Cyprus Poll After Deposit Grab: 84% Think "Crisis Is Fault of Country’s Political, Economic and Social Systems"

In other words, congrats, Germany, EU, ECB, IMF. You did it.

From Zero Hedge (4/28/2013; emphasis is mine):

One Month Later: What Cyprus Thinks In The Aftermath Of Its Bank Sector Collapse?

Curious what the Cypriot people think just over a month after the most dramatic European banking sector collapse in years, and subsequent first bank sector bail-in and depositor impairment ever? Courtesy of Bloomberg, which summarizes a poll conducted via Symmetron and posted in Kathimerini Cyprus we now have an idea of what the still stunned Cypriot population thinks.

The Cyprus financial crisis is fault of country’s political, economic and social systems, not foreign institutions such as troika, according to 84% of Cypriots in poll by Symmetron published today in Kathimerini Cyprus. Poll also showed:

• Of 800 people questioned, 68% said bankers were most responsible for crisis, 63% said politicians next most to blame, 48% said central bank

• 79% said previous President Demetris Christofias and his govt is more to blame vs 13% for current administration led by President Nicos Anastasiades

• 54% said it was mistake for parliament to vote against 1st loan deal

• 68% said they don’t have enough money to meet direct needs, pay financial obligations

• 70% said personal economic situation to worsen over next 12 months

• 92% no longer trust central bank

• 66% said current govt actions to confront crisis not enough

• 64% against exit from euro area

• 73% said faithful implementation of loan agreement won’t lead country out of crisis

• Symmetron conducted poll April 22-26; margin of error +/-3.5 percentage points

So, Cyprus citizens now say everyone's deposit should have been taken away, not just deposits above 100,000 euro. And no exit from euro. And "government is not doing enough!"

The Cyprus Deposit Grab will be a successful template if people elsewhere are like Cyprus citizens. As far as Germany goes (also posted by Zero Hedge), that's what any government should do to the citizens - grab citizens' assets to reduce the government deficit.

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Cyprus Utterly Rejects EU Demand for Deposit Haircut, ECB Says It Will Still Help "Within Certain Limits"

Whatever that means. The stock market algos liked this help "within certain limits", and Dow Jones Industrial ended up 3 points up for the day.

The amended "deposit tax" would have exempted accounts with less than 20,000 euros but taken money from all else. (More at Reuters.)

Cypriot Parliament vote on "deposit tax" (AP, 3/19/2013):

In favor: Zero
Against: 36
Abstentions: 19

Abstentions were from the ruling party.

ECB's comment (Reuters, 3/19/2013):

After Cyprus vote, ECB says ready to offer liquidity within rules

BERLIN (Reuters) - The European Central Bank said on Tuesday after Cypriot lawmakers overwhelmingly rejected a key element of a proposed bailout that it was in contact with its IMF and EU partners and remained committed to providing liquidity within certain limits.

"The ECB takes note of the decision of the Cypriot parliament and is in contact with its troika partners," the bank said in a statement. "The ECB reaffirms its commitment to provide liquidity as needed within the existing rules.

By the way, I think I know now why the reporting on the deposit confiscation in Cyprus has been very much subdued and equivocal in Japan. Japan is about the only country in the world that instituted the one-off, much more punitively progressive tax on wealth including bank deposits successfully, right after the World War II under the US occupation (GHQ) in 1946.

Anyone with the accumulated wealth (not necessarily in cash, but in goods and real properties) of 100,000 yen (probably today's 100 million yen, or about US$1.05 million) got 10% of it taken by the government. Unlike Cyprus, it was progressive, and the highest bracket was 90%. The 90% confiscation of one's wealth was justified by GHQ as "punishment" for profiting from the war. It didn't matter to them that most people whose wealth were confiscated had nothing to do with profiting from the war.

Roosevelt "New Dealers" in GHQ must have felt very righteous doing it, who went on to take away farmland from the large land-owning farmers in 1947 for the sake of "fairness". (Never mind that not all farmers wanted to be the land-owning farmers...)

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ECB Has Been Secretly Propping Up Greek Banks

From Financial Times, via CNBC (5/21/2012):

There has been no official announcement. No terms or conditions have been disclosed. But Greece’s banking system is being propped up by an estimated €100 billion or so of emergency liquidity provided by the country’s central bank — approved secretly by the European Central Bank in Frankfurt. If Greece were to leave the eurozone, the immediate cause might be an ECB decision to pull the plug.

Extensive use of “emergency liquidity assistance” (ELA) to help banks in the weakest economies has been one of the less-noticed features of the eurozone crisis. Separate from normal supplies of liquidity and meant originally as a temporary facility for national authorities to use when banks hit problems, ELA proved a lifesaver for the financial system Ireland and is now even more so in Greece. As such, it has given the ECB — which has ultimate control over the facility — considerable power to determine countries’ fates.

Whether that power would ever be exercised is unclear. ELA is a subject on which the ECB is deeply reluctant to provide information — even on where or when it is provided.

“You don’t say when you are in an emergency situation, because then you make the situation worse. So I really don’t see the usefulness of being more transparent,” Luc Coene, Belgium’s central bank governor, explained in a Financial Times interview this month.

The ECB’s guard slipped a little late last month. Its weekly financial statement published on April 24, showed an unexpected €121 billion increase in the innocently titled heading “other claims on euro area credit institutions,” the result of putting all ELA under the same item. By definition, €121 billion was the minimum amount of ELA being provided by the “eurosystem” — the network of eurozone central banks.

By scouring ECB and national central bank statements analysts, have since pieced together more details. Analysts at Barclays, for instance, reckon Greece is now using €96 billion in ELA, with Ireland accounting for another €41 billion and Cyprus €4 billion. If correct, total ELA in use has exceeded €140 billion — more than 10 per cent of the amount lent to eurozone banks in standard monetary policy operations.

Because of the risks of extra liquidity creating inflation, ELA in excess of €500 million requires approval by the ECB’s 23-strong governing council: its use can be stopped if two-thirds of the council oppose an application.

(Full article at the link)

On this reassuring news, the stock futures for the major European bourses are up right now. Stock markets in Asia are all up, with Korea's KOSPI up more than 1.7%.

In an separate, related article at CNBC, Mr. Alexis Tsipras is quoted:

In Greece itself, the head of the county’s radical left party traveled to Paris on Monday to try to consolidate support from political allies for rejecting the terms of the country's bailout package, ahead of general elections that could decide the destiny of Greece in the euro zone.

"I don't know if we have scared Europe, but judging by your presence here today, we have surprised it," Alexis Tsipras, the 37-year-old leader of Syriza, told journalists at the French National Assembly.

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Trichet: "Euro Is Stronger Than Deutsche Mark"

Hilarity of the day so far.

According to Bloomberg, Jean-Claude Trichet, the ECB President and a Frenchman, says euro is stronger than Deutche Mark because:

1. Euro to USD is still higher than $1.1837, the close of the first trading day of Euro on January 4, 1999; and

2. It is still higher than the average Euro/USD since the introduction, which is $1.1842.

He also said that because euro is stronger than Deutsche Mark, it is healthy and sound, and it is here to stay.

From the end of 1988 to last week, according to Bloomberg, the basket of currencies that make up euro, which is dominated by Deutsche Mark, averaged $1.1945.

Mr. Trichet seems to have run out of good things to say about euro, so he is resorting to elementary school arithmetic.

I don't know exactly when Trichet said what he said, but euro was below $1.190 overnight. Since then it has trimmed the loss and at one point was as high as $1.19910. Right now, it's back down at $1.1951, barely above the Deutsche Mark benchmark.

Now what, Mr. Trichet?

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Battle of Euro: Pols vs Evil Speculators Update

Zero Hedge speculates that:

"The negative here is that Germany will look at the Eur response and pitch its naked short ban to all other European countries, which will now gladly accept the proposal, myopically hoping for another 1-2 bp move in the EURUSD. We believe there may well be an announcement of a Europe-wide naked short covering ban this weekend, coupled with the imposition of a transaction tax." [Emphasis is mine.]

Stock market participants around the world, LOOK OUT BELOW...

The Zero Hedge article also thinks today's massive intervention was by the ECB, not the Swiss National Bank.

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Trichet Wants 'Quantum Leap' in EU Budget Control

Never waste a good crisis to promote your unpopular agendas.

Jean-Claude "Rahm Emanuel" Trichet wants (barely-)sovereign nations in eurozone to adopt a tighter fiscal union to prevent "bad behavior" like racking up too much debt. The European Commission president José Manuel Barroso, a Portugese, has already proposed a "peer review" process for budget of not just PIIGS but all enrozone members.

Trichet Wants ‘Quantum Leap’ in Euro Budget Control (Richard Weiss and Mark Deen, 5/15/2010 Bloomberg)

"May 15 (Bloomberg) -- European Central Bank President Jean- Claude Trichet called for a “quantum leap” in the way euro- area nations set their budgets and defended his decision to buy bonds from debt-saddled countries such as Greece and Portugal.

"“There is a need for a quantum leap in the governance of the euro area,” Trichet said in an interview with Spiegel magazine published on the ECB website. “There need to be major improvements to prevent bad behavior, to ensure effective implementation of the recommendations made by peers and ensure real and effective sanctions in the case of breaches,” he said.

"Trichet, who said the current crisis may be worse than the Great Depression, is fending off critics who say the ECB caved into political pressure as the sovereign-debt crisis stirred speculation that Europe’s single currency may break up.

"While the 16 members of the euro share a common monetary policy, members are responsible for their own fiscal decisions. That allowed Greece’s budget deficit to reach almost 14 percent of its gross domestic product, exceeding the EU’s 3 percent limit without penalty. Germany’s is 3.2 percent of its GDP.

"Trichet’s move came in tandem with a decision by European Union nations to push through a $1 trillion aid package to support members of the club who face the highest borrowing costs. The ECB’s debt purchases helped push down two-year bond yields over the course of the past week, making it less expensive for indebted nations to finance themselves." [The article continues.]

It is almost absurd to talk about "a common monetary policy" of the eurozone, as there's hardly anything common about the 16 eurozone member countries other than they are located on the European continent.

Euro, a political currency created for wealth transfer from productive nations (think Germany) to not-so-productive nations (think PIIGS) (that's my humble opinion, more in a later post), remains a political tool to force the EU political integration whether the peoples in the member countries like it or not.

The European Commission as executive body, the ECB the central bank, the Council of the European Union and the European Parliament as legislative body, the Court of Justice of the European Communities as judicial body. Sovereignty? What a quaint, 20th century idea!

Never waste a good crisis. Or if there is no crisis, create one.

It should be Germany, not France, who should be threatening to pull out of euro.

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M3 Contraction and Japanese Sovereign Bond Crisis?

I don't think so.

Amrose Evans-Pritchard of Telegraph UK is known for writing cheerful topics like global depression and deflation (he is a deflationist) and coming fiscal, economic, and social crises if not downright catastrophe. In this article from January 4, 2010, probably intended as his New Year prediction, he argues that the sovereign debt crisis will be triggered by Japan, and that will finally stop the bear market rally of the global stock markets.

I regularly follow and read his writings (as you see the box to the left that has the feeds). But I have some problems with this one.

Global bear rally will deflate as Japan leads world in sovereign bond crisis (Ambrose Evans-Pritchard, 1/4/2010 Telegraph)

"The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system. "

Right off the bat, I have a problem. He talks about M3 contraction in US and Europe. As you may know, the Federal Reserve stop publishing M3. But that's not my problem. Is M3 really contracting, as he says?

ECB (European Central Bank)'s definition of M3 is slightly different from the U.S. counterpart. It includes:

• Currency in circulation (M1, 2, 3)
• Overnight deposits (M1, 2, 3)
• Deposits with an agreed maturity up to 2 years (M2, 3)
• Deposits redeemable at a period of notice up to 3 months (M2, 3)
• Repurchase agreements (M3)
• Money market fund (MMF) shares/units (M3)
• Debt securities up to 2 years (M3)
  (Source: ECB's definition of Euro area monetary aggregate)

And here's the latest Euro area M3 numbers compiled by ECB. Do you see "contraction"? It was pretty much flat all year, but to call that a "contraction" is like calling a flat day in the stock market a rally because it didn't go down.

How about M3 in the U.S.? M3 is M2 plus large time deposits, institutional money market mutual fund balances, deposits of eurodollars and repurchase agreements (Wikipedia.org). Let's take a look at M2 chart at St. Louis Fed:

In both Europe and the U.S., monetary aggregates didn't contract in the last six months at all. The rate of change may have been decreased or gone slightly negative (in case of EU), but to call that a contraction is really stretching it.

My next problem is this:

"Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.

"Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China's yuan in the beggar-thy-neighbour race to the bottom..."

Too bad Fujii just resigned, and the post has gone to probably the worst possible person (in my opinion) in the administration: Naoto Kan. While Mr. Kan may be just the right person for Evans-Pritchard (extremely temperamental Mr. Kan wants weaker yen, more deficit spending), again that's not my problem. It's about Evans-Pritchard's contention that Japanese government cannot sell bonds at 1%.

Who buys Japanese sovereign bonds?

Unlike US Treasury notes and bonds, almost all Japanese sovereign bonds are purchased in Japan by Japanese financial institutions (banks, postal banks, insurance companies, pension funds). Overseas buyers make up less than 4%, compared to over 30% for the U.S. Treasuries. The Japanese government has been trying to push "Kokusai" (sovereign bonds) to the general public, but the reception has been cool mostly due to the super-low interest rate. The issuance of the bonds more than doubled in the past 10 years, but the rates hardly budged.

If indeed the government has to raise rates to attract more buyers, then the general public may finally start to buy. It may finally drive up the rates for bank CDs, and people may be able to save again. Inflation? What inflation? Japan's population is decreasing, and the rate of decrease will accelerate. I don't think much inflation can happen without population pressure.

In the past 20 years, much household wealth was destroyed in Japan not from ongoing recession and deflation but from super-low interest rates. In their effort to preserve and increase their wealth as best they could, ordinary people were forced to chase the high-yielding investments such as CDs in US dollar. That carry trade by numerous households has spectacularly backfired. They were also driven into mutual funds that invested in U.S. commercial real estate, as these funds were sold by neighborhood banks as "safe and high yielding".

They would welcome bonds and CDs that would yield 5%. That would absorb money in circulation, therefore non-inflationary.

For Japan to flip from deflation to hyperinflation, it would need some other disaster than the government issuing more debt or Mr. Kan becoming the finance minister.

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ECB Injects $662 Billion - What Exit Strategy?

When analysts and economists, and even politicians in the U.S. and Europe are talking about an "exit strategy" of the central banks, the European Central Bank pumps more money for longer period.

ECB Injects $662 Billion into Banking System
(6/24/09 Wall Street Journal)

"The European Central Bank pumped a record amount of liquidity into its money market Wednesday, signaling continued monetary stimulus as banks jumped at the chance of locking in low-cost funds for 12 months."

Well, this doesn't look like a green shoot growing in Europe.

Now the ECB's balance sheet will far exceed that of the US Federal Reserve, at 2.16 trillion Euro (= US$ 3.03 trillion).

As of June 19, 2009, ECB's balance sheet size was more or less comparable to the Fed's, at 1.72 trillion Euro (= US$2.41 trillion). As of June 20, 2008, it was 1.44 trillion Euro. The increase was almost entirely due to the increase in "Lending to euro Area Credit Institutions". (Here's the link to ECB's weekly financial statements.)

Back to the WSJ article:

"The ECB action came as policy makers in most developed economies pondered the right timing to institute "exit strategies" to reverse the torrent of monetary and fiscal stimulus pumped into world economies to stave off the worst of the recession."

What exit strategy? is what central banks in both the U.S. and Europe are saying.

"Analysts said the high demand for the funds reflected the problems some banks are still having in funding their businesses. At the same time, it also reflected expectations that the euro zone's economy will start to recover later in the year, and that the low rates offered this week may not be around for much longer thereafter."

"some banks [still having problem in funding their businesses]" seems an understatement, if 442 billion Euro was quickly taken up.

"He [ECB governing council member Lorenzo Bini Smaghi] added that local authorities should make sure they do [financial institutions lend the money out]. Some analysts have warned that the banks are more likely in the first instance to throw money at short-dated government bonds, locking in the positive spread, or "carry," currently on offer."

How should the local authorities make sure the money gets loaned out? How could they? Unless there's a stiff penalty for hoarding, the money is likely to be used for carry trades, as "analysts have warned".

Debasing the currency and penalizing hoarding have been tried many times throughout the history, and they haven't worked. Imperial Romans tried and miserably failed, most likely prompting the collapse of the empire even before the barbarians showed up at their gates.

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German Chancellor Angela Merkel Critical of Central Banks

Germany Blasts 'Powers of the Fed' (6/3/09 Wall Street Journal)

Her criticism seems to have come from nowhere, according to the article, but what she says is common sense to many fiscal conservatives and non-Keynesian economists.

"German Chancellor Angela Merkel, in a rare public rebuke of central banks, suggested the European Central Bank and its counterparts in the U.S. and Britain have gone too far in fighting the financial crisis and may be laying the groundwork for another financial blowup.

""I view with great skepticism the powers of the Fed, for example, and also how, within Europe, the Bank of England has carved out its own small line," Ms. Merkel said in a speech in Berlin. "We must return together to an independent central-bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years' time.""

She almost sounds like Peter Schiff.

"The public criticism is unusual -- and not only because German politicians rarely talk harshly about central banks in public. When politicians around the world do criticize their central banks, they almost always gripe that they are too tightfisted."

Instead, the German Chancellor is complaining they are doing TOO MUCH to the point of harming the economy.

Her criticism of central bankers' intervention in the economy is interesting to me. Although she was born in Hamburg (West Germany), her family moved to East Germany soon after her birth. She grew up in East Germany, under the Communist system. Then the Berlin Wall fell and suddenly it was one Germany. I would expect her to be more in favor of centralized power, or at least more at home.

You could say that it is nothing but domestic politics; the Chancellor is simply defending herself against her party's conservative critics. Probably it is. But it could also be that Germany is getting fed up with being in Euro, as their once-strong national currency (Deutsche Mark, anyone remember?) has been replaced with Euro, an artificial currency that are imposed on stronger countries (e.g. Germany) and weaker countries (e.g. Spain) as if they are more or less on the same footing. Germans may perceive Euro (and EU) and their role in it as "subsidizing" the weak countries at the expense of their own country.

It is also possible that the Chancellor and her fellow Germans remember what happens when the central bank starts printing money in large quantities (this from Ludwig von Mises Institutie site).

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