash for very important expenditures. Next time the very important expenditure does not have to be a bank, or even a financial institution. It could just as well be an urgently needed but financially strapped income-security system (Americans, think TANF or even Social Security).
The purpose behind the Cyprus bank heist was not primarily to save the banks – that could have been handled in a much different way by, e.g., the ECB printing another five billion euros – but instead to establish that government can raid the bank accounts of private citizens under the auspices of some kind of fiscal emergency.
It is not far-fetched to guess that many governments in small EU member states are now salivating over the opportunity to raid the bank accounts of their own wealthy citizens. The fact that the Cypriot government appears to be ready to take 40 percent above 100,000 euros makes this an even more attractive “revenue tool” for Europe’s cash-strapped welfare states.
It is this realization that is now setting in on investors all across the euro zone. The Guardian again:
[All] markets erased their early gains to close down on the day. The FTSE 100 index lost 0.2% and the German stock market fell 0.5%. Bank shares fell across Europe while the euro, which had nudged up through $1.30 initially, fell back to below $1.29. US markets, which had largely shrugged off the Cypriot problem, were also lower, with the Dow Jones Industrial Average down over 70 points, 0.5%.
The decline in Dow Jones is temporary, while the decline in Europe is the beginning of a permanent downward adjustment. Again: one of the ideas behind the Cyprus bank heist is to start a process that stokes fear in financial investors, resulting in a moderate outflow of funds from the euro zone. This will in turn cause a depreciation of the euro.
Germany needs this downward adjustment to compensate its export industries for the ridiculous shift to a much more expensive system for producing power.
Yes, politics can be that cynical. It is a risky strategy, but so is any high-end manipulation of the course of events, either in politics or in the economy.
In fact, if the Cyprus bank heist was repeated in a couple of more countries, it would give the desired financial outflow the boost that German leaders are calculating with.
And they may get exactly what they want. The Guardian again:
Malta’s finance minister wrote an article in the Malta Times expressing concern about what would happen if it encounters similar problems in the eurozone.
But this ill-intended, well-hatched plan also puts on full display the arrogance with which Europe’s political elite runs its new kingdom. They are either oblivious to, or dismissive of, the severity of the crisis that Europe has been stuck with for the better part of four years. This crisis only seems to get deeper and more entrenched for every move that this political elite makes. Der Spiegel has a good analysis:
It has been only four weeks since German Chancellor Angela Merkel had nothing but nice things to say about her “very esteemed” counterpart in Cyprus. In a telegram to newly elected President Nicos Anastasiades, she “warmly” congratulated him on his election victory and wrote that she looked forward to their “close and trusting cooperation.” That was then, as Merkel conceded last Friday in a speech to the parliamentary group of her center-right Christian Democratic Union (CDU) at the Reichstag in Berlin.
I could say something funny here about the fact that the German parliament is once again referred to as Reichstag – something about how it is easier to rule a continent by means of a common currency than by means of a common army. But let’s leave that aside. Back to Der Spiegel:
Although her intent was not to set an example, she said, Germany also would not “give in.” She added that there would be “no special treatment” for Cyprus. And over the weekend, she lived up to her word. … Since Cypriot parliament rejected the initial bailout plan, one crisis meeting followed the next in Berlin, Frankfurt and Brussels as concepts were presented, revised, rejected and resubmitted. In the end, the European Central Bank (ECB) imposed an ultimatum on the country. The message from ECB President Mario Draghi was that either Cyprus agree to the bailout conditions or it could be the first member of the euro zone to declare a national bankruptcy.
The technical meaning of that would be that Cyprus would have left the euro zone, reinstated its national currency and re-denominated all its debt in that new currency. Most analysts would contend that such a move would have led to a drastic depreciation which in turn would have caused foreign investors in Cypriot treasury bonds, as well as in private banks, to lose money.
However, there is a real possibility that the opposite would have happened: with Cyprus out of the euro zone the country could de facto have reinforced its position as a low-tax jurisdiction with high respect for bank privacy. That would have led to a new inflow of foreign money, and eventually the little nation could actually have come out more prosperous.
Now they are facing the exact opposite scenario, as Der Spiegel explains:
In the end, Nicosia agreed. The country’s oversized banking industry is to be radically downscaled, one of its biggest banks, Laiki, is going to be dissolved and those holding accounts there will see volumes over the €100,000 insured limit potentially vanish. A worsening economy will almost certainly be the result.
Not to mention the ramifications for the entire euro zone:
Smoldering and flaring for the last three years, the euro crisis has reached a new stage. For the first time, a parliament rebelled against the requirements of international creditors, and for the first time euro-zone taskmasters tried to take a slice of the savings of ordinary citizens, prompting people throughout the continent to wonder whether their money is still safe. The unprecedented showdown led many in Europe to speculate over the national character of the Cypriots, and wonder: Are they especially jaded, desperate or simply nuts? Finding the right answer was the perplexing task for leaders in Brussels, Paris and Berlin. How far can one bend to demands from a teetering country like Cyprus without losing one’s credibility?
Actually, the real question is: how far can the European political elite bend their member states before they start breaking apart – or breaking away from the common currency, and perhaps even the euro zone? The jury is still out on that question, but there is no doubt that the political elite that runs Europe completely lacks understanding of the art of government. They have eradicated hundreds of billions of euros worth of GDP in several EU member states, just to preserve their precious union and at the same time gradually centralize control over fiscal policy. They completely dismiss the will of voters, either as expressed in elections, in a referendum or in the form of parliamentary representation. Cyprus is only the latest example, and certainly won’t be the last.
They are Europe’s authoritarian leaders and deserve to be called Eurotarians. They rule with very little regard for the half-a-billion people whose tax money they live off. they use instruments of power, such as austerity policies, to close the ranks of member states and if necessary oppress public opinion.
These instruments of power have thus far allowed the elite to win and become seemingly stronger. But at the same time, each new victory they score erodes the very pillars upon which they build their power. Der Spiegel makes a good point on this:
But a monetary union, at its core, is not held together by budget figures or austerity programs, nor by the statements of finance ministers and the heads of central banks, no matter how well-received they are in the markets. The most important glue holding together a monetary union is the mutual confidence of its members, and that has declined drastically in recent months. While many in the north question the willingness of politicians in Rome and Athens to bring about reform, citizens in the south are increasingly furious over the austerity diktats from Berlin, Brussels and Frankfurt. There are predetermined breaking points all across the continent, but they are more apparent in Cyprus than anyplace else. … the debacle over the debt-ridden island nation is more than just another financial crisis along Europe’s southeastern edge. It is emblematic of the entire monetary union. If the euro zone collapses, it will be because of both its economic contradictions and its members’ inability to reach agreement.
In other words, the attempts at keeping the euro zone together, by means of austerity and anti-democratic thuggery, have created a backlash that will combine a persistent economic crisis with an accelerating democratic crisis. These two are now merging into a perfect storm of uncertainty, unemployment and deprivation. Italy offers a great example, as illustrated by this story from Corriere della Sera:
Time is running out for Italian industry. Business is in a “desperate” condition with companies “very close to the end”. This umpteenth warning came from Confindustria chair Giorgio Squinzi during talks with the mandated prime minister, Pier Luigi Bersani, in which Mr Squinzi appealed for a swift return to “a stable government”. Given the three million Italians out of work, with a spike of almost 40% for young people, Mr Squinzi pointed out that the employment issue “is becoming a tragedy”. Confindustria had no option but to be “extremely concerned about Italy’s real economy”, warned Mr Squinzi. The Confindustria leader said “intervention is needed with absolute priority”, starting with payment of the public sector’s outstanding debts to businesses and implementing what he described as a no-holds-barred “shock treatment” for the first hundred days of government.
In the recent election Italian voters responded negatively to the bone-crushing austerity measures forced upon the nation by the EU and the ECB. Their response created a stalemate in negotiations for a new prime minister and parliamentary majority, which in turn has led to a standstill in legislative activity. There is no identifiable course of fiscal policy, which means uncertainty as to taxes and government spending. (This includes the macroeconomically small but microeconomically important problem of government contractors not getting paid.)
This uncertainty, ultimately brought about by the relentless pressure from the EU and the ECB, is making life increasingly desperate for Italy’s businesses and citizens. The private sector’s faith in, and respect for, a parliamentary government will at some point start eroding. Once that process gains critical mass they will either leave the country in order to invest elsewhere…
…or support political forces that are much more hostile toward the EU than what we have seen thus far in Italy. We got a foretaste of what that means in the Greek election last summer.
It would be an exaggeration to say that the common currency and the European project of unity are unraveling. That said, though, there is no doubt that Europe is inching closer to the point where both the EU and the currency union start falling apart. The institutional uncertainty of the continent has increased, while the reasons to invest there have weakened significantly.
Therefore, I will say it again: If you have any investments in the euro zone, get the money out ASAP.
So the European political elite went ahead and did it. They forced Cyprus into seizing people’s bank deposits. They are taking 40 percent – yes, forty percent – of the deposits above 100,000 euros in one of the two largest banks and essentially wiping out deposits above the same level in the other.
This will effectively destroy the banking sector in Cyprus and cause a plunge in the nation’s GDP. Today we learn that this might have been the intention all along.
But it does not stop there. More euro-zone countries have already pledged to adopt this confiscation method, which means two things: 1) anyone with common sense and a fistful of dollars stashed away somewhere in the euro zone should pull his assets out right now; and 2) this is opening up to become a currency war between Europe and America.
More on these two points later. Let’s start with the actual deal that Cyprus was forced into accepting by the Eurotarians in Brussels, Frankfurt and Berlin. Bloomberg News reports:
Cyprus dodged a disorderly default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros ($13 billion) of aid. Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc in a night-time negotiating melodrama that threatened to rekindle the debt crisis and rattle markets.
They would never have kicked Cyprus out of the euro zone. Frankly I doubt that they could actually have done it, technically. This would be like the United States trying to force dollarized Latin American countries into using their own currency. But it would also have opened the opportunity for other euro-zone members to exit in order to save themselves from crippling austerity programs. A Greek exit would probably have been right around the corner, with Portugal presumably to follow.
The EU, the ECB and the German government would never have done everything to prevent this. Cyprus should have called their bluff.
The fact that they did not raises a certain number of more shadowy questions about under-the-table deals. But let’s leave those to the investigative reporters. Back now to Bloomberg, which reports that the plan to seize bank deposits was not something that the Eurotarians came up with as a last-minute solution. On the contrary:
Cyprus, the euro area’s third- smallest economy, is the fifth country to tap international aid since the crisis broke out in Greece in 2009. The first Cypriot accord, reached March 16, fell apart three days later when the parliament in Nicosia rejected a key plank, a tax on all bank accounts that sparked the indignation of smaller depositors.
This deposit confiscation scheme is now going to spread to other countries. More on that in a moment. Now for the real shocker in the deal:
The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second biggest. Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.
So there you have it. Confiscation at the 40-percent level, elimination of some deposits and a virtual destruction of the Cypriot banking industry. Which, again, was apparently part of the purpose all along:
The squeezed banking industry will likely lead to a “sharp drop” in Cyprus’s gross domestic product this year and next, according to Reinhard Cluse, a London-based economist at UBS AG. As a result, the euro group’s debt-to-GDP ratio target of 100 percent by 2020 “must be doubted,” he said. The Cypriot Finance Ministry said in a January presentation that bailing out the country may push debt to a peak of about 140 percent of GDP next year.
The debt ratio is no longer the primary issue for Europe’s political leaders. Their goal is to maintain the euro zone as it is and to open up a currency war on the United States. Thre currency war is unequivocally at the request of the Germans, whose manufacturing industry is stagnant while their competitors in the United States are doing reasonably well.
In order to keep the euro zone together and create a currency war the Germans and the EU-ECB leaders are willing to once again trample upon the very livelihood of European citizens. Just as the UBS economist says, the wiping out of the Cypriot banking industry will severely affect the Cypriot economy. But we know from before that the Eurotarians have no problems destroying the economy of an EU member state to get what they want. They wiped out a quarter of the Greek economy in four short years and they forced Portugal into austerity measures that have shrunk their economy so it is no bigger today than it was a decade ago.
Again, the two-fold goal of the Cyprus bank heist is to secure the euro zone as it is and to cause a long-term depreciation of the euro. In order to accomplish the latter, the Eurotarians have to create a certain, calculated level of capital flight from the euro zone. There are several ways to do this, but the instrument they have chosen – seizing bank deposits above a certain level – is devious enough to work. However, to cause a “right-sized” exodus you cannot limit the scheme to one country. You need others to follow. Alas, EUBusiness.com reports:
Three small eurozone countries — Finland, Estonia and Ireland — said Sunday the private sector ought to be involved in future financial rescue packages for member states. “There must be some private sector involvement,” Irish Minister of State for European Affairs Lucinda Creighton said on the sidelines of an informal retreat in Finnish Lapland on the future of Europe. Finland, which hosted the two-day meeting of European leaders in Saariselkaeae, said the proposed Cyprus rescue package marked a departure from previous packages. … “We are moving from a system of bail-out to a system where we decouple the connection between the bank and the sovereign. We are going towards a system of bail-in,” Finnish European Affairs Minister Alexander Stubb said. Under a bail-in, creditors share the burden by forfeiting part of their investment to help rescue a bank.
Now, let’s be apprehensive of the details in this. The Cyprus bank heist was not about saving the banks per se. It was about getting revenue for the government from a new source. In other words, the deposit confiscation is a one-time tax that replaces other taxes, such as a temporary increase in income, property or consumption-based taxes.
As a source of revenue for government, the deposit confiscation can serve to finance any spending need the government might think it has. That it is tied to a bank bailout is of less importance, though not insignificant. It is easy to sell this tax to the public if it is tied directly to a bank bailout; however, once people have seen this “tax” be used once, they are also willing to accept it for other, supposedly equally urgent measures – such as to close a large government budget deficit.
Neither Finland nor Estonia have any urgent problems in their banks, yet their governments are eager to endorse bank-deposit confiscation as effectively a kind of “emergency tax”.
Expect other euro-zone countries to endorse this egregious violation of private property rights. Once enough of them have done so, and one or two more countries have used it (hello, Portugal and Spain?) there will be a momentum of fear among investors in the euro zone, enough to propel a certain amount of money to leave. This is a risky game, of course, because the drainage could be so large that it affects the viability of the banking industry in the euro zone. However, I doubt that this is of any concern in Eurotarian circles: they have taken enormous risks already to get what they want; the game they played with Cyprus about expelling them from the euro zone was just the latest example.
A sizable flow of money out of the euro zone would cause the euro to depreciate, especially vs. the U.S. dollar. This way the Germans can de facto use the currency of the euro zone to neutralize the cost of their own ridiculous restructuring of their energy sector in a “renewable” direction.
Political cynicism at the highest level. Unfortunately, it looks like the Eurotarians are getting away with it, especially since they are being supported by so called “non-government organizations”. These NGOs are helping castigate Cyprus as a nation that deserves to be hammered like this. After all, Cyprus has committed two evils: they are a haven for off-shore banking and they are a low-tax jurisdiction.
Cardinal sins in the eyes of some. Behold a second story from EUBusiness.com:
In the heat of a crisis which has left it on the brink of bankruptcy, NGOs have accused Cyprus of a host of economic wrongdoings — as a tax haven, a hub for money laundering, and of financial opacity.
How about that… financial opacity. Don’t you just love it when statists invent new, fancy terms for the same old hate-the-rich ideology?
French Finance Minister Pierre Moscovici has spoken of excessive expansion and lending in the financial sector of an overbanked country. He put the total capital of the banking sector at seven times gross domestic product, with deposits paying annual interest rates of 5-6 percent, with non-residents — especially Russians — accounting for a large portion. According to a study by the Institute of International Finance (IIF), a banking lobby group, non-residents accounted for 20 billion euros ($25.8 billion) of deposits, out of a total of 52.2 billion euros in Cypriot banks. Citing figures from the European Central Bank, the IIF said 85 percent of those non-resident deposits came from clients outside the European Union, in particular Russia, Ukraine and Lebanon. Other countries, chiefly Germany, suspect Cyprus of having turned a blind eye to money laundering, with an independent European audit lined up to verify.
So the uniquely vicious assault on the Cypriot economy also serves the purpose of bringing a low-tax jurisdiction to its knees. Such jurisdictions pose a threat to high-tax welfare states who do not want their taxpayers to have a better alternative than to stay at home. Once the high-tax jurisdictions, led by Germany, have subjugated Cyprus, others will hesitate to use low taxes to compete for foreign investments. Otherwise, countries like Greece, Ireland and even Italy – not to mention possible breakaway provinces like Scotland and Catalonia – could do just that in order to kick start their economies.
Shutting town the “tax haven” of Cyprus is therefore an ancillary benefit to the Eurotarians.
It is going to be a turbulent spring in Europe. Let’s hope we can keep its fallout away from our shores. And whatever you do – get your money out of the euro zone!
I had planned an article on emerging austerity measures in Canada, but the unprecedented drama on Cyprus calls for a return to Nicosia. You can blame it all on the European Central Bank. The EU Observer has the story:
Cyprus is on the brink of bankruptcy and of becoming the first-ever country to leave the euro after the European Central Bank (ECB) issued an ultimatum on Thursday (21 March). In its statement, the ECB warned that it would turn off the tap of emergency funding to Cyprus’ banks on Monday if a rescue package is not agreed. Removing Cyprus’ emergency support could see the country’s two largest banks, Bank of Cyprus and Laiki, collapse within days.
This is pure-bred authoritarianism. But as I explained before, no one should be surprised that the Eurocrats – who from now on shall be known as Eurotarians – would take it to this level. They crushed the Greek economy and turned the Mediterranean nation into a wasteland of industrial poverty. They have brought Portugal to a simmer of social unrest, provoked a surge of separatism that could ultimately cause Spain to break apart, and they almost eradicated parliamentary democracy in Italy.
All to make the point that they, not the nation states, run economic policy. If the EU and the ECB want austerity in a euro-zone country, then that country’s government better do exactly as they are told, or face the wrath of the Eurotarians.
The government of Cyprus is now learning first hand what this wrath means in all its ugly practice. The threat from the ECB to expel Cyprus from the euro zone is as nasty as it could be. Here is how it works:
1. The ECB wants the Cypriot government to seize up to ten percent of people’s bank deposits – the average “haircut” seems to be about eight percent.
2. If the Cypriot government refuses to comply, which they have done thus far, bank customers will in theory get to keep their deposits intact. However, in return for their non-compliance the Cypriot government will lose the ECB funds that would continue to keep the major banks in Cyprus at acceptable levels of liquidity.
3. To avoid bank defaults, Cyprus has turned to Russia for emergency loans. This would allow them to keep their banks afloat while avoiding a deposit confiscation.
4. The contacts between Nicosia and Moscow infuriated the Eurotarians in the EU and the ECB. Cyprus has all of a sudden showed that the ECB is not the only circus in town. But instead of sitting down, negotiating and recognizing Cyprus as a business partner, the ECB slams a nuclear bomb on the table and demands full and unabridged submission from Nicosia.
5. The ECB’s threat to kick Cyprus out of the euro zone is diabolic. It would force the Cypriots to reinstate their national currency, a move that would come with great currency risks. The ECB is calculating that the uncertainty of a currency change and the potential losses would be a more bitter pill to swallow for bank clients and lawmakers in Cyprus than the confiscation of deposits.
At the end of the day – that would be Monday – I don’t think the ECB is going to act on its threat to hurl Cyprus out of the euro zone. As the EU Observer story reports, others agree:
Carston Brezki, senior economist at ING, described the ECB’s move as a “gun at the head of Cyprus.” But he expressed doubt if the ECB would really switch off Cyprus’ financial life support. “It is hard to imagine that the ECB would really be willing to be the one to pull the trigger,” he noted.
It is going to be a close call, because both Mr. Brezki and I are probably under-estimating the complete arrogance that has engulfed the ECB executive offices. Nevertheless, the threat is going to have tangible effects, one being that the Cypriot government is working overtime to find an alternative to bank-deposit confiscation. EU Observer again:
The Cypriot government of president Nicos Anastasiades is now scrambling for a Plan B to put to the eurozone, involving alternative ways to raise the €6 billion contribution on which the eurozone’s €10 billion bailout package is conditioned. Using the island’s natural gas reserves, pension funds or state-owned assets as collateral have all been mooted as possible means to raise the cash. A set of bills were tabled yesterday in Nicosia, including plans to create a state investment fund to raise Cyprus’ contribution. The Cypriot parliament is also expected to vote on legislation to impose capital controls restricting the amount of money customers can take out of their bank accounts when, or if, they reopen next week. … Meanwhile, finance minister Michalis Saris will remain in Moscow for a third day of talks with Anton Siluanov, his Russian counterpart.
If the Cypriots call the ECB’s bluff they may still make a deal with the Russians. It would give them the “best” combination of two options: they get to stay in the euro zone, which makes them attractive for offshore investors from Russia. Currently, Russians own 23 percent of all bank deposits in Cyprus, a share that could easily grow with more deals between Nicosia and Moscow. At the same time, a loan from Russia to replace ECB funds would get Cyprus out from under the austerity boot that is currently hanging like a dark, ominous cloud over the island, just above the even darker, even more ominous threat of bank-deposit confiscations. A Russian loan would clear the Cypriot skies completely.
The big question is, again, how delusionally arrogant the Eurotarians at the ECB actually turn out to be. Again, I doubt they will force Cyprus out of the euro zone – somewhere, someone within the inner circles of the EU should know that some countries would actually like to leave the euro zone. They should be able to tell the ECB that a Cyprus exit would embolden euro-skeptics in, e.g., Greece, Spain and Italy.
Then again, allowing Cyprus to stay in without implementing the plan to seize bank deposits has its own consequences for the Eurotarians. It would show that they are, at least to some degree, a bunch of paper tigers. It would also stop the first test run of this new form of tax: as I explained a couple of days ago, the plan to seize bank deposits has widespread support among euro-zone governments. The reason for this is that they see it as a new form of taxation, and they need a live-size test run, an example they can refer to and say “it’s been done before, don’t worry, it didn’t hurt people in Cyprus, just lay still and allow us to take a few pints of your blood”.
One thing is clear, though. With its threat to kick Cyprus out for not seizing bank deposits, the ECB has put its fangs of totalitarianism on full display. From now on, nobody should be in any doubt that the entire EU project, as Nigel Farage says, is fundamentally anti-democratic.
I usually do not spend more than at the most two articles on the same subject, but the plan to seize bank deposits in Cyprus is such a pivotal moment in Europe’s political and economic crisis that it merits one last piece. In fact, this story from Reuters puts an important perspective on the crisis, a perspective that hints at what the true, long-term impact of this disastrous plan could actually turn out to be:
Cyprus pleaded for a new loan from Russia on Wednesday to avert a financial meltdown, after the island’s parliament rejected the terms of a bailout from the EU, raising the risk of default and a bank crash. Cypriot Finance Minister Michael Sarris said he had not reached a deal at a first meeting with his Russian counterpart Anton Siluanov in Moscow, but talks there would continue. Russia’s finance ministry said Nicosia had sought a further 5 billion euros, on top of a five-year extension and lower interest on an existing 2.5 billion euro loan. Cyprus is seeking Moscow’s help after parliament voted down the euro zone’s plan for a 10 billion euro bailout on Tuesday.
There are two reasons why they are turning to Moscow for help. Russians own 23 percent of all bank deposits in Cyprus, and most of their deposits are quite large. This benefits both parties: the Cypriots have been able to built a little bit of an offshore banking industry, which in turn has helped elevate the nation’s notoriously poor per-capita income scores; the Russians, in turn, get a quick and easy entryway into the EU, where they can buy upscale vacation homes and in general live a lavish lifestyle.
The second reason for the Cypriot government to turn to Russia is that the leaders in Moscow don’t give a fly’s fart about austerity. The people in the nation of Cyprus are of Greek descent – the island is technically divided with the north-east part being a deplorably poor Turkish province – and they know very well what the EU has done to Greece. They do not want the same treatment.
Closer financial ties between Nicosia and Moscow is, of course, not exactly what the Eurocrats in Brussels would want. Reuters again:
The European Central Bank’s chief negotiator on Cyprus, Joerg Asmussen, said the ECB would have to pull the plug on Cypriot banks unless the country took a bailout quickly. “We can provide emergency liquidity only to solvent banks and… the solvency of Cypriot banks cannot be assumed if an aid program is not agreed on soon, which would allow for a quick recapitalization of the banking sector,” Asmussen told German weekly Die Zeit in an interview conducted on Tuesday evening.
What he really meant to say is that the solvency of the banks can only be guaranteed if the government takes eight percent or so of what people have deposited into the banks. That is, after all, what the EU-ECB bank grab plan says. In other words, drain the banks for some of the money they can use to issue loans and make money, and the banks will be better off.
Makes perfect sense. Eurocrat sense.
As does this hollow threat from another European politician, as reported by Reuters:
Austrian Chancellor Werner Faymann said he could not rule out Cyprus leaving the euro zone, although he hoped its leaders would find a solution for it to stay.
Complete nonsense. The EU and the ECB have wreaked havoc with their destructive austerity policies on country after country to keep the euro zone together. They have hurled Greece into a full-fledged depression and pushed its parliament to the brink of fascism just so they could make sure the Greeks were not going to give up on the euro. They have turned middle-class Spaniards into food scavengers to guarantee that Madrid would not re-introduce the peseta. They have effectively neutralized parliamentary democracy in Italy and reduced Portugal to a whirlpool of social turmoil – all in the name of the common currency.
There is no chance that they will kick Cyprus out of the euro for going to Russia for loans. The Eurocracy may be arrogant enough to ignore the will of the European voter when it comes to fiscal policy, but they are smart enough to know that the euro is unpopular even among national leaders in Europe, and if they allow one country to slip out of the euro zone – for whatever reason – it will open for more countries to follow.
That is not to say that the EU won’t try to punish Cyprus. But they really do not have that many ways of doing it. The EU is a burden on most countries, though Cyprus is one of the net takers of EU funds. In theory, the EU could reduce or terminate parts of the grants they hand out to Nicosia. In practice, though, that would be politically very dangerous, as it would spark stronger anti-EU sentiments in many countries. National leaders would in all likelihood voice their strong opposition, especially the British government which is being pressured by a surging UKIP to sever ties with Brussels.
What we do know, though, is that there will be some kind of reaction from Brussels, and that it will probably be of the knee-jerk type. Reuters reminds us that:
The EU has a track record of pressing smaller countries to vote again until they achieve the desired outcome.
The difference is that no other country has had such comparatively convenient access to alternative credit as Cyprus has.
We won’t know the full fallout of the bank-grab scheme for some time. But there is no doubt that this story will have consequences for the entire European Union, not just the euro zone. And it will be worth following.
The decision to start confiscating bank deposits in Cyprus was not something that Europe’s political leadership came up with on a whim. It’s been long in the making, part of a carefully laid-out plan.
Those who believe that Cyprus was only the start appear to be right.
More on that in a moment. First, let us put this decision in its proper context. The leaders of the EU and the ECB – and the finance ministers of the euro zone – were all in on this deposit confiscation deal, and the idea very likely saw the light of day in the EU leadership. This is important, because it helps us understand whether or not this is indeed something that the EU will implement in more countries than just Cyprus.
The Eurocrats within the EU and the ECB have been trampling on the people of Europe for several years now. They have gotten high on their own political arrogance after having forced Greece into submission and years of bone-crushing austerity. They have put country after country under their authoritarian policies, apparently believing that they could continue to rule Europe at their own discretion.
If you can eradicate one quarter of the GDP in Greece and still subject tens of millions of other Europeans to the same anti-democratic, fiscally torturous policies, then why should the confiscation of people’s bank deposits present you with any more than minor white noise of protests?
The problem for the Eurocrats is that this might have been the worst possible thing to do at the worst possible point in time. It is one thing to tax people to death on their income, and to put heavy weights of value-added taxes on their spending. It is an entirely different thing to start going after what people have managed to set aside for themselves and their families – out of money that government has already taxed both one or two times.
A savings account is one of the few remaining sources of personal pride that citizens in Europe’s fiscally oppressive welfare states have left. Not to mention the fact that for many millions of middle-class families all over Europe, the money they have in the bank is a critical life line in tough economic times. Since these are tough economic times, they really do need to be able to rely on those savings.
Add to this that welfare state after welfare state in Europe has begun defaulting on their spending promises, cutting down on entitlements of all kinds, from unemployment benefits to college tuition assistance to subsidies for pharmaceutical products – and we have a full, sharp and chilling picture of why the Cypriot bank-deposit confiscation comes at exactly the wrong time.
Precisely because this looks small compared to years of austerity, at least from the viewpoint of someone up in the EU ivory tower, I highly doubt that the Eurocrats understand the depth of fear that their plan to seize bank deposits has stoked in Europe’s middle class. I also doubt that they will realize what the political fallout from this will be. If anything could cause the EU to unravel, it would be a widespread application of this kind of organized theft of people’s property.
However, we might never get that far. While the people’s will is little more than the irritating sound of a mosquito in the ears of the Eurocracy, the reaction on the financial markets might actually cause them to rethink their plan, or at least limit its application to one country. Consider this good analysis from Stefan Kaiser at Der Spiegel:
The shock waves of the Cyprus bailout deal hit financial markets on Monday, as anger spread over a one-time levy on bank deposits on the small island at the fringe of the euro zone. This marks the first time since the start of the European sovereign debt crisis that average savers are being forced to help rescue a country’s finances alongside taxpayers, investors and private creditors.
And this after years of higher taxes and government spending cuts that, each time they were introduced, were sold to the public as “the” solution to the current crisis. And just like each round of austerity proved to be just a prelude to the next one, people in Europe now have good reasons to ask themselves where this bank-deposit confiscation scheme will strike next.
According to Kaiser and Der Spiegel, investors on the financial markets have already made up their mind:
Financial markets reacted nervously, as share prices of banks across Europe dropped. Monday’s biggest losers were financial institutions in countries hardest hit by the debt crisis, like Spain’s Bankia, whose stock temporarily slipped by more than 8 percent. Deutsche Bank was also not immune, losing 4 percent of its stock price. Investors appeared to be fleeing to assets perceived to be safer, like German bonds or gold.
Then Der Spiegel reveals the true depth of support among Europe’s political leadership for the confiscation scheme:
It looks as if the deal struck by euro-zone finance ministers in Brussels over the weekend is already in doubt as a result of massive uncertainty among the public and on the finance markets. Several news agencies have reported that the terms of the deal were to be renegotiated on Monday. Proposals include lowering the levy on bank deposits below €100,000 ($129,000) to 3 percent from 6.75 percent, and potentially increasing the forced contributions of deposits above €500,000 to 12.5 or 15 percent, up from 9.9 percent.
In other words: all the finance ministers of the euro zone were in on this deal. This means that the plan to seize bank deposits has been in the making for quite some time. It is therefore not a desperate measure aimed at simply saving Cyprus, but something that will become a regular part of the European policy tool box for grabbing more money whenever government needs it.
This, in turn, means that the Eurocracy has been planning to do this for a long time – and as we know by now, whenever the Eurocracy decides to do something, they will stick with it regardless of the consequences. You don’t need to look further than to Greece where the persistence of the Eurocracy to force austerity down the throat of the Greek people has now cost that nation one quarter of its GDP.
That tells us quite a bit of what they are willing to do in terms of trampling on public protests in order to get their will; if they can basically transform an EU member state into a complete economic wasteland and throw half of all the young in that country into unemployment and economic despair, then why would they worry when their plans to seize bank deposits draws flak in the media?
Their determination to stay the course is put on full display in how they are considering a re-arrangement of the confiscation rates. By suggesting to take more from large deposits and less from small deposits they are playing the same despicable class-warfare tones as the left always uses when it wants to go after private property.
Then Stefan Kaiser at Der Spiegel reminds us that there is actually a precedent to this deposit confiscation:
In the case of Greece’s second loan program in 2011, private investors were called on to take part for the first time. German Chancellor Angela Merkel insisted that such action would remain unique to that program.
This was when the Greek government declared that it would write down what it owed them. Backed by the EU, the ECB and the IMF they basically unilaterally seized a portion of the money people had lent them by buying their treasury bonds.
It was, in some way, possible for them to get away with that scheme since the bond buyers had technically deposited their money with the government. The Cypriot bank-deposit confiscation plan is different in that those who have the deposits have given their money to another private entity, a bank. Even with the Greek debt writedown in mind you would expect private-to-private transactions to be safer.
Not so, alas, which explains why this is becoming such a toxic political issue. In fact, it is becoming so toxic that the leaders in Europe who concocted the scheme are now trying to pass the blame to someone else. From the EU Observer:
German finance minister Wolfgang Schaeuble and European Central Bank board member Joerg Asmussen during parallel events in Berlin on Monday (18 March) tried to blame each other for an unprecedented eurozone bailout deal demanding small savers in Cyprus to take losses on their bank deposits. “The levy on deposits under €100,000 was not an invention of the German government,” Schaeuble said during a conference on taxation. He insisted that the “configuration” he and the International Monetary Fund were defending was to tax only deposits above €100,000 – to a much higher rate than what was finally agreed. “The figures we have come up with are at the lower limit. If another configuration was chosen, touching only deposits above €100,000, the result would have been different and we would not have had these problems,” Schaeuble said.
The last statement is startling. Apparently, Mr. Schäuble seems to believe that all he and the Eurocracy need in order to get away with their deposit confiscation is a little bit of class-warfare rhetoric.
But his statement also reveals the utter contempt that he and others in Europe’s power-hungry political elite have acquired for the rule of law. This contempt is extremely dangerous, because it opens the floodgates of completely unabridged government power. It is very easy to transition from today’s policy paradigm where private property rights are worth defending only insofar as they produce taxable economic activity, to a paradigm where property rights are not even given such scant recognition.
America can learn a lot from this moment in Europe’s downward spiral. One lesson is that when a welfare state finally plunges into a deep crisis, no rules apply anymore. When government has brought the private sector to its knees in its desperate attempt to save the welfare state, then the distance between the welfare state and the totalitarian state will be so short that no one can see the difference anymore.
It is rather telling that the Cypriot bank-deposit confiscation idea surfaces in Europe, at this time. The Eurocracy is no doubt getting desperate when it comes to saving their super-state project with it common currency and its welfare state. No one should doubt that the confiscation idea was conceived in closed, anonymous, tainted-window offices at the heart of the EU power machine.
More on that in a moment. First, let’s listen to a voice on what this totally game-changing deposit confiscation can lead to for the Cypriot economy. From EUBusiness.com:
Russians are preparing to withdraw billions of euros from Cyprus and the island will plunge into a recession lasting for decades due to the onerous terms of a EU bailout, economists warned on Monday. “The Russians are already indicating they want to withdraw their money. Why should they stay? They will go somewhere where they can be protected; we can’t protect them,” economist Simeon Matsi told AFP. “We have indications that billions (of euros) will be withdrawn, we already know of about three billion that is ready to move. They are already asking lawyers to draw up documents to withdraw money.”
It’s ironic. Wealthy Russians make tons of money in an economy where protection of property right is precarious. They then take their money to Europe, the birthplace of the ironclad definition of property rights – only to see their property be subjected to an unprecedented confiscation campaign from government.
As a condition for a desperately-needed 10-billion-euro ($13 billion) bailout for Cyprus, fellow eurozone countries and international creditors Saturday imposed a levy on all deposits in the island’s banks. Deposits of more than 100,000 euros will be hit with a 9.9 percent charge, while under that threshold the levy drops to 6.75 percent. The controversial tax is seen hitting Russian pockets hard, with experts estimating that Russian deposits in Cypriot banks amount to at least 15.4 billion euros ($20 billion) of the estimated 67 billion euros of deposits held by Cyprus banks.
If the EU could apply the 9.9 percent confiscation to all the 67 billion euros, they would only get two thirds of the money they are after. If the Russians withdraw their money before the confiscation kicks in, they only collect a bit more than half of what they are after. And that is under the assumption that there are no other major withdrawals, an assumption that is obviously unrealistic.
Talk about creating a bank run… but the long-term consequences for the Cypriot economy are far more ominous:
Economist Castas Apostolides said the Cypriot government went unprepared into negotiations with the eurogroup. “We should have called Europe’s bluff,” he said. “A bank haircut on deposits is unacceptable; they should have walked out because without a business sector there is no Cyprus economy,” Apostolides said. “Cyprus will be unable to exit recession for the next 20 years. Our children will pay for this mistake.”
Indeed. One of the most important pillars of economic freedom is the credit system. It allows for a functional separation of property rights and rights of use, without destroying or eroding the status of the former. A credit system can only function if people feel that their property – their bank deposits – are always protected. If bank deposits are not protected, there will be no money for the banking system to lend. If they have no money to lend, there will be no credit available for small businesses to grow.
But even larger businesses can start feeling uneasy. They often bank internally – set up their own internal credit system for funding investments – but they, too, need to have their money deposited somewhere. Unless they own their own bank they need to expose themselves to the same world as the rest of us. When government can arbitrarily come up with a reason to confiscate ten percent of your deposits, even large corporations are going to get nervous.
Once that uneasiness sets in, people and corporations with large assets will start comparing risks on a broader scale. One immediate question is: are your bank deposits safe in other EU member states? The EU Business again:
An analysis by IHS Global Insight said there was a “potential for contagion from the move to impact bank sectors in other troubled economies on the periphery of the eurozone.” “A mass of withdrawals from eurozone periphery banks could heat up the debt crisis once again after the international financial community had decided that lending to countries such as Spain and Italy would not require the extremely high risk premia it had earlier demanded,” it said. “The financial markets’ immediate bad reaction to the part funding of the Cypriot rescue by taxing bank depositors has highlighted the concerns that it could be opening a nasty can of worms.” UBS Investment Bank managing director Reinhard Cluse said the deal “raises the obvious question whether the depositor bail-in in Cyprus is a ‘one-off’ or whether it will eventually be repeated elsewhere in the future”.
Let us not forget that the reduction of the risk premiums for investments in Spanish and Italian treasury bonds happened only after the European Central Bank had promised to buy an unlimited amount of their treasury bonds. In other words, the ECB did precisely what it is not allowed to do according to the EU constitution, namely bail out countries with unmanageable government debts.
The ECB allowed itself to break the constitution – and the EU accepted it – to achieve a political goal, namely to save the common currency and the Spanish and Italian welfare states. In other words, the respect for the rule of law is already rather scant in the hallways of European power. It is therefore not very surprising that this bank-deposit confiscation idea was concocted in those very same hallways. Euractiv reports:
Cypriot President Nicos Anastasiades said yesterday (17 March) he had no choice but to accept a painful tax on the country’s bank deposits in return for international aid, saying the alternative was bankruptcy.
For government, mind you.
In a nationally televised address, the president called it the least painful option under the circumstances before going on to accuse eurozone finance ministers of forcing Cyprus into this deal, Euronews reported. Breaking with previous EU practice that depositors’ savings are sacrosanct, Cyprus and international lenders agreed at the weekend that savers in the island’s outsized banking system would take a hit in return for the offer of €10 billion in aid. … The news stunned Cypriots and caused a run on bank machines, most of which were depleted within hours. Electronic transfers were halted. Outside Cyprus, the move unnerved depositors in the eurozone’s weaker economies and investors fearing a precedent that could reignite market turmoil.
There you go. Once the Eurocrats have gotten away with doing this to one country, they will most certainly do it elsewhere. They have done it with austerity, and they have already set a precedent for not caring too much about the rule of law.
It is easy for the Eurocrats to concoct all these power-grab schemes. It is a lot harder for the nationally elected officials to deal with the wrath of the people – as Greek and Italian voters have shown. When it comes time to confiscate people’s bank deposits, things get even more tense, which explains why, according to Euractiv, the Cypriot president is making a desperate promise:
Anastasiades promised those savers they would be compensated by being given shares in banks guaranteed by future natural gas revenues. Cyprus is expecting the results of an offshore appraisal drilling this year to confirm the island is sitting on vast amounts of natural gas worth billions.
And if that is not the case? If the reserves are not “vast”? Let’s not forget that the global-market price of natural gas has dropped significantly over the past year, as new resources have come on line, primarily in North America. And more is to come. By the time the Cypriot report is done it could turn out that only a fraction of the reserves is commercially viable.
At that point, what will the Cypriot government do? Can it even survive such a crisis, on top of a massive bank run?
Ultimately, the bank customers in Cyprus are just another cluster of victims of the reckless European attempt at saving what cannot be saved: the European welfare state. Let’s not forget that this entire thing did not start with a financial crisis, but with government deficits. The financial trouble in 2007-2008 would have been contained if it was not for the fact that banks over the previous decade had invested profusely in treasury bonds. The philosophy was that such assets would offset the rising risks elsewhere.
When governments like Greece, Portugal and Spain started having serious debt problems the low-risk end of bank balance sheets basically evaporated.
Bottom line: had the governments of Europe not borrowed so much money to save their unsustainable welfare states, the banks would have been able to handle the crisis on their own.
Just as the Eurocrats thought they had managed to talk down the euro crisis and save their beloved currency union, a little Danish boy steps out of the crowd and points out that the emperor still has no clothes. From Bloomberg.com (via Zerohedge):
Lars Seier Christensen, co-chief executive officer of Danish bank Saxo Bank A/S, said the euro’s recent rally is illusory and the shared currency is set to fail because the continent hasn’t supported it with a fiscal union.
I spent six years in Denmark. Danes are serious professionals, they are upfront, free-spirited and they have no problem speaking the truth. Culturally, When you hear this from a man in this position within the private sector in Denmark, you better listen.
“The whole thing is doomed,” Christensen said yesterday in an interview at the bank’s Dubai office. “Right now we’re in one of those fake solutions where people think that the problem is contained or being addressed, which it isn’t at all.”
Exactly. The main reason why the euro appears to be stable at this point is that the European Central Bank has put a cooler on the bonfire-like debt crisis by promising to buy any euro-denominated treasury bond, anywhere, any time. Technically, the promise was limited to the most troubled eurozone countries, but by implication it extends to all member states.
This uncapped promise has allowed international investors to go back into high-yield euro-denominated treasuries from primarily Greece, Portugal, Spain and Italy. Secondarily, they can also invest with similar confidence in French treasuries, which are next on the troubled-bonds list. Thereby the ECB removed a major reason for investor flight out of the euro, temporarily strengthened the currency and created the false impression that the crisis is over.
It is not. Bloomberg.com again, which paints a picture of declining GDP and a new phase in the debt crisis:
The European Central Bank forecasts the euro-area economy will shrink 0.3 percent this year … [and while] the euro has strengthened, the economies of Germany, France and Italy all shrank more than estimated in the fourth quarter. Ministers from the 17-member euro area met during the week to discuss aid to Cyprus and Greece as a tightening election contest in Italy and a political scandal in Spain threaten to reignite the region’s debt crisis.
Greece has suffered from a shrinking GDP for years now. Since the recession-turned-depression started they have lost roughly a quarter of their economy. That is extreme, but it shows the devastating consequences of combining austerity with an entirely artificial currency union. Furthermore, it should be a warning sign to the Eurocrats as well as other member states to not adopt the same kind of fiscal policy in their countries. Yet that is precisely what seems to be in the making: the “aid” to Cyprus and – again – to Greece will consist of a buyout of treasury bonds combined with austerity requirements.
There can be only one outcome: more of the same crisis.
As Bloomberg.com continues, it illustrates the dire situation of the European economy, a situation that according to Danish banker Christensen is going to be the undoing of the euro:
France is grappling with shrinking investment, job cuts by companies such as Renault SA and pressure from European partners to speed budget cuts. While Germany expanded 0.7 percent last year…
That’s a pathetic “growth” rate for an economy like the German.
…France posted no growth and Italy probably contracted more than 2 percent, the weakest in the euro area after Greece and Portugal, according to the European Commission. The economy is on the brink of its third recession in four years and the highest joblessness since 1998. Prime Minister Jean-Marc Ayrault said Feb. 13 the country won’t make its budget-deficit target of 3 percent of gross domestic product this year as the economy fails to generate growth and taxes.
The pursuit of a balanced budget is the enemy of growth. So long as the political leaders of Europe’s big welfare states do not want to concede that their countries can no longer afford their big, onerous, sloth-encouraging entitlement programs, there will be no change in the course of the European economy. The welfare states will continue to drive up deficits and drive down growth. The EU will continue to demand austerity, which will further drive down growth and widen the deficit gaps in government budgets. Europe will stagger and stumble, but there is no chance it will ever recover under its current big, redistributive goernment.
In a nutshell, all you Europeans: this is as good as it gets.
And just to add some more salt in Europe’s self-inflicted wounds, Bloomberg. com tops off with a stark reminder of the economic reality the Europe is stuck in:
“People have been dramatically underestimating the problems the French are going to get from this. Once the French get into a full- scale crisis, it’s over. Even the Germans cannot pay for that one and probably will not.” … Spain, which plans to sell three- and nine-month bills tomorrow and bonds maturing in 2015, 2019 and 2023 on Feb. 21, faces a sixth year of slump. Output is forecast to contract for a second year in 2013 with unemployment at 27 percent amid the deepest budget cuts in the nation’s democratic history. Public-sector debt is at record levels, having more than doubled from 40 percent of gross domestic product in 2008. The European Commission, which is due to update its forecasts this week, sees it rising to 97.1 percent of GDP next year.
This is the crisis that the ECB is trying to cover with an endless monetary commitment to defend the euro. But the deficits do not go away, and economic growth does not return. In its desperate fight to save the euro and the welfare state, Europe’s political leaders will bleed the former dry and deplete the latter of any money to honor its entitlement commitments.
I stand by my verdict: Europe is in permanent decline, it is turning itself into an economic wasteland of industrial poverty that over time will be left behind by North America and Asia.