Collapsonomics (Part 5): Big Panic in Little Cyprus, by Al Martin

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by Al Martin

Collapsonomics (Part 5): Big Panic in Little Cyprus

(3-20-13) The government of Cyprus wants a bailout from the European Central Bank, which is primarily controlled by Germany, that will force depositors to give up 6.7% of accounts which are smaller than 100,000 Euros and 9.9% for accounts larger than 100,000 Euros. This confiscation is couched as “deposit insurance.” Since Cypriot banks have become a refuge for Russian KGB mob money, there has been some reluctance to take this route.

What the Cypriot government wanted was an absolute guarantee on all deposits, both foreign and domestic. But the ECB didn’t want to agree to this which was what was also done to Iceland, Ireland and Portugal. The ECB didn’t want to guarantee foreign deposits at 100 cents on the dollar.

The Cypriot government then said that if the ECB couldn’t guarantee this, they wanted refuge somewhere in Europe. After all, what kind of Russian money is in Cypriot banks? The Cypriot government has a pretty good idea who the Russian depositors are and whence came the money.

This process is nothing new since it has happened in other countries – namely Iceland, Ireland, Portugal and Greece. In other words, domestic account holders in Cyprus are going to have to pay deposit insurance guarantees directly because the Cypriot banks don’t have the money – and neither does the Cypriot government.

Thus bank account holders will be paying 6-9% as deposit insurance against their own deposits. After all Cyprus has been in negotiation for a Euro bailout for a year. This is nothing new for the Cypriot people or foreign depositors in Cypriot banks.

So where will the Russian KGB mob money go – even though a 10% haircut can be considered chump change for them, i.e. just the cost of “doing business”? The Russian government effectively browbeat the Germans over the issue. This is simply old animosity and old fear, namely that the Germans are afraid of the Russians.

The Russians put the arm on the German government because the real ECB decisions on bailouts are made by the Germans and Uncle Vlad (Putin) said you’ve got to guarantee the deposits of all the Russian KGB mob money in Cypriot banks – or we Bolsheviks are going to go on the march again. After all nothing scares the Huns like the prospect of marching Bolsheviks.

They just decided to use the same format that has been used before. The Cypriot government obviously wants all of their bank accounts domestic and foreign to be guaranteed. The Cypriot banks were all beyond the point of no return. They were no different that Portugal, Ireland and Greece, the other so-called PIG nations. The Cypriot banks also held a lot of bad Greek paper and that became a bone of contention with the Turks since Cyprus is still partitioned. They didn’t want to make good on defaulted Greek debt.

The Turks backed away because they knew how contentious this issue would become inside of Turkey, making Turkish taxpayers effectively responsible for defaulted Greek debt. That’s why the ECB has to come up with these twisted cockamamie “solutions” because the Euro Zone’s brave face they put on, they can’t get away from the old animosities.

A Cypriot government which is controlled by the Greek faction was loaded up with Greek sovereign debt, but that’s only because the ECB kept putting the arm on them on the Cypriot banks to buy it as the ECB has put the arm on all Euro Zone banks or Euro Zone wannabe banks to buy Greek debt.

The deal that was worked out by the Euro Zone commission to unify Cyprus was a parliament that has both Greeks and Turks. It should be remembered that after the revolution in the 1970s Cyprus became partitioned so that 2/3 of it was Greek and a 1/3 was Turkish. It was essentially two countries and the EU worked out a unification deal. They did it by exerting pressure which was easy to do because they had leverage on the Greeks already. It was also easy to exert pressure on the Turks who wanted into the European Union. That’s how a deal was worked out.

So how did Cyprus become such a haven for money laundering for Russia? Because Cyprus was not yet a EU member and did not come under EU banking scrutiny So with endemic corruption within the Cypriot government, it wasn’t hard for Russian mob money to work its way into Cypriot banks because what the Russian mob knew is that come hell or high water, a deal would be worked out to guarantee foreign deposits. They might not get 100 kopecks on the ruble back right away but they knew that ultimately the losses would be guaranteed.

The Russian KGB mob was willing to take that risk because they knew that ultimately the deposits would be guaranteed. They knew that the Russian government would exert pressure on the Huns to make sure that all foreign deposits would be guaranteed. They knew that at the very worst it would become a deal like it became in Iceland, where foreign deposits were guaranteed, but the foreign depositors didn’t get 100 cents on the dollar back for five years.

The Russian money will remain there because they can’t withdraw it. They’re stuck too, since the banks are insolvent. Cyprus has no hard currency reserves left. They literally cannot withdraw the money. It’s true that there is collateral damage in all of this to some extent and the collateral damage always seems to be the British pensioners who had money in Iceland then in Ireland then in Portugal and now in Cyprus. This was not only British pensioners but pensioners throughout Europe. It was common to go to the peripheral states since they knew there were existing or likely ECB guarantees of foreign deposits and where interest rates were substantially higher and where there wasn’t any unearned income tax.

The reason why the pensioners and depositors in Europe keep getting hurt is because Social Welfarism drives domestic deposits into foreign jurisdictions. And that’s particularly true with the British. They are in the worst position of all because they are not EU members and they are trying to hold the line, as it were, on Social Welfarism, yet they are finding it an increasingly lonely place.

Holding the line and not succumbing to the falsely corrosive and unsustainable doctrine of Social Welfarism has its costs and part of those costs is driving capital out of your own country because you’re forced to tax to such an extent in order to maintain spending.

And that’s what the Cyprus panic is all about.

As the planet keeps lurching from crisis to crisis, this is another good example of why it is impossible to predict the timing of economic collapse because we are a planet full of straws and we don’t know which straw will be the one that “breaks the camel’s back”…

* AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.

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