Last night I said I was preparing an in-depth article about Cyprus' financial crisis and its implications for the rest of the world. Unfortunately, details of the final (?) bailout plans are still not altogether clear, so I'm going to delay part of that article until they're more fully explained. Nevertheless, events so far have raised all sorts of questions and hold all sorts of very nasty implications for national economies in Europe - and, by extension, here in the US as well.
(If you want to understand how the crisis arose, there's a good explanation of the history and background issues here.)
Cypriot banks have now been closed for ten days, while withdrawals from ATM's have become more and more difficult (and more and more restricted in the amount that can be withdrawn). In order to prevent a run on the banks when they reopen, and prevent foreign depositors from withdrawing their multiple billions of Euros from Cyprus, the nation now faces draconian financial controls. These won't even be voted on by that nation's parliament, because the latter body last week delegated authority to take these measures to the Finance Minister and the Governor of Cyprus' Central Bank. According to the Telegraph, the controls include:
- Restrictions in daily withdrawals
- Ban on premature termination of time savings deposits
- Compulsory renewal of all time savings deposits upon maturity
- Conversion of current accounts to time deposits
- Ban or restrictions on non cash transactions
- Restrictions on use of debit, credit or prepaid debit cards
- Ban or restriction on cashing in checks
- Restrictions on domestic interbank transfers or transfers within the same bank
- Restrictions on the interactions/transactions of the public with credit institutions
- Restrictions on movements of capital, payments, transfers
- Any other measure which the Finance Minister or the Governor of Cyprus Central Bank see necessary for reasons of public order and safety
In other words, if you wanted to get your money out, except for small amounts, you're screwed - at least in the short term. I'm sure the nameless Russian depositors (read: gangsters) who've stashed over 23 billion Euros in Cyprus accounts are going to be absolutely delighted to hear that, along with the news that up to 40% of their funds are likely to be seized by Cyprus to pay down the intolerable debt burden of its financial sector. Many of those depositors got where they are today through organized crime, some even by tactics the civilized world would unhesitatingly term 'terrorism'. If I were a Cypriot legislator or financial administrator who'd planned and/or approved this wholesale theft of their assets, I'd want to make sure my bulletproof vest was in good working order, and my life insurance policies were paid up, and that I had a safe hiding place for my wife and kids . . .
This 'rescue package' may save the vestiges of Cyprus' financial system, but it's going to be absolutely devastating to the rest of the island's economy. Something like 70% of that economy is comprised of Cyprus' financial sector, with tourism and shipping making up most of the remaining 30%. The EU has specifically demanded that the financial sector be reduced in size by at least half, to bring it into line with the proportions found in other EU economies. This means Cyprus is going to take a hit, in the short to medium term, affecting one-third of its gross domestic product. That doesn't mean just recession - it means wholesale, outright economic depression, widespread poverty, and potential political and social upheaval as a result of fiscal collapse. Whether or not the nation can survive this 'rescue' remains to be seen. Jeremy Warner, examining the likely consequences of the bailout for Cyprus, could only quote Tacitus: "They make a desert and call it peace".
The implications for the rest of Europe are frightening. I fully expect Cypriots to try to get as much of their money out of their banks as possible, as soon as they reopen; and I fully expect the Cypriot government to implement any and all of the restrictions described above to stop them doing so. This may well panic savers in other troubled Eurozone economies (particularly Greece, Italy, Spain and Portugal) to withdraw at least some of their own funds (particularly because Spain appears to be planning its own 'raid' on bank accounts, and is already inflicting major financial pain on investors and bondholders in its financial sector). If this develops into widespread bank runs, it could cripple the economies of those nations - and there's no way the Eurozone has enough capital available to save all of them.
The situation in the USA is not as dire - yet - but the Chairman of the Federal Reserve, Ben Bernanke, didn't do himself or our financial system any favors last week when he effectively refused to answer questions as to whether something like this - the seizure of bank accounts by the state - could ever happen here. He waffled, evaded and dodged the issue, but would not come out flat-footed and dismiss the possibility. When the Chairman of the Fed won't rule out such draconian and confiscatory measures . . . you can draw your own conclusions. I already have.
Perhaps the best summation of how bad this could get (although this is, admittedly, a worst-case scenario, and not necessarily the most likely) comes from Casey Research's latest Daily Dispatch newsletter. I'm going to quote from it at some length, and I highly recommend that you subscribe to it yourself to remain informed about such developments.
Archimedes once said that if he had a lever long enough and a place to stand, he could move the world. Today, the half-Greek island of Cyprus appears to be the fulcrum, and the long arm of the EU may be the lever that heaves the entire world over the edge of the abyss.
. . .
Europeans living outside Cyprus should not kid themselves that this is just a Cypriot problem – anyone with a bank account in Greece, Spain, Italy, etc. should be thinking very hard about how safe their cash is from confiscation. As we go to press, the Cypriot parliament has backed away from the bank levy on everyone that caused so much uproar, but the new deal still seizes money from larger depositors. This does not undo the fact that it’s still stealing – nor that the ECB asked for some of every citizens’ savings. Europeans living in non-PIIGS countries should not kid themselves about the impact on themselves if the countries near default tumble like dominoes.
And people not living in Europe should not kid themselves into thinking that this is just a European problem; in today's global economy, every country would get hurt by a banking and economic collapse in Europe. Those who think Asia will save the world must remember that the EU is China's largest trading partner. Or was – who can say it will be tomorrow?
Key point: with a fractional reserve banking system, it doesn't take a majority of bank depositors to decide to withdraw their cash to put their banks out of business. If something like 10% of depositors decided to withdraw all of their money, banks would be in real trouble – and even if only a smaller percentage were to initially decide to keep their cash at home, they could spook the required fraction into panicking and pushing the banks into insolvency. In stable times, fractional reserve banking may seem like free goodies for all, but during unstable times, it makes banks that much more precarious. Things have to be pretty dire for an entity like the ECB to demand action that could spark such a panic.
But wait – the banks are backed by the governments, so depositors are safe, right?
Yeah, right – the same bankrupt governments that are facing insolvency themselves . . .
We've been saying for some time that the global house of cards could topple at the slightest rustling of the wings [of] any of a number [of] circling black swans. Something like the ECB turning draconian with Cyprus and scaring the heck out of everyone else in the EU seems more like a swan dive right into the heart of the teetering structure.
Many mainstream commentators are dismissing the significance of the Cyprus debacle – but the same type of people also dismissed the threat of the subprime crisis until it could no longer be denied.
This does not prove that what's happening regarding Cyprus today is the tipping point future historians will point to as the beginning of the end of the EU and hence the rest of the old economic order. But it could be.
. . .
What is absolutely clear is that the extreme measures the ECB has just shown it is willing to take are solid evidence that we are right about just how shaky things are – just how close to the crumbling edge of the abyss the whole world is.
Even if the direct, overnight theft of Cypriot bank deposits does not spark a bank run across Europe, it won't change this fact.
. . .
If ... the wheels fall off the economic "recovery," the vast majority of people will see a substantial reduction in their standard of living – and many will simply be wiped out.
There's more at the link. It's important reading.
Friends, keep watching developments in Cyprus. Things could get very bad indeed, and there's no guarantee whatsoever that current developments will prevent that - in fact, they may precipitate worse things. The next week or two will be crucial for the world economy.