After the subprime crisis and after the Greek Bankruptcy, it was taxpayers’ money that bailed out the financial institutions.
For Europe, Chypre’s bankruptcy was the final point of rupture in the current economical regulations and laws.
In most of the European countries, private deposits are guaranteed by the state up to a certain amount. However, by regulations, the deposits must be
back up by collateral.
This collateral is rated by agencies (Fitch, S&P, Moody’s etc) to determine if it is safe to cover the deposits.
So, in order to understand the implications of such a law, we must first understand what is banking
What is Banking ?
Banking is a simple business where a bank borrows money at a rate (A) and then lends it to another party for another rate (B). Rates A and B
representing the compounded interests. The bank’s profit and loss is then simple calculated by doing B-A.
Note: all banks that stood by their normal activities went through the subprime crisis without a sweat.
Today, banking has become a lot more complicated as the financial systems created derivative and structure products. Originally mainly done for
insurance purposes, those products have now turned into massive speculation activities.
We have now universal banks meaning the mix between what is called corporate and private banking. Meaning that the funds the bank receives are mixed
and spread out to other departments for other funding.
This is important to understand as the vast majority of bank’s going AWOL comes from the corporate part of their activities.
European Debt and Basel III
If you owe 100 000 euros to a creditor and can’t pay back, you have a problem.
If you owe 1 trillion euros to a creditor and can’t pay back, the creditor has a huge problem.
Like in the US, the European debts have grown too huge to be sustainable and too big to fail.
Governments have been issuing debt (bonds) after debt. Basel III regulation indicated the private deposits must be backed by government bonds up to a
certain percentage. I think it’s around 8% or 10% something like this.
In 2014-2015, when Chypre went bankrupt, Europe did not care as much as for Greece. They receive no bailout from an already drained EU. As such, since
banks did not receive any more funds, deposit owner could not get their money out and the Chypre government ordered a special tax on deposits to bail
out the banks.
Following this episode, the EU put in place a new regulation in case of government bankruptcy…
The EU bailout plan in case of Gvt default
After Chypre, new regulations came out concerning the rights of a debtor and the rights of a creditor.
It basically went like this: if a government cannot pay their debt anymore, the creditors can vote to see how to reimburse themselves (a gvt owning
their own debt are not allowed to vote) : meaning creditor could lay their hands on Versailles for example.
Now coupled with the backing of deposits with gvt bonds, those regulations now turned the table completely around!
The reinforced European regulation and the disappearance of cash
Now that banks can bail themselves out by picking on deposits higher than 100K euros.
EU governments are currently fighting to lower the paper and coins cash use: for example, in France, you are not allowed to pay by cash anything above
1000 euros. This is done to reinforce fiscal control and also used as a big data structure to know everything about you.
Note: the FMI already proposed to solve the debt issue by serving themselves on the cash deposits. The Christine Largarde proposed to tax not only
the cash but everything else (house, cars etc)…
What does it means?
1- It means the state bonds are not backing private deposits anymore
2- It means that deposits are backing state debt.
3- It means there will be no more cash available to deposits owner to get from the bank if they smell something fishy.
4- It means the creditor own the debt, thus the country (at least on paper)
5- It means the people become... (I let you finish the rest of this sentence)
Good or bad, it’s for you to decide !