Cyprus banks face meltdown as ECB ready to pull plug Cyprus Crisis Escalates – Banks May Remain Closed For Weeks

The European Central Bank warned Thursday it was ready to pull the plug on emergency funding for Cyprus banks as the island’s politicians scrambled to raise billions of euros to head off financial meltdown.

bears explain who is behind all this

The ECB said Cyprus had until Monday to clinch a bailout deal or funds would be cut off, while an EU source warned that unless the island pushed a workable plan through parliament and overhauled its banking sector by Tuesday it risked being kicked out of the eurozone.

The government urged against panic while scrambling out a “Plan B” to resolve the chaos unleashed by an initial plan to tax bank accounts — many of them Russian — by 5.8 billion euros ($7.47 billion) to complement 10 billion euros in eurozone and IMF loans between now and 2016.

Part of the package, a government statement said, involves setting up a “solidarity investment fund,” which media reported would nationalise provident funds, with bonds issued against future natural gas revenues.

Finance Minister Michalis Sarris, in Moscow seeking Russian help in bailing the island out of its financial mire, told the Cyprus News Agency (CNA) he is looking to persuade Moscow to invest in the solidarity fund.

No other details of Plan B were immediately available, but political leaders emerging from the meeting told reporters that a tax on bank deposits that sank an earlier deal had been ruled out completely.

CNA said the measure was likely to go before parliament on Thursday night after being considered by the cabinet.

With Cypriot banks in lockdown until next Tuesday, queues grew at cash dispensers on the island amid fears of an indefinite bank closure.

A European Union source said on Thursday that fears of a run on deposits when banks do reopen prompted the EU to urge Cyprus to place capital controls on the banks to avoid a financial collapse and an exit from the eurozone.

“Cypriot authorities have three things to do before Tuesday: Present a credible and viable plan B to replace the rescue rejected by parliament, install long-term controls on capital placed in the banks, and prepare to merge the two main banks in trouble,” the senior European Union source said, adding that there was otherwise a risk of Cyprus having to leave the eurozone.

Orders have been placed to withdraw billions of euros as soon as business reopens on Tuesday, the source said.

The troika of lenders — the EU, ECB and International Monetary Fund — agreed to the 10-billion-euro bailout on Saturday on condition Cyprus raised the other 5.8 billion euros.

Lawmakers on Tuesday flatly rejected a highly unpopular measure that would have slapped a one-time levy of up to 9.9 percent on bank deposits as a condition for the loan, leaving the government scrambling to find other ways to raise cash to repay its debts.

Eurogroup head Jeroen Dijsselbloem warned in Brussels the crisis poses a “systemic risk” that threatens to ricochet through the eurozone.

In Moscow, Prime Minister Dmitry Medvedev slammed the European proposals to solve the Cyprus crisis as “absolutely absurd,” further raising tension between Russia and the European Union.

Russians including wealthy tycoons hold between a third and half of all Cypriot deposits and are believed to have more than $30 billion in private and corporate cash in the island’s banks.

Despite the large Russian holdings in Cyprus, the island’s finance minister failed to make any progress in two days of Moscow talks to secure aid.

Sarris was to hold further meetings on Thursday although the prevailing mood offered little optimism and he stressed that a new loan from Russia was not on the table.

At the opening of a conference in Moscow with the head of the European Commission, Jose Manuel Barroso, Medvedev slammed the European strategy to bail out the near-bankrupt eurozone member.

“This scheme that is being discussed on Cyprus now looks absolutely absurd,” Medvedev said.

“I think that in any case the Eurogroup could examine a future plan of regulating Cyprus with the participation of all the interested sides, including Russian structures.”

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BREAKING: Russian treasury unable to meet it’s financial obligations. All government agencies see asset freeze in Cyprus-Prime Minister Medvedev

nteresting interview by Medvedev today who admitted that most Russian government agencies use Cyprus for it’s financial transactions.

A few points here:

-How corrupt does a country have to be for its government agencies to use a tax haven for financial transactions?

-From latest reports, the Cypriot banks might open on March 26th at the earliest. That’s two weeks after being shut down. That’s two weeks of unmet financial obligations, ie government employee salaries, public works financing, unpaid pensions etc etc…Expect unrest on the streets of Moscow

-The EU/Germany are certainly aware that 95% of all Russian money goes through the Cypriot banks. Certainly they were well aware of the consequences this would lead to. Is this the first salvo in the new world war??

http://www.newsru.com/finance/21mar2013/cyprusmedvedev.html

Russia complains government accounts blocked in Cyprus

Russian Prime Minister Dmitry Medvedev complained Thursday that accounts of Russian government agencies in Cyprus had been blocked as Cypriot Finance Minister Michalis Sarris was set to resume talks in Moscow to secure aid.

In comments released early Thursday, Medvedev warned that Russia would take a “firm” stand on Cyprus because the accounts of governmment structures had been blocked on the island.

http://www.globalpost.com/dispatch/news/afp/130321/russia-complains-government-accounts-blocked-cyprus

Cyprus ATMs Low On Cash, Credit Card Payments Refused; Medvedev Compares Europe To USSR
Read more at http://investmentwatchblog.com/breaking-russian-treasury-unable-to-meet-its-financial-obligations-all-government-agencies-see-asset-freeze-in-cyprus-prime-minister-medvedev/#m0QMmVvgfYuGm9u4.99
Read more at 

“The banking crisis in Cyprus is worsening, Eric.  The banks there remain shut as the Cypriot politicians scramble for a solution to bailout that country’s banks.  The banks were supposed to re-open this past Tuesday after a 3-day weekend from a national holiday.  Then they were supposed to open today, but they remain shut.  Now the authorities say they will open on Tuesday.  But who knows?  They could remain closed for days or even weeks, given their dire financial condition.

 

In fact, the EU authorities say that the Cypriot banks are insolvent 

“In other words, the liabilities of these banks, which are mainly the money it owes to depositors, are far greater than the value of the banks’ assets, even after accounting for bank equity and any reserves.  This insolvency of course did not happen overnight.  It has been going on for months – actually years and took a turn for the worse when Greece fell over because the banks in these two countries are so closely interlinked.  One has to ask why this insolvency was allowed to happen?

 

The answer isn’t pretty.  Cypriot politicians and the bankers themselves conspired with the European Central Bank, with the blessing of EU politicians, Brussels eurocrats and IMF bureaucrats, to try to sweep under the rug the reality of the situation.  I guess they were hoping that by pretending that all was well, the problem would go away – or someone else in the future could deal with it when they were no longer in office.

 

Cynics of this practice are often criticized by central bank apologists for calling this policy one of “extend and pretend”, but it is an accurate description.  The ECB and IMF extend loans to keep the banks liquid and then pretend all is well while hoping things improve.  But they rarely do.  Bad assets like defaulted loans have little or no value, which creates a black-hole on the asset side of bank balance sheets.  When that black-hole is greater than bank capital and reserves – as is the case with Cypriot banks – a bank is effectively bust.  

 

Papering over these bad assets does not make them good again; it simply hides them and thereby disguises the fact that bank assets are less than bank liabilities, i.e., the money the bank owes depositors.  So kicking the can down the road is never a solution because reality always hits eventually, and right now it is hitting Cyprus like a tsunami.  To put it bluntly, Eric, its banks are busted.  But we are just starting to see the knock-on effect from this bank holiday.

 For example, merchants in Cyprus have moved to a cash-only basis.  They no longer accept credit or debit cards because they do not know when – or if – they will ever get paid by their bank.  Then, consider everyone who can’t access their money.  

 

In addition to all of the people who have money deposited in these banks which they can’t access, there are also thousands of international companies that are shut-off from their money.  They cannot make the payments they planned to settle bills, nor receive any money that they were expecting.  There is going to be a severe impact on economic activity, not only in Cyprus itself, but wherever these international companies operate.In this respect, this situation in Cyprus reminds me of the Herstatt Bank failure in 1974 which turned into an international crisis, even though it was just a medium-sized bank in what was then West Germany.  Herstatt went bankrupt and shut its doors before paying out $200 million that was owed to many companies and banks around the world.  That was a lot of money back then after adjusting for inflation and the size of the global economy four decades ago.  

 

When these companies and banks didn’t get their money, a daisy-chain of defaults and near-defaults spiraled out of control for months.  One casualty was a New York bank called Franklin National, which was up to that time the largest bank failure in US history. 

 

Franklin National failed about two months after Herstatt collapsed, which highlights an important point that I cannot stress enough.  The fallout from this banking collapse in Cyprus is likely to last for weeks, maybe even months.  What’s more, just like Herstatt’s collapse had an impact far beyond the borders of West Germany, so too will this failure of the Cypriot banks.  This interlinking of the financial system is the nature of banking today and one of the financial system’s greatest vulnerabilities. 

 

When one bank goes bust, others inevitably follow.  It is just a matter of “when”, not “if”.  And the when depends on how long the authorities pursue their “extend and pretend” policy, which in the case of Cyprus is not much longer.  The ECB said after Monday it will no longer make loans to provide Cypriot banks with liquidity.  Thus, Cypriot authorities have to come up with an estimated €6 – €10 billion by Monday to plug the black-hole on the asset side of the aggregate balance sheet of Cypriot banks. read more

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