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Cyprus is small enough not to be really significant in economic terms for the Eurozone as a whole. (Let's treat the strategic significance of Cyprus giving exclusive gas exploration rights to Gazprom or a Mediterranean naval port to Russia in return for a bail-out as a separate issue for now).

So the mostly German bankers who run the European Central Bank (ECB) decide this is a good opportunity to demonstrate to all and sundry the consequences of not playing ball with your creditors. The ECB refuses liquidity to insolvent Cypriot banks because the Cypriot Government refuses to implement the ECB bank bail-out plan. The banks have to limit withdrawals (say to 20k Max) because they cannot sustain the outflow of funds that would otherwise occur. The banks are declared insolvent and a liquidator is appointed. Bondholders/depositors are given shares in the banks in lieu of their investments over 20K and the banks re-open under new "ownership and management".

Russian "investors" (otherwise known a money launderers)  lose their shirts. Some bigger businesses become illiquid and may have difficulty trading. Small businesses and individuals are generally ok with 20K working capital but don't trust the banks as a place to maintain their working capital funds. A mattress/cash economy emerges. This works fine for small local cash businesses but business trading with other Eurozone countries cannot get credit and may have difficulty settling accounts with other Eurozone suppliers/customers. Cyprus may have to issue its own currency again but has difficulty getting it accepted by its trading partners. The larger economy grinds to a halt. The tourist industry almost collapses. Cyprus is effectively quarantined and "thirdworldised".   German Finance Minister Schäuble  has already said on ZDF TV: "The business model of Cyprus is no longer sustainable. Someone has to tell the Cypriots."

ECB central bankers look on with some satisfaction because this will teach the Greeks, Italians, Spaniards, Portuguese and Irish et al just what will happen if they don't play by the rules. They are happy enough the Russians got burned, but may cut a deal with Putin to stop the aforementioned Gazprom or Naval Port scenarios. NATO threatens a blockade if Russia does try to set up a naval base in Cyprus. Turkey decides this is  good time to consolidate it's position in Northern Cyprus by formally occupying and developing Varosha in Famagusta. Europe is once again on the brink of war.

All of this may seem ridiculous when you consider how small Cyprus is in the larger scheme of things. And then you remember that WW1 started because of the murder of a relatively obscure Archduke in Sarajevo. Once again the greed of central European elites threatens the security and prosperity of the continent as a whole.  Those who refuse to learn the lessons of history are condemned to repeat it.

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Comment Preferences

  •  Several Scenarios Come to Mind (6+ / 0-)

    If Cyprus defaults, I guess.

    I have to wonder if the best course of action is not to shut down the banks, withdraw from the Euro, tell the Russians to flick off and go Iceland on the whole thing.

    The losses to global wealth, finance and banking could easily be absorbed by the world economy.

    Maybe the global elites are worried about the precedent being set, though, and that's what this is unlikely to be permitted to happen.

    "I'll believe that corporations are people when I see Rick Perry execute one."

    by bink on Tue Mar 19, 2013 at 06:18:12 PM PDT

    •  They appear (2+ / 0-)
      Recommended by:
      Frank Schnittger, northsylvania

      to have made that decision, with the Parliamentary vote to reject the terms of the bail-out.  The major bank in question (Laiki), I have learned, was already nationalized last August.  Which means that the government owns it, probably because the last owner had already screwed it up so badly that was its only option.  Now they're going to have to cut their losses.  According to a report on BBC, Athanasiades specifically tried to shield the large depositors by limiting their "tax" to under 10%; that is probably what caused the meltdown as the amount demanded by the Germans could have been made up by either a 16% tax on deposits over 100K EU, or the haircut they worked out where supposedly insured amounts were to be taxed 6.75%.  It was the latter that sparked rebellion, as he was cutting into insurance "guarantees" relied upon in good faith by small depositors.

      The precedent that the ECB appears to have been setting, which will still hold good, is that large depositors can no longer expect to be routinely shielded from bank collapses over and above the amount of standard insurance.  Unfortunately they will have done that in the most embarrassing manner possible, with great damage to the credibility of all actors in the financial system.  Expect a rapid return of the European "south" to historical modes of corruption, cash transactions, grey markets and local patronage, all developed originally to deal with financial institutions and governments which could not be trusted.

  •  Didn't Iceland tell their bankers to go to hell? (5+ / 0-)

    And isn't their economy stronger than ever - or at least coming back strongly? I say kudos to the Cypriots. They should not be bailing their bankers out. Let the Russian bankers (who control the Cyprus banks, no?) take their losses......if Russia turns off their gas lines to the Germans, maybe Merkel et al. will speed even faster to energy independance. This is getting very old: economy good (bankers win)/economy bad (bankers win). 2013 is NOT 2008. We have to stop playing this global game. Haven't we learned any lessons?

  •  how about if the people who caused it... (12+ / 0-)

    are the ones who have to pay? Make that global. If the banks need bailing out then dip into Jamie Dimon's account, into Lloyd Blankfein's account, into Gene Sperling's account, etc.

    •  Yes and no. (3+ / 0-)

      This IS the problem, of course -- the Greek collapse was caused by profligate government spending COMBINED with investment dependence on unregulated American pyramid schemes.  The Greeks couldn't go after Dimon and Blankfein and the Americans gave them a slap on the wrist.

      The Cypriot collapse is a result of the Greek collapse, so we have the second domino falling.  But it is now making the RUSSIANS pay for the American pyramid scheme, which brings in some very powerful and nasty people who are taking a gut-punch ultimately caused by our incompetence/immorality.  However the chances look good that they are going to blame the Germans.

      The diarist is right.  This is very much the kind of interrelated nightmare that caused WWI.  Imagine that rich Uncle Sammy took thirty of his cousins and nephews out to the bar and told them he was paying for all they could drink.  At eleven when they're all in their cups he discovers that whoops@! he forgot that his credit card was overcharged, and he only has $200 cash on him.  That will cover his own bill, after he has a talk with the bartender.  Everyone else is now on their own.  Icie tells the bartender that he's sorry, but he doesn't have the money, and walks out without paying.  The barkeep adds a portion of Icie's bill to everyone else's.  Lukie didn't have any money to pay for his drinks in the first place, but Fritz offers to cover the bill if he stops drinking.  Lukie tries very hard, but he's got a splitting headache and now  he's doubled over with stomach cramps and puking on the floor.  His brother Stasi buys him a couple of gingerales to try and settle him down, but Stasi borrowed the money from Ivan, who's been sitting in the corner nursing a bottle of vodka on his own.  Now the barkeep demands that Stasi pay his bill, and part of Lukie's since they're obviously related.  Fritz says he'll pay part of it, but only if Stasi steals the rest from Ivan.  Ivan can't decide whether to punch Stasi or Fritz.

      Meanwhile, Uncle Sammy has slunk out of the door, into his limosine, and ordered the chauffeur to take him home because it looks like there's going to be a fight in there.

      •  The Greek gov't was involved in a vendor finance (2+ / 0-)
        Recommended by:
        Frank Schnittger, cynndara

        scam with European corporations. That's where the money went. The spending on those scams was certainly profligate, but usually those words are used to describe a huge bureaucracy (which doesn't exist in Greece, and never existed, or too much social welfare--which also never existed). Also, Greek banks were never involved with the Wall Street scam either, no exposure there.

        But you're right that Cyprus's downfall was Greek debt.

        Here's the thing though: all of it is a ponzi scheme. Cypriot banks passed the profits from high interest on Greek bonds to their customers. That's a ponzi scheme.

        Just as in Spain and Ireland, you have banks lending to private persons and thereby frothing up the economies. When the banks go belly-up, suddenly you have asset bubbles popping. Whether it's the gov't doing it or private actors, these are all ponzi schemes.

        The key is in finding malinvestment. Greece excelled at malinvestment as it participated in vendor finance scams purchasing military weaponry, while Spain and Ireland excelled in malinvestment when it came to banking and property.

        There are two kinds of people in this world. The kind who divide the world into two kinds of people, and the kind who don't.

        by upstate NY on Wed Mar 20, 2013 at 08:01:27 AM PDT

        [ Parent ]

  •  German Govt is very fucked up (3+ / 0-)

    Cutting down old beech forests & calling it green energy is outrageous.

    12 new coal fired power plants.

    Very fucked up.

    & now this BS in Cyprus.

    look for my eSci diary series Thursday evening.

    by FishOutofWater on Tue Mar 19, 2013 at 06:34:18 PM PDT

  •  What does Germany have to do with Cyprus? (0+ / 0-)

    The ECB EXPLICITLY promised the German voter that it would never monetize debt nor would it ever transfer resources to member states.

    It was explicitly outlined to the German voter, who had many reservations about Germany joining the Eurozone.

    Do you want the ECB to flagrantly violate its promise to the midde-class German voter by bailout out Cyprus?

    Why not blame Cypriot pols, who decided to join the Eurzone in the first place?

    Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project. www.hamiltonproject.org

    by PatriciaVa on Tue Mar 19, 2013 at 06:36:48 PM PDT

    •  Germany, the ECB and Cyprus (5+ / 0-)

      Germany needs Cyprus and other Eurozone states as a market for its exports of goods and services.

      The ECB is not supposed to be a political actor and so can't promise voters anything, much less voters from a single member state.

      The Cypriot insolvency is largely caused by its exposure to the Greek insolvency which is largely caused by Greece buying German goods with German bank loans it never had any means to pay back.

      It takes a stupid borrower AND a stupid lender to create a mountain of bad debt.

      Germany's strategy of export led growth means it needs somebody else to be a net importer which can only be financed by loans which ultimately become unrepayable - without Germany becoming a net importer.

      Therefore so long as Germany wants to remain a net exporter these crises will be a continuing and endemic part of the Eurozone.

      •  At one point, Cisco was the most valuable company. (0+ / 0-)

        ..in the world, at over 550B dollars, back in 2000.

        Cisco was providing vendor financing to hundreds of startups, who recycled that money back to Cisco's treasury via purchase of Cisco equipment.

        Cisco was a stupid lender, so it stopped lending.  But doing so enabled Cisco to remain a thriving going-concern.

        Had it not stopped lending, it would have found itself in the same predicament that so many of its clients: bankruptcy.

        Why not acknowledge that the Eurozone experiment if flawed?

        Why not have each country revert to its legacy currency?

        Learn about Centrist Economics, learn about Robert Rubin's Hamilton Project. www.hamiltonproject.org

        by PatriciaVa on Tue Mar 19, 2013 at 07:02:25 PM PDT

        [ Parent ]

        •  Germany wants the Euro (2+ / 0-)
          Recommended by:
          cynndara, DeeDee001

          because its whole economic strategy is based on export led growth which is best enabled by having zero currency risk and no appreciation of the DMark against the currencies of importing countries.

          Smaller peripheral European countries want the Euro because their are huge costs and currrency risks associated with running your own currency. A medium sized hedgefund could "game" an Irish Punt (for example) making huge profits for speculators and hugely damaging the economy.

          The Euro is a failure at the moment because it doesn't have the institutional mechanisms (like the Fed) any currency needs to be stable:
          1. A lender of last resort
          2. A target to support full employment as well as low inflation
          3. Centralised bank regulation, resolution and re-structuring powers.
          4. Coordinated Fiscal policies within the Eurozone to prevent the sort of balance of payments crisis we have now.
          5. An interest rate regime designed to prevent asset price bubbles in the periphery as much as an economic slump in the centre.

          Fundamentally, the Euro crisis is a balance of payments crisis and a bank regulation crisis resulting in a bank restructuring crisis resulting in a sovereign debt crisis.

          Germany has had a beggar thy neighbour export led growth strategy fueled by German banks making silly loans to importing countries because they had no one to lend their money to in Germany.

          Fix German economic policy, and Eurozone regulatory mechanisms as outlined above, and the Euro can benefit everyone. At the moment it is harming everyone except the speculators.

    •  Your sig line (2+ / 0-)
      Recommended by:
      ask, Frank Schnittger

      unless it's snark, really makes me leery of anything your saying. Rubin is anything but centrist. He's nothing but a Shock Doctrine dude.

      •  We are all at the centre (2+ / 0-)
        Recommended by:
        cynndara, shaharazade

        of our own universe, and, like a stopped clock, even a centrist can be right twice a day. For most of the economic cycle, however, it is always some dude on the fringes who is most right! Right now, in a liquidity trap crisis, that dude happens to be Krugman. If the economy and inflation take off  Rubin could even have his day in the sun. The point is that sophisticated economic theories which can predict and manage economic cycles cannot rely on moral absolutes like increasing entitlement spending is always bad. When the economics facts change, Krugman, like Keynes, will change his mind. Rubin et al will try to claim they were right all along - just like they were right some day in the 1950's or 1970's.

    •  Germany had the quid pro quo (1+ / 0-)
      Recommended by:
      Frank Schnittger

      of Europe trading German unification and lack of claims on WW2 destruction for German unity in the EU and eurozone.

      It's a quid pro quo.

      Why would you argue against the people that made those agreements, like Kohl??!!

      He has blasted Merkel and her cohort. He very well knows what he agreed to. And this isn't it.

      There are two kinds of people in this world. The kind who divide the world into two kinds of people, and the kind who don't.

      by upstate NY on Wed Mar 20, 2013 at 08:03:21 AM PDT

      [ Parent ]

  •  Derivatives (2+ / 0-)
    Recommended by:
    Frank Schnittger, cynndara

    The real question is how this will effect the derivative market. Derivatives are many times world GDP and, for the most part, are not accounted for on balance sheets or risk analysis. In many cases, derivatives are housed in "off balance sheet" Special Investment Vehicles and for risk purposes are zeroed out by hedging trades. What happens if some fraction of those notational values become the actual values various banks are required to cough up due to Cyprus's actions? Every single one of the TBTF banks are incestuously interconnected. Deutsche  Bank has a problem which means BNP Parabis has a problem which means Barclays has a problem which means JP Morgan has a problem. For example, JP Morgan has over 70 trillion dollars in derivative exposure. Derivative bettors, according to US bankruptcy law circa 2005, have precedence over depositors. Your money deposited at JP Morgan will be gone. FDIC insurance has 25B versus JP Morgan's almost a 1 Trilion in deposits. FDIC can't make you whole.

  •  Check out this craziness (1+ / 0-)
    Recommended by:
    Frank Schnittger

    http://www.ekathimerini.com/...

    EU law guarantees deposits up to 100,000 euros per customer, per bank. But Commission spokesman Simon O'Connor said those guarantees only existed: «in the event of a bank failure."

    "In this case, we are not talking about such a situation, we are talking about a one-off levy which will be applied as a fiscal measure, to all bank accounts in Cyprus,» he told a regular briefing in Brussels.

    I hope my bank goes bankrupt so I can get my money bank (loopy).

    On of the more interesting statements of the last few days: "Cyprus's debt is totally unsustainable, too high relative to GDP." The new Eurogroup leader said this.

    Cyprus's debt to GDP: 71.6%
    Lower than most of the eurozone.

    Yanis Varoufakis writes that all the Cypriot banks passed Euro stress tests with flying colors 12 months ago.

    There are two kinds of people in this world. The kind who divide the world into two kinds of people, and the kind who don't.

    by upstate NY on Wed Mar 20, 2013 at 08:05:04 AM PDT

    •  Irelands debt to GDP ratio in 2007 (1+ / 0-)
      Recommended by:
      northsylvania

      was 25% - almost the lowest in the Eurozone. "Growth" was at historic highs. The banks passed all stress tests going. In the meantime the ECB pursued historic low interest rate policies - because of slow growth in Germany following re-unification - which created asset price bubbles in peripheral Eurozone countries.

      Germany has continued to insist, against all the evidence, that this was some kind of Sovereign debt crisis. It is in their interest to blame everyone else but themselves. Ironically the Eurozone would probably be a lot more stable now if Germany left, as it is the country which is driving the balance of payments imbalances.

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