What Have Central Bankers and Government Treasuries Really Learnt From Cyprus?

London, UK - 31st March 2013, 18:30 GMT

Dear ATCA Open & Philanthropia Friends

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

Since ‘The Great Unwind’ began in 2007, a lot of water has passed under the bridge. Yet, what is extremely important now is to focus attention on the most recent bank bail-ins by way of bailouts! No matter what the authorities say, what has been learnt cannot be unlearnt: the dangerous bail-in cat is now finally out of the bag! It remains to be seen how big and predatory this new cat can become.

Financial Massacre without Consequences?

So what lessons have major central bankers and government treasuries around the world learnt from the merciless Cyprus debacle in 2013 carried out by the IMF-ECB-EU troika and the subsequent relative calm displayed by the Cypriots despite being financially slaughtered? They have learnt that they can get away with this financial massacre, as long as insured depositors are not touched, and that establishes a dangerous global precedent involving three powerful institutions: the International Monetary Fund (IMF) in Washington, DC, the European Central Bank (ECB) in Frankfurt-am-Main and the European Commission (EC) in Brussels.

Ships run aground in Storm

Bail-In Mould (No, Not a Template!)

Amongst many elite central bankers, government treasury ministers and mandarins, the following now appears to be the new mainstream view:

1. Bail-ins with massive uninsured depositor haircuts and bond holder losses are the new bail-outs for banks. Under the threat of losing their precious credit rating, nations no longer appear to have the appetite, the wherewithal or the funds in their treasuries, available to rescue their outsized banks given the scale of the financial institutions’ reckless lending, leverage via structured finance products and prolific use of WMD derivatives;

2. Too-Big-To-Fail (TBTF) Systemically Important Financial Institutions (SIFIs) including banks don’t need sovereign crippling tax-payer funded bail-outs as the first step. Until private sector bail-ins have fully taken place, including the total wipe-out of all stakeholders, there is no need for the tax-payer to step in. Bond holders and uninsured depositors have to pay the price for their bank’s failure first — regardless of how large, influential or threatening those stakeholders might be; and

3. Moral hazard can be avoided by pushing back on all the banks’ owners and stakeholders to wipe them out first. This sets an example for other banks’ owners to begin to reign in their own renegade management that takes on huge liabilities and bloats the banks’ balance sheets. Exercising the bankers’ birth-right of increasing bonuses and transferring the underlying risk to the tax-payer funded bail-out mechanism cannot be encouraged to go on forever.


Whilst there is no official template to solve bank-induced financial crises, yet that is exactly what is now evolving post Cyprus. If you don’t believe that such a template exists, please ask Dijsselbloem — also known as ‘Diesel-Bomb’ — the minister of finance of the Netherlands, president of the Eurogroup of finance ministers and president of the board of governors of the European Stability Mechanism (ESM). Although he has retracted some of what he has said, the online interviews published by reputable news agencies are worth reading carefully.

Under-the-Mattress Banking

What the central bankers and government treasuries ought to take into account is that Cyprus is not a colossal Romance country like France, Italy or Spain — the 2nd, 3rd and 4th largest Eurozone economies — or even a global wealth management centre such as Luxembourg, Singapore or Switzerland where their financial sector is 20x, 7.7x or 6.8x GDP respectively. Once confidence is lost in traditional brand-name banks in one of those systemically important major economies or wealth management nodal points, the consequences of under-the-mattress banking could yet prove to be diabolical for the global financial system, geo-strategy and geo-political balance.

Leap Into the Unknown

On a more sombre note, it is too early to say what has been learnt because events remain in a dynamic state of flux. Second, capital controls mask the true extent of the savers’ collective anxiety. Third, the potential for out-of-control contagion is only just beginning to manifest in the Club-Med nations. Fourth, the toxic fallout may be invisible and un-measurable yet the intangible risk appears to be cascading in terms of inter-bank lending measured via Target2, financial geo-strategic and geo-political balance. Fifth, the colossal bank runs in history have always happened like a snow avalanche and once the terrifying process starts with a small fragment of snow breaking-off at the top of the mountain, it can easily become an unstoppable chain-reaction. Similarly, crowd psychology and herd behaviour transform from fear to panic to hysteria without adequate notice and flagging along the way and can become uncontrollable. There is something primordial about the safety and security associated with keeping money in the bank and challenging this ‘Fidelity’ or faithfulness can create an emotional break-down and adverse asymmetric reaction that is difficult to pre-calculate or attempt to model accurately.


Fasten your seat-belts, there may be massive financial turbulence ahead not just in the Eurozone peripheral and Romance countries but also in wealth management centres such as Luxembourg, Switzerland and Singapore. London, New York and Hong Kong as the primary global financial anchors will continue to see massive flight of capital via their transit lounges. The future for uninsured wealthy depositors may lie in de novo non-bank banking entities that are not off-shore but on-shore. The de novo non-bank banks are able to protect capital, vault cash and to preserve wealth for generations to come via protected cell structures and segregated accounts that do not and cannot fall victim to the insolvency of the fractional-reserve banking system’s outlandish leverage and inexplicable vagaries imposed by regulators in the interest of political expediency. The unintended consequences of central banking and government treasury departments’ new found draconian discipline of bail-ins over bailouts could yet prove to be the death knell for uninsured fractional-reserve banking and have cascading consequences that are hitherto unforeseen and unknown. Watch out for financial earthquakes and avalanches in the near term!


What are your thoughts, observations and views? We are hosting an Expert roundtable on this issue at ATCA 24/7 on Yammer.


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