Last week I noted, “Another week, another new all-time high for the Dow,” and I wondered what might possibly “derail” the bullish Market Psychology that has driven stocks higher since mid-November…a rally reminiscent of the fabulous Nasdaq run for the roses in 1999…this time driven by extraordinary Central Bank “money printing.” I speculated that Europe might be the catalyst…specifically Italy…following an election where voters repudiated the “Austerity” forced upon them by the EuroElite…I thought Italy might cause Market Psychology to waver…
But…rather than Italy…a European “Black Swan” appeared…Cyprus…another sovereign highlighting the “North/South” divide of Europe…a poor Southern country with “poor” financial management skills (no kidding!)…that now desperately needs aid…and the EuroElite, as a condition of providing “aid” demanded that all depositors in Cyprus banks suffer a “haircut”…lose some of the money that they have in Cypriot banks. (Note: On March 23/13, one week after the “haircut” story broke, German Finance Minister Wolfgang Schaeuble says that it was the Cypriot Government’s idea to levy a “haircut” on accounts of less than Euro 100.000…that the idea did not come from Germany, the EU or the IMF. Given the emotional impact of the “haircut” story it seems odd that the EuroElite would wait a week before trying to “set the record straight.” It does appear, however, that regardless of who came up with the idea of a “haircut” that the EuroElite was willing to go along with it.)
This “depositor haircut” idea from the EuroElite was a game-changer for me. Yes, I know the Cypriot banks were over-stuffed with foreign [especially Russian] money…and as a result of those deposits…which dwarfed the Cyprus GDP…the banks…and here we can blame poor choices for compensating bank employees…chose to invest huge sums in Greek bonds…which was a really BAD investment idea… BUT…the EuroElite demanded that every depositor in Cyprus banks must suffer a haircut as a condition of “aid” being granted to the country.
Talk about a breach of trust.
Remember over the last two years when bank runs in Greece and other southern countries were taking place…citizens rightly realized that their country might drop out of the Euro and revert to national currencies…with significant devaluations… the citizens and corporations decided to move their assets to a “safer” place…Germany or Switzerland…and that the “bank runs” were cooled by talk of depositor guarantees…and statements such as, “We will do whatever it takes,” from the head of the ECB.
So now…having seen these depositor haircut demands…if you are a citizen or corporation in Spain or Portugal or Italy…and you have money in the local bank…you have to ask yourself…or be prepared to meet with your corporation’s executive committee and answer their questions…”What happens to the money we have in the local bank if our government asks the EuroElite for aid? Will we get a depositor haircut? Have we moved our money to a “safer” jurisdiction in advance of that possibility? And if not, why not?”
Wouldn’t it be an awful feeling if your government just took some of your money…money you thought was safe in your local bank…and wouldn’t you be the village idiot if you saw them take your neighbours’ money and you just left yours sitting there?