Cyprus Games

It appears that the government of Cyprus is still unwilling to deal with the reality of its failed banking system. This should be no surprise as none of the other governments of Europe have been willing to deal effectively with theirs, either.

At the end of last year, total EU banking assets were about €47 trillion, around 370% of EU GDP. Even applying EU accounting rules, which differ from the US, US bank assets are still only around 170% of GDP ( €20 trillion, less than half as large). And that’s risk enough. But Europe is out of control as it has piled debt on debt in supporting the Keynesian entitlement state. Now the strictures of the Euro are forcing an accounting, which up to now has been deferred time and again by various can-kicking maneuvers. The Greek “haircut” – PSI – was advertised as a unique situation. Now the Cyprus “haircut” is being sold the same way. Don’t kid yourself. The Cyprus circus will be repeated in the other Eurozone countries, with different acts of course but the problem is the same. The debts are simply too large to be paid, which means that money will be destroyed and powerful deflationary forces will be unleashed. Cyprus, by itself, is TSTM. But the message is clear – depositors and bondholders will be sacrificed in bank failures. The troika is doing people a favor by sending this message now, even though it could well afford to bail out Cyprus without loss to depositors. It will not be able to afford to bail out the larger financial systems, such as those of Spain, France or Italy, and it is better for people to be alerted now, rather than when these systems inevitably melt down.

Money in a EU bank is not safe. Period. The good news is that this should now be clear. The bad news is that people will start to act as they realize their exposure, and thereby accelerate the meltdown. The only question is how fast this realization will sink in.

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