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Generational Dynamics Web Log for 19-Mar-2013
19-Mar-13 World View -- Cyprus banks remain closed as bailout crisis continues

Web Log - March, 2013

19-Mar-13 World View -- Cyprus banks remain closed as bailout crisis continues

Syria's conflict may be spreading into Lebanon

This morning's key headlines from GenerationalDynamics.com

Cyprus banks remain closed as bailout crisis continues
Russia calls the Cyprus bailout 'Armed robbery by Brussels'
The Cyprus bailout and the 'Kick the Can Theory'
For the first time, a major Chinese company goes bankrupt
Syria's conflict may be spreading into Lebanon

Cyprus banks remain closed as bailout crisis continues

Cyprus' bailout crisis deepened on Monday, as the Parliament put off for the second day a vote on whether to accept the European bailout terms. The terms are that the European Central Bank would supply a 10 billion euro loan, but require that Cyprus come up with 5.8 billion euros by "taxing" its savings bank depositors 6.7% for accounts under 100,000 euros, and 9.9% for larger accounts.

Cyprus has announced that its banks will remained closed at least until Thursday, in order to prevent bank runs while the government tries to resolve the crisis.

A vote is now scheduled for Tuesday evening. If the bailout terms are rejected, then the ECB will cut off all liquidity to Cyprus, forcing it to leave the euro currency, according to a number of analysts.

The bailout terms have caused worldwide anxiety over the banking system. Reading various comments on blogs and in media interviews, I've read and heard things like the following:

"I've withdrawn every penny from my bank account. I just don't trust them."

"People who have saved their entire lives are now learning that the government can take their money at any time."

"The people who spent all their money are OK. The people who saved money are being hurt."

"If they can do it here in Cyprus, they can do it anywhere."

"Deposit insurance is worthless, everywhere in the world."

"Lock and load. Stock up on canned goods, and be ready to defend yourself when the government shows up."

"The government can now track every penny you have in every account in the world. This gives them the power to confiscate it at any time."

"If there's a financial crisis in the United States, the government will do the same it did in 1933, when it confiscated everyone's gold and closed the banks."

There has been pressure on the Europeans to soften the terms, but on Monday they told Cyprus that the terms hadn't changed, but they suggested that it's not necessary to raise the 5.8 billion euros from small bank depositors.

According to one report I heard, there is a proposal to increase the tax on accounts above 500,000 euros to 15%, and to remove the tax from accounts under 100,000 euros. Bloomberg

Russia calls the Cyprus bailout 'Armed robbery by Brussels'

Russia's president Vladimir Putin is calling the bailout plan "unfair, professional and dangerous." Prime minister Dmitry Medvedev said the decision was strange and controversial, and that it "looks like a forfeiture of other people’s money." According to various reports, Russian banks and private individuals have some $30-40 billion in Cyprus banks, and so they will lose $3-4 billion -- assuming that the tax isn't is raised to 15% as some have proposed.

If the tax on Russian depositors is increased to 15%, it will cause a real crisis in Russia, according to some commentators.

Another commentator suggested that a more dangerous scenario for Russia would be if Cyprus enacts a moratorium on loan repayments to Russia. This would cost Russia tens of billions of dollars.

There are various unconfirmed reports floating around that the Russians were tipped off in advance of the bailout plan, and that Putin and some of his advisors transferred funds out of the Cyprus in the days before the announcement. Once again, these reports are unconfirmed. Russia Today and Russia Today and Business Insider

The Cyprus bailout and the 'Kick the Can Theory'

Long-time will recall that several years ago I proposed the "Kick the Can Theory" with regard to the financial debt crisis in Greece. The theory said that the Europeans will never take any action until the very last minutes, and then they'll only "kick the can down the road," meaning that they'll do the minimum necessary to solve the immediate problem, leaving the underlying causes unchanged, only to get worse. Thus, each crisis would be worse than the last one.

The Kick the Can Theory has been correct every time with respect to the Greek crisis, but it seemed that the Europeans violate the rules when it came to the Cyprus bailout.

The "pure" kick the can decision would have been for the ECB to loan the entire bailout amount to Cyprus, so that no depositors would be hurt. However, the Germans and others objected to this, because they didn't want to bail out Russian oligarchs.

So the ECB refused the "pure" kick the can decision, and so Cyprus had to come up with billions of euros.

Contrary to initial assumptions, it wasn't the Europeans or the Germans who insisted that Cyprus "tax" small savings accounts. It was the Cyprus government that made that decision. Cyprus was left to find a can-kicking solution on its own -- either tax small depositors or tax the Russians. Either way, they were going to be blamed. They tried to take a middle road and tax both, but now they're getting dumped on from both sides.

The experience this weekend shows what happens when the Kick the Can Theory is violated. There was no way to "kick the can down the road," since the Europeans have reached the end of their patience in bailing countries out.

There are now crisis talks going on across Europe to find a can-kicking solution.

One possibility is that Russia may bail Cyprus out in return for exclusive contracts to Cyprus's rich offshore oil and natural gas fields.

Another possibility, already suggested, is that small depositors would be protected, and the entire burden would be on large depositors, including Russians and other foreign depositors.

Another possibility, also already mentioned, is that the ECB back-pedal and agree to provide the entire 17 billion euro bailout loan. This would deal a fatal blow to austerity drives in Greece, Italy, Spain and other countries.

Another possibility is that Cyprus can leave the eurozone, and return to its old currency, the pound, which was their currency until they adopted the euro in 2008.

Each of these solutions has serious obstacles. What's interesting is that the Europeans are "running out of road," in the sense that you can only kick the can down the road so far.

The next 24-48 hours are crucial, and a compromise of some sort will be reached. However, that won't end the crisis. Europe has crossed a red line, and everyone from widows and orphans to oligarchs are now fully aware that their bank accounts are not safe.

As I've written many times, Europe is trending into a deflationary spiral, and Generational Dynamics predicts that there will be a major global panic and financial crisis, worse than the panic and crash of 1929, and it will be triggered by something. Perhaps the Cyprus decision will be the trigger, perhaps something else will. But the Cyprus decision has already raised anxiety among savers around the world, and moved the world one step closer to full scale panic.

For the first time, a major Chinese company goes bankrupt

A major Chinese company, the world's biggest maker of solar panels, is declaring technical bankruptcy and going into default, after failing on Friday to repay $541 million in debt repayments. The company, Suntech Power Holdings Co. Ltd. (STP), had been supported by China's state organizations. As I've said in the past, as bad as America's economy is, China's is much worse, with huge ghost cities and massive air and water pollution. Bloomberg and Zero Hedge

Syria's conflict may be spreading into Lebanon

Jets and helicopters from the regime of Syria's president Bashar al-Assad fired rockets into targets inside Lebanon on Monday. The al-Assad regime has threatened to take the war into Lebanon, targeting "concentrations of armed gangs inside Lebanese territory in order to prevent them from crossing into Syrian territory." The Mideast as a whole continues step by step to become destabilized, and the Syrian conflict continues to turn into a regional war between Sunni and Shia Muslims. Daily Star (Lebanon)

(Comments: For reader comments, questions and discussion, see the 19-Mar-13 World View -- Cyprus banks remain closed as bailout crisis continues thread of the Generational Dynamics forum. Comments may be posted anonymously.) (19-Mar-2013) Permanent Link
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Generational Dynamics Web Log for 19-Mar-2013 19-Mar-13 World View -- Cyprus banks remain closed as bailout crisis continues

Cyprus banks remain closed as bailout crisis continues

Russia calls the Cyprus bailout 'Armed robbery by Brussels'

The Cyprus bailout and the 'Kick the Can Theory'

For the first time, a major Chinese company goes bankrupt

Syria's conflict may be spreading into Lebanon

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Generational Dynamics Web Log for 19-Mar-2013
19-Mar-13 World View -- Cyprus banks remain closed as bailout crisis continues