When Is A Nation Bankrupt?

What does the world really think about the euro?  This morning it is announced that Cyprus has come to an agreement with the EU, the European Central Bank and the IMF in Brussels that will provide a bail out for that blighted country.  But what has actually happened?  The EU will provide a €10 billion bail out while the Cyprus government contributes €6 biilion by robbing the deposits in the island's banks.  The second largest bank — Laiki Bank — will be progressively shut down and bond holders and those deposit holders with more than €100,000 on deposit will suffer big losses — perhaps 40% or more of their money.  Under the agreement all deposits of less than €100,000  will be secured — which I suppose does at least abide by one fundamental principal of banking; that the deposits of ordinary people are protected.  There is little else of merit in this deal, which is fundamentally wrong.  It seems that the bankers and politicians are determined to destroy the Cyprus banking system and its dodgy off-shore status. Many of the larger deposits are linked to Russia and money laudering.  If this is true the EU, the ECB and the IMF should have instructed the Cyprus government ages ago to divest themselves of these crooked foreign investments.  Cyprus has been running an over-sized banking system — closely tied to Greece — for years and paid high interest rates that ultimately would become unsustainable.

The Laiki Bank will be split into "good" and "bad" banks — where have we seen this before?  The good assets eventually will be merged into Bank of Cyprus.  Presumably the bad bank bits will be written off — the bond holders and the large depositers?  Large depositers in the Bank of Cyprus - the island's biggest bank - will have to contribute a substantial sum — to be resolved in the near future.  

The Chairman of the Cyprus Parliament's Finance Committee, Nicholas Papadopolous, said the agreement made "no economic sense".  Speaking to the BBC, he said, "We are heading for a deep recession, high unemployment. They wanted to send a message that the Cypriot economy ought to be destroyed, and they've succeeded in a large part - they've destroyed our banking sector,"

We are travelling in uncharted waters now.  The politicians and bureaucrats responsible for inventing the euro are prepared to go to any lengths to protect their pet project.  But we have now gone beyond the limits.  No fundamental rule finance and banking is safe any more.  They believe they can do whatever they like to stay afloat.  Significantly, this "deal" will not be put before the Cyprus Parliament.  How can they get away with that?  The first bail out deal was totally rejected by Parliament and there is every reason to expect that the same would happen to this scheme.  How will the government continue?  Will they dismiss Parliament in the manner of a medieval monarch?  Sooner or later they will be removed from office.  The EU [Germany] cannot impose their selected bureaucrats and/or politicians as managers on any soveriegn nation — at least, not without riots in the streets.

Banks in Cyprus have been closed since last Monday and many businesses are only taking payment in cash.  On Sunday, Bank of Cyprus further limited cash machine withdrawals to 120 euros a day.  With queues growing outside cash machines, Laiki also lowered its daily limit to 100 euros.  The details of the reopening of Cyprus' banks has been discussed today and already it is clear that there will be severe limitations on the ability of deposit holders to withdraw their own cash.  If depositors are not allowed free access there will be trouble in some form or another.  Where in any bank's Terms & Conditions does it state that you may not always be allowed to withdraw your own funds?  The only answer to this is never to deposit funds in any such bank.

Cyprus is only a small country and it is absurd that they have been allowed to get into a mess like this.  I still believe that the euro is doomed and that becomes more certain with each ever more absurd bail out package.  This scheme destroys any credibility for a banking system.  And it must be remembered that it is the same people who got us into this mess who are demanding that Europe wide it will be Joe Public who bails them out.
The latest announcement that has spooked the markets is the suggestion from Holland that the Cyprus model could become the norm for future bail outs.  That large depositors and bond holders can be expected to hand over their money to pay for the sins of politicians and investment bankers.  It is wrong and absurd.  Get your money out and into the boxes under the bed as soon as possible.
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