Sunday, June 28, 2015

"Special Alert: the EU Crisis Goes Into Hyperdrive"

"June 28, 2015

Special Alert: the EU Crisis Goes Into Hyperdrive

As we have asserted since 2012, the template for dealing with Crises has been laid out in Europe, particularly in the countries of Spain and Cyprus.

That template is:

1)   A problem first emerges.

2)   Various political and financial officials state that the problem is contained and there’s nothing to worry about.

3)   Months later, the market and mainstream media catch on… usually when the problem is already a massive crisis and a bank holiday needs to be declared.

4)   Individual investors lose a LOT of money while the same folks who cause the problem A) are not fired, fined or jailed B) never come clean about the full scope of the problem and C) claim that they can solve the problem and have all the answers.

Consider the story of Bankia.

Bankia was formed by merging seven bankrupt regional Spanish banks in 2010.

The new bank was funded by Spain’s Government rescue fund… which received “preference shares” in return for over €4 billion in funding for the bank (all provided by taxpayers of course).

These preference shares were shares that A) yielded 7.75% and B) would get paid before ordinary investors if Bankia failed again. So right away, the Spanish Government was taking taxpayer money to give itself preferential treatment over ordinary investors (including said taxpayers).

Indeed, those investors who owned shares in the seven banks that merged to form Bankia lost their shirts. They were wiped out and lost everything when the new bank was created.

Bankia was taken public in 2011. Spanish investment bankers convinced the Spanish public that the bank was a fantastic investment. Over 98% of the shares were sold to Spanish investors.

One year later, Bankia was bankrupt again, and required the single largest bailout in Spain’s history: €19 billion. Spain took over the bank (again) and Bankia shares were frozen on the market (meaning you couldn’t sell them if you wanted to).

When the bailout took place, Bankia shareholders were all but wiped out and forced to take huge losses as part of the deal. The vast majority of these were individual investors, NOT Wall Street or its European equivalent (Bankia currently faces a lawsuit for over 140,000 claims of mis-selling shares).

So that’s two wipeouts in as many years. 

The bank was taken public a second time in May 2013. Once again Bankia shares promptly collapsed, losing 80% of their value in a matter of days. And once again, it was ordinary investors who got destroyed.

Indeed, things were so awful that a police officer stabbed a Bankia banker who sold him over €300,000 worth of shares (the banker had convinced him it was a great investment).

Today Bankia is tied up in a massive compensation lawsuit whereby it is to pay out between 200 and 250 million Euros to investors who bought it during its initial IPO. Of course, this payout is based on accounting standards that are at best massaged and at worst likely outright fraudulent (this is, again a bank that has wiped out investors three in times in three years), so who knows what will happen?

While certain items relating to this story are unique, the morals to Bankia’s tale can be broadly applied across the board to the economy/ financial today.

Those morals are:

1)   Those in charge of regulating the system will lie, cheat and steal rather than be honest to those who they are meant to protect (individual investors and the public).

2)   Any financial problem that surfaces will be dealt with via fraud or lies rather simply allowing those who screwed up to be fired or go to jail.

3)   When the inevitable collapse finally does hit, it will be individual investors and the general public who get screwed (not bank executives or politicians).

4)   The problem will be prolonged as much as possible, likely fixed years down the road, if ever and individuals will have little or no say in how it pans out.

In terms of the timelines for these events, Cyprus…

Here it is:
  • June 25, 2012: Cyprus formally requests a bailout from the EU.
  • November 24, 2012: Cyprus announces it has reached an agreement with the EU the bailout process once Cyprus banks are examined by EU officials (ballpark estimate of capital needed is €17.5 billion).
  • February 25, 2013: Democratic Rally candidate Nicos Anastasiades wins Cypriot election defeating his opponent, an anti-austerity Communist.
  • March 16 2013: Cyprus announces the terms of its bail-in: a 6.75% confiscation of accounts under €100,000 and 9.9% for accounts larger than €100,000… a bank holiday is announced.
  • March 17 2013: emergency session of Parliament to vote on bailout/bail-in is postponed.
  • March 18 2013: Bank holiday extended until March 21 2013.
  • March 19 2013: Cyprus parliament rejects bail-in bill.
  • March 20 2013: Bank holiday extended until March 26 2013.
  • March 24 2013: Cash limits of €100 in withdrawals begin for largest banks in Cyprus.
  • March 25 2013: Bail-in deal agreed upon. Those depositors with over €100,000 either lose 40% of their money (Bank of Cyprus) or lose 60% (Laiki).
The most important thing I want you to focus on is the speed of these events.
Cypriot banks formally requested a bailout back in June 2012. The bailout talks took months to perform. And then the entire system came unhinged in one weekend.

One weekend. The process was not gradual. It was sudden and it was total: once it began in earnest, the banks were closed and you couldn’t get your money out (more on this in a moment).

There were no warnings that this was coming because everyone at the top of the financial food chain are highly incentivized to keep quiet about this. Central Banks, Bank CEOs, politicians… all of these people are focused primarily on maintaining CONFIDENCE in the system, NOT on fixing the system’s problems. Indeed, they cannot even openly discuss the system’s problems because it would quickly reveal that they are a primary cause of them.

For that reason, you will never and I repeat NEVER see a Central banker, Bank CEO, or politician admit openly what is happening in the financial system. Even middle managers and lower level employees won’t talk about it because A) they don’t know the truth concerning their institutions or B) they could be fired for warning others.

Please take a few minutes to digest what I’m telling you here. You will not be warned of the risks to your wealth by anyone in a position of power in the political financial hierarchy (with the exception of folks like Ron Paul who are usually marginalized by the media).

With that in mind, now is a good time to prepare for systemic risk. I cannot forecast precisely when things will get as ugly as they did in Cyprus for the financial system as a whole (no one can).

However Greece just entered the final stages of its debt collapse: the ECB has just announced that it is declaring a Bank Holiday in Greece. We all know what is coming next: default or confiscation of deposits.

This will be spreading throughout the globe in the coming months."

Graham Summers
Phoenix Capital Research

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