While the management of the ongoing banking crises on this side of the Atlantic has been dishonest, the management on the other side of the pond, or in today's case, sea, has been an unmitigated disaster. Or so it would seem.
We are talking about Cyprus. For those who have yet to hear about Cyprus, it is an island nation located in the far eastern Mediterranean Sea, just below Turkey. It is currently inhabited by a fiery mix of Greeks and Turks, who have lived in an uneasy peace with each other for some 40 years after the events that took place during the summer of 1974.
Like many island nations, Cyprus has been able to find common ground with those who have been unable to find common ground on the mainland. It has found that it can leverage its sovereignty and willingness to bend the rules to offer banking services without the nagging regulations which increasingly plague banks and their clients in western nations on the mainland.
Now that the government of Cyprus is bankrupt and in need of a bailout, showing that even a tax and banking paradise can be poisoned by a bad currency, they have gone hat in hand to Belgium, a strange country in the north with absolutely nothing in common with Cyprus, save the currency in question.
The Eurocratic apparatus in Belgium, either on its own or at the behest of the global banking giants in Cyprus, has decided that the terms of the bailout, or "bail in", would be the direct confiscation of funds from depositors bank accounts in the form of a tax, in this case between 3 and 9.9% to ultimately pay back the countries who have been generous enough to provide the funds, which, despite the technicalities involved, for most Europeans means Germany.
Predictably, the people of Cyprus, who caught wind of the confirmation of the rumors on Friday and awoke Monday to find that their government had declared what is, at this writing, an indefinite banking holiday to prevent anyone who did not want to participate in the bail in from withdrawing their funds from the country's banks, are channeling their anger at the German Embassy. An example of this can be seen in the video that accompanies this article.
The Cypriot authorities have declared the banking holiday to avoid a run on their banks, and most commentators have astutely presumed that a bank run would be bad for the bank. We difer from most commentators and postulate that this tax on depositors is taken precisely for the benefit of the Cypriot banks. Further, that it has been taken not only for the benefit of the banks in Cypriot, but to serve as the catalyst for the Euro zone to return to growth, or the activities which pass as economic growth circa 2013.
How can this be? To understand this will take a basic understanding of the banking revenue model.
Ever since 2008, the Federal Reserve and the ECB have been underwriting the banking sector by providing cheap cash to banks and, indirectly, the governments and people's of their respective countries. This is where the oft cited parallel of today's bank runs and those that occurred during the Great Depression falls apart. For all of the mistakes that Ben Bernanke has made, the unconditional guarantee of liquidity in the banking system is the one that he will never relinquish, despite appeals to reason, for he mysteriously sees it as his life's calling.
However, in an effort to stem the fall in asset prices over the past five years, the Feds and the ECB have largely ignited an increase not in economic growth, but in bank deposits. Bank deposits, far from being a boon to the receiving bank, are a huge problem when market conditions force them to reinvest funds at extremely low interest rates. This reinvestment dynamic represents a significant squeeze on the traditional banking revenue model.
Enter Cyprus, an island that holds a disproportionate amount of bank deposits due to its pre-Friday status as a tax haven. As a thinking Eurocrat who is hunting for a way to both ensure that the banking revenue model continues to function, the government of Cyprus retains legitimacy, and that economic activity in the Euro zone will increase, the pile of Euros in Cypriot banks looks like a great target not to loot, as most analysis of the situation paint this move as, but to force billions of Euros out of the digital vaults of the banking system to wash from the shores of Cyprus outwards into the other Euro zone countries in search of real goods.
We can see that the Eurocratic genius in the move is that the mere threat of a unilateral tax on deposits as a condition for a Euro zone bailout is causing lines to form at ATMs from Andalusia to Cataluña, across the border into Torino and down to the lonely parts of Sicily.
Within a matter of days, billions of Euros which were locked up in the accounts of savers and otherwise useless to the European economy will be running around the Spanish and Italian streets in a desperate attempt to purchase anything real in which to hold said savings.
With what appears to have been a boneheaded Eurocratic move, the Eurocrats may have managed to do what Ben Bernanke and all of the helicopters in the world could not have done to the club Med economies: Shower them with foolishly spent cash while at the same time bailing out both the banks and the governments as a grotesque side effect.
Meanwhile in Cyprus, the latest is that the government wants to think over the terms of the bailout. The formal vote has been postponed until Friday, and we presume that the banking holiday will remain in effect until after the vote is taken and any taxes are skimmed.
It is a hard assignment, and we do not envy them nor blame them for thinking it over. The decision before Cypriot government officials is simple. Should they accept the bailout, they face being blamed by their countrymen for sacrificing their parched island on the Eurocratic altar as well as spending the rest of their lives dodging the hit men of any oligarch's who did not have sufficient forewarning of the move. Should they reject the bailout, their government may even find a few contributions from said oligarchs to keep operating, and the only cost will be a few less German tourists on their shores, which, given the alternative, seems a small price to pay.
In the end, if our hunch is correct, the mere threat of a banking holiday and tax on deposits in other European countries should be enough to stimulate the Euro zone.