A small number of honest words have been spoken by politicians lately, and it’s getting interesting.
From Jean-Claude Juncker’s admission that politicans care more about being re-elected than about doing the right thing, to a stunning admission today by another figure in the Euro hierarchy, Jeroen Djisselbloem, that the recent haircut of depositors in Cyprus’s ailing banks might be a ‘template’ for resolving banking problems elsewhere in Europe.
What the heck is going on? In short, Cyprus is a mini-Greece, with insolvent banks which had limped along by a combination of Euro-denominated loans, and Russian oligarch offshore banking. Eventually, the loans went bad, ironically due in part to the mostly Greek Cypriots having invested heavily in the mother ship (Greece).
The loans came due, the northern European states (IE Germany) became tired of asking their taxpayers to keep less prudent bankers afloat, and strict conditions were set on further loans – IE Raise collateral by stealing some of the depositors’ money. While parliament was debating how best to raise the money, depositors started a run on the banks, and the banks were closed (not yet re-opened).
The debate raged all week, and into Sunday night, with a deal being reached in the early hours of Monday morning that small depositors (under Euro 100,000) would be held harmless, while large depositors could lose up to 40%, especially those Russian oligarchs that the banks had spent so much effort to attract. BUT, a deal is a deal, and markets soared on Monday morning – the Euro strengthened against the Dollar and other major currencies, stock markets rallied, and the sun was shining everywhere except on the Cypriots, who still couldn’t get their money.
And then the ‘Diesel-Bomb’ detonated, when Djisselbloem let slip that haircutting large investors might be the way forward for shaky banks in other countries (hint – most of Southern Europe). And he didn’t just make a private comment – it was in a press conference which included The Financial Times and Reuters. Wires buzzed, stories ran, markets swooned, and the Euro slumped. He was forced to walk back his comments, but the damage was done – see the charts of the S&P 500, and the Euro/Dollar exchange rates.
In case you were wondering what’s been keeping the dollar afloat in the world, with Helicopter Ben printing like crazy, it’s stuff like this – our currency looks stable when compared to the foolishness going on in Europe, but that is not a stable situation you can (ahem) take to the bank. And don’t think confiscation of savings cannot happen here.