First, the Middle East:
Chemical weapons were used on civilians in Syria on Tuesday, Israel security sources confirmed. These sources did not, however, know whether it was Syrian President Bashar Assad's regime or the opposition forces fighting to topple him that used the weapons of mass destruction, after each party accused the other.
Syria's government and rebels accused each other of launching the deadly chemical attack on Tuesday. If confirmed it would be the first use of such weapons in the two-year-old conflict.
Now back to the financial crisis:
While Spain's economy minister Luis De Guindos proclaimed in the Senate today that bank deposits under EUR100,000 are "sacred"and that "Spanish savers should stay calm," Spain, it would appear, has changed constitutional rules to enable a so-called 'moderate' levy on deposits - as under previous Spanish law this was prohibited. For now, they claim the 'levy' will be "not much higher than 0%" and is mainly aimed at regions in Spain that have "made no effort to collect taxes" based on new revenue expectations. As El Pais reports, the minister of finance and public administration, Cristobal Montoro, defends the need for such a 'levy' in their constitution on the basis of standardizing taxes across regions (and is preparing a proposal on the amounts to be paid) and although it would appear that while the European Commission could previously argue that such a 'tax' would violate the free movement of capital in Europe, it now leaves the door open to eventually effectively taxing the deposits. We can't help but remember the Tequila crisis and the constant reassurances from Zedillo up until even the night before Mexico devalued...
In Nigel Farage's first TV appearance since the Cypriot wealth tax was announced, the Englishman pulls no punches. In all his years and all his experience of the desperation of the European Union's leadership "never did [he] think they would resort to stealing money from people's savings accounts." The simple fact is that they know they cannot let any country leave, no matter how small, for "once one country goes, the whole deck of cards will come tumbling down." There is now"clear irreconcilable differences" between the North and the South of Europe and now that they have done this in one country, "they are quite capable of doing it in Italy, Spain and anywhere." The message that sends to people is "get your money out while you can." As far as his British constituents, he strongly recommends George Osborne (UK Chancellor) urge ex-pats to remove all their money and do monthly transfers from home. "Do Not Invest In The Euro-Zone," he concludes, "you have to be mad to do so - as it is now run by people who do not respect democracy, the rule of law, or the basic principles upon which Western civilization is based."
The Daily Bell weighs in on the situation:
Investors, of course, are not able to judge the soundness of banks because banks are part of a larger fiat-moneysystem that is foundering. There is only one sure thing about current economic systems worldwide – and that is that they will undergo regular crises as money printing becomes overwhelming and economic instability results.
The press release goes on to point out that New Zealand ought to promote a deposit insurance scheme rather than an open-bank resolution scheme that includes deposit confiscation.
But the release leaves unanswered the larger question, which is one that has to do with the sudden occurrence of such approaches. One is left with the uneasy feeling that top Western bankers somehow DO want to send a message to citizens that the banking system itself is the master not the servant.
If so, people will trust banks even less than they do now, and the result will be, generally, a financial system increasingly prone to failure.
Conclusion: Out of chaos ... what?
The blow-up in Cyprus – still not resolved – is just a symptom of the larger disease. European governments spend more than they take in and all the bailouts and austerity measures are not going to solve the problem any time soon.
Devaluation would be the easiest way to deal with fiscal and monetary difficulties but Europe cannot devalue, except as a whole, because most European countries are participating in the euro.
The result is a kind of miserable stalemate and as Hinrichs says above, it cannot go on forever. What Hinrichs does not say is that there are potentially two solutions.
The first, as S&P warns, is increasing social unrest based on an IMF-style recipe of higher taxes, lower government benefits, cuts in services and monopoly privatization.
The second is an increasing and deepening political and economic union. Ironically, as we have pointed out many times, various top EU leaders are on record over the past decades as predicting it would take a deep crisis to force a deeper union.
Given this sentiment it is not out of the question that those running the EU actually want to see some sort of social explosion across the Eurozone and are provoking the crisis in order to ensure that they can then provide a solution to it.
The solution, of course, will be an expansive and increasingly powerful EU state.
The Cypriot parliament tonight voted against a bill to introduce a tax on bank deposits, in return for a €10bn bailout offered to the country by Germany and other eurozone governments. Not a single Cypriot MP voted for the deal. The structure of the tax in the bill is shown in the table below. The vote leaves Cyprus’ place in the eurozone hanging in the balance and threatens the escalation of the crisis to a new level, though the most likely outcome is that the Cypriot parliament votes a second time, on a revised deal.
What are the possible outcomes?
1. Cyprus votes again and approves a revised tax:
But such a decision and vote must come quickly. In addition to running out of government cash, banks would have to remain closed during the interim period, meaning businesses and the wider economy could not practically function. The vote would therefore have to take place by the start of next week to avoid another escalation of the crisis. In our view, this remains the most likely option (possibly in combination with part of option 2).
2. The eurozone blinks:
With the possibility of a country exiting the eurozone becoming very real and the “irreversibility” of the single currency coming under direct threat the eurozone may present Cyprus with a more palatable deal. After all the cash in question – €5.8bn – is only 0.06% of eurozone GDP. The real issue will be how to provide this cash while keeping Cypriot debt sustainable.
3. Cyprus looks to ‘other plans’ (i.e. Russia):
Cypriot President Nicos Anastasiades suggested that Cyprus is considering “other plans” in case the parliament voted down the deposit levy and no new bailout deal was forthcoming. As of now, it is not clear exactly what these plans are, however, it is a decent bet that many, if not all, involve Russia in some way.
4. Cyprus exits the eurozone:
The logistics are messy, but as we suggested with respect to Greece, some use of Article 50 in the EU Treaty to exit the EU would be the most likely option.
This situation is worth watching very closely as the world's financial system is teetering just on the edge and it will take very little to trigger a larger run on banks throughout the EU.