Friday, September 12, 2014

Same $#!%, Different PIIGS

by Shane Obata

Desperate governments call for desperate measures.

Unfortunately for us, citizens often end up paying for the mistakes of their governments. That’s not how it should be but, sometimes, that’s how it is. If and a when a government is no longer able to meet its obligations, capital controls, broad wealth confiscation measures, and other extreme burdens are often considered.

Spanish bond yields just fell to their lowest levels in history but does that mean that your money is safe there? Absolutely not. It means that investors are complacent, not that Spain’s political risk has diminished.

Portugal is in the same boat. While its borrowing costs continue to fall, its prospects for economic growth and its financial position continue to worsen. If you’ve got assets in Portugal then now would be a good time to contemplate how safe they really are. Unless you like bail-ins, that is.


“A bail-in “forces the borrower’s creditors to bear some of the burden by having part of the debt they are owed written off. In the case of Cyprus, the creditors in question were bondholders, and depositors with more than €100,000 in their accounts.”

Some say “bear the burden”, others, like Jeff Thomas, say “wealth confiscation” :

“On 16th of March 2013, the banks of Cyprus – with the approval of the Cyprus government, the European Commission, the European Central Bank, and the International Monetary Fund, confiscated private savings of accounts exceeding €100,000.”

Why were the savers punished? Because of excessive risk taking by Cyprus’s banks. Two of its largest banks, Laiki Bank and the Bank of Cyprus, decided to Greek government bonds in an attempt to profit from their higher yields. Unfortunately for the banks, the bet turned sour when yields spiked past 40% during Greece’s sovereign debt crisis. As a result, the Greek bonds lost most of their value – costing the Cypriot banks close to €4.5 billion and wiping out their capital.

Were there any indications that a bail-in might occur? Sure.

According to Trading Economics, In Cyprus…

- GDP started contracting in late 2011.

- The number of employed persons fell from 388.7 thousand in 2011 to 376 thousand in 2012.

- The number of unemployed persons more than tripled from 2009 to 2013.

- The Government debt to GDP ratio increased from 58.5% in 2010 to 86.6% in 2013.

- The residential property price index has been in decline since the financial crisis.

In sum, depositors in Cyprus were punished for the mistakes of their banks. Yes, Cyprus’s economy was showing weakness before the confiscation occurred. That said, it was not clear to depositors that their savings were at risk; what happened to them was unjust to say the least. Savers should NEVER be held accountable for the mistakes of their governments; regrettably, they often are.

Another form of wealth confiscation to think about is deposit taxes.

Deposit taxes

Like bail-ins, deposit taxes are bad for savers. What’s more is that they’ve been used before – recently in Spain:

“On 4th July, Spain announced that it would impose a blanket taxation on all bank accounts at the rate of 0.03% for the purpose of “Harmonizing tax regimes and generating revenues.” – Jeff Thomas

This situation is a great example of moral hazard because the deposit taxes will negatively impact Spain’s citizens more so than its government officials.

If the tax is supposed to help Spain’s economy then isn’t it a good thing? No. Spain’s people should not be forced to make up for the errors of their government.

Not unlike Cyprus, Spain’s economy has been in trouble for some time. According to Focus Economics, in Spain, GDP, Investment, and retail sales contracted in every year from 2009 to 2013. Furthermore, public debt as a % of GDP grew from 54% to 93.9% over that same time frame.

In both Cyprus and Spain, poor decisions and economic and fiscal problems led to some form of wealth confiscation.

If it happened there then could it happen to Portugal? It’s not out of the question.


Same problems, different country. Portugal is an ideal candidate for wealth confiscation because, like Cyprus, its banks are in trouble. On July 19th, 2014, the holding company of Banco Espirito Santo (BES) – Portugal’s 2nd largest bank - filed for bankruptcy protection. Since that time, two more of its holding companies did the same. If and when BES goes under then who’s going to have to pay for it? Hopefully not its depositors.

What’s more is that the economic backdrop is Portugal is getting worse.

In Portugal,

- Debt as a % of GDP is rising

- Credit is contracting

- Economic activity is in decline

- The employed population and the working-age population (15-64) are shrinking

- Consumer sentiment is mostly negative

If the banking system problems in Portugal turn out to be systematic then it’s likely that its people might have to foot the bill. In order words, wealth confiscation might be right around the corner.

If you’ve got assets in Portugal then watch out. You don’t want to be left holding the bag if and when shit hits the fan.

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