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The International Bank Heists Have Begun

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The Exchange

By Brian Whitmer

Last month, the financial press churned out a veritable encyclopedia-length discourse on the death of Cyprus’s financial sector. However, one glaring question remains: How did everybody miss it? Actually, the puzzle is far more perverse, because not only did the experts fail to foresee the Cypriot banking debacle, these very professionals who were responsible for recognizing the good banks and rooting out the bad ones were, in fact, lauding Cypriot banks throughout their entire decline.

The chart above depicts a sampling of the accolades that the global finance community bestowed on the Bank of Cyprus during its six-year trek into insolvency. Starting with the bank’s 2008 award for best bank from Global Finance Magazine, the trail of tributes continued in 2009 and 2010, when the bank received quality recognitions from The Banker magazine and JP Morgan Chase. Even as late as 2012, with the bank’s shares down 98% from their all-time high, the Bank of Cyprus still received a 2012 private banking award from the internationally renowned financial journal Euromoney. The Bank of Cyprus website described its bookending tribute from Euromoney this way: “This is yet another major international distinction which confirms the successful path taken by the Bank of Cyprus Group, placing it among the world’s top financial institutions offering private banking services.”

The startling irony is that the bank’s description is exactly correct. Thanks to an entrenched system of fractional reserve banking, most of the world’s top financial institutions are fundamentally no sounder than the Bank of Cyprus. Few investors cared when authorities suspended trading in the bank last month. However, this widespread obliviousness will shift dramatically as the Continent’s larger, more well-known banks follow suit.

The Die Has Been Cast

Above all else, the country’s ongoing deposit debacle confirms the value of EWI’s defensive posture toward banks. On Monday, March 18, under pressure from the European Commission, the European Central Bank and the International Monetary Fund, Cypriot President Nicos Anastasiades agreed to confiscate 6% to 10% of Cypriot bank balances to partly offset the bailout’s €17 billion price tag. By Tuesday, nervous depositors were emptying ATMs, officials had shuttered banks across the island, and the proposed levy had even sparked an international incident with Russia — where most of the large depositors are believed to hail from. Unveiled last week, the rescue’s terms reveal the startling trajectory that bank officials took, one that will unquestionably become a road map for the Continent’s future crises. Under the amended agreement:

  • Cyprus will close its second largest bank, Cyprus Popular, and customers will lose the vast majority of their €3 billion of savings. According to the Cypriot financial minister, in fact, the bank is likely to return just 20% of its deposits to large account holders, and the process may take as long as six or seven years. Meanwhile, authorities will move Popular’s healthy assets to the Bank of Cyprus, which will undergo a separate restructuring.
  • Under those terms, 37.5% of deposits over €100,000 will be swapped for bank equity, which is now next to worthless. This levy will affect more than 19,000 depositors holding a combined €8 billion in assets. “In effect, that cash will immediately disappear from depositors’ accounts,” explains the Wall Street Journal.
  • Yet, the immediate loss to uninsured Bank of Cyprus customers will be far higher than 40%. Bloomberg, in fact, reports that the bank levy will reach at least 60% when factoring in a temporary 22.5% “deposit withholding,” which will receive no interest and could undergo further write-offs.
  • Cypriot banks closed for nearly two weeks last month. When they reopened on March 28, officials limited daily withdrawals to €100 and permitted travelers to take just €1,000 overseas. Some officials say the government will lift the capital controls next week. Others say that a month or more may pass until authorities can completely remove the restrictions. Either way, for the first time in the euro’s history, a government has blocked its depositors from accessing their money for an extended period of time.

Despite these stunning developments, analysts remain glib and the financial press blasé. “I really don’t care,” says the chief executive of the world’s largest money management firm. “Cyprus Just A ‘Hiccup’ For Stock Rally,” reads a March headline from CNN Money. “Cyprus is a unique case,” said Spain’s finance minister last month. “Slovenia will not be the next Cyprus,” reiterated that country’s economic leader. As with each of the Continent’s four previous rescues, authorities are apathetic because stocks and social mood are peaking.

Bond investors, too, have largely shrugged off the news. Yields on 10-year bonds in Greece, Portugal, Italy and Spain have barely budged since hitting a two-year low in February 2013. For that matter, even Cyprus’s insured depositors — those with account balances below the €100,000 threshold — appear to be exceptionally relaxed for having just narrowly escaped a bank robbery. Indeed, Cypriot banks reopened to a few long lines on March 28, but the country avoided outright panic.

If anything, the monthlong debacle shows the value of socionomic thinking over that of mainstream economic wisdom. Most analysts routinely fail to uncover economic trouble, because they fail to recognize the stock market’s incredible value as a barometer of social mood. “It was a lightning bolt out of nowhere,” a 50-year old Cypriot taxi driver tells the Wall Street Journal. In the near future, other large and small banks across the eurozone will be zapped; those deposits, too, will seemingly disappear in a flash.

Brian Whitmer is editor of The European Financial Forecast and contributes the European stock section of Global Market Perspective. He received a degree in civil engineering from the University of Maryland and has served as a designer, planner, and project manager for $100-million-plus civil and residential developments. After receiving his MBA from Georgia Southern University, Brian joined Elliott Wave International in 2009. Brian's analysis and forecasts are quoted regularly in European media outlets and he has been interviewed multiple times by notable media including Financial Times and Fortune. For more information, visit: www.elliottwave.com.