Tag Archives: cyprus

Blood sweat and tears without further purpose

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>   
>   (email exchange)
>   
>   Dijsselbloem made very clear that the shareholders, then the bondholders and then the
>   uninsured deposit holders are at risk when a bank gets into problems.
>   

Yes.

>   
>   Looks like eur / usd will go down until Draghi comes out and says that the ECB will do
>   whatever it takes to protect depositors. How do you see eur / usd now that this Cyprus
>   precedent is set and Dijsselbloem’s clear statements?
>   

Good question! Technically the euro goes down from portfolio shifts. But the euro also gains fundamental support from the coercive reduction of net financial assets.

The yield spreads adjust to discount the risk of confiscation, further supporting the German premium regarding member nation debt.

It would be the same with bank deposits but for the ECB’s lending to banks capping funding costs. So more deposits shift to German banks and ECB lending increases.

The Greek PSI was declared a one and only event but now the credibility of that and any other proclamation is gone.

‘Whatever it takes’ now clearly includes taxing bank deposits as well as bond holdings, and not to forget transactions taxes.

All for the further purpose of debt reduction, also known as the reduction of net financial assets of the non government sectors.

And worse.

The very promise of the euro has turned from harmony and growth to blood sweat and tears without end, and without further public purpose.

All begging the question:

‘So what’s the point?’

>   
>   On Monday evening there was a long interview with Dijsselbloem on Dutch TV after the
>   markets reacted so heavily in the afternoon after his remarks. He did not take one word
>   back. Indirectly his statements made very explicit that the deposit guarantee system in
>   the euro zone has its limits due to the limits of the member states that are not
>   monetarily sovereign anymore. When the interviewer asked him if the 100K limit is not
>   too high, He admitted that it is very high. He did not yet make the step that only a
>   guarantee from the ECB would be credible and able to cover 100% of deposits.
>   

Not good.

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Cyprus proposal detail

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Proposals from earlier today:

ECB guarantees deposits for .25% annual fee
ECB takes over regulation, supervision, enforcement of banking regs etc.

This becomes the model for regulating all EU banks

I finally got a quick minute to add some color to the above proposals from earlier today.

With about 70 billion in assets, the banking system has negative capital of about only 2 billion, or about 3% of assets. And that no doubt includes markdowns on EU member nation debt that ‘goes away’ with the ECB ‘doing what it takes’ to sustain solvency.

With ECB deposit insurance the liquidity issue goes away, so the approx 10 billion in loans won’t be applicable, and ‘regulatory forebearance’ can then obviate the need for the rest of the proposed and highly controversal and problematic ‘rescue package.’

Additionally, the cost of funds goes down, so net interest margins widen to promote internal capital rebuilding.

ECB regulation will include ‘regulatory forebearance’ where the banks are allowed to operate with current levels of negative capital under strict ‘tarp like’ terms and conditions- no dividends, salary and bonus controls, credit quality criteria, etc. etc. and not to neglect thorough investigations into criminal activity and prosecution.

When capital ratios are brought into compliance with BASIL levels either through earnings and/or raising new equity the ECB can remove the ‘special requirements and restrictions’ imposed due to insufficient capital.

The ECB, like all central banks, will ultimately insure all bank deposits and also do the regulation. It’s already pretty much doing this indirectly. Cyprus is an opening to do it directly, and get the process down there first before expanding to the rest of the ECB’s member banks.

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