Sprott on Cyprus

Well, not figuratively. I'm pretty sure he's still in Canada. The topic here is Cyprus and you need to read it.

CAVEAT DEPOSITOR

By: Eric Sprott & Shree Kargutkar

“If there is a risk in a bank, our first question should be: ‘Ok, what are you the bank going to do about that? What can you do to recapitalise yourself?’ If the bank can’t do it, then we’ll talk to the shareholders and the bondholders. We’ll ask them to contribute in recapitalising the bank. And if necessary the uninsured deposit holders: ‘What can you do in order to save your own banks?’” – Jeroen Dijsselbloem, March 26, 2013 1

A deal has just been struck with Cyprus. However, it was not the deal that Cyprus saw other countries receive. This was not the deal received by Greece, Italy and Spain. There were no bailed out banks in the aftermath. There was no transfer of risk from over-levered banks to the taxpayers. The risk was pushed back onto the banks. Their equity was wiped out. Their bondholders were wiped out. Their uninsured depositors saw their accounts raided for additional liquidity. It wasn’t just that the rules of the game had changed, the game itself changed. By raiding the depositors’ accounts, a major central bank has gone where they would not previously have dared. The Rubicon has been crossed. Going forward, this is expected to be the “template” for dealing with risky, over-levered banks and the countries which support them.

For the first time since the crisis began, we are faced with a new paradigm, or a “template”, for how a major central bank will address weakness in the financial sector. While the old template involved “bailing out” through transfer of risk from the corporate sector to the taxpayer, the new template calls for “bailing in”, whereby the risk is contained within the affected institution at the expense of equity holders, bond holders and finally the depositor.

How does the new template affect you?

This “template” is already being applied to the “too big to bail” banks in other developed countries around the world. A statement in the joint paper published by the FDIC and the Bank of England in December 2012 reads:

“An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company into equity. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailedin creditors would become the owners of the resolved firm…. Such a resolution strategy would ensure market discipline and maintain financial stability without cost to taxpayers”.2

Note the lack of the phrase “uninsured depositors” in this context, which opens the doors for both insured and uninsured depositors to be affected. In a similar vein, Canada’s recently released budget addresses the same problem. Page 144 of Canada’s Economic Action Plan 2013 reads:

“The Government proposes to implement a – bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers.”3

Likewise, New Zealand’s Open Bank Resolution policy allows for a “bail in” of afflicted banks by wiping out the equity holders first, the bond holders second and finally forcing a haircut on the depositors.4

Over-levered banks are not a recent development. We are faced with a banking crisis, seemingly once every generation. In a majority of cases, the bad banks were allowed to fail and newer, stronger banks took their place. However, the recent modus operandi of the central banks and policy makers allowed over-levered banks to get even bigger, rewarded risk taking with bailouts and let the inherent problem of unsustainability fester.

CHART 1: BANKS ASSETS – COUNTRY GDP
maag-march-2013-chart-1.png 
Source: Capital IQ, CIA Factbook 

We carried out the exercise of taking the largest banks, or in other words, the “too big to fail” banks in the G7 countries and added up their assets in relation to the host country GDP. For the layperson, a typical bank’s assets are primarily composed of the loans they have originated while the liabilities are primarily composed of deposits they have accepted. With the exception of the US, all G7 countries have banking systems that have become larger and in some cases dwarfed their respective economies.

Governments around the world are finally beginning to realize the gravity of the risk that exists in their banking sectors. The EU has decided to build upon the new template of the “bail-in” regime. The US, UK and Canada have all followed suit. This puts the onus squarely upon the depositor. The depositor is a lender to the financial institution that he banks with. However, most depositors naively assume that their deposits are 100% safe in their banks and trust them to safeguard their savings. Under the new “template” all lenders (including depositors) to the bank can be forced to “bail in” their respective banks. Several G7 countries already have provisions that allow troubled banks to be bailed in using depositor accounts. We have been vocal about our concerns over the state of the global financial system for the better part of the decade. The Greek tragedy is now being played out in Cyprus with a new twist as depositors have been unwillingly turned into sacrificial lambs. Given the size of the banking sector in most G7 countries and the burgeoning government debts, the ability of the governments to bail out their banks is severely constrained, especially considering the political headwinds that exist today. For this reason, we strongly believe that real assets trump a fiat currency in a “savings” account. It is not our intention to be alarmist here, merely to say, “caveat depositor”.

1 Import Export Stats – US Census Foreign trade: http://blogs.ft.com/brusselsblog/2013/03/the-ftreuters-dijsselbloem- interviewtranscript/
2 http://www.bankofengland.co.uk/publications/Documents/news/2012/nr156.pdf
3 http://www.budget.gc.ca/2013/doc/plan/budget2013-eng.pdf
4 http://www.centralbanking.com/central-banking/official-record/2257939/rbnzarticle-
says-open-bank-resolution-helps-keep-banks-in-line

43 Comments

achmachat's picture

alo!

yay!

best day ever.. kind of.

ordered the two mint boxes.... and most importantly... FIRST!!!! 

what I wanted to share here: I was talking to my banker today, and he said that back then when dexia was in big trouble, they had seriously considered doing the same thing they just did in Cyprus... and this in Luxembourg!

me: but Europe's entire banking system would have collapsed overnight if confidence was lost in Luxembourg.

him: yep!

another little bit of info: he said that at the moment, your money is insured up to 100,000 EUR per bank, so you could still spread it around and feel "safe". But... he immediately added that rules always change when they have to...

Gramp's picture

there it is!

Hold on tight Turdville!

codesurfer's picture

I'ts a wonderful day to stack

May the Phyz be with you.

thurd aye's picture

..

thurd get furth!

Got this email,may interest you,who knows.

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Go well.TA

ancientmoney's picture

Bail-ins . . .

While this is new in the modern financial world, what was done in Cyprus, it is actually the way it was before FDIC insurance came about.  Watch "It's a Wonderful Life."

Most people I know keep their deposit below the FDIC threshold, for what that's worth now days.  While that may protect you from being part of a bail-in some day, it does not protect from devaluations.

Mr. Fix's picture

Six.

Have a nice day!cool

2x2's picture

is the top ten still open?

... here comes today's kapooya

(30 seconds in the green. Oh well. Yesterday really took me by surprise, didn't think it would be as bad, didn't think it would drift this long without a healthy rebound. Hope that Turd's extra "F" applies and is apparent soon!)

treefrog's picture

o!

canada!

tyberious's picture

Bear raid on gold and silver

Bear raid on gold and silver unlikely to depress prices much beyond this week

arabianmoney.net / By Peter Cooper / April 3, 2o13

Bullion banks and their professional hangers on have staged a bear raid on the gold and silver markets this week. It’s the wartime equivalent of a diversionary raid that attempts to temporarily distract the attention from the true battle ground.

With stock markets stuck around all-time highs and the US markets facing a massive reversal if Elliott Wave theory holds true then it is pretty obvious that this is where the real battle will be fought. D-day was on the beaches of Normandy not up the road in Calais as the allies tried to fool the Germans in to thinking.

Fundamentals

Only yesterday we published a graph showing how the monetary base and gold move in step (click here). You cannot bet against the inevitable for very long and succeed. All the Comex traders are doing is giving the physical buyers the chance to snap up bargains, and the sales of coins suggests that is what is happening (click here).

READ MORE

tyberious's picture

Take Your Money and

Take Your Money and Run

aucontrarian.blogspot.com / By Frederick J. Sheehan / April 3, 2013

It is a wonder of the times that, in matters of money, such trust endures when those in whom it is invested work so hard to demonstrate they will squander or confiscate it. Both money and trust. At the very least, the mandarins have made no attempt to hide their inability to think and act beyond today’s headlines. Every day is writ anew, with complete ignorance of previous decrees and assurances.

“Why Cyprus Is a Special Case” - March 25, 2013, Bloomberg

Cyprus ‘Bail-In’ Not a Special Case After All – March 25, 2013, ITV News: “If we want to have a healthy, sound financial sector, the only way is to say, ‘Look, there where you take on the risks, you must deal with them, and if you can’t deal with them, then you shouldn’t have taken them on.’” – Dutch Finance Minister, Jeroen Dijsselbloem.

ECB Repeats That Cyprus is a Special Case to No Effect. – March 26, 2013, City A.M: “The European Central Bank’s Ewald Nowotny has repeated that Cyprus is a special case, but markets aren’t paying attention. The euro remains stubbornly low.”

“Merkel Says Greece is Special Case” – January 9, 2012, Reuters: “We have said time and again that Greece is a special case….”

“Ireland is a Special Case” – German Chancellor Angela Merkel and Irish Taoiseach Enda Kenny – October 21, 2012

“Portugal’s Problems: The Next Special Case?” Renewed optimism about the euro zone has passed Portugal by – Feb 4, 2012, The Economist

READ MORE

¤'s picture

To QE or not QE....that is QuEstion

It would appear that QE is completely necessary in order to keep the US running and to at least keep the status quo in place so that a brutal depression doesn't occur.

The only thing keeping the current level of day to day operations and our economic system going is that direct monetization.

However, nothing is forever and that would apply to QE and ZIRP also.

So the question then becomes...why would they even consider such an aggressive and extreme ZIRP policy in the first place?

1.) At the time it was their only real recourse unless they wanted the economy and the current system to meltdown in 2008 right then and there. Extreme can kicking gave them time.

2.) Given time to formulate some type of plan for a gradual crash landing might they also have realized that the entire system needs to be changed/controlled? How could they facilitate that effectively and efficiently?

3.) By creating another mass bubble (ZIRP) and ensuing panic when it collapses and giving them cover and excuse to drastically alter the current set-up to one that is overtly controlling (ie. capital controls).

4.) Despite the assertion that QE (in it's present and 'known' form) can never end, what happens if they 'publicly' end it. One negative word from Bernanke or his predecessor and the market crumbles and it causes the change/control they seek or need?

5.) Look for the public insinuation in the future from Bernanke & Co. that the QE punchbowl is being drained (eventhough they'll still do it via a shadow method) and they're returning to a more historically normal interest rate policy OR something altogether different.

6.) When any or all of that happens look for higher rates, market & socio-economic turmoil and the excuse for drastically changing the current system. At that point the market and public will clamor for a fix by any and all means,

7.) In a word or two....look for "capital controls" to happen and a system makeover made possible by 'ending' QE because when it's 'believed' by the market and public it'll cause the change and control they've had 4+ years to plan for that they desire.

During the chaos of a bank holiday they'll institute the change and capital control they want while all of us have no control and little capital.

Nothing is forever and the only constant is change. Change they'll make happen.

Silver_investor's picture

Frustrated

"Given the size of the banking sector in most G7 countries and the burgeoning government debts, the ability of the governments to bail out their banks is severely constrained, especially considering the political headwinds that exist today. For this reason, we strongly believe that real assets trump a fiat currency in a “savings” account."

I certainly agree. But with what we're seeing in the PM markets, it's just so hard to believe that we're ever going to have true price discovery. They forced silver down into the $26 range during the night. And I fear we may be going lower from here. 

BagOfGold's picture

On the subject of bail-ins...

in Canada...It's A Wonderful Life!...

You're poorer...

Watch this movie classic here!!!...

Bag Of Gold

hammerman's picture

in summary....

in every and all countries.... get your money out of the banks ASAP....or you can look in the mirror and weep as you have been warned!!!....   and you sweethearts who worked so hard and have your metals stored somewhere by somebody you have never met..... yes you....  you got nothing if you aint got it in your hand....  prepare for civil unrest soon as when the EBT cards are turned off all hell gonna break loose just as planned.....  pray for all of us....

¤'s picture

Two Slugs Slugging It Out ~ MOPE

                                          495px-Garden_snails_and_love_dart.jpg

Fed presidents slug it out over bond-buying policy

April 3, 2013, 8:21 AM

It’s not often — but not unpredecented — for Federal Reserve officials to make joint appearances. But Tuesday night’s gathering when Richmond Fed President Jeffrey Lacker hosted Chicago Fed President Charles Evans was notable for the debate format that ensued from the opposite ends of the monetary policy spectrum.

Lacker is a reliable hawk, who wants the central bank’s bond buying efforts to stop, and dissented on every policy decision last year (he doesn’t have a vote this year). Evans by contrast is a dove among doves, and an influential member who came up with the idea — now adopted by the Fed — of linking bond purchases to the jobless rate.

The Fed is “missing tremendously” in its mission to keep the unemployment rate low, Evans said, according to the account in the Richmond Times-Dispatch. Lacker by contrast fears inflation — not so much now, but down the road.

“I will say that given the policies we have adopted, I see upside risks starting a year and half to two years from now. I see risks around the process of us turning direction and starting to withdraw monetary stimulus when the time comes,” Lacker said. Evans doesn’t see inflation pressures since there’s so much slack in the labor market.

That part of the debate wasn’t a surprise. But there may have been an inkling of movement by Evans. “At some point we will reduce the flow rate and end this program,”  said Evans of the central bank’s $85-billion-a-month bond purchases, according to a Reuters account of what he told reporters later.  “It could well be later in the year.”

That’s not a dramatic shift, to be sure, and expectations in the market are that the Fed will at least start to reduce if not end the purchases later this year. But the fact that a dove like Evans admitted such a possibility could be a signal that QE3 is heading toward the sunset.

– Steve Goldstein

http://blogs.marketwatch.com/thetell/2013/04/03/evans-lacker-slug-it-out-over-fed-policy/

billhilly's picture

Bail-in's....

So why is it wrong to expect the depositors (uninsured) to be expected to be part of a recapitalization?  Stock holders, bond holders and depositors should all have the a part in "the pain" if the bank screws up their assets.  No?  Why should the taxpayer be burdened with bail-out's? 

It took me a while to figure out that yes, when I make a deposit that I am actually loaning the bank my money.  Then they can do their fractional reserve magic and put me/you at risk.  This is the contract, yes?  Loan's carry risk, yes?  Now, I don't believe many people see this side of the picture and just feel that they are "using" the bank as a storage facility.  Well, time to learn and awaken.

As for "insured" deposits, well take that guarantee for whatever you think it is worth.  All insurance depends ultimately on the ability, and willingness, of the insurers to pay.

My bottom line, I have no faith in lending any bank my money (although I am sure there are some ok smaller banks who do actually have some sound policies).  The bank of Billhilly is my soundest investment.

tyberious's picture

Bitcoins Go

Bitcoins Go Parabolic

Tyler Durden's picture

In the last 48 hours, the price of the virtual currency has surged by 50% from $94 to $141 as the rate of expansion goes more than parabolic. This leaves us with the question, which line item on the Fed's Balance Sheet is 'Virtual Currency Transactions'... what better way to destroy an up and coming currency competitor than to blow a bubble in it and explode it?

That is a 14x rise since the start of the year...

20130324_BTC_0.jpg

hammerman's picture

bitcoins?

ever hold one in your hand? dont worry you guys... when they shut down the internet those will disappear just as quick as all the trade accts and ohhh yes all that paper gold and silver.... be pretty hard to get someone in washington/ny on the phone when you want your investments?

silver66's picture

But, but the gov't and media

tell me it is just confusion, those darn words don't mean what I think they mean. I am so unedjumecated

http://www.theglobeandmail.com/report-on-business/ottawa-clears-up-confusion-over-bank-bail-in/article10697667/

I will sleep easy now that the politicians have clear up the matter... whew... I guess I should reverse my transaction from yesterday

Silver66

Save_America1st's picture

Bitcoins...

I smell a rat...Fed rats or JP Morg rats???  Who knows....But some entity has to be blowing up BTC with big $$$ in order to crash it.  Gee, I wonder who has unlimited amounts of FRN's to throw around like that???

hammerman's picture

yes yes the rule of law....

just ask obama bout that when he changed the bk laws during GM?   hell theres probably somethng buried in plain site in Obamacare bill?  if not check the Franken/Dodd bill as it is still under construction?    ya ya  nancy pigloesi told us we would just have to wait to pass da bill to see the goodies inside the bill?    we have the most corrupt govermint money has bought... problem is ....IT WAS OUR MONEY they bought this govermint with...... wake up... wake up...

babaganoush2307's picture

Hammerman...

...it is spelled Government

That is all.

hammerman's picture

thought it was gubmint?

you guys are getting my best 1 finger typing i got

Mudsharkbytes's picture

DPH - those are snails, not slugs…

…and, they're not fighting - just the opposite, in fact.

Save_America1st's picture

26.90

the sale continues...

GSR almost 58:1 

awesome...might have to trade in a gold Buffalo for a big ass stack of silver Buffalos today!!!

babaganoush2307's picture

Lol hammerman...

...I am just pulling your chain, gubmint it is

GuerrillaCapitalist's picture

Bitcoins Scare Me

Zero Hedge does it again by shining a bright light on the parabolic rise of bitcoins. It has all the elements of government/bank manipulation. The gangsters have to know if bitcoins and other virtual currencies are allowed to be used along side and in direct competion to fiat cash that the illusory fiat will suffer sudden death.

I've been leery of virtual cash since it appeared on the scene simply because they don't have a physical presence, now this blatant manipulation underscores my opinion. Physical assets are the only place to park unneeded funds. Food, fuel, farmland, self protection devices and of course our favorites: gold and silver are real money.

My god, how many lessons do the sheep have to endure before they awaken to the catastrophe contained in the kicked can?

Road_Scholar's picture

@DPH

If I post a good looking girl with a "stack" it gets removed.  But you can post snail porn?!  I guess seniority has its perks...hahaha

On a serious note, the contrarian in me says that this Keynesian experiment keeps going for a few more years.  I know we all see that it's total BS based on lies and manipulation, but we're the small fraction that know what's going on.  All market blow-off tops happen when the masses rush in.  I think we've got a while to keep stacking, the sheeple are really asleep.  We might have an opportunity to join the 1% when the reset does happen!

 

wouldyoubelieve...'s picture

@hammerman

Will Rogers said we have the best government money can buy, and he was right, but this also proves how much the value of USD's has depreciated in the most obvious way, even more than the price of PM's

Mr. Fix's picture

"the best government money can buy,"

So where do I go to get my refund?

 this government is not worth a damn.

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