To make matters more confusing overnight, we already know that the Cypriot President said the 6.75/9.9% tax/levy was a good deal and that Germany had originally come in looking for 40% of total deposits. Overnight the ECB said it DID NOT insist on a bank levy, last night German Finance Minister Schauble blamed the ECB, Trokia and Cyprus for the levy structure, so now every key player who is said to have imposed this deal is quickly denying it, they see how they have caused a bigger crisis and ONCE AGAIN WE HAVE ANOTHER FOULED UP EUROPEAN BAILOUT WITH ALMOST NO THOUGHT PUT IN TO IT WHATSOEVER.
Russia added to the confusion overnight when they said they saw no Russian Capital Flight out of Cypriot banks, how could they when the banks have been and remain closed? This comes on top of the news the Russians are sending a small fleet of destroyers and other ships in to the Mediterranean. Then Russia said they may "Reconsider their role"in a Cypriot rescue following the bank tax as Russia was NOT consulted. Russia was said to be considering loosening some of their loan term agreements with Cyprus.
Russian Deputy Economic Minister then said this move casts doubt on the entire EU banking system, hinting Russian funds will find another offshore location outsside of the EU. When we talk about Russian funds we are not talking about the average Russian citizen, we are talking about massive deposits from Russian Oligarchs, this is why the EU shot itself in the foot with a so called, "Bazooka". I have done follow-ups on every EU bailout plan and each one is worse than the last, it's as if there's absolutely no communication between the parties, they announce a grand scheme that is obvious at the onset as a failure or worse, the consequences of their plans are ALWAYS worse than the actual event they are trying to fix.
Cyprus' bailout in absolute terms is minuscule, $10bn Eur., however the net effect may be one of the biggest mistakes the EU has made, just like the Senkaku Islands are seemingly a small ordeal, but threaten a much wider confrontation, one that has already ripped a gapping hole in Japanese exports to China. I'M NOT SAYING THIS TO BE DRAMATIC, BUT I HAVE NEVER SEEN SUCH STUPIDITY IN MY LIFE, the EU would have been much better off giving Cyprus a free pass than what they did this weekend.
One of the consequences that was apparently lost on Eurocrats is the obvious flight of capital, would you feel safe with money anywhere in the Euro-zone after they so brazenly ignored all laws protecting deposits including depositor insurance and where willing to take money out of people's bank accounts with no warning, with no clear understanding if they could even pass this in the legislature before announcing such a train wreck?
The other side of the flight of capital is understanding the difference between the US banking system and the EU banking system, to make it brief, the US has a far higher deposit to loan ratio than the EU has, the EU probably has more non-performing loans. When the deposit base is eroded more than it already has been, what happens to those loans, does the ECB completely re-write the rules of capital to loan ratios to allow for essentially naked loan origination with no assets? Does the entire concept of Fractional Reserve Banking see the rules changed in the middle of the game as the EU proved beyond a doubt, they are more than willing to do? Do they require EU banks once again to raise capital, which was such a nightmare the last time they tried, the world needed a global Central Bank intervention episode to counteract the consequences, remember that?And they risk all of this over Cyprus that contributes something like 0.3% to EU GDP and over $10 bn euros?
As of tonight and as expected, the failure on anyone involved to do simple math has cast the entire plan's success (if that's the right word) in a highly doubtful light as Cyprus' president, Anastasiades must tell the Eurogroup he lacks the votes needed to pass the levy. Did no one consider this? The Cypriot parliament has 56 seats, of which the President's party, Disy has 20 (20 votes), nine more votes are needed to pass the bank robbery, however of the remaining 5 parties who have voiced their intentions, there are only 3 possible undecided votes to garner, leaving the levy 6 votes shy of passing no matter how you slice it unless they just decide to dissolve the rules of Cypriot Parliament.
Tonight the news is that the Eurogroup supports Cyprus protecting deposits under $100k Eur., but the full $5.8 bn must still be raised through levies, which means those with more than $100k in deposits just saw a bad situation of 9.9% get even worse, many of these are Russians. In addition, the Euro-Groups statement did not rule out levies on account of $100k and under, it just talked about safeguarding them, which sounds like still stealing their money, just less of one saving class and more of another's.
Negotiations are ongoing, I wouldn't expect anything that is remotely close to a smart, workable solution, instead I would expect as usual, a poorly conceived, cobbled together, plan in which no one who makes the final decision was consulted and ultimately leads to a worse situation than what we can possibly imagine.
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