The following is an article from Netzoners ” citizen reporter “financial correspondent.
Mr Christopher M. Quigley B.Sc., M.M.I.I., M.A.
It is hard I am sure for Americans to fully comprehend the disaster that was the recent Cypriot Euro debacle.
Yesterday, Monday the 25th. March we were told that “the day has been saved”. The Euro is again “on solid” ground. “Ordinary depositors, with balance up to 100,000 Euro, have had their funds guaranteed”. “What a difference 14 days make” we are being told.
To get a sense of the panic that was swirling about in Europe last week I include a quote from the Irish Independent of 22nd March 2013:
Irish property speculators fear for cash in Cypriot account.
“A group of up to 30 Irish property speculators have been left sweating on their investments due to the Cypriot bailout crisis.
The group, mainly Irish nationals living in the Middle East, all invested in a fund to take advantage of the collapse in property prices back home in Ireland.
Under the scheme, each invested €20,000 or more with a property consultancy, which has been seeking to snap up cut-price Irish properties whose value is likely to increase in the coming years.
A further 20 British nationals are also thought to be involved in the scheme.
Investor funds were placed in a Cypriot client account.
However, the account cannot currently be accessed after banks on the Mediterranean island closed their doors last weekend.
And hundreds of thousands of euros could be wiped off the value of the fund should the Cypriot government cave in to pressure from the EU and IMF for a levy on bank deposits as part of a bailout deal.
Richard Jones (37), a project finance consultant from Ballyhaunis, Co Mayo, who is involved in the scheme, flew in to Cyprus earlier this week in an attempt to withdraw the cash before any proposed levy on the account.
“I came over yesterday because the banks were due to reopen, but they didn’t,” he told the Irish Independent.
“I found it hard to get into a hotel room here. Everything has been booked up by the Russians coming in to withdraw their cash. That just confirmed my decision to come out as there will be an almighty run on the banks once they reopen.”
He said the clients’ funds were held in a Cyprus bank because the country “has been seen as a gateway for investment from the Middle East into Europe”.
“Most of my investors are very small — around €20,000. But it is a lot of money to them. They are mostly Irish and British expats living in the Middle East and they see value to be had in Irish property now,” he said.
Mr. Jones said he believed the current crisis signals the “beginning of the end for the euro”.
He added: “I think what the EU has signaled is that bank deposits are no longer safe. At a single stroke they have reduced the European banking system to third-world status.”
For businesses and individuals with substantial funds in the banks in Cyprus the 100,000 Euro guarantee is of little benefit. As a result of the deal brokered with the IMF/ECB/European Commission “Troika” large account balances will be cut by up to 30%. What’s more the balance of funds outside the “cut” will be frozen until the situation has been fully stabilized. Many believe that it could be months maybe years before these client funds are returned to their rightful owners.
What a disaster the “bailout” turned out to be for the 50 Irish and British businessmen mentioned in the opening quote. In total they will lose approximately 300,000 Euros from their investment project overnight. Third-world status indeed.
Flight of Capital:
Now that the dust has settled somewhat we are being told that the “markets” have reacted favorably to the Cypriot bailout news.
However, this crisis is far from over. The “Rubicon” of the sanctity of deposits has been crossed.
No Eurogroup bank will ever be trusted again. Many believe that Italy and Spain have similar crises in the making and anxiety within Europe is starting to rise again. Can you imagine the “fear factor” welling within the citizens of these countries looking at how ordinary Cypriots have been treated?
Rather than wait for protective capital controls to be introduced in Spain and Italy it is expected that focused entrepreneurs and savvy chief executives will start moving funds out of their Euro accounts and Eurogroup banks. People no longer have any confidence that their financial leaders will be able to deal successfully with a full blown Spanish or Italian banking melt-down. To understand this perception one must comprehend the degree of incompetence displayed by the European Central Bank. The astonishing mismanagement and lack of insight shown during the Cypriot crisis was so clear for all to see that confidence in the Eurogroup banking system has utterly vaporized.
Why? Let us look at a few simple figures.
The total private banking deposits in the two main Cypriot banks was “only” about 68 billion Euros. As of last December private sector banking deposits in Italy was 1.497 trillion Euros and in Spain 1.52 trillion Euros.
On the 18th. March the ECB was alarmed with regard to deposit destruction and capital flight from Cyprus. In order to protect this “base” it closed all banks indefinitely and intimated that all banking deposits were going to share in a “cut” to recapitalize the crippled financial institutions. In one fell swoop Brussels destroyed the primacy of the 100,000 Euros deposit guarantee scheme which supposedly applied to ALL Euro account holders within the Eurozone. When the dust settled the final deal agreed did protect this 100,000 Euros deposit level but, as we have already noted, some individuals and many businesses and corporations were eventually “robbed” of 30% of total deposits. If this was the ECB’s reaction to “save” banks with only 68 billion Euros of private deposits many concerned citizens cannot even begin to comprehend how Brussels intends to deal with any similar crisis that may develop in Spain and Italy which has a deposit base of 3 trillion Euros.
Are you beginning to get the picture?
This issue is not vacuous chatter. I have just read a story in a Dublin newspaper stating that the head of one of the largest Irish industrial conglomerates has instructed his financial chiefs to move all free bank balances out of the Euro ever Friday and move it back for business every Monday. When questioned about this practice the chief executive’s answer was: “Everybody is starting to do it. Fool us once shame on you, fool us twice shame on ourselves”.
How it that for a vote of confidence in the Euro zone?
It is my guess that as more and more corporations execute such deposit protective measures many will soon begin to limit the funds they actually return to Euroland every Monday. Such a development would make the introduction of capital controls a self-fulfilling certainty. With capital controls in place the Brussels/Berlin trap will be set. In such a scenario it will be finally comprehended that the Euro really is not a currency as such (it is my contention that it never was) but rather a fixed exchange rate mechanism. It is about time the ECB emperor was seen to have no clothes.
I fervently believe events will show that the Cypriot “deposit robbery” was a seminal event in European social history. Confidence once taken from a “currency” cannot be restored. When the financial controllers of Google Europe, Apple Europe, Microsoft Europe, McDonalds Europe, Facebook Europe, Microsoft Europe, IBM Europe, Oracle Europe etc. gradually wake up and have the epiphany that 20% – 30% of their corporate banking deposits could be up for grabs in a future Italian or Spanish crisis (Cypriot banking a-la Angela Merkel style) the writing will surely be on the wall for the Euro project.
The free movement of capital is a bulwark “right” of the European Common Market. Introducing capital controls to “save” the Euro is the total antithesis of such free trade rights. At such a juncture the decision will have be made whether to save the European Common Market or save the Euro. I think at this point the result is obvious. It is just a matter of time and a few more mis-handled “crises”. The European Common Market operated very well for over four decades without a common currency. It is time some brave European statesmen make some tough choices and commence opting for community solidarity and social cohesion rather than economic hara-kiri.
Accordingly, a colleague of mine has written an open letter to the Prime Minister of Ireland today. This letter urges Premier Kenny to establish an emergency finance committee to develop a plan of action to save the Irish banking system should the Eurogroup fail. His letter summons the government to act without delay and requests that contacts be made at the highest level with friendly American and British Commonwealth institutions to prepare for the possible need for an alternative Irish currency to the Euro. Such a currency would act as a back-stop to the financial tsunami currently rising within the sub-terrain depths of ECB mendacity and European Commission incompetence. Preparation for such an eventuality may seem “pie-in-the-sky” but to be fore-warned is to be fore-armed and if the bungled Cypriot deposit grab is anything it is just such a fore-warning.
© Christopher M. Quigley 26th. March 2013