Tuesday, April 2, 2013

Wanna Know How Cyprus (And the Rest of the Countries Already In Line) Could Crash the Currency-Centered Crowd? Clusterfuck Alert!

(If throwing a contribution Pottersville2's way won't break your budget in these difficult financial times, I really need it, and would wholeheartedly appreciate it. Anything you can afford will make a huge difference in this blog's lifetime.)

Here's how John Mauldin tells the tale (and it's a long'un so get a tall drink before you get started):

. . . Cyprus is a former British colony that gained independence in 1960 after years of resistance. The island covers a total of 9,251 km² (roughly half the size of Connecticut) and is split along ethnic lines between the northern third, which is largely Turkish Cypriot, and the southern two-thirds, which is mainly Greek Cypriot.

The tension between the two groups has simmered for fifty years and, despite the country's entering the EU on May 1, 2004, peace talks between north and south are ongoing.

Cyprus's 1.1 million inhabitants make it the 160th-largest country in the world, and its GDP of €18bn puts it 125th in economic output.

Clearly, little Cyprus punches above its weight.

The reason for this? The size of the Cypriot banking system, which, at roughly €150bn (and falling), is about seven times the size of the country's economy.

On October 7, 2010, President Medvedev of Russia witnessed the signing of a new 'protocol' to a double-taxation treaty between Russia and Cyprus that paved the way for the removal of Cyprus from a list of 'non-cooperative jurisdictions'. What this meant was that Cyprus was suddenly an oligarch's delight, boasting the lowest corporate tax in the EU (10%) and many other benefits around moving money that made the establishment of Cyprus-based holding companies (and their attendant bank accounts) de rigueur.

Source: Eurofast

The Cypriot banks themselves, flush with deposits (many of them the property of wealthy Russians), invested their reserves heavily in, amongst other things, Greek government bonds. And, despite things being a bit shaky in the Eurozone, Cyprus was hanging in there quite well — until the Delay of Game that occurred in March of last year, when, to stall the demise of the EU as we know it, the eurocrats once again bailed out Greece. But this time, against a backdrop of rising German ire at the increasing size of the cheques their taxpayers were being forced to cut, we had our first PSI (private-sector involvement).

What this meant was that investors in those Greek bonds favoured by the Cypriot banks were obliged to take a haircut of roughly 75% on their holdings.

And, just like Ireland's, Cyprus's banks were instantly in trouble.

During the next year of wrangling (during which everybody knew the numbers but assumed everything would be 'solved', as always) there were the usual false dawns and minor scares, but the working assumption was that everything was going to be OK — and it was.

Until it wasn't.

Now, I'm not going to bore you with a full recap of the events of the last 14 days, because I'm sure you are all sick to death of it by now; but, in essence, after taking into account the amount of money the Troika were willing to pony up, Cyprus was short €5.8bn.

That shortfall had to be made up from somewhere, and so where better than guaranteed deposits? After all, haircutting the senior bondholders wouldn't do much good — what with Greek banks, other supposedly solvent European banks, and the ECB being chief amongst them.

Here's how it played out:


Friday March 15th: Cypriot banks close.

Saturday March 16th: Cypriot banks don't open.

Saturday March 16th: Cypriots are told they face the theft of their money by the government, in the form of a haircut on their deposits of between 6.75% and 9.9%, depending on whether they were under the government-insured EU limit of €100,000 or not.

Saturday March 16th: Cypriots are not best pleased.

Sunday March 17th: Cypriots empty the island's ATM machines.

Monday March 18th: Cypriot banks don't open again — this time because of a one-day bank holiday.

Tuesday March 19th: No doubt aware of their fate should they vote in favour of the bailout terms, Cypriot MPs vote a resounding 'NO!' to the conditions imposed by the Troika.

Wednesday March 20th: One-day bank holiday is extended to prevent a run on the currency.

Friday March 22nd: Russia spurns request from Cyprus for financial lifeline.

Monday March 25th: New bailout terms are agreed (to) that don't involve haircuts below the insured limit but substantially increase haircuts on those above — which are technically uninsured in any case.


Wednesday March 27th: Capital controls are announced, which will 'only be in place for a week'.

Thursday March 28th: Banks reopen under draconian restrictions, but Cyprus is calm.

Thursday March 28th: The announcement is made that capital controls will be in place for a month.

So, that's the timeline. Now that we're all clear on the Delay of Game infractions, let's take a look at the impressive implications and try to figure out who gets penalized.

First, if we look at the traditional capital structure of a bank (below), you will see that at the very top, and supposedly last in line to suffer any kind of a loss, are government-guaranteed deposits.

Next come uninsured deposits, then senior bondholders, and down the line we go until we come to the poor equity holders — the first cab off the rank when losses are being doled out.

Source: FIIG

Prior to Cyprus, the progression was pretty well set in stone:

(Reuters): In previous packages for Greece, Ireland, Portugal and Spain, leaders were unwilling to force losses on either senior bondholders or savers for fear of prompting flight from banks across the region.

Under new EU regulations, senior bondholders would bear part of the cost of future bank bailouts but that provision is not due to be enforced before 2015. Non-euro zone member Denmark is the only EU state to impose losses on senior bondholders in recent years, but after its banks were shut out of debt markets in 2011 it has moved to limit the likelihood of such losses.

Flashback: On February 1, then-Cypriot finance minister, Vassos Shiarly, calmed fears after meeting with Dutch lawmakers in The Hague (emphasis mine):

(Bloomberg): Cypriot Finance Minister Vassos Shiarly said senior creditors won’t be forced to take losses in a proposed rescue of the country’s banks.

Only junior bondholders will face losses in the bailout of Cyprus’s lenders, which may need about 10 billion euros ($13.7 billion) of fresh capital, Shiarly said in an interview in The Hague late yesterday. Senior creditors and depositors won’t be touched, he said after meeting with Dutch lawmakers....

Most junior bondholders are individuals in Cyprus, Shiarly said. “There’s been a lot of discussion and an association has been formed to lobby against the bail-in,” he said. “Unfortunately it’s a necessity.” There has been no talk of imposing losses on depositors, he added.

Flashback: On February 11th, the following letter was set to the CEO of Laiki Bank from the office of the Governor of the Central Bank of Cyprus (unfortunately for all involved, ZeroHedge dug it up after the fact. I love those guys!):

Fast-forward to March 1st, when Cyprus's newest FinMin, Michalis Sarris, had this to say to waiting reporters after his party's win in the general election:

(WSJ): "There is nothing more foolish than talking about a deposits haircut," Mr. Sarris told journalists. "The important thing is to come to an agreement as soon as possible."

Exactly two weeks later, depositors were shut out of banks and left helpless as the new government, at the behest of the EU, stole their savings.

So, as it turns out, there was one thing more foolish than talking about a deposit haircut, and that was believing the Cypriot government's assurances.

Of course, as always, the headlines did no justice at all to what was going on behind the scenes (at least, if you focused your attention on the mainstream media).

If you did a little digging, however, you quickly realized that this was just a complete and utter ... (I'm looking for a word other than 'clusterf***' here, but I just can't find one that is equally apposite, so I'm afraid I'm going to have to go with it) clusterf***.

Firstly, the bail-in was a sop to German voters in an election year for Angela Merkel. The German press had been full of stories about how the money in Cyprus all belonged to 'evil Russian gangsters' and that bailing out Cyprus was effectively giving money to criminals, and so Angie & Wolfie decided to play hardball to appease their electorate.

OK, that's a dumb move, but with AFD (Alternative für Deutschland) threatening to get all Grillo on Angie (see story on page 27), I do get it. BUT ...

Remember those 'evil Russian gangsters'? Well another, less pejorative name for them is 'smart money', and what does 'smart money' do? It generally does smart things.

(Reuters): In banknotes at cash machines and exceptional transfers for "humanitarian supplies", large amounts of euros fled the east Mediterranean island before and after Cypriot lawmakers stunned Europe by rejecting a levy on all bank deposits.

EU negotiators knew something was wrong when the Central Bank of Cyprus requested more banknotes from the European Central Bank than the withdrawals it was reporting to Frankfurt implied were needed, an EU source familiar with the process said. "The amount the Cypriots mentioned ... on a daily basis was much less than it was in reality," the source said.

Confusion over just how much money was pulled out of Cyprus' banks is illustrative of the confusion surrounding the negotiations as a whole. Representing just 0.2 percent of the euro zone economy, Cyprus nevertheless threatened to reignite the bloc's debt crisis. Cyprus' problems began in Greece — it is heavily exposed to the euro zone's first bailout casualty.

No one knows exactly how much money has left Cyprus' banks, or where it has gone. The two banks at the centre of the crisis — Cyprus Popular Bank, also known as Laiki, and Bank of Cyprus — have units in London which remained open throughout the week and placed no limits on withdrawals. Bank of Cyprus also owns 80 percent of Russia's Uniastrum Bank, which put no restrictions on withdrawals in Russia. Russians were among Cypriot banks' largest depositors.

Yes folks, it appears as though the people who got really penalized by the bank closures in Cyprus were, you guessed it, the little people.

This capital flight, however, creates a far bigger problem than just the sheer amount of egg it leaves on the faces of the eurocrats; because with the big money fleeing, the pool of capital available to be stolen is much, much smaller than originally calculated, and that means the haircut on deposits over €100,000 can no longer be the 9.9% originally proposed.

Nor will it be the 15% suggested after the Cypriot parliament rejected the first proposal. 20%? No, more; much more. The last official estimate was 40% ... but that was a lifetime ago.

How big will the haircuts eventually be? Well, frankly, that's anybody's guess. The most recent official scheme runs as follows:

Depositors in the Bank of Cyprus will be forced to take shares in the bank to the tune of 37.5% of any savings over €100,000, while the rest will likely never be paid back.

Of the 62.5% of uninsured deposits not converted into shares, 40% will continue to accrue interest (which will not be repaid unless the bank makes a decent profit — riiiiiiiiiight), which only leaves the last 22.5%. Which will earn zero interest.

But spare a thought for Laiki Bank depositors, who will lose 80% of their deposits in the winding down and THEN be transferred to the Bank of Cyprus.

It's an unmitigated disaster. Period.

However, fears of riots in Cyprus when the banks finally opened on Thursday gave way to a huge sense of relief when the unrest failed to materialize.

Unfortunately, this unexpected calm and the lack of long lines outside banks in places like Spain, Greece, and Italy has been taken as a sign that the eurocrats have recovered their own fumble once again.

They haven't. Believe me, they haven't.

"It hasn't happened" and "it hasn't happened yet" are two identical statements but for just three little letters, and yet the difference between them is a gaping chasm.

Allow me to illustrate this point.

Remember Friday September 12th, 2008? That was the last of the 'olden days'. On that day, Lehman Brothers was operating normally, despite rumours that it was in trouble. These rumours were, of course, strenuously denied by Dick Fuld, Joe Gregory, and anyone else at the company who was challenged as to its solvency.

After the market shut, the full horror began to unravel in real time before a stunned global audience. I say 'stunned,' but wouldn't you know it, the smart money had been pouring out of Lehman for weeks.

When the market opened Monday, September 15th, after Lehman had been officially forced to declare bankruptcy, the world prepared for cataclysm. But then something 'unexpected' happened:

Source: Bloomberg

As you can see from this chart, by the end of the first week after Lehman crystallized everybody's very worst fears, the market managed to close slightly positive, inducing a false sense of calm. However, that close above the pre-Lehman level was the last time the market would see such heady heights for quite a while.

The next chart (following page) shows what happened in the two months immediately after that first-week close; and, as you can see, just because bad stuff didn't happen in those first few days, it didn't mean things weren't about to get very, very dicey indeed as reality sunk in.

Source: Bloomberg

So, with that as a salutary example, and noting the relatively sanguine behaviour of markets this past week, what do we suppose is the new reality, PC (post-Cyprus)?

Lesson One: The eurocrats are capable of making — and in fact are likely to make — horrific errors in judgement around financial matters, in the interests of furthering their political aims.

The full ramifications of the damage done by these clowns when they even suggested breaking the sacrosanct deposit guarantee have yet to be felt, but it will slowly dawn on savers throughout Europe that their money is no longer safe in a Greek bank, nor a Spanish one. Nor an Italian or Portuguese one. In fact, with interest rates at zero, the banco de mattress is looking more and more like the smart option (see picture, left, from Spain).

Lesson Two: The slightest slip on the part of the eurocrats when trying to spin what they really want to do versus what they think the public will allow them to do could turn out to be disastrous.

Witness the newly incumbent head of the Eurogroup, Jeroen Dijsselbloem (successor to Mr "When-it-gets-serious-you-have-to-lie" himself, Jean-Claude Juncker) saying out loud that Cyprus is a 'template' for future bailouts, whereupon the market stumbled dramatically. So much so that Dijsselbloem's backpedalling was worthy of Lance Armstrong himself.

As everyone held their breath, Dijsselbloem issued a statement saying that Cyprus is “a specific case with exceptional challenges” and that “no models or templates” will be used in the future.

Unfortunately for Dijsselbloem & Co., the FT was on hand to provide a full, on-the-record transcript of the conversation in question, in which Jeroen certainly seems to suggest that Cyprus marks the dawn of a new approach to bailouts-ins. I'll let you judge his sincerity.

Lesson Three: What the public is told in the heat of the crisis and what actually happens once the immediate crisis has seemingly passed are altogether different things:

Casting aside the March 1 assurance from Sarris that nothing was more foolish than talking about a deposits haircut, let's focus on the assurances made to savers last week.

First, they were told that the banks would only be closed for a day. That ended up turning into almost two weeks. Then they were assured that the draconian capital controls put in place would only be there for seven days; but by sundown on the first day, that had been extended to 'about a month'.

As I write this, depositors still wait to hear the final amount of their savings they will end up losing to confiscation; but that money is now captive, and so if it takes a little longer to figure out how much of the 'dumb money' is left to carry the load, then so be it. That money is not going anywhere.

These capital controls will be impossible to lift at any point in time, I suspect, so the week that turned into a month will likely turn into a much longer period. Just ask Icelanders who still have capital controls in place from 2008.

Lesson Four: Delays of Game work both ways. Just because money hasn't begun pouring out of peripheral European banks doesn't mean it won't.

Late on Friday, the good folks at Zerohedge (them again) broke the following story, which demonstrates the delayed reaction to events in the financial world as problems begin to permeate the consciousness of Europeans in general — and, in this case, Italians in particular:

(Zerohedge): It appears, given news from Italy today, that European depositors are increasingly coming to the realization that deposits in their local bank are not 'safe' places to put their spare cash, but are in fact loans to extremely leveraged businesses. In a somewhat wishy-washy, 'hide-the-truth'-like statement on Monte dei Paschi's website, the CEO admits to, "the withdrawal of several billion in deposits." Of course, the reasons why these depositors withdrew their capital from the oldest bank in the world will never be known though of course he blames it on "reputational damage" from their derivative cheating scandal. Apparently the fact that this happened to come about six week after said scandal and the bank's third bailout, and that the prior two bailouts did not result in such an outflow of unsecured liabilities (at least not to the public's knowledge), was lost on the senior management, as was lost that a far greater catalyst may have been the slightly more troubling events in Cyprus in the second half of March.

Unsurprisingly, as Reuters notes, the CEO declined to give a forecast on the level of deposits at the end of the first quarter of 2013.

Going forward, this is the key takeaway from the events in Cyprus:

That one crucial misstep by Dijsselbloem's Eurogroup has started a Europe-wide bank run that cannot be seen yet but is surely happening. In the 21st century, bank runs happen over the internet long before we see the angry queues forming outside the branches of weak banks; and, sadly, it takes those pictures to impress upon the 'dumb money' the gravity of the situation. By the time they understand what is happening to them, it's too late. Just ask any one of the hundreds of thousands of Cyprus residents who believed the promises of their government and central bank in the days and weeks leading up to the seizure of their hard-earned savings.

Cyprus will, in time, come to be seen as the beginning of the end for the euro; because trust has finally been broken, and without it fractional-reserve banking cannot operate.

By breaking that trust, the eurocrats have shown themselves to be what they are: ineffectual bureaucrats desperately lurching from one crisis to another, but now they have crossed the Rubicon.

Already, their next test awaits them as Slovenia, a country twice the size of Cyprus in land mass with a GDP of $45bn, begins to crumble under the weight of its own banking crisis.

Saddled with nonperforming loans equal to 20.5% of their portfolios, Slovenia's three largest banks are, according to the IMF, 'under severe distress', and the country's borrowing costs have tripled in a week (chart, left).

Naturally, the government uttered the usual assertions of solvency and promised all the right things:

(UK Daily Telegraph): The new prime minister Alenka Bratusek told the Slovene parliament on Wednesday that the fears are overblown. “Our banking system is stable and safe. Comparisons with Cyprus aren’t valid. Deposits are safe and the government is guaranteeing them.”

Sound familiar, folks?

But, if Slovenia does happen to require a bailout, it will be too soon after Cyprus to treat them any differently; and so Slovenians are at risk of being the second citizenry of the EU to suffer deposit seizure and capital controls. At that point, even the most disengaged citizens of peripheral Europe may just wake up and smell the coffee.

On the plus side, Slovenia's banking sector is just 130% of GDP, as opposed to Cyprus's 700%; so that helps, but if we're talking about off-shore banking destinations whose financial sectors could be potentially troublesome in the case of a Europe-wide bank run, then surely Luxembourg, with a banking sector that is equal to 2400% of GDP, warrants a cursory glance.

But maybe that's a subject for another day.

This week's Things That Make You Go Hmmm... is stuffed full of goodness, beginning with a look at Cyprus and the unraveling of fractional-reserve banking and moving right along to the problems besetting poor Slovenia. And then it's on to little Luxembourg, so you can all familiarize yourselves with the names and places that will soon require constant monitoring.

From there we make the short hop to Switzerland, to find that the referendum that now must be called on repatriating Swiss gold has a wrinkle in it that may play havoc with currency markets. Then we buzz across the English Channel to London, where the Candy Brothers' monument to opulence is raising a quizzical eyebrow or two.

Texas joins the chorus of places looking to repatriate gold, we sit on the shoulders of 'the Alchemists' as they try to fix the world in 2008, and we meet the German professor who is to Angela Merkel what Beppe Grillo was to Mario Monti.

Our charts include some fantastic work by Greg Weldon (a giant amongst data analysts, both literally and figuratively), some fascinating gold and silver charts that suggest brighter times ahead for both monetary metals, a handy dandy Cyprus bailout reference, and a great chart on European versus US unemployment — not to mention a nifty map of the potential targets for North Korea's missile batteries.

Lastly, we savor the wisdom of Fonzie Bill Fleckenstein, the bombast of Nigel Farage, and — for you millions who requested it — my recent speech at Mines & Money in Hong Kong, entitled 'Risk: It's Not Just A Board Game'.

Until Next Time.


Cyprus and the Unraveling of Fractional-Reserve Banking

The “Cyprus deal” as it has been widely referred to in the media may mark the next to last act in the slow motion collapse of fractional-reserve banking that began with the implosion of the savings-and-loan industry in the U.S. in the late 1980s.

This trend continued with the currency crises in Russia, Mexico, East Asia, and Argentina in the 1990s in which fractional-reserve banking played a decisive role.

The unraveling of fractional-reserve banking became visible even to the average depositor during the financial meltdown of 2008 that ignited bank runs on some of the largest and most venerable financial institutions in the world. The final collapse was only averted by the multi-trillion dollar bailout of U.S. and foreign banks by the Federal Reserve.

Even more than the unprecedented financial crisis of 2008, however, recent events in Cyprus may have struck the mortal blow to fractional-reserve banking. For fractional-reserve banking can only exist for as long as the depositors have complete confidence that regardless of the financial woes that befall the bank entrusted with their “deposits,” they will always be able to withdraw them on demand at par in currency, the ultimate cash of any banking system.

Ever since World War Two governmental deposit insurance, backed up by the money-creating powers of the central bank, was seen as the unshakable guarantee that warranted such confidence. In effect, fractional-reserve banking was perceived as 100-percent banking by depositors, who acted as if their money was always “in the bank” thanks to the ability of central banks to conjure up money out of thin air (or in cyberspace).

Perversely the various crises involving fractional-reserve banking that struck time and again since the late 1980s only reinforced this belief among depositors, because troubled banks and thrift institutions were always bailed out with alacrity—especially the largest and least stable. Thus arose the “too-big-to-fail doctrine.” Under this doctrine, uninsured bank depositors and bondholders were generally made whole when large banks failed, because it was widely understood that the confidence in the entire banking system was a frail and evanescent thing that would break and completely dissipate as a result of the failure of even a single large institution.

Getting back to the Cyprus deal, admittedly it is hardly ideal from a free-market point of view. The solution in accord with free markets would not involve restricting deposit withdrawals, imposing fascistic capital controls on domestic residents and foreign investors, and dragooning taxpayers in the rest of the Eurozone into contributing to the bailout to the tune of 10 billion euros.

Nonetheless, the deal does convey a salutary message to bank depositors and creditors the world over. It does so by forcing previously untouchable senior bondholders and uninsured depositors in the Cypriot banks to bear part of the cost of the bailout. The bondholders of the two largest banks will be wiped out and it is reported that large depositors (i.e., those holding uninsured accounts exceeding 100,000 euros) at the Laiki Bank may also be completely wiped out, losing up to 4.2 billion euros, while large depositors at the Bank of Cyprus will lose between 30 and 60 percent of their deposits. Small depositors in both banks, who hold insured accounts of up to 100,000 euros, would retain the full value of their deposits.

The happy result will be that depositors, both insured and uninsured, in Europe and throughout the world will become much more cautious or even suspicious in dealing with fractional-reserve banks. They will be poised to grab their money and run at the slightest sign or rumor of instability. This will induce banks to radically alter the sources of the funds they raise to finance loans and investments, moving away from deposit and toward equity and bond financing. As was reported Tuesday, March 26, this is already expected by many analysts....

*** von mises institute / link

Slovenia Faces Contagion from Cyprus as Banking Crisis Deepens

Slovenia’s borrowing costs have rocketed over recent days as it grapples with a festering financial crisis, becoming the first victim of contagion from Cyprus.

“Banks are under severe distress,” said International Monetary Fund in its annual health check on the country. Non-performing loans of the Slovenia’s three largest banks reached 20.5pc last year, with a third of all corporate loans turning bad.

Yields on two-year debt in the Alpine state have tripled over the past week, jumping from 1.2pc to 4.26pc before falling back slightly on Thursday. Ten-year yields have reached a post-EMU high of 6.25pc.

“The country has lost competitiveness since joining the euro and it’s led to slow economic collapse. Markets have been very complacent, but it has been clear for a long time that the banks need recapitalisation, and it is not easy to raise money in this climate,” said Lars Christensen from Danske Bank.

The IMF expects the economy to contract by 2pc this year, following a fall of 2.3pc in 2012. “A negative loop between financial distress, fiscal consolidation and weak corporate balance sheets is prolonging the recession. A credible plan to address these issues is essential to restore confidence and access markets,” it said.

The new prime minister Alenka Bratusek told the Slovene parliament on Wednesday that the fears are overblown. “Our banking system is stable and safe. Comparisons with Cyprus aren’t valid. Deposits are safe and the government is guaranteeing them.”

Slovenia’s bank assets equal 130pc of GDP compared with 700pc for Cyprus, though the Cypriot figure is misleading since a large part of its banking system is made of “brass plate” subsidiaries of foreign lenders such as Barclays or Russia’s VTB.

Tim Ash from Standard Bank said the events of the past two weeks had pushed the country over the edge. “Slovenia is now inevitably heading towards a bail-out. The eurozone shot itself completely in the foot in Cyprus,” he said.

The Slav-speaking state — a Baroque jewel with historic ties to Austria — has a population of just 2m and is too small to pose a financial threat.

However, analysts say a crisis in Slovenia would further complicate EMU politics, forcing the northern creditor states to define their rescue strategy yet again. Austerity fatigue in Germany and Holland has already caused policy to harden.

Luxembourg has also come into focus as markets take a closer look at EMU money centres. Its banking assets are 2,500pc of GDP, by far the highest in the eurozone....

*** Ambrose Evans-Pritchard / link

Luxembourg Warns of Investor Flight from Europe

In Luxembourg, leaders are warning that applying the Cypriot bailout model — a levy on bank deposits — to other crisis-plagued countries could lead to a flight of investors from Europe. But the EU is considering the option anyway.

The debate over this week's "bail in" of bank account holders in Cyprus as part of the country's debt crisis bailout is continuing to simmer in Europe. In Luxembourg, Finance Minister Luc Frieden has warned that the example set in Cyprus by taxing people holding €100,000 ($129,000) or more in their accounts could drive investors out of Europe.

"This will lead to a situation in which investors invest their money outside the euro zone," he told SPIEGEL. "In this difficult situation, we need to avoid anything that will lead to instability and destroy the trust of savers."

Earlier this week, Euro Group President Jeroen Dijsselbloem sparked an enormous controversy after stating that the solution found in Cyprus could be applied throughout the euro zone in the future.

The remark triggered immediate criticism from his predecessor as head of the Euro Group, Luxembourg Prime Minister Jean-Claude Juncker. "It disturbs me when the way in which they tried to resolve the Cyprus problem is held up as a blueprint for future rescue plans," Juncker told German public broadcaster ZDF earlier this week. "It's no blueprint. We should not give the impression that future savings deposits in Europe might not be secure. We should not give the impression that investors should not keep their money in Europe. This harms Europe's entire financial center."

But in the European Parliament, politicians are considering ways to make banks bear greater responsibility for their own financial problems. Lawmakers are considering the European Commission's proposed banking resolution legislation for faltering financial institutions.

The discussion includes the possibility of future compulsory levies on major depositors, although it is more focused on placing greater responsibility for risks on other investors in banks.

"We want to clearly strengthen the position of deposit customers," said Swedish European Parliament member Gunnar Hökmark. Under the proposal, deposits of up to €100,000 would be excluded from any loss participation at a bank. Any deposits over that amount would only get hit if the losses couldn't be fully covered through a bank's shareholders and other creditors.

The EU currently guarantees all deposits under €100,000, but this policy was called into question two weeks ago after the finance ministers of the euro zone decided to make small-scale savers contribute to the bailout of the Cypriot banking sector. Ultimately, Cyprus issued a one-time levy only against depositors with €100,000 or more in their accounts, the first time that personal bank accounts have been hit in Europe as part of a formal bailout package.

Under current EU policy, private creditors will not be required to cover banking imbalances until 2018. But in Germany, Andreas Dombret, a board member of the Bundesbank, the country's central bank, would like to implement the new rules much sooner, by 2015. And Carsten Schneider, the budget policy expert for the opposition center-left Social Democrats, says he believes the rules for winding down banks should be implemented as soon as 2014.

"Societal and political acceptance is ending for the model of bank rescues in which the state protects bond holders and major investors," said Schneider.

*** der spiegel / link

Does a Yes to the Swiss Gold Referendum Imply an End to the CHF Cap?

According to the upcoming referendum “Save our Swiss gold”:
The SNB should stop selling its gold.

The gold has to be stored in Switzerland.

Gold should represent at least 20% of the SNB assets.

Did you know that:

The SNB has sold one ton of gold per day during five years?

1550 tons of the people’s assets in form of gold had been sold for cheapest prices (between 300 and 500 US$)?

When the concerned minister was asked where the SNB gold currently is stored, he answered in parliament: “Where this gold exactly is stored, I cannot say, because I do not know, because I do not need to know and because I do not want to know."

The referendum initiative was successful, 106000 signatures were achieved. Hence the referendum will probably be held in the coming year. With it the Swiss people will decide if the SNB should be obliged to hold gold as 20% of its total assets. Currently the SNB holds only 10% gold.

Until the end of Bretton Woods, the Swiss managed to accumulate large gold reserves thanks to continuous current account surpluses. In the year 2000, the IMF intensified the “demonetization of gold” campaign started in the 1970s in the strong belief that the “new economy” and the strength of the anchor currency of the global monetary system, the US dollar, would be able to defeat any future supply-side and inflation issues.

Many central banks, like the Bank of England or the SNB, sold masses of gold. The Germans and Italians, however, decided to keep their big gold reserves, possibly to give the euro a better credibility. Since the last gold sales in 2007, the Swiss have maintained the same quantity of gold in a sort of “gentlemen agreement among central banks of developed nations”. Despite the strong rise of gold prices since 2008, they never bought more gold, but central banks of emerging markets did.

Source: SNBCHF.com

Between 2001 and 2007, the SNB made the Swiss cantons happy and delivered some billions of francs to prop up their finances. The gains were unfortunately not caused by strong asset management capabilities, but mostly due to gold price improvements and gold sales at quite cheap prices.

For the proponents of the gold referendum, the SNB gold sales were the destruction of what their parents and grand parents achieved during the Bretton Woods period. As the year 2010 SNB results show, the remaining Swiss gold holdings prevented higher losses; Unfortunately, the quantity of gold was less than half the one of the year 2000; otherwise gains on the gold price would have nearly neutralized losses on fiat currencies....

*** SNBCHF (Thanks, BG) / link

A Tale of Two Londons

Up until the 18th century, Knightsbridge, which borders genteel Kensington, was a lawless zone roamed by predatory monks and assorted cutthroats. It didn’t come of age until the Victorian building boom, which left a charming legacy of mostly large and beautiful Victorian houses, with their trademark white or cream paint, black iron railings, high ceilings, and short, elegant stone steps up to the front door.

This will not be the impression a visitor now gets as he emerges from the Knightsbridge subway station’s south exit. He will be met by four hulking joined-up towers of glass, metal, and concrete, sandwiched between the Victorian splendors of the Mandarin Oriental Hotel, to the east, and a pretty five-story residential block, to the west. This is One Hyde Park, which its developers insist is the world’s most exclusive address and the most expensive residential development ever built anywhere on earth. With apartments selling for up to $214 million, the building began to smash world per-square-foot price records when sales opened, in 2007. After quickly shrugging off the global financial crisis the complex has come to embody the central-London real-estate market, where, as high-end property consultant Charles McDowell put it, “prices have gone bonkers.”

From the Hyde Park side, One Hyde Park protrudes aggressively into the skyline like a visiting spaceship, a head above its red-brick and gray-stone Victorian surroundings. Inside, on the ground floor, a large, glassy lobby offers what you’d expect from any luxury intercontinental hotel: gleaming steel statues, thick gray carpets, gray marble, and extravagant chandeliers with radiant sprays of glass. Not that the building’s inhabitants need venture into any of these public spaces: they can drive their Maybachs into a glass-and-steel elevator that takes them down to the basement garage, from which they can zip up to their apartments.

The largest of the original 86 apartments (following some mergers, there are now around 80) are pierced by 213-foot-long mirrored corridors of glass, anodized aluminum, and padded silk. The living spaces feature dark European-oak floors, Wenge furniture, bronze and steel statues, ebony, and plenty more marble. For added privacy, slanted vertical slats on the windows prevent outsiders from peering into the apartments.

In fact, the emphasis everywhere is on secrecy and security, provided by advanced-technology panic rooms, bulletproof glass, and bowler-hatted guards trained by British Special Forces. Inhabitants’ mail is X-rayed before being delivered.

The secrecy extends to the media, many of whose members, including myself and the London Sunday Times’s and Vanity Fair’s A. A. Gill, have tried but failed to gain entry to the building. “The vibe is junior Arab dictator,” says Peter York, co-author of The Official Sloane Ranger Handbook, the riotous 1982 style guide documenting the shopping and mating rituals of a certain striving class of Brits, who claimed Knightsbridge’s high-end shopping area, which stretches from Harrods to Sloane Square, as their urban heartland.

One Hyde Park was built by two British brothers, Nick and Christian Candy, together with Waterknights, the international property-development company owned by Qatar’s prime minister, Sheikh Hamad bin Jassim al-Thani. Christian, 38, a lanky former commodities trader, is the duo’s discreet number cruncher, while his stockier, tousled-haired brother, Nick, 40, is its flashy, name-dropping, celebrity-loving public face. The Candys don’t go in for small gestures. In October, Nick married the Australian actress Holly Valance in Beverly Hills, after she had announced their engagement by tweeting a photo of Nick down on one knee proposing on a beach in the Maldives.

In flaming torches behind the happy couple, will you marry me was written, without the usual question mark.

Designed by the architect Lord Richard Rogers, who also designed London’s iconic Lloyd’s building, One Hyde Park has divided Britain. Gary Hersham, managing director of the high-end real-estate agency Beauchamp Estates, says it is “the finest building in England, whether you like the style or you don’t,” while investment banker David Charters, who works in Mayfair, says, “One Hyde Park is a symbol of the times, a symbol of the disconnect. There is almost a sense of ‘the Martians have landed.’ Who are they? Where are they from? What are they doing?” Professor Gavin Stamp, of Cambridge University, an architectural historian, called it “a vulgar symbol of the hegemony of excessive wealth, an over-sized gated community for people with more money than sense, arrogantly plonked down in the heart of London.”

The really curious aspect of One Hyde Park can be appreciated only at night. Walk past the complex then and you notice nearly every window is dark. As John Arlidge wrote in The Sunday Times, “It’s dark. Not just a bit dark — darker, say, than the surrounding buildings — but black dark. Only the odd light is on.... Seems like nobody’s home.”...

*** vanity fair / LINK

I need to stop perusing Mauldin's musings. You, however, may continue at the link in the title.

And whether you found much agreement with his rendering of recent economic history or not, you've got to admit that he tells an interesting story.  Frightfully so.

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