Cyprus Banksters And Russian Gangsters
In case you haven’t heard the small island nation of Cyprus has the world’s attention this week. In a word, it’s a mess. A big, historic mess.
Why historic? Well, let’s not get ahead of ourselves.
First, we need to understand what’s happening, why it’s happening, and what could happen; and then take some guesses at what’s likely to happen.
Here’s the quick version of where we stand:
- Cyprus’ banks are several orders of magnitude larger than Cyprus’ government.
- Cyprus’ banks – based on excessive risk taking and over extending themselves – are insolvent and cannot function. They have been closed since Monday.
- Cyprus’ government does not have enough money to bail out the banks. In fact, the government’s debt is 127% of the nation’s entire GDP, meaning the government itself is broke.
- Cyprus is part of the European Union, therefore it cannot print its own money.
- Cyprus’ government cannot borrow any money in the private markets because no one will lend to them the amount they need at an interest rate they can afford.
- Last Friday the European Central Bank (ECB) offered Cyprus a bailout on the condition the government siphon (steal) up to 10% of all bank deposits from its citizens as a contribution toward the bailout.
- Earlier this week Cyprus’ government voted against the bailout following outrage by the people that their money was to be stolen in order to “make good” on the errors of the politicians and bankers.
- The banks are scheduled to reopen next Tuesday. When that happens customers with deposits will flood the banks with withdrawal requests, draining the banks of all currency (this is called a bank run, or a run on the banks).
- Since the banks do not have enough currency to cover the total amounts of deposits they have on record, some people will not get their money.
- Yesterday the ECB told Cyprus that if they do not agree to the terms of the bailout by this coming Monday, all offers will be withdrawn from the table.
- Without a bailout the Cyprus banks and government will be forced into default and bankruptcy. In this case the banks would most likely never reopen and the depositors would lose ALL of their money – forever. Eventually new banks would open (with a clean slate) and replace the old banks. The government would most likely withdraw from the European Union, drop the Euro as its accepted currency and create a new currency which citizens would be forced to use, exchanging their Euros for the new currency at “pennies on the dollar”. Cyprus would be shut out of international credit (bond) markets and would be forced to live within their means (based on whatever they could produce, use or export). Of course, internally, this would cause much pain, and perhaps violence, for the people and government of Cyprus.
- Talks are ongoing between the government of Cyprus, the ECB, and anybody else they can think of that might give them some money before Monday.
- One group of people that might help are the Russians. Why the Russians? Cyprus’s banks have for decades been to the Russians what the Cayman Island banks are to the US. In other words, a place to hide and/or launder money for tax and other purposes for wealthy businesspeople, which in Cyprus’ case includes . . . drum roll . . . . the Russian Mafia and the Russian oligarchs. Oops. The Russians have indicated interest in a swap; bailout money for ownership to Cyprus’ natural resources (mostly undeveloped offshore oil). Of course, having a base of operations in the Mediterranean so close to Europe wouldn’t be too far down on Russia’s list of political and military desires.
Okay, so how does this affect the world, and possibly us here in America?
Well, for starters I said this was a historic mess. It’s historic as this is the first time the European Union has tried to force a government to steal depositors’ money in order to fund a bailout. So the thought goes, if they can do it in Cyprus why not Italy, Spain, Greece, or any other EU country? And if the EU can do it, why couldn’t any other country (in fact, one party in New Zealand is already pushing to do it there)? And, what if people get scared enough that Europeans start bank runs all over Europe; could they not create a spiral of insolvency that triggers a global banking crisis?
Keep in mind that, via the Federal Reserve, American taxpayers have been shoveling billions into European banks every month since 2008 to prevent exactly this from happening. So guess what, if Europe goes bust, your tax dollars are gone – forever. American banks are also heavily exposed to Europe – not so much via lending them money, but tremendously (as in TRILLIONS) in derivatives that our banks have purchased using …. you guessed it, credit. For those who don’t remember, derivatives are “up or down” bets placed on the value on an unrelated asset; meaning, I can purchase a derivative on credit betting that X will go up or down by an agreed amount. If I bet it the wrong way I have to pay the company that took my bet. But if I don’t have the money I’m in trouble. Our banks have bets placed all over Europe, many going the wrong way, and we all know they don’t have enough money to cover these bets. So, in a full blown crisis American banks (and thus our economy) could be brought to their knees by the decisions the people of Cyprus make.
So what’s likely to happen? Fear of that full blown crisis will drive someone to make a deal and Cyprus will be bailed out. If not, watch out, it’s Katie bar the door. Though I fully expect a bailout it won’t fix anything – as soon as they burn through that cash we’ll be right back where we are today with an even bigger pile of debt and danger. Do not be lulled or fooled into thinking anything, anywhere (including here) has been fixed. So, as bad as it may sound to say let the whole thing crash, that may be the least painful – and certainly the quickest – way to reset the system and start over.
Hang on though, the next week will anything but boring.
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