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Cyprus Rejects Bailout Deal Leaving Eurozone Facing Fresh Crisis

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Photo Credit: Filip Singer

The Cypriot parliament has thrown out a controversial plan to skim €5.8bn (£5bn) from savers’ bank accounts, in a move that risks plunging the eurozone into a fresh crisis and heightens expectations that the cash-strapped country will seek a funding lifeline from Russia.

Cyprus has just 24 hours to find a solution to its funding gap before its banks are due to reopen following the dramatic no vote on Tuesday night, which failed to support a hastily renegotiated change to the original deal.

Late on Tuesday night the eurozone governments said that despite the vote Cyprus would still need to raise the €5.8 bn – a third of the €17bn bailout.

With the crisis escalating, an RAF flight carrying €1m in low-denomination notes landed in Cyprus to provide cash for 3,000 British service personnel based on the Mediterranean island. The banks have been shut since Friday and electronic transactions halted, although cash machines are still working and the Ministry of Defence said the euros were being flown in as “contingency measure”.

About 2,000 of the military staff, typically posted to the island for 18 or 24 months, have their salaries paid into local accounts. The MoD said it was “approaching personnel to ask if they want their March, and future months’ salaries paid into UK bank accounts, rather than Cypriot accounts”.

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Nobody’s Property Is Safe When Bailouts Begin

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Photo Credit: Petros Giannakouris

Imagine checking your bank statement one day only to discover that someone had just taken 10 percent out of your savings account without your permission.

You’d be pretty upset, wouldn’t you? So were many citizens of Cyprus, whose government announced last Friday it would be assessing a 9.9 percent “stability levy” on all deposits of more than $100,000 and a 6.75 percent levy on deposits less than that. Cypriots quickly deduced that the government was seizing their property to bail out their nation’s banks and immediately tried to withdrawal their funds. To prevent them, the government of Cyprus has declared a bank holiday that has been extended through at least Wednesday.

The Cyprus crisis began last spring when the face value of Greek debt was cut after that government was bailed out last spring. Cyprus banks, which have longstanding cultural ties with Greece, carried substantial exposure and lost billions. Cyprus Popular Bank alone had $3.4 billion in Greek government debt, whose value was reduced to $2.5 billion. Cyprus was forced to nationalize that bank last November, and things haven’t gotten any better since.

Like the rest of the European Union, Cyprus has been mired in recession since 2011. Its government has been seeking a bailout from its EU partners since last June. But EU member nations, especially Germany, are tired of bailing out their spendthrift neighbors, especially ones like Cyprus, where the banking sector was recently measured to be eight times as large as the entire Cypriot economy.

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Russia’s Gazprom Offers Cyprus Restructuring Deal to Avoid EU Bailout in Exchange for Gas Fields

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Photo Credit: Greek Reporter

Representatives of the Russian company submitted the proposal to the office of Cypriot President Nicos Anastasiades on Sunday evening, Sigma TV reported.

The proposal states that Gazprom will fund the restructuring of the country’s crippled financial institutions in exchange for substantial control over the country’s gas resources while Cyprus won’t need to take the harsh bailout package offered by the EU.

EU offered a 10 billion euros rescue package to Cyprus with the condition of raising 5.8 billion euros ($7.5 billion) by taking a piece of every bank account in Cyprus. The originally proposed levies on deposits are 9.9 percent for acounts exceeding 100,000 euros and 6.7 percent on anything below that.

Cypriot President Nicos Anstasiades is not willing to discuss the Russian’s offer according to Newsit who cited an anonymous source close to the President.

“The president is not going to discuss this plan because he wants a solution that will come from the EU,” said the anonymous source.

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Texas Fed Chief Says Too-Big-to-Fail Banks Should Be Shrunk

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Photo Credit: 401(K) 2013

Federal Reserve Bank of Dallas President Richard Fisher said the government should break up the biggest U.S. banks rather than allow them to hold a “too-big- to-fail” advantage over smaller firms.

The 12 largest financial institutions hold almost 70 percent of the assets in the nation’s banking system and profit from an unfair implicit guarantee that the government would bail them out, Fisher said today in a speech at the Conservative Political Action Conference in National Harbor, Maryland. The biggest banks enjoy a “significant” subsidy, enabling them “to grow larger and riskier,” he said.

“These institutions operate under a privileged status,” Fisher said. “They represent not only a threat to financial stability, but to fair and open competition.”

The biggest banks came under scrutiny yesterday at a Senate hearing on JPMorgan Chase & Co. (JPM), which hid trading losses, according to a report by the Senate’s Permanent Subcommittee on Investigations. The New York-based firm under Chief Executive Officer Jamie Dimon lost more than $6.2 billion last year in a credit derivatives bet by Bruno Iksil, known as the London Whale.

Fisher said in a phone interview with Bloomberg News that his proposal “will not lead to the denial of credit for U.S. corporations.” The cost from big banks “far exceeds the benefits,” and the U.S. doesn’t need “to have the largest banks in the world to compete,” Fisher said after his speech.

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Fed Preparing For Future PR Nightmare

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photo credit: medill dcEveryone wants the Federal Reserve to say how it will unwind the $3 trillion balance sheet amassed from years of quantitative easing.

Indeed, this was something of a hot topic in Fed Chairman Ben Bernanke’s testimony before Congress last week.

One of the big issues the central bank faces is the inevitable loss it will have to take when interest rates rise and the value of the Fed’s bond portfolio declines.

Although not an economic problem — as “losses” for a central bank are pretty meaningless — there could be a PR problem when the Fed stops making payments to the Treasury from the interest income it receives on its bond portfolio.

Deutsche Bank strategist Stephen Abrahams recently explained why this could be such a nightmare:

The possibility of suspending remittances and carrying unrealized losses could complicate the Fed’s relationships with the rest of Washington and the public. While remittances help the federal government pay down debt, any shortfall in operating income leading to a suspension of remittances would require the Fed to borrow from Treasury.

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Federal Reserve Grappling With When To End Stimulus Program

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Photo Credit: DonkeyHotey New minutes from the Federal Reserve show central bank officials grappling with exactly when and how the Fed should exit from its massive stimulus efforts.

The minutes detailing talks of the Fed’s meeting at the end of January show officials trying to decide whether to continue monthly bond purchases of $85 billion, and with what exactly the Fed should be doing to support a steady but slow economic recovery.

“Several” members of the Federal Open Market Committee (FOMC) argued in January that the Fed should be prepared to vary the speed at which it is buying bonds in response to the trajectory of the economy or the effectiveness of the policy.

Currently, the Fed has committed to buying $85 billion of bonds a month until it sees either substantial improvement in the labor market or a spike in inflation. To be more precise, the FOMC has said its policies would likely remain in place until the unemployment rate fell below 6.5 percent or inflation climbed above two percent.

But the minutes show a number of participants warning that the Fed may be forced to reduce or halt those purchases well below those thresholds if further evaluation of the policy’s effectiveness and risks were to change.

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Crime Does Pay: Convicted Felon Gets $104 Million from IRS

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Bradley Birkenfeld, the former UBS AG (UBSN) banker who went to prison after telling the Internal Revenue Service how the bank helped thousands of Americans evade taxes, secured a whistle-blower award of $104 million, the largest individual federal payout in U.S. history.

Birkenfeld told authorities how UBS bankers came to the U.S. to woo rich Americans, managed $20 billion of their assets and helped them cheat the IRS. He pleaded guilty to conspiracy in 2008, a year after reporting the bank’s conduct to the Justice Department, U.S. Senate, IRS and Securities and Exchange Commission. He left prison on Aug. 1.

“The IRS sent 104 million messages to whistle-blowers around the world — that there is now a safe and secure way to report tax fraud,” Birkenfeld’s attorney Stephen M. Kohn said today at a news conference in Washington. He is seeking a presidential pardon for Birkenfeld, who is under home confinement.

Birkenfeld’s disclosures preceded UBS’s decision to pay $780 million to avoid prosecution, admit it fostered tax evasion from 2000 to 2007 and turn over data on 250 Swiss accounts. UBS later agreed to provide information on another 4,450 accounts. Since then, at least 33,000 Americans have voluntarily disclosed offshore accounts to the IRS, generating more than $5 billion.

The UBS case led to an erosion of the use of Swiss bank secrecy by wealthy Americans to cheat the IRS. At least 11 banks are under criminal investigation in the U.S. Two dozen offshore bankers, lawyers and advisers, as well as 50 American taxpayers, have been charged with crimes.

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Bernanke Pursuing Failed Policies of the Past, Pushing For Yet Another “Stimulus”

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Photo Credit: DerFussi

The Federal Reserve chairman, Ben S. Bernanke, delivered a detailed and forceful argument on Friday for new steps to stimulate the economy, reinforcing earlier indications that the Fed is on the verge of action.

Calling the persistently high rate of unemployment a “grave concern,” language that several experts described as unusually strong, Mr. Bernanke made clear that a recent run of tepid rather than terrible economic data had not altered the Fed’s will to act, because the pace of growth remained too slow to reduce the number of people who lack jobs.

The federal government said on Wednesday that the economy expanded at an annual rate of 1.7 percent in the second quarter, slightly higher than its initial estimate of 1.5 percent but lackluster in normal times. A measure of consumer confidence hit a three-month high on Friday, but that, too, was impressive only in comparison with the immediate past. The government will release a preliminary estimate of August job growth next week; it is expected to show that the unemployment rate remains above 8 percent.

Mr. Bernanke said that the Fed’s efforts over the last several years had helped to hasten economic recovery, that there was a clear need for additional action and that the likely benefits of new steps to stimulate growth outweighed the potential costs.

“It is important to achieve further progress, particularly in the labor market,” Mr. Bernanke said. “Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

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