Flash Point: Neanderthals Sack Cyprus

Long thought to be extinct, an obscure tribe of Neanderthals, mostly from the Brussels region but reinforced by other neolithic tribes, notably the International Monetary Fund and the German Bundesbank, fresh from their looting  of Greece, combined this weekend for a raid on the state of Cyprus. From Zero Hedge we read that the news site Ekathimerini reports (emphasis ours):

The Eurogroup reached on Friday night an unprecedented decision for bailing out Cyprus that dictates a haircut on all bank accounts on the island’s banks with immediate effect, while cash withdrawals are not allowed for the time being, generating unrest [otherwise called a ‘bank holiday’].

Along with loans adding up to 10 billion euros from the European Support Mechanism, Cyprus will have to find another 7-7.5 billion euros from privatizations and from a 6.75 percent one-off haircut on all bank accounts with a balance up to 100,000 euros, rising to 9.9 percent on accounts exceeding 100,000 euros.… [additionally, a] Tax on interest will amount to between 20 and 25 percent.

Ekathimerini continues reporting that:

Finance Minister Michalis Sarris has postponed his official visit by two days and will now go to Moscow on Wednesday. [As reported by King World News today, a lot of private Russian money is in Cypriot banks including possibly Putin’s. This will prove interesting to follow. As Jim Sinclair notes, “It’s very dangerous in doing business with the Russians, to lose their money.  Revenge will be very much a part of the motivation for what happens from this point forward. Read: Sinclair – One Of The Most Important Events In History & Gold]

Cyprus state broadcaster CyBC reported on Saturday that German Finance Minister actually entered the Eurogroup meeting on Friday proposing a 40 percent haircut on Cypriot bank accounts. Sarris stated on Saturday that this had also been the proposal of the International Monetary Fund.

Sarris stated in Brussels that in view of the threat from the European Central Bank for banks in Cyprus to shut down and chaos to ensue, the increase in interest taxation and the haircut to bank accounts became necessary. “A disorderly default, that was a genuine possibility, has been averted,” he said.

“It allows our economy to proceed decisively to a new beginning.” [This can be similar to Greece’s ‘new beginning’. It’s called a depression.]

It was the Neanderthalic logic of the last section that tipped us off to the brigands’ identity. Who else would think that stealing 40% of the money of all bank depositors in Cyprus would prevent banks in Cyprus to shut down and chaos to ensue. This is more draconian than the terms of the Treaty of Versailles imposed on the Germans after World War 1. The Germans apparently learned well and Christine LaGarde also hasn’t forgotten her country’s contribution to World War II.

Our prediction is that when Cypriot banks open, there will be a massive run on them. Foreign depositors will look for safe havens outside of the European periphery. Citizens that can figure out how to preserve their wealth will also remove their funds. This will destroy the banks’ capital bases forcing them into insolvency. The government will hastily impose capital controls and limit withdrawals. The Cypriot economy will stall and total chaos will reign. The likelihood of default has been moved forward considerably by the Eurogroup actions.

Faced with the precedent that this unilateral economic nuclear strike presents, depositors across the periphery will start moving money into other assets such as gold, and safe havens such as Switzerland and abroad. This may very well be the tipping point for the EU.

Update:20130318

We received the following commentary from David Kotok of Cumberland Associates. It will be linked from their website archive in the next couple of days. In the meantime, we are taking the liberty of republishing it. Here is David’s essay with our emphasis. It simply supports much of our discussion above and advances several more. Market reactions were instantaneous. The social and political fallout will appear over time. A Russian response will be carefully calculated and measured. A Turkish response will be the same. After initial impulse withdrawals, bank runs slow down but continue. It takes time for depositors to arrange a prudent alternative. Aftershocks from this event will continue for days and weeks and possibly months.

Several world travelers are sitting at lunch in Paris, immersed in speculation. Greek banks in Cyprus were ring-fenced. Cypriot banks were not. Why?

If Greek banks with branches in Cyprus are punished, the euro group has to offer more money to bail them out. So why magnify the loss by including the Greek banks’ branches in Cyprus? Next, think of the geography here. Cyprus is divided: half its people are Turkish and half are Greek. There is ancient enmity at work here. Why exacerbate that?

Now get to the issue of Turkey. Turkey has been baited about the European Union for decades. It is neither in nor out. Some premiers such as former French presidents say things like, “Someday they will qualify.”

Look at Turkey’s shared borders with countries like Syria, Iran, and Iraq. Think of what the world looks like today. Think of Turkey as a very strong growth emerging market.

If you had to handle a banking crisis involving substantial Russian deposits in the European Union and Eurozone and denominated in the euro, what construction would you use?

Now we are in the throes of this mess in Europe. No one knows how this will turn out. Add to that the prospect of Russian retaliation. Does it come in the form of higher energy prices? Does it come with taxation or imposition of fees on the electrical grid that runs through Eastern Europe? No one knows.

The decision to impose taxation and revise the formula in order to maintain parliamentary passage, thus enabling the Russians to pay the price, is fraught with risk.

We expect large bank runs, and not only from Cypriot banks. No one in their right mind would hold euro deposits in weaker banks or weaker countries. Cyprus is proof that national deposit guarantees are worthless in the present euro-system structure.

It is Paris and it is cold. Lunch and the conversation are exciting.

David R. Kotok, Chairman and Chief Investment Officer

 Update:20130319

It’s interesting that the MSM is starting to say the Cyrus crisis is past. Markets aren’t convinced however with gold continuing to rise along with the USD (a ‘safe haven’ currency) and markets after trying to put on a good face, falling. The Russian angle continues to be played up in the MSM now but in a new interview with KWN, Cyprus Disaster Is Much Bigger Than Being Reported, Jim Sinclair observes:

The Central Bank of Cyprus doesn’t even know how big the Russian deposits are because it is held as secret at the behest of the Russians.  It is a secret banking system set up for the Russians, by the Russians, and the IMF has just taken a large bite out of that elephant. 

People need to grasp that this is not about $130 billion.  The real dollar figure is orders of magnitudes larger than that number.  How much higher we’ll never know, but it is massive.  This is the Bank of Russia we are talking about here.  The Central Bank of Russia is for the people in Russia.  What the IMF went after here is the central bank of the Russian elite and former KGB, and the Russians simply will not stand still for that.

Part of the result of all of this is the Russian elite will now move heavily out of currencies and into gold.  Going forward, the Russian sovereign entity will now support the price of gold and it will be for the benefit of the Russian oligarchy.

If Jim is right, we aren’t even on the playing field yet, let alone in some inning or other. As we said, this will work its way out slowly. If it is the tipping point, all the global dominoes now go down. Position yourself in precious metals.

 

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