Modern money creation through fractional reserve banking on top of central bank reserve creation with the addition of shadow banking is not something the average Eurocrat understands. If anything, his reflexes tell him to loathe everything that is associated with high finance. That the system of political control and centralized coercion that the Eurocrat advocate actually create an entirely new parasitical class called banksters doesn`t even occur to him. On the contrary, the Eurocrat wants to expand his system, unknowingly bloating the bankster’s money and influence even further. Now, the high elite ranking far above the Eurocrat on the pecking order know very well that the current system is feeding the insatiable behemoth known as big banking. They want it that way, because that is the only way to gorge on the middle class without the middle class understanding who is really behind their misfortune. Through control over money and banking their power become almost limitless and the wet dream of omnipotence every politician crave seem within reach.
However, there is only so much the hapless middle class can take before they take to the streets. And if it is one thing the Europeans have learnt through history, it is to be very aware when genuine anger starts to spread through the continent. Wolfgang Schaeuble, the German Finance Minister, warned about revolution if they failed to “win the battle against youth unemployment” which at last check were just shy of 25 per cent.
Looking back at the seven year old economic depression, we see that the single thing that angered people the most was the massive bail-outs of the banking system. Maybe you could get away with it in 2008 and 2009, but not anymore. It has become political suicide to hand over more cash to the banking system, and rightfully so. But this has created quite a dilemma for the continental masters, because the sovereign is fully dependent on an expanding financial system to gobble up excess bond issuance through constant inflation. If they cannot fund through inflation the ever expanding Leviathan and by implication cater to their own megalomania, they would have to resort to increasing taxes! And in Europe, the limit has been reached! No, there is only one way forward, through more inflation! So, should they let the financial system deleverage and drag the respective sovereigns down with them? Or should they cough up enough capital from tax payers in order to facilitate renewed leveraging? The Europeans find themselves caught between a rock and a hard place with no easy way out of this peculiar conundrum.
In enter Cyprus or the template as it has been called among Eurocrats. Suddenly a new way to continue the destructive path forward presents itself: taxing wealth. It all started in June 2012 when the Europeans looked for a way to break the vicious cycle between banks and sovereigns. They decided to create a banking union which was communicated or should we say interpreted as mutualization of liabilities across the Eurozone. No such thing was intended by the German paymasters; on the contrary, they wanted the banking union to mean more rules and more centralization!
Compromise was sought and today the edifice rests on three pillars: the fundamental piece that needs to be in place before anything else can proceed is a single financial supervisor, a role given to the ECB. The latest estimate suggest this will be up and running by late 2014. The two other pillars consist of a resolution authority and a direct bank recapitalization scheme. And this is where the fun starts.
The bar to reach genuine debt mutualization was lifted so high and became so limited in scope that it is essentially there in name only. The new pecking order is clearly outlined with German precision: a bank in trouble will be forced to write down its equity, and then swap unsecured creditors into new equity. If that isn`t enough, then unsecured depositors will be prone to attack. First large corporations will take the hit, then the SME tranche and at last rich individuals. And there will not be any taxpayer support until 8 per cent of liabilities, or 20 per cent of risk weighted capital, is affected. Only then can the national resolution fund help out. A limit on five per cent of remaining liabilities (after the 8 per cent write down) is put in place to make sure one bank won’t exhaust the whole resolution fund. When all this is done, then recourse to ESM, which has a scarce €60bn, may be called upon for direct bank recapitalization.
Covered bonds, deposits under €100.000 and interestingly enough interbank liabilities with maturity of less than 7 days will always enjoy taxpayer support.
Now, can this devious scheme help maintain the elite`s status quo?
It is easy to see that the incentive for bank investors is to move up and preferably above the dotted red line as shown below:
Source: Council of European Union – press release June 27 2013
As the bank resolution framework is phased in, investors will cover their bonds and the banking system will have to come up with the best collateral they have (the one not pledged to the ECB) as unsecured creditors will move up the ladder to tax payer protection. Large corporations will not sit idle by; they will invest in the new money market funds that never exceed maturity over seven days in the interbank market.
Needless to say, banks funding cost will increase and they will have to lift lending rates accordingly. Taken together with Fed tapering, an unwind of the Yen-carry into southern Europe, the credit crunch in China and of course disintegrating governments in Portugal and Greece, we have entered a perfect risk-off combination.
So what can our masters do? It looks almost as if they have are going to lose this one! There is one more option, but this will anger the German electorate more than any, so they better wait until the German election is over in September.
The ECB could do outright QE and just skip the OMT which does not exist anyway. They went another “unprecedented” step today (Thursday July 4th) by doing something they have said again and again they would never do – pre-commit. From the press conference
“Looking ahead, our monetary policy stance will remain accommodative for as long as necessary. The Governing Council expects the key ECB interest rates to remain at present or lower levels for an extended period of time.”
The nonsense of tapering and exit strategies is not going to happen anytime soon. The European system, the US system, the Chinese system and the Japanese system is 100 per cent dependent on it. While the precious metals has taken a beating lately, the latest development in Europe is testimony that if you are in it for the long haul you should not worry.