Monday, March 18, 2013 - Cyprus Extraction

Cyprus Extraction

by Sinclair Noe

DOW – 62 = 14452
SPX – 8 = 1552
NAS – 11 = 3237
10 YR yLD - .04 = 1.96%

OIL +.42 = 93.87
GOLD + 12.90 = 1606.80
SILV+.13 = 29.00

We start with some traditional Cypriot music plaing in the background. It seemed like a good idea, until we learned there was a levy of almost 10%

Last Friday, we weren't even thinking about Cyprus, a tiny island country, south of Turkey, east of Greece, roughly 900,000 people. Maybe you knew about their financial problems: a credit downgrade to junk status, a 4 billion-euro bailout for the Cypriot banks. Maybe you remember that it started with the Greek breakdown and how the Greek bondholders got haircuts on Greek bonds, and Cyprus does business with Greece. And then we all forgot about Cyprus.

Until this weekend. The Cyprus banks are on the verge of failure and they need a 10 billion-euro bailout. The IMF and the ECB came up with a plan over the weekend, but it wasn't a bailout; they call it a bail in. The idea they concocted was to tax bank deposits: 6.5% on bank accounts up to 100 thousand-euros and 9.9% on bank accounts over 100 thousand-euros. Not really a tax; a levy; or maybe a haircut. Actually, they are going to steal the money.

Cyprus will receive a loan of about half the requested size under the usual austerity conditions. And in the unlikely event that all goes well, the government of Cyprus will get some cash to cover the loan offered by the Euro-partners who just stole from the Cypriots, but the cash won't be enough to cover the loan and the Cypriot banks will collapse anyway.

The benign scenario is that depositors will accept the tax and keep their money where it is. Depositors in other troubled countries will accept that Cyprus is special. A less benign scenario is that depositors fear another round of levies because if the policy makers can get away with it once, they can do it twice. Next hing you know, there are massive bank runs.

Today is a holiday in Cyprus. The banks were scheduled to be closed and they will stay closed till Wednesday; an extended bank holiday. Cyprus's banking association are calling on people to remain calm, saying it would implement measures to protect the stability of the banking sector. A crowd of protesters gathered at the presidential palace and they were not happy. And if you're thinking FDIC insurance on bank accounts, well, they have a version of that in the Eurozone, protects accounts up to 100 thousand-euro.

Side bar to this: Foreign deposits made up 26 billion-euro of the total 64 billion-euro in deposits as of December and 14 billion-euro were from Russian depositors. Cyprus banks are like Cayman Island banks for unsavory Russian tax evaders. Putin described the bailout plan as “unfair, unprofessional, and dangerous.”

Trying to deflect criticism, the German finance minister said: “the levy on deposits below 100,000 euros was not the creation of the German government. If one reached another solution, we would not have the slightest problem.”

The president of Cyprus said he had been blackmailed into accepting the deal.

The confiscation opens a Pandora's box. Moody's warned the decision was a significant departure from past instances of support. It triggers euro area policy makers willingness to risk wider financial market disruptions in pursuit of other policy goals.

And then the Cypriots might have something to say about the thieves that broke into their bank accounts.

What does it mean to you. Not much. Euro-exchanges were lower and US exchanges were lower, but we just went through 11 winning sessions and the Dow hit records, S&P was close to records. A pullback or a little pause is healthy. The markets don't go straight up. And the markets did not flame out. The world didn't end. It's just a little island in the Mediterranean.

There is no indication we are headed for a 2008-style meltdown. Of course banks runs are ugly; they start with one person and then there are lines; pandemics start with a sniffle; contagion starts with a sneeze. Today, the markets did not blink. One reason is because the stock markets are the thieves' den.

The IMF on behalf of the big global banks it serves and the ECB on behalf of the big Euro-banks it serves, is stealing without any authority whatsoever depositors' money in Cyprus. Because the banks that lent to the Cyprus banks to keep them in business are now about to get shafted and rather than get shafted, they enforce their right to get bailed out and in turn, shaft the people of Cyprus.

The banks will deputize the the Euro Commission to go in, with the backing of the IMF and the ECB, to steal the money to give back to themselves. This is so they can use what they steal as “reserves” to make themselves look better. That, in turn makes the ECB and IMF look better, so they can lend more money to the same banks in Cyprus, whose depositors they just stole from, to bail them out. Sounds like pretzel logic, except the banksters always win. If you can't make money the old fashioned way, just steal it. The only really unique part is the central bankers are looking into the eyes of depositors and saying “It's our money anyway.”

And that in turn raises a basic question: What function does a bank provide to the larger community? Does it provide a medium of exchange to aid businesses within that community (fiat money and credit/debt money under charter by the government)? Or does it use this medium as a told to extract rents from the community? A service or rent extraction? The answer is rent extraction.

On a per capita basis the 5.8 billion-euro bailout/extraction works out to about $25,000 dollars per Cypriot. Imagine if the Federal Reserve tried this trick in America, stealing $25 k fro every US bank account. I mean outright stealing, not the slow motion theft by inflation that we've all grown accustomed to.

It did set up a little bounce for gold. Nothing like a good old fashioned Eurozone mess to give gold a boost above $1600.