The biggest bank robbery

Gold was the only precious metal, which rose on balance by 16$/oz. However, gold gave back part of the gains made last Monday. The SPDR Gold Trust ETF still recorded outflows, which dampened the rise of gold. But on the other hand, large speculative accounts increase their net-long position in gold futures by slightly more than 19K to 135,610 contracts in the week ending Tuesday, March 19.

The reason for the rise of the gold price was the decision taken at a eurozone summit in the early morning hours on Saturday, March 16, which gave the term bank robbery a complete new meaning. In order to provide a rescue package for Cyprus, the German finance minister, Mr. Schaeuble, and IMF chief, Mrs. Lagard, acted like a modern version of Bonnie and Clyde by insisting that the Cypriot government had to steal the amount of 5.8bn euro from deposits at banks in Cyprus. The two lawyers and also the head of eurozone finance ministers demonstrated that there is no economic intelligent life at summits in Brussels. In order to keep the rate, at which bank deposits would have to be expropriated, below 10%, Cyprus’ newly elected president proposed that also deposits below 100,000 euro should be included in the bank robbery. And again the lawyers failed miserably. According to EU law, deposits up to this amount have to be protected against a bank failure. The eurozone finance ministers would have had to reject this proposal.

In principle, there is nothing wrong that also holders of bank bonds or depositors lose money in the case of a bank failure. However, in the case of the Cypriot banking system, EU finance ministers insisted on violating this principle because not all bank debt is equal. In the case of a default, share holders lose all money at first, and then sub-ordinate debt as the most risky debt will be liable. At the end of the chain, there are the deposits, which will only participate in covering losses on amounts above the maximum of the deposit insurance, which is 100,000 euro. For bearing higher risk, investors get compensated by higher interest rates the higher the likelihood to lose money in the case of a default. However, the EU finance ministers insisted on a contribution from all depositors independent of the risk category and compensation for taking this risk. Share holders in Cypriot banks have suffered losses as the price of their shares plunged. However, they still own their shares and will not have to make a contribution according to the rescue plan. Thus, share holders and investors in subordinate bank debt are treated best because they normally would lose the total investment.

The crisis of the Cypriot banking system is not the result of irresponsible lending to a booming real-estate sector as it has been the case in Ireland and Spain. They also did not buy highly leveraged CMBOs backed by worthless sub-prime US mortgages as the German Landesbanken (government owned institutions) did. It is also not the result of pouring money into investments, which were regarded as highly risky already at the time the investment was made. Due to the close link between Cyprus and Greece, Cypriot banks invested in Greek government bonds, which were regarded as safe by the regulators even in early 2009. With the forced default of Greece, remember the driving forces were again Mr. Schaeuble and Mrs. Lagard, Cypriot banks suffered losses on what was supposed to be a safe investment. These losses caused a solvency crisis.

Germany’s finance minister was a young boy at the age of five years when Germany had its second state bankruptcy in the past century, which is now 65 years ago. It led to the introduction of the D-Mark, which became a strong currency later. However, the currency reform also caused that German banks would have gone insolvent if there had not been a measure to prevent the insolvency. The German government allocated claims to the banks, which just filled the gap in bank balance sheets.

This compensation claims had a long maturity and a low coupon with annual redemptions. To restore the solvency of Cypriot banks, the government could purchase bank shares and pay by providing long-term claims with no or only a rather small coupon. However, such a solution is rejected by the ECB as being too close to state financing. But this could be avoided by excluding those compensation claims from the collateral for refinancing at the ECB.

The parliament in Cyprus rejected the proposal that bank deposits should be subject to a special tax. However, a tax on deposits above 100,000 euro is still on the agenda when eurozone finance ministers meet later on this Sunday. Mr. Schaeuble promised that the default of Greece would be a special situation. Now, he pretends again that the solution for Cyprus would be a special situation and would not repeat again. This finance minister has lost all credibility. The decision of the eurozone finance ministers could lead to a bank run when banks open again in Cyprus. The ECB prepares for capital controls while the Lisbon treaty guarantees the freedom of capital flows.

All this amateurish handling of the crisis by the eurozone finance minister underlines that investors can not trust politicians. Investments at banks are not as safe as assumed. So far, there is not spill-over effect or contagion in other countries in Southern Europe. Nevertheless, the eurozone finance ministers provide a good argument for holding gold in a portfolio and store it in vaults located in safe countries outside of the reach by the jurisdiction in the country of residence.