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Going for the Gold in Cyprus (All that Glitters Is not . . . “Oh, Never Mind,” Part 2)

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Joseph Goebbels, Hitler’s pro­pa­ganda chief, once said: ‘In 50 years’ time nobody will think of nation states.’ 

COMMENT: One of the aspects of the eurozone crisis and the German-driven austerity program that is unnerving business professionals and analysts concerns the capriciousness of the fiats being handed down by the troika.

Reversing field time and again, the EMU’s not-so-wise men (and women) are destroying business confidence on the part of those who might be inclined to invest in the industrial or financial sectors of the eurozone’s troubled economies.

Now it seems that the “caprice” has metamorphosed into “plunder” and subterfuge.

It appears that 75% of Cyprus’ gold reserves are going to be appropriated as part of the “settlement.”

Furthermore, this apparently comes as news to the Cypriot officials handling the situation for that unfortunate country.

Pterrafractyl has some insightful commentary on a relevant Paul Krugman column on gold, the gold standard and the kamikaze fiscal policy of the troika:

Paul Krug­man makes an impor­tant point in his lat­est col­umn that’s crit­i­cal when try­ing to under­stand the forces at work in the euro­zone cri­sis: Even though the euro­zone isn’t tech­ni­cally on the gold stan­dard, it’s effec­tively run as if it that’s the case. Aus­ter­ity poli­cies mimic the kind of defla­tion­ary traps asso­ci­ated with gold stan­dards: fis­cal or mon­e­tary stim­u­lus is sim­ply much less of an option when a gold stan­dard is in place OR when there’s a “troika” that’s man­dat­ing aus­ter­ity. And it doesn’t really mat­ter if a gold stan­dard or aus­ter­ity ends up ruin­ing the econ­omy because the ben­e­fits for impos­ing a gold stan­dard or aus­ter­ity aren’t really about economic/financial ben­e­fits.

They’re about psy­cho­log­i­cal benefits…people will feel bet­ter about the over­all “sys­tem” if they are con­fi­dent that no one is get­ting any “free money”…especially the “moochers”. Con­fi­dence that euro­zone lead­ers (in Berlin) will impose pain on “moocher” nations is intended to be sold as if it’s good as gold. And aus­ter­ity is, indeed, effec­tively as good as a gold stan­dard when it comes to being as bad as a gold stan­dard can be for the econ­omy. But that doesn’t seem to mat­ter. Gold is shiny and peo­ple just like shiny objects. Sim­i­larly, aus­ter­ity is pain, and a large swathe of human­ity just seems to enjoy inflict­ing pain on each other. Golden aus­ter­ity, it seems, is here to stay.

In this context, there are several things to remember, including:

  • Germany recently repatriated much of its gold bullion, being held in vaults in the U.S. and U.K. Why did they do this? What do they have in mind?  Of what are they afraid?
  • Gold, is, to say the least, NOT a reliable or “safe” asset. Anyone operating under that illusion should read Gold Warriors by Sterling and Peggy Seagraves. 
  • There is not nearly enough gold in the world to function as a viable medium of exchange.
  • Cypriots are being faulted for the size of their banking sector relative to their overall economy. The Turkish invasion of the island in 1974 decimated the Cypriot agricultural and industrial sectors of their economy, forcing them to restructure and allot a much greater role to finance.

“EMU Plot Curdles as Creditors Seize Cyprus Gold Reserves” by Ambrose Evans-Pritchard; The Telegraph; 4/11/2013.

First they purloin the savings and bank deposits in Laiki and the Bank of Cyprus, including the working funds of the University of Cyprus, and thousands of small firms hanging on by their fingertips.

Then they seize three quarters of the country’s gold reserves, making it ever harder for Cyprus to extricate itself from EMU at a later date.

The people of Cyprus first learned about this from a Reuters leak of the working documents for the Eurogroup meeting on Friday.

It is tucked away in clause 29. “Sale of excess gold reserves: The Cypriot authorities have committed to sell the excess amount of gold reserves owned by the Republic. This is estimated to generate one-off revenues to the state of €400m via an extraordinary payout of central bank profits.”

This seemed to catch the central bank by surprise. Officials said they knew nothing about it. So who in fact made this decision?

Cypriots are learning what it means to be a member of monetary union when things go badly wrong. The crisis costs have suddenly jumped from €17bn to €23bn, and the burden of finding an extra €6bn will fall on Cyprus alone.

The government expects the economy to contract 13pc this year as full austerity bites. Megan Greene from Maverick Intelligence fears it could be a lot worse.

She says the crisis has reached the point where it would be “less painful” for Cyprus to seek an “amicable divorce” from the eurozone and break free.

Quite so, and while we’re at it, lets seek an amicable divorce for everybody, for Portugal, for Ireland, for Spain, for Italy, and above all for Germany, since they are all being damaged in different ways by the infernal Project. All are victims of their elites.

It is an interesting question why Cyprus has been treated more harshly than Greece, given that the eurozone itself set off the downward spiral by imposing de facto losses of 75pc on Greek sovereign debt held by Cypriot banks.

And, furthermore, given that these banks were pressured into buying many of those Greek bonds in the first place by the EU authorities, when it suited the Eurogroup. . . .

. . . . The workhouse treatment of Cyprus is nevertheless remarkable. The creditor powers walked away from their fresh pledges for an EMU banking union by whipping up largely bogus allegations of Russian money-laundering in Nicosia. A Council of Europe by a British prosecutor has failed to validate the claims.

The EU authorities have gone to great lengths to insist that Cyprus is a “special case”, but I fail to see what is special about it. There is far more Russian money – laundered or otherwise – in the Netherlands. The banking centres of Ireland and Malta are just as large as a share of GDP. Luxembourg’s banking centre is at least four times more leveraged to the economy.

It should be clear by now that the solemn pledges of EMU leaders are expendable. They change their mind whenever its suits them, and whenever the internal politics of their own countries demands. . . .

Discussion

2 comments for “Going for the Gold in Cyprus (All that Glitters Is not . . . “Oh, Never Mind,” Part 2)”

  1. The perfect case of the sum being worth a hell of a lot less then its parts.

    V

    Posted by Vee Demarche | April 13, 2013, 4:55 pm
  2. If they’re seriously adding the sale of national gold reserves into the troika’s “bailout” “toolkit” then we’ve officially entered the comically-evil phase of the troika’s descent into madness villain behavior. Or at least rentered it. Because now everyone will ask the obvious questions of what’s going to happen to the other eurozone nations. Is everyone’s gold reserves at risk? That’s quite a symbolic move. And that’s part of what makes this such a chilling proposal: it’s really more about psychology than it is any meaningful payback of creditors. Even Italy, with the fourth largest gold stash in the world, only has 94 billion euros. Now, 94 billion euros is a lot, but it’s not A LOT in the in the grander scheme of things, at least for a country the size of Italy. With over 2 trillion euros in debt, Italy’s 94 billion euros isn’t much more than the 83 billion euros that Italy is expected to spend simply financing its debt this year alone. Confiscating ALL of Italy’s gold is a measly one year interest payment.

    If the policy regmine we’re seeing today was part of the plan back in 2008, before austerity and “troikas” were publicly considered even feasible, there was no way in hell the Berlin could have just come out and said “hey there everyone, we’ve decided to transition you all into a much more brutal and heartless social contract where fear of punishment and ‘discipline’ will be the new guiding lights of the empire”. That would have caused a revolution. So instead, we’re just seeing a seemingly endless stream of disasters where the solution involves one “surprise!” change after another to the “vision” for the future of the EU. The only consistency in the change is that the rules keep getting put in place that will ensure there’s a system that traps its participants in debt death-spirals.

    And at the rate we’re seeing these “surprises”, we can predict with confidence that someday the EU will indeed reach that Shining City on the Hill. The City where socioeconomic human sacrifices ensure the wrath of the market gods will stay at bay. The a lot of shiny gold in the Shining City on the Hill, but its all owned by this one really rich guy that thinks he’s like the Pope of The Markets. He basically runs the place and is a total dick. You probably don’t want to live in the City on the Shining Hill:

    If Cyprus can sell gold to help bailout, why not others?
    Reuters Apr 11, 2013, 07.57PM IST

    LONDON: Heavily indebted euro zone nations such as Italy and Portugal could come under pressure to put their bullion reserves to work as a result of plans for Cyprus to sell gold to meet its financing needs.

    A European Commission assessment of what Cyprus needs to do as part of its European Union/International Monetary Fund bailout showed Cyprus is expected to sell in excess gold reserves to raise around 400 million euros ($523 million).

    Other struggling euro area countries may be pushed to take note. Between them, for example, Portugal, Ireland, Italy, Greece and Spain, hold more than 3,230 tonnes of gold between them, worth nearly 125 billion euros at today’s prices.

    The lion’s share of that – 2,451.8 tonnes – belongs to Italy. But Portugal and Spain also hold hundreds of tonnes and gold is currently trading around $1,558.95 per ounce in spot terms, or 1,189 euros.
    t
    The metal makes up more than 90 per cent of Portugal’s foreign exchange holdings, and 72.2 per cent of Italy’s. India, by contrast, holds less than 10 per cent of its reserves in gold.

    Gold sales on their own would be far from a magic bullet to solve euro zone financing problems: Italy’s entire gold reserves, for example, are worth less than 95 billion euros, against outstanding debt of around 1.685 trillion euros.

    But the Cyprus situation shows that even a relatively small gold sale may help address severe debt problems. Cyprus’ gold sale would allow it to easily come up with around 3 per cent of what it must contribute to the bailout.

    It is something that has the market somewhat concerned given that a big sale would push down the price. Central bank gold buying was one of the few areas of demand to increase last year at a time jewellery, coin and gold-bar buying was on the wane.

    Indeed, spot gold posted its biggest one-day drop in nearly two months on Wednesday after news of the planned sale broke.

    “Cyprus may be a one-off, (but) the market’s concern will be that it isn’t, and that other countries will be invited to sell their gold,” one senior gold trader said.

    “It’s a potential game-changer for the market,” he added. “Given we know that Portugal rejected the most recent austerity plan, and they have over 90 per cent of the country’s foreign exchange reserves in gold, does this mean that Portugal perhaps will be asked to sell some of its gold?”

    PROHIBITION

    Despite this, potentially hefty barriers lie in the way of central banks making sales to meet financing needs. Article 7 of the Protocol of the European System of Central Banks, for instance, guarantees central bank independence and freedom from government influence.

    In other words, if a central bank doesn’t want to sell its gold, in theory it can resist.

    CAP ON SALES

    There is also the issue of how much central banks are actually allowed to sell even if they want to.

    The Central Bank Gold Agreement, originally signed in 1999 and currently in its third incarnation, caps gold sales by signatories at 400 tonnes a year.

    Leveraging gold does not necessarily have to mean selling it, of course.

    Central banks can also swap gold for cash with other central banks or other institutions through a simultaneous sell spot/buy forward transaction, with a view to redeeming it later.

    The World Gold Council says methods other than selling may offer better returns for gold holders.

    “It is important that Cyprus explores all the options available to it and outright sales are not the only one,2 a spokesman for the WGC said. “We believe that the most effective way for countries to benefit from holding gold is to leverage its gold as collateral for sovereign issuance.”

    “A gold-backed bond could raise four or five times the value of Cyprus’ current total gold reserves – more than 2 billion euros in today’s money.”

    That doesn’t mean, though, that troubled countries won’t look at their gold and see a quick fix.

    It will be very interesting to see how these moves impact the gold market. It’s not an especially large market compared to the overall size of the global economy but it has immense psychological value. Gold is just associated with “safety” in people’s minds. If the eurozone hurdles are lifted against the sale of gold by central banks caps that’s going to send two very conflicting messages to the markets:
    1. Gold is important to own if you want something considered systemically “safe” by TPTB.
    2. If TPTB show a predilection for demanding gold sales to pay back national debts, nations might start seizing citizens’ gold.

    This will be a story to watch. And it looks like there will be plenty of future twists and turns and “surprises” coming up. Wolfgang Schauble is casting new doubts on whether or not the proposed EU banking union that’s supposed to come into effect in 2014 will be allowable without a treaty change. If the treaty has to be changed that’s simply going to take a lot more time. If if there’s no banking union in 2014 there will be European Stability Mechanism (ESM) coming online in 2014 either. And if there’s no ESM, that means we get to continue along making up new rules with each new banking crisis. The brave travelers will pick up the pace on their journey to Shining City (of beatings) on the Hill. Zombies can shamble. They can also run:

    Germany puts brakes on EU bank union with treaty call

    By Annika Breidthardt and John O’Donnell

    DUBLIN | Sat Apr 13, 2013 3:41pm EDT

    (Reuters) – Germany said European banking union will require changes to EU law, in a call that could slow completion of the plan designed to underpin the euro currency.

    Speaking after a meeting of European Union finance ministers on Saturday, Germany Finance Minister Wolfgang Schaeuble said the EU’s Lisbon treaty had to be changed to allow common rules on shutting troubled banks – a central element of the union.

    “Banking union only makes sense … if we also have rules for restructuring and resolving banks. But if we want European institutions for that, we will need a treaty change,” he said.

    Designed to ensure vulnerable countries do not have to tackle financial problems alone, the plan for banking union was one of the bloc’s biggest political steps to stabilize the euro and prevent taxpayers from footing bills for bank rescues.

    “We will not be able to take any steps on the basis of a doubtful legal basis,” Schaeuble told reporters. “That’s why it’s also crucial that we strengthen the network of national restructuring funds and authorities.”

    As a first step towards the union, the European Central Bank is set to start supervising euro zone banks from July 2014.

    This should be followed by a so-called bank resolution scheme to close or salvage struggling banks as well as pay for the costs involved. The third and final step would be a coherent framework across Europe for deposit protection.

    Worried the supervisory role could compromise ECB monetary policy independence, Germany on Friday persuaded EU countries to sign a political declaration committing to future treaty change.

    Schaeuble also made clear legal change would be necessary for the unified scheme for tackling failed banks.

    Changing the Lisbon treaty, which underpins the bloc’s law, would be a drawn-out process as it calls for the agreement of all member state – some of which require referenda.

    It would raise particular problems for Britain, where eurosceptics have argued that the country should quit the bloc.

    Schaeuble has long had reservations about banking union, which would be a step towards allowing the euro zone’s rescue fund to directly assist banks, a move Germany fears might leave it facing the bill for reckless lending by foreign banks.

    Schaeuble said the country of a bank in financial difficulty must first inject fresh capital before direct support from the European Stability Mechanism (ESM) is possible.

    Spain’s Finance Minister Luis de Guindos said member states would pay a minimum 4.5 percent of capital for troubled banks.

    “From that point, there would be a burden sharing to converge towards 10 percent paid by the member state,” de Guindos said. “This means the ESM will pay for around 90 percent and the member state for 10 percent.”

    Schaeuble also emphasized German opposition to the creation of a joint deposit guarantee scheme.

    So we have Schauble now dangling out there the possibility that the ESM won’t be available indefinitely AND reiterating German opposition to joint deposit guarantees as part of the new banking union. It’s kind of fascinating how there seems to be an attempt to systematically undo one of the main inherent advantages of a big union. One reason the United States has superpower status is because IT’S BIG. When one part is hurting, the rest of the nation comes to help it and even make long-term investments in the ailing region. There are irreplaceable advantages to being big….unless you set of rules that systematically nullify those advantages.

    It has to be said, grimly fascinating experiments like what we’re seeing don’t happen everyday. And there are real economic theories being put to the testg. Normally, if a nation joins a colonial empire it’s because they aren’t given a choice. In this instance, we seem to be seeing an attempt to sell the EU populace on the idea that some austerity now will avoid austerity in the future. THAT’s the EU New Deal. Some pain and some gain now in exchange for less pain in the future. Once the eurozone economies are “harmonized” adequately, the magic of “Ordoliberalism” will take hold across the continent. At least in theory. So what happens if the theory doesn’t work? Ever? Ordoliberalism can’t just work for Germany anymore. It has to work for the whole continent. And given that Germany’s economic success is heavily rooted in an export-based strategy – and Germany’s high-tech export sector is something that simply cannot take place across Europe – it remains to be seen how an Ordoliberal regime will work for broken economies that are only going to be well-suited for low-wage exports. The internal economy that invovlves things like education and healthcare aren’t really allowed under Ordoliberal rules until after you’ve found that high-value export niche. The developing world has been trying to export its way out of poverty for a long time using this strategy and it’s very unclear that this strategy really can work for everybody.

    It’s part of why the eurozone crisis is so troubling for the world: We live in a world where there is simply too much technology and labor overcapacity for everyone to have a well-paid 40-hour a week job. Figuring out how to fairly share resources without freaking out about “moochers” and unemployed people is going to be vital over the next century and human psychology REALLY hates helping “moochers”. One of the real intrinsic values that gold has is that it’s good at generating a shared concensus: Because pure gold always weighs the same and looks the same it’s the type of thing that people all over the world can make agreements over. Forming that shared consensus is the real “technology” employed when money is in use. It’s a social technology. Coming up with a new shared concensus that involves a little something called “sharing” is one of the great challenges of our era of not enough jobs and real natural resource austerity. The pro-austerity paradigm we’re seeing emerge with each one of these new EU “surprises” is exactly the kind of anti-sharing dark age consensus that humanity needs to avoid if we don’t want to have severe austerity in the future.

    So is there a Plan B if the eurozone is still a basketcase in 5 or 10 years or is Europe destined to endless chiding by its elites about how the people just aren’t being austere enough for the magic of the markets to work? Considering that we’re repeatedly told that there are years of austerity in store for these nations you have to wonder if broken economies for years is part of the unspoken current plans that the proles aren’t yet ready to hear. Maybe that’s the final “Surprise!”

    Posted by Pterrafractyl | April 13, 2013, 7:27 pm

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