Tiny Cyprus Re-Opens Europe’s Can of Worms

With the Dow Industrials trading at record heights last week, Wall Street and its news-media shills boldly ratcheted up the hubris to levels unseen since the dot-com bubble popped exactly 13 years ago. All news is good news these days, it would seem — especially fraudulent employment data spun to suggest that boom times are about to return to the U.S.

As far as we’re concerned, however, the real news is in Cyprus, where the latest eurobank bailout perfectly describes the sort of seemingly minor trouble that could cause the global financial system to implode overnight. Will Cyprus’ banking problems prove to be the black swan that author Nassim Taleb famously described? Unfortunately, for reasons Taleb took pains to explain, we won’t know the answer until it’s too late. But it’s hardly inconceivable that this measly €13 billion bailout could trigger a sequence of events with global implications.

On the surface, it’s hard to see what could be even remotely troubling about the sight of nervous depositors queueing outside the Bank of Cyprus. As far as investors in the U.S. are concerned, the depositors might as well be Yap Islanders trying to exchange paper receipts for stone money. Trouble is, Cyprus is a major haven for the untold loot of Russian tycoons. And while it’s one thing for Cypriot riff-raff to get skittish about the safety of their nest eggs, the Russian oligarchs are another matter. Were a whiff of fear to hit their sensitive nostrils, deposits they’ve stashed all over Europe would scurry for safety elsewhere, presumably into U.S. Treasury paper and – wouldn’t this be a novel turn of events? – gold.

Jeopardy for Depositors
They have good reason to be skittish, since this latest bailout will expose depositors and certain bondholders to moral hazard risks as never before. For depositors, the “impairment” will come in the form of a 6.75% levy on deposits of less than €100,000 and 9.9% for sums above that amount. Bondholders’ comeuppance will come via a “bail-in” increasing the witholding tax on capital income and restructuring and recapitalizing the banks. It was unclear whether the provisions would apply only to junior bondholders, or to sovereign backers as well.

A knowledgeable assessment of the gathering storm can be found at ZeroHedge, a web site with more readers — and, perforce, more credibility — than The Financial Times, The Wall Street Journal and The New York Times put together. If bullion and dollar-based assets are not up sharply on Monday in the wake of this developing story, the financial world is far more complacent than we might have imagined. In any case, it seems very late in the game to be jumping on U.S. stocks just because the mainstream media’s fulsome green-shoots story has turned into a full-blown Garden of Eden hallucination.