Asmussen’s Musings and the Orwellian
EU
By Pater Tenebrarum
We have
previously written about the fact that the 'depositor haircut' in Cyprus has
indeed become the 'template' for dealing with bank insolvencies
in the EU. As we have pointed out at the time, this is in a fundamental sense a
salutary event: it should finally open the eyes of depositors as to what risks
they are exposed to when keeping money at fractionally reserved banks.
Moreover, there is no reason why tax payers should foot the bill for bailing
out insolvent banks.
So far,
so good, if only it were that easy! This week a report made the
rounds regarding German ECB board member Jörg Asmussen informing a
reportedly 'astonished' EU parliament in Strasbourg about the 'new template'.
The original article can be found at 'Deutsche Wirtschaftsnachrichten' in German language (a Google
translation should serve to get the drift). 'Savers must bleed', as the
article states. Moreover, it points out that citizens will now be asked to so
to speak pay up twice: once as tax payers funding the ESM, and in individual
cases as savers keeping money at banks that happen to go under.
A major
bone of contention remains however the fact that in order to avert bank runs,
the EU wants to make sure that the deposit insurance for deposits of less than
€100,000 remains in place. It is a bone of contention mainly for the reason
that a number of countries could not possibly swing even that.
Hence the urge to create the so-called 'banking union', because once it is in
place, German tax payers and savers will be liable for insuring bank depositors
in Greece and elsewhere just as they are now doing in Germany. France is very
eager to get this banking union off the ground, as are understandably Spain and
Italy. It is a good bet that none of these nations have the wherewithal to bail
out their own banking systems if push really comes to shove. For instance, the
three largest French banks hold assets worth 240% of GDP (with the assets of
the banking system as a whole clocking in at over 400% of GDP).
Orwellian
Language
An article at Reuters recently also discussed these topics. It reads almost like a satire in places.
Consider the beginning of the article:
“Depositors should be the very last to suffer losses when a bank collapses, according to a proposal being discussed by European Union countries and seen by Reuters, which would shield savers from the kind of losses they face in Cyprus.”
So in
other words, depositors will be liable, but it won't be like Cyprus, promise!
If they are to be 'shielded' from losses akin to those suffered by depositors
and savers in Cyprus, something must be different. However, nothing actually
is.
“The idea comes as member countries finalize a new draft law for the European Union that could make losses for larger savers a permanent feature of future banking crises. EU officials, however, are nervous that such a regime will panic savers, prompting them to withdraw money.
In the
paper, outlining the process of 'bailing in' savers and other steps to deal
with troubled banks, officials
in Brussels said that it might be wise to put depositors behind all bondholders
when dividing losses from a bank collapse.
Small savers, with less than 100,000 euros, will, in any event, be protected. But officials also raise the possibility of allowing national exemptions from losses for big depositors in their country if a bank fails.” (emphasis added)
Again,
we repeat that there is no reason why depositors should not suffer losses,
after shareholders and bondholders have been subjected to a 100% haircut. We
wonder though at the manner in which this is formulated above: 'officials in
Brussels think it might be wise' to proceed in this manner.
What else did they have in mind? Anyway, how on earth is this different
from Cyprus?
The
Orwellian language (the assertion made at the outset, that this new policy is
somehow different from the Cyprus case) is designed to keep up a false sense of
security among depositors, one that is by no means warranted. The next
assertion, namely that 'deposits of less than €100,000 will be protected in
any event' cannot remain unchallenged either. This is simply not true in a
number of countries, unless they get the necessary funds from the EU's bailout
funds or from the net paymasters in the EU once the 'banking union' is
established.
Also,
there seems to be widespread apathy regarding the fact that all
fractionally reserved banks are de facto insolvent. There are more than €3.5 trillion
in uncovered money substitutes held in overnight deposits in the euro area. As
the term 'uncovered' already implies, these are at present nothing but numbers
in accounts. The banks do not have this money. They have either
lent it out, or invested it otherwise. This is money that was created from thin
air in the process of fractional reserve lending. In fact, these data reveal
the fundamentally fraudulent nature of the system: since every single cent in
overnight deposits must in theory be available on demand at any time, the fact
that €3.5 trillion of this money are simply not there already
constitutes a fraudulent breach of contract, whether or not there is a bank run.
There
was a truly funny chart in a recent edition of the Elliott Wave Theorist
regarding the now defunct Bank of Cyprus (a.k.a. Laiki Bank) that illustrates
nicely the apathy we mention above. Even while the bank's share price collapsed
and it careened inexorably toward bankruptcy, it was showered with accolades
from 'financial industry professionals' (ranging from financial magazines, to
other banks such as JP Morgan, to various professional associations) all the
way down.
However,
Laiki was of course fractionally reserved, could only keep functioning due to
'ELA' (emergency liquidity assistance) and held a huge amount of worthless
Greek sovereign bonds to boot (we have previously discussed how the Cypriot bankers foolishly fell for the lies of assorted leading eurocrats
regarding the 'impossibility of a Greek default'). None of this could keep the
accolades from pouring forth. Depositors may be excused for wrongly believing
they were perfectly safe.
The award-winning collapse of the Bank of Cyprus, chart via Prechter's
Elliott Wave Theorist.
If not
for receiving a bailout, Cyprus would not have been able to protect small
depositors either. The government would have been just as bankrupt as the
banks. This danger is one the EU wants to hide from depositors, because it
rightly fears that an admission of this fact could provoke a run on the banks.
As
Brian Whitmer of EWI remarks:
“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.”
Indeed.
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