The Cyprus contagion spreads

As predicted by many observers, now that the Cyprus crisis has produced the first official seizure of depositors’ funds to rescue a failing bank, in what’s becoming known as a ‘bail-in’ – using insiders’ funds – rather than a ‘bail-out’ – using outside money, the powers that be are racing to apply the same model to other economies.  In recent weeks, we’ve seen the following:

  • New Zealand’s government is promoting what it calls ‘Open Bank Resolution‘, permitting the seizure of depositors’ funds to rescue failing banks;
  • Canada is proposing to “implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital.”  As Mish Shedlock points out, “In case you are unfamiliar with bank parlance, deposits are not ‘assets’, they are ‘liabilities’. A plan that would turn ‘certain bank liabilities’ into regulatory capital is a plan to confiscate deposits.”
  • The CEO of Italy’s biggest lending financier has come out in support of a similar solution, “provided global rulemakers agree on a common approach“.  That’s a very significant point, because if some countries – particularly major players in the world’s financial markets – openly reject such proposals, the ‘smart money’ will instantly flee markets that are exposed to this risk, and seek ‘safe haven’ in those that are deemed to be safer.  The former markets daren’t risk such a flight of capital, so they want to make sure everyone follows the same rules.
  • Most recently, the European Economic and Monetary Affairs Commissioner, Olli Rehn, came out flat-footed in support of such proposals.  The Telegraph reports that ‘People with big deposits could suffer a ‘haircut’ under planned European Union law if a bank fails’.  Mr. Rehn and his colleagues are actively pursuing new legislation and regulations that would extend the ‘Cyprus Model’ across the entire European Union.

Readers will remember our earlier mention of Ben Bernanke’s evasion of the issue when asked whether such developments could occur in the USA.  His weasel words speak loud and clear to those of us who’ve learned to read between the lines.  In short, if you think your money is safe in US banks, think again.

The next domino to fall in governments’ desperate search for financial resources to raid is likely to be pension funds, both public and private.  Australia has just doubled its tax on retirement savings, by taxing them upon withdrawal as well as before deposit.  We’ve already discussed long-standing proposals by left-wing and progressive politicians and pressure groups in the USA to ‘nationalize’ all IRA and 401(k) savings, in order to wipe out deficits in pension schemes and recapitalize Social Security and Medicare.  Furthermore, most of the fifty US states have grossly mismanaged their public pension schemes, to the point that collectively they’re underfunded by over $3 trillion.  I confidently predict that we’re going to hear increasing calls from those states for a ‘bailout’ from Washington for their pension plans – in other words, they’ll demand that all US taxpayers pick up the tab that their own taxpayers can’t (or won’t) afford.  Sucks to be us, I guess.

The inimitable Karl Denninger put it very bluntly today in an article titled ‘How They Will Steal Your Retirement‘.  Here’s an excerpt.

I’ve laid this out before but it’s time to do it again, because it’s coming folks.

. . .

… the government needs to find a way to keep the game going.  They will look toward private and public retirement assets to do so because this is one of the very few remaining stores of wealth they can attach.  To do it they’re going to play on your fear and offer you a carrot that is in fact a giant corn cob aimed you know where.

Here’s what I expect.

They will “offer” to replace your loss in your trading account, including a taxable account, provided that you convert the entire thing to a ladder of 10 to 30 year Treasury notes at then current interest rates, which will be ridiculously low — lower than they are now — and agree to lock it up until you are 65.

. . .

Note that if the system does not survive and the bonds default you may get zero.  That risk, of course, will be claimed to be “non-existent.”  Uh huh.  Whether that happens via outright default or through dilution doesn’t matter; either way a loss is a loss is a loss and what matters is how many gallons of gas you can buy, not how many chits you possess.

. . .

You can bet the deal will include forfeiture of any residual value and recapture against any Medicare and Medicaid expenses.  Additionally you will not be able to touch the amount until you are 65, and then you will be required to take an actuarial 20 year payout to age 85, like it or not.

I’m willing to bet that 90% of the people offered this deal will take it and sign away their futures voluntarily.  I’m also willing to bet that all of the State and Local pension systems will be coerced into accepting this “deal” through being offered some sort of “safe harbor” against benefit reductions (which will be massive for pensioners) under some rubric of “Federal Sovereignty” that will trump so-called “guarantees” in these municipal and state pension laws.

Note that without this “deal” virtually all State and Local pension systems are going to blow up within the next decade or so.  It is a mathematical certainty.  Long before they blow up they will siphon off as much as they can from you in the form of increased property and other taxes; this will not be a quiet process either.  Your only means of avoiding this is to live somewhere that is rural and has none, or at least very few, of these obligations

Those of you who live in cities are going to get buggered to within an inch of your life, to be blunt.

. . .

I’d love to look at the next 10 years+ and say that things get “more bleak” beyond that horizon, but the fact of the matter is that the ponzi debt-leverage monster has run out of gas …

We don’t have 10 years, in short, and one way or another there will be a massive shift and reform in how the world works financially.  The options here range from reasonably good to catastrophically bad, and if you’re younger than 70 you’re going to get to experience them — like it or not.

There’s much more at the linkGo read the whole thing.  It’s worth your time to do so.

Cyprus was the first domino to fall in terms of governments deliberately grabbing the private wealth of their citizens without so much as a ‘by your leave’.  Other dominoes have begun to totter.  The ‘signs of the times’ are increasingly clear to anyone with eyes to see them.



  1. I wonder if it would be plausible to empty my bank accounts, and then put the cash in my safety deposit box. Or if they'd just literally rob me at gunpoint if I went to collect it after they tried a haircut scheme like this.

    It just drives me nuts that the people this punishes worst are those who are actually trying to save, to the benefit of the people who live paycheck to paycheck.

    And I bet the two banks I have accounts with, and also have credit cards through, would get really bent out of shape if they confiscated 10% of my account balance, and then I notified them that I was "writing off" 10% of my CC balance.

    Sorry. I try to avoid swearing on your blog, because it seems like it bothers you, but man it's hard to talk about this sort of institutionalised theft without doing so.

    Though, hrmmm. I'd trade 10% of the current balance of my bank accounts for a 10% reduction in the principle amount on my mortgage. Heck, I'd even let 'em go 50-50.

  2. In the state of Illinois, it was the specific non-funding of the state portion of the retirement fund for the past 15 years that makes this problem.

    This is a Chicago problem (because they have enough votes to force the rest of the state to go pound sand.)and one they should backroll exclusively.

  3. @Perlhaqr: I've so far withdrawn 40% of our cash reserves from the bank. It's now sitting in a nice, secure safe, one strong enough to give any burglars a very hard time. I intend to work up to a 50% 'withholding' level, keeping it in cash, rather than trust it to the banks. In the light of what's happening in so many other countries, I don't see how we can avoid something similar happening here in the not too distant future.

    It would be very nice if I were wealthy enough to be able to afford to keep some gold and silver on hand, but I can't. Oh, well. Good luck to those that can!

  4. I recommend becoming a 'coin collector'. I buy old (pre-1965) US dimes, quarters, half-dollars and the like, 'looking' for that rare coin. The gradual accumulation of 'junk silver' is just a side effect of my numismatic efforts. 😉

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