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Market Oracle FREE Newsletter


Back To Bad Bank Bailouts

Stock-Markets / Credit Crisis 2014 Jul 30, 2014 - 03:19 PM GMT

By: Andrew_McKillop


Oh No Its Cyprus Again
Depositors only want their money back – and that is the only thing they can't have. Cypriots were understandably enraged at the so-called Eurogroup Triumvirate’s decision some 18 months ago to resolve “technical insolvency” of the two largest banks in the country with what are now well known and called “bail-ins”. Cypriot banks were at that time more than just “technically” insolvent and the Triumvirate (the ECB, the European Commission and European Financial Stability fund) could dictate taking away depositors' savings to rescue one of Cyprus's two most-troubled large banks.

The Triumvirate boiled down to a three-man team of little-known and usually never-seen European financial fixers. These usually-anonymous fixers shuffle in and out of the ECB, the Commission and national finance ministries, sometimes adding a trip to the IMF in Washington or a working sejour at Goldman Sachs in New York like the ECB's Mario Draghi, before he “came back to save Europe”.

The Cypriots were given the usual mindwarp explanation of why depositors' savings were being taken “to save the banks”, which would later be partly-owned by the depositor's because “some” of the pillaged deposits would be “converted to shareholdings” in the bailed-in banks. This method, the Cypriots were told, avoids forcing Cypriot taxpayers to rescue “troubled financial institutions” which doesn't only mean banks. The mindwarp is this – are the straight majority of Cypriot depositors who had their savings pilfered taxpayers on the island, also? The answer is yes.

The mindwarp logic is that bail-ins are “free market capitalist” and “avoid using taxpayers funds”. The method is also totally opaque – which is the opposite of transparent. Everything is done behind closed doors. Not having taxpayers money on the table (but taking it from their pockets through their savings accounts) provides the figleaf excuse that all can be done in private and nobody has to know, except the Triumvirate, who gets what and who pays when Bad Banks are saved. Or in this case, not saved.

Insiders Work from the Inside
Almost anybody has heard about insider dealing. It is a crime although it is not-so-often punished. The Cyprus bank bail-in was described by the Triumvirate themselves, and by Europe's glove puppet media, like the 'Financial Times' or 'The Economist' as the New Method. Failing banks will be bailed out from the inside, and this will now be the norm. Insider bail-ins, you can guess, are custom made for abuse.

The European Union already has an inner sanctum for this, equipped with a road map called the EU Bank Recovery and Resolution Directive. This Directive, like its name implies is an order and says the “Cyprus model bail-in” is the new rule and bail-ins will precede any external bail outs. In other words, but the Directive predictably makes a point of smothering this in jargon, these bail-ins will feature an open season for financial predators, because what are called “uninsured deposits” will be up for grabs when a bank fails. Anything left in the kitty will be divided-up by the Triumvirate's chosen few. Only after that will depositors get some of their money back.

The process is totally open to abuse as well as uber-hypocritical. When the bailed-in Bank of Cyprus was miraculously saved by “free market principles” it registered an increase of its paid-in capital becoming stronger than before – in theory. In fact the capital increase was simply due to shuffling funds from the pillaged savings accounts, to the Bank's capital account! The depositors were now shareholders of the Bank, whether they liked it or not, and of course there were “rational limits” on how many of those forced shares they could sell and at what price. In actual black and white print, the EU and other members of the bail-in Hit Squad say that from now on depositors will be betting on the long term share performance of the Bank of Cyprus.

Bailed-in depositors now hold about 80% of the newly-issued shares in Bank of Cyprus and essentially control the board of directors. As a result, the new board is now a mélange of Russian oligarchs (or rather their lawyers), Cypriot fund directors, and a range of Other Directors including almost anybody at all – who knows nothing about running a bank. This is democratic capitalism!

Like Day Follows Night
In the 18 months since the late January 2013 bail-ins in Cyprus, with one of its major banks purely and simply wound up, nonperforming loans are of course rising and provisioning for those bad loans will take either all, or more than all of the €9 billion worth of emergency cash lent by the ECB. So the Bank of Cyprus is now close to “technical insolvency” again and desperately needs a new infusion of capital. Without it, the bank has no chance of passing the coming ECB “stress tests” which forecast the likelihood of a bank totally collapsing, if its paid-in capital reserves are too low.

Right from the the start, the Bank of Cyprus's directors are squabbling about another raise of paid-in capital for the bank, which has to come from somewhere, and will inevitably dilute the total value of their shares – called a “haircut” in financial talk since the global crisis of 2008 started. Various tricks can be tried to keep everybody happy. New shares issued by the Bank could be set at a very high price – but nobody would buy them. Only persons and groups already having a stake in the Bank would be allowed to buy the new shares – basically what financial talk calls a “buy-back operation”, heavily used by now financially threatened, supposed “corporate giants” like Amazon.

To be sure, the Bank's board of directors could refuse to do anything and force the Triumvirate to come back to Cyprus, with several billion euros in their pockets, and run another bail-in, but that would lose a lot of face for the bail-in Hit Squad. It would also very likely finish off the Bank of Cyprus forever.

Also totally inevitable, the “new weakness” of the Bank, which of course is “surprising” has triggered a free-for-all attempt by depositors, and by the larger stakeholders, to bail out of the Bank entirely. This is through “distressed asset” sales of anything – remaining savings left on accounts at the Bank, still-performing loans made by the Bank, real estate and other assets used to guarantee loans. Only an idiot can pretend that Bank of Cyprus shares will not decline in value.

This is a perfect Return to Square One. Depositors just want their money back. They have had enough of the bail-in game, which doesn't work. Logically speaking, which is dangerous because logic doesn't apply, the final result will be a “classic” Bad Bank Bailout

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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