Cyprus details heavy losses for major bank customers
NICOSIA (Reuters) - Major depositors in Cyprus's biggest bank will lose around 60 percent of savings over 100,000 euros, its central bank confirmed on Saturday, sharpening the terms of a bailout that has shaken European banks and saved the island from bankruptcy.
Initial signs that big depositors in Bank of Cyprus would take a hit of 30 to 40 percent - the first time the euro zone has made bank customers contribute to a bailout - had already unnerved investors in European lenders this week.
But the official decree published on Saturday confirmed a Reuters report a day earlier that the bank would give depositors shares worth just 37.5 percent of savings over 100,000 euros. The rest of such holdings might never be paid back.
The toughening of the terms will send a clear signal that the bailout means the end of Cyprus as a hub for offshore finance and could accelerate economic decline on the island and bring steeper job losses.
My view:
This move has extremely deflationary consequences for Cyprus in particular and Europe in general.
The loss of confidence in the banking sector globally is in danger of growing, encouraging individuals to pull their cash from any institution that is perceived to be weakening.
In this scenario, if it continues, bank's capital is gradually eroded away at the same time velocity of money in the general economy falls steadily.
As students of economics know, the inflation rate can be determined by two factors; the supply of money (& credit) and the velocity of that money supply.
Once savers begin to lose faith in banks, savings are pulled out of the system and are no longer available to be lent by financial institutions. The effect this has is to drive down the velocity of money (& credit) in the overall economy.
Any substantial move by savers to hide their money from confiscation has the potential to begin a domino effect of collapsing velocity and pushing an economy into deflation.
While the EU is playing hardball with Cyprus, the moral hazard of their actions could be vastly larger than ever anticipated.
I would be wise to take appropriate precautions, as all central banks seem to act in harmony.
Given the seriousness of the consequences, we will continue to report on these developments as they arise.
Liquidity Trap
I believe you are partially right, but I don't believe you percieve the whole picture yet.
ReplyDeleteIf the main money organizations can make people believe they shouldn't keep their money in the bank than what will the people do, but remove it. The question is, what will they do with it. Do they by a new washer, refrigerator, car, stock, or bond.
The ultimate goal is for them to buy bonds, good, bad, or indifferent ones, but preferably treasury bonds. Why? Because this means the Feds don't have to do another QE right away. They can pull the money out of the little people by them doing it voluntarily and they think they are so wise because now they have a Treasury bond.
Not really good news, because this kicks the can down the rode a bit further, and eventually another QE will have to be issued. The problem is, most of the the little peoples money is now gone and they don't have any money to confiscate accept what is in in stock and retirement programs. AH!! Retirement programs. Now we can go after those because they will be low hung fruit that is readily accessible. Stocks go last because that is a more visible item and it looks good for the world to see the stock markets stay strong..
Oh, we have a bundle of money to confiscate yet, before those rascals have an opportunity to get it all.
Thank you for your comment Anonymous.
ReplyDeleteYou make a good point that the goal is to attract/coerce the people's money into Treasuries. And yes, retirement programs will be in the crosshairs very soon in an attempt to sustain the ravenous government beast. But there is a problem with these near zero returns on Treasuries. The risks are relatively high and there are alternative investments. I expect that once the stock market peaks, possibly within a month or two, we will see funds rotate into bonds and most importantly, precious metals.
It is the later that will be most interesting to observe because they have no counterparty risk. So, from my perspective, deflation is looming as the velocity of money collapses, and deflation benefits gold and silver.
It could prove to be an exciting time to be a precious metals investor given the dark choices governments and banks are making.
Let us pray for an upwelling of hope, for new light and new strength, for tolerance of those different than us, for morality and lacking that, for forgiveness. Lets us pray for fresh energy as spring rolls into full swing.
ReplyDeleteAnd regardless of how that all pans out....get some free platinum! LOL
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