Friday, March 22, 2013

The Week That Was – Money Centers in Focus


What an interesting week. Monday brought a wave of righteous indignation over the thought of a haircut for Cypriot depositors, on Friday everyone is cheering the idea that deposits over E100k are going to gets ‘faced’ for 40%. The Cyprus story is far from over, but there are some lessons so far:

- European leaders have shown their hand. They are more than willing to stiff depositors when pushed to the wall.

- The deposit level of +/- E100k has been reinforced at the benchmark for haircuts.

- All Deposits < E100k in European banks are safe.

- All Deposits > E100k are unsafe.

- One would have to be oblivious to these facts (or a complete idiot) to have greater than E100k in an EU bank deposit.

-  European Money Centers are at risk.


One consequence of being a money center is that there has to be huge foreign liabilities. Looking at what is owed to external creditors provides some information on what I call the Money Center Debt Syndrome (MCDS). The following numbers on External Debt come from the CIA (Link). The numbers are external debt owing to other countries, minus external debt of other countries held. (The CIA presents all numbers in dollars.) The numbers are only the liabilities, there are foreign assets held against these liabilities. I want to focus on just the debt side of this picture.


The two biggest money centers in Europe are Zurich and London. The MCDS is very obvious:

Switzerland – External Debt = $2.2T.  External Debt to GDP = 210%

UK – External Debt = $9.8T. External Debt to GDP = 400%

Again, there are real assets behind most of this debt, so these ratios are not really as scary as they appear. In addition, these money centers are outside of the Euro Zone. I don’t think there is an issue with these. Now consider Germany, a country with a large GDP and a relatively small function as a money center:

Germany – External Debt = $5.6T. External Debt to GDP = 150%


Italy/Spain are not money centers at. As a result, they do not suffer from MCDS:

Italy – External Debt = $2.5T. External Debt to GDP = 110%

Spain – External Debt = $1.4T. External Debt to GDP = 93%


The following are 2011 numbers for Cyprus:

Cyprus – External Debt = $106B. External Debt to GDP = 440%

Clearly there was a red flag with external debt/GDP in Cyprus two years ago. The ratio was higher than all the other EU countries. It was higher than Switzerland. Cyprus was an accident waiting to happen.


Now to the point of this article; consider the ratio for this European money center:

Luxemburg – External Debt = $2.2T. External debt to GDP = 3,700%


Yes, yes, I know. Luxemburg is different than Cyprus. Luxemburg is just a booking center, there are assets behind all of this debt. But at the same time, this looks like a very unstable situation.


I end with where I started, only an idiot would leave more than E100k in a Luxemburg bank (any EU bank for the foreseeable future). I believe that the deposits that are behind Luxemburg’s external debt are measured in the trillions, the vast majority of those deposits exceed E100k. It would not take much for this situation to slide out of control.










  1. It’s the “deja vu all over again” perception that we re-forget and have to re-learn. And that perception is the interconnected-ness of everything. Cyprus may be the butterfly of the eventual hurricane. As humans, we do a rotten job of seeing the big picture. And even if we could see the big picture we would have to update it everyday. You don’t even have to throw in the special interests of politicians and we will still jump from panic situation to panic situation. Politicians provide a good scape-goat for our short comings, and rightfully so. But a lot of blame needs to be leveled at our non-political selves, for not taking the time and effort to educate ourselves about that big picture.

  2. The other takeaway from the Cyprus debacle, is this message to legislators in other periphery countries- Take the first deal the Troika puts on the table, because if you refuse, whatever you agree to after 7-10 days of turmoil will be far worse. If Cyprus is forced to “walk the plank”, and the end resolution for the average Cypriot is much worse than the initial 6% on <100k, 10% on everything else, whatever Spanish politicians who approve a bailout package with onerous terms, will probably be able to survive voting it through with their necks intact…

    One other interesting thing is how the ECB ELA program (emergency liquidity assistance) is being used as a "gun to the head" of the Cypriot negotiators. The Cypriot banks have been receiving aid in this form for roughly a year now, last saturday (i believe although could be off by a few days) the ECB announced it will cut off this funding on Monday if a deal is not reached, which would send the banks under. The justification ("The ECB only provides emergency assistance to "solvent" banks with temporary problems", is what they say), is a load of rubbish.

    The ELA aspect reveals the fundamentally anti-democratic nature of this whole EU operation. The sovereignty that national legislatures do have, they can only exercise it while the ECB points a gun to their head. Dark. The ELA threat may be a bluff in response to Cyprus' bluff of flying to Moscow for a potential deal there. But point stands.

    I am someone who could in no way be accused of being insufficiently cynical about the US government and politics, but frankly the EU has accomplished the feat of making our political system look quasi-sensible in comparison… Yes, we have the monstrosity of the farm bill, etc, but in this light it seems a decent enough solution to the problems of federalizing an enormous area. You don't have Schumer going to Nebraska and threatening to send all the midwestern banks under unless their residents cough up 10%. Give me the manufactured fiscal cliff garbage and posturing it involved over the hardball Merkel et all are playing. Makes the Boehner and Obama spats seem quaint.

    • If you go back to the late 1980s there were definitely regional political aspects of the bank failures of the day. Texas S&L’s and eventually commercial banks and on the other hand five New Hamsphire banks all failing the same weekend and the failure of Bank of New England. Further back even was Penn Square and Continental Illinois.

      • You aren’t wrong to bring up those examples, and yes, there are regional political frictions all the time. But my point is that in the US, those play out in a much more benign or controlled way- at least relative to the debacle currently unfolding in the EU. And this is one of many regional debacles in the EU, there was Ireland and Greece in the past, and several more to come.

        1) I don’t think in the US one region or state would impose quite the onerous conditions that were imposed on Ireland and Greece, on poorer states. (Irish citizens will be paying off promissory notes related to the bailouts for years, Greek unemployment skyrocketed as a necessary and predictable result of the terms of their bailout).

        2) As much as they compete for limited federal resources, US states do have regional rivalries, but I truly don’t think you’d ever see hardball between the different US regions the way you are seeing it in the EU. As I said (and gave a brief but insufficient summary of), the Troika is using the threat of cutting off ELA assistance to the Cyprus central bank (this is the source of the monday deadline for the current negotiations) as a way of putting a gun to the head of the Cypriots. I really don’t think a rich state like NY would threaten a poor state to “walk the plank” and demand almost punitive economic measures, the way Germany regularly does.

        That said, it’s possible I am speaking too soon, because in the near future the unfunded pension liabilities of certain states could be a real flashpoint in US politics. What happens when CA or IL can’t pay its bills because of the massive (state constitutionally protected) unfunded liabilities it has racked up over the last few decades? This, to me, is one of the ways the US could end up in political crisis.

  3. BK–says, “only an idiot would leave more than E100k in a Luxemburg bank (any EU bank for the foreseeable future)”
    Homer says, “only an idiot would leave any money in a Fiat money account in any banking institution”. I still stand by my belief that this Cypress thing is a way to support the US bond market and dollar hegemony.

    The Big Boys have way too much money in these institutions to just willy-nilly take it out.
    They are captured by their positions and greed. How are you going to do it and what are you going to do with it? There is more money, digital and real paper, than good (wealth) to buy with it. They’re stuck. The only thing is to keep the game going or suffer hyperinflation ( the reconciliation of Fiat money to real wealth). China is already moving out of dollar denominated asset into real wealth, stealthily, trying not to tip over the apple cart. It’s monetary musical chairs, and the band played on! Where are you going to be when the music stops? Everything is so obvious when it’s over even the shoe shine boy, sees it clearly. Hindsight, as you slap your forehead, “I shoulda saw it coming”.

    Debt don’t matter no how, until those that owe it are asked to pay up. When you have a bank account, you are an unsecured creditor. CREDITORS ALWAYS TAKE THE HIT BECAUSE DEBTORS DON’T HAVE NO MONEY. So, all these Big Boys (between a rock and a hard place) are creditors which lends momentum to keeping the con going. That means the US Bond market and dollar hegemony must not fail. That’s the band playing the music in the game of musical chairs.

  4. The EU leaders have broken what little trust they had with the citizens they are required to represent. It doesn’t matter if you are elected official or a monarch — once people realize you don’t care about them (except as a tax revenue source), and you don’t feel obligated to follow your own laws or keep your word …

    The EU said that depositors > EUR 100,000 are screwed under all scenarios
    They also said depositors < 100,000 will be screwed whenever it is politically expedient to do so — unless a sufficiently large angry crowd threatens to burn all of Europe to the ground.

    One group that was never asked to make any sacrifice? The Eurocrats themselves. Big paychecks, big headcount, lots of fancy state parties at 5star hotels, private planes to go to "emergency" conferences at other 5 star hotels.

    If you lose the French election, you get to be head of the IMF as a consolation prize. Doesn't matter how much bribe money you took — just call it a campaign contribution and order more room service. Stupid taxpayers get the bill, not you

    One would have to be clueless **AND** a complete idiot to keep any liquid assets in an EU bank. Anything the politicians can steal will be stolen.

    Unfortunately, when things get this bad, history suggests the end-game involves wide scale war throughout Europe. It would be a lot better if the people of Europe would jettison the EU now, rather than waiting for war, but that is not how they have handled things in the past.

    This is not the first European group to promise a free lunch. Obama promised a free lunch to the US also. Free health care for everyone, as long as you don't look at your shrinking paycheck and you don't care about turning your children into debt slaves!

    BTW — VP Biden just spent $550,000 for ***ONE NIGHT*** at a fancy 5 star hotel in Paris. Yes, that includes his entourage. Hope all the Obama voters enjoy scrimping for food again tonight — you voted for it!!!

    • Bubba Joe—Government in every instance had failed in it’s promises. Yet, people clammer for the nostrum these politico snake-oil salesmen are selling. (We’re going to use our badges and guns to steal from you’re neighbors and give it to you.) An the people say, “When can you start”. It’s stealing by majority vote. People have lost their moral compass and it has left them blind. They place trust in government where it has over and over again been demonstrated that it is untrustworthy. All Cons give something back (or promise to), that’s what hooks you in, but they always take more than they give. That is the nature of the Con. The misplaced trust is going to come back and bite them, as it always does. Maybe it will bite them so hard that this time it opens their minds to reality. I hope so.

  5. Doesn’t anyone tie in the Bernank and Geitner with all this? Without their guidance, things may have been a little different. But big money will always find a safe harbor. Think about all the money we DON’T know about.
    Now…..back to Mr. Elvgren’s work………………mmmmmmmmmmmmm. I wondered how they dusted that handrail.

  6. StuckinEuroland says:

    Nice article BK! I don’t normally react to posts, but this one hit a nerve as I am one of the “idiots” in your concluding paragraph. With what happened over the past couple of weeks in Cyprus, I am taking steps to no longer be among the “idiots”. I will note, however, that the Luxembourg numbers are skewed by the SICAV industry: Luxembourg-domiciled SICAVs represent a decent chunk of the 3700% external debt you quoted. There ARE assets behind that stuff (I hope!).
    As someone “stuck” in Europe for now, I have had no choice but to open bank / brokerage accounts in 4 different countries, one of which is outside the Eurozone (and I’m not even counting my Bitcoin account)
    I am domiciled in another kleptocratic country, and Luxembourg seemed to be a “second-best” solution to park some of my savings. The fact that the Cypriot “solution” is being pushed by the EU (as opposed to some local government) is NOT comforting me at all.

  7. StuckinEuroland—“…the Cypriot “solution” is being pushed by the”…IMF. Look up FINANCIAL REPRESSION on Wikipedia and look at the 5 key elements of Financial Repression as postulated by Carmen Reinhart and Belen Sbrancia to reduce the defict.

    It is all a Deficit problem and Government are going to do everything they can to sustain their power (privileges).

    As I have said, The government is like a tiger. When you’re starving to death with a
    tiger. The tiger starves last.

    How far down the list of 5 key elements is your government? It is a playbook for what you can expect. Financial Repression is coming everywhere (all fiat money systems) and it is coming good and hard. It is the only way debt can be reduced with the structure intact. This way leads to the impoverishment of society and the saving of the connected few. The other way to reduce the debt is hyperinflation or outright repudiation. I’m betting on Financial Repression (the slow cooking of the middle class and the devouring thereof. You know like the frog.). However, if the frog wakes up and jumps out of the pot, it could be hyperinflation.

  8. If there is a World War all bets are off.

    • ManAboutDallas says:

      Homer ? World War Three is ALREADY UNDERWAY ! It just hasn’t turned into a SHOOTING war.. yet. Don’t worry, it will. On second thought, maybe worry juuuuuuuuuuuuuuuuuuuuuuuuuuust a little.

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  11. Kester Blindsea says:

    I took a look at the CIA link mentioned by Bruce and there is this footnote related to Luxembourg: “As the Bank of International Settlements explains, small countries with large financial sectors tend to have disproportionately large gross external debts as well as holding large cross-border debt assets. Luxembourg is a net creditor country.” Another small country with a relatively large banking center is Malta which has an external debt relative to GDP of “only” 72%. Does this mean that Malta-based banks are a much safer place for your money than those based in Luxembourg? I think there is no real correlation here but I do believe that the quality of the local regulator is critical – this is where I believe the Cypriot problems began. Poor regulation and not external debt.

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