Loose Lips Sink Ships Of State – Cyprus And EuroLand

by Mike

A small number of honest words have been spoken by politicians lately, and it’s getting interesting.

Diesel-BOMB prepares to change feet!

Diesel-BOMB prepares to change feet!

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.

The S&P was doing very nicely on the news, until the Diesel-Bomb went off!

The S&P was doing very nicely on the news, until the Diesel-Bomb went off!
(Click-enlarge)

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.

The Euro slumped against the Dollar when Djisselbloem made his careless remarks

The Euro slumped against the Dollar when Djisselbloem made his careless remarks

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  • Tim from Nashua

    A Wall St Journal article on this subject said that this template is already in place for U.S. depositors that have more than the FDIC limit in a bank. If said bank is closed due to not enough assets on hand. Any depositor above the FDIC limit may lose all that money above the limit. Thus, roughly 2% of America’s depositors could ‘take a haircut’ via unisured bank depostits. Know your bank. Don’t go above the FDIC limit. And know that our elected ‘leaders’ are bandying about taxing 401K/403B investments, so those could ‘take a haircut’ too.

    • Tim, you are correct, but there is the explicit guarantee, and the implicit guarantee.
      Up until recently, both in the USA and in Europe, “too big to fail” has meant complete bailouts of depositors, while the stock and bond holders have taken the loss when the banks were recapitalized by their governments. (Implicit guarantee)

      The only thing we can count on is the explicit guarantee that deposits up to a certain value are “insured”, but a big enough bank run will blow that away, too, because the insurer (federal government) practices fractional reserve banking in its insurance scam, too – the vault is almost bare.

      Where the Cyprus bailout got into new territory was:
      (a) the paymasters (Germany, et al) demanding that the depositors take a haircut BEFORE the recapitalization would proceed.
      (b) the initial demand (later withdrawn) that the insured depositors participate in said haircut.
      (c) the explicit statement by DieselBoom that ECB bailouts of other (southern) European banks would not be pain free, but would hit their depositors, especially large ones.

      So, yes, know your bank(s), diversify your deposits, and keep a watchful eye on the markets.

      In southern Europe, the damage is now done, and the bank runs are beginning – Pandora’s box is open, and we should watch for signs of the contagion spreading.

    • The link to the earlier story by Scott Morales was a reference to the renewed risk that our ‘leaders’ may be looking to tap our 401ks.

  • Unfilterednews

    Have you read the fine print on IRA,s. What does it say?? Committees in Congress have been discussing diversifying your funds or a portion of them into treasuries for about 3 years. You didn,t build that wealth.

  • Unfilterednews

    This doesn,t make sense why they would allow bankees to fear their balances being insecure. Banking is mostly confidence, its a loan to a corporation.Many small to medium size banks could go bust quickly with bank runs, or is this what they want? Larger central Banks could always take over these bk banks, like Goldman and JP or the likes,? Maybe thats the plan? Or maybe we could nationalize these bad banks? Another theory, go completely digital money, say EU bucs or Obom bucs. Another industry would bite the dust, more layoffs.

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