Here come capital controls in Europe. Of that, I have little doubt. Actually, they are already here, both in legislative form and in action. Let's walk through what they are, why they're here, how they got here, and what you can do to avoid them.
What Are Capital Controls?
Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets (money) into and out of the country's capital account. These measures may be economy-wide, sector-specific (usually the financial sector, ex. your bank).
Why Are They Needed By Sovereign Countries?
In Despite What You Don't Hear In The Media, It's ALL OUT (Currency) WAR! Pt. 1, I discussed the "Trilemma", as excerpted:
According to Wikipedia (and modified by us):
- A fixed exchange rate (as attempted and failed by the Swiss and currently and unsustainably by the Danes)
- Free capital movement (absence of capital controls), as was the case in Cyprus before March of 2013 when capital controls were introduced
- An independent monetary policy - not capable by anybody in the EU save Germany due to the power of the Troika, yet all but Greece proclaim they are pursuing such.
It is both a hypothesis based on the uncovered interest rate parity condition, and a finding from empirical studies where governments that have tried to simultaneously pursue all three goals have failed.
The Impossible Trinity or "The Trilemma", in which three policy positions are possible. If a nation were to adopt positiona, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty.
Put plainly, either balance sheets get burned trying to buy and sell currencies, capital controls are implemented, or QE (sovereign monetary policy) fails. Trying all three simultaneously has NEVER, EVER worked! Of course, according to the ECB, it's different this time...
Guess what? Balance sheets are burned.
Realize why the ECB is doing this QE thing to the level that it is. Their banks are still in trouble, material trouble. Reference "Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe" from 5 years ago and tell me if you think its gotten better (Hint: pay very close attention to the countries these banks are domiciled in, capital controls data soon to follow several paragraphs below)...
Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns
Well, it's all relative. The banks are smaller, leverage is down - and that's after 6 years of global QE, ZIRP and now NIRP, yet each and every bank is STILL big enough to collapse the country that it's domicled in...
With this in mind, let's review the The Anatomy of a European Bank Run!
Below is a chart excerpted from our work showing the asset/liability funding mismatch of a French bank. The actual name of the bank is not at issue here. What is at issue is what situation this bank has found itself in and why it is in said situation. Both Lehman and Bear Stearns collapsed from the EXACT SAME PROBLEM! That problem is asset/Liabitlity mismatch.
What many bank depositors who believe their bank deposits are actually cash don't realize is that they are creditors to the bank - short term lenders. You bank accounts, time deposit accounts, CDs, checking and savings accounts are short term, UNSECURED loans to bank that uses said loans to engaged in significantly and materially more risky endeavors to generate profits. What sort of endeavors, you may ask? Well, as was the case with many French, Cypriot, Italian, Spanish and German banks, making real estate, corporate and government loans of a longer term to profligate nations such as Greece, for one. It's good work of you an get it. Borrow from mom and pop savers at 25 basis points and lend to Greece at 23%. Good money, dude!
That is, until it becomes apparent that the money you lent Greece isn't going to come back.
Even that, in and of itself is not a problem since the fractional reserve banking system doesn't really require you to have the money that you borrowed from mom and pop on hand to pay them all back. It works, until it doesn't. When mom and pop figure out what you've done with their money by reading and article such as this, that's when the stinky brown stuff hits the fan blades. You get a run on the bank as everyone tries to get those overnight, and 1 and 2 month deposits out - at the same time.
This is what happened to Bear Stearns and Lehman, literally overnight - although the signs were available months beforehand if you paid attention. I predicted both of these collapses at least 60 days before they occurred:
The collapse of Bear Stearns in January 2008 (2 months before Bear Stearns fell, while trading in the $100s and still had buy ratings and investment grade AA or better from the ratings agencies): Is this the Breaking of the Bear?
- The warning of Lehman Brothers before anyone had a clue!!! (February through May 2008): Is Lehman really a lemming in disguise? Thursday, February 21st, 2008 | Web chatter on Lehman Brothers Sunday, March 16th, 2008 (It would appear that Lehman's hedges are paying off for them. The have the most CMBS and RMBS as a percent of tangible equity on the street following Bear Stearns. The question is, "Can they monetize those hedges?" I'm curious to see how the options on Lehman will be priced tomorrow. I really don't have enough. Goes to show you how stingy I am. I bought them before Lehman was on anybody's radar and I was still to cheap to gorge. Now, all of the alarms have sounded and I'll have to pay up to participate or go in short. There is too much attention focused on Lehman right now.
Why are these bank metrics significant?
Well, the obvious answer is they can collapse the economy of the countries they're domiciled in. The less obvious answer is what sovereign nations are willing to do to prevent that. Hint: It's not significantly reducing the risks of the banks, nearly all of which are larger and more dangerous than they were in 2007! To get the answer, let me refer you to a post made in the bitocintalk.org forum two years ago.
First Off Let's Make Bank Collapse Real...
To begin with, let's make this Cyprus thing real, by showing a live example of what happens to a real small business that had the gall to bank with Laikie Bank in Cyprus. Look at the timeline of events:
February 10, 2013: The Financial Times comes out with an article that is not nearly as detailed and instructive as this one, yet still quite alarming.
A radical new option for the financial rescue of Cyprus would force losses on uninsured depositors in Cypriot banks, as well as investors in the country's sovereign bonds, according to a confidential memorandum prepared ahead of Monday's meeting of eurozone finance ministers.
... The new plan has not been endorsed by its authors in the European Commission or by individual eurozone members. The memo warns that "the risks associated with this option are significant", including a renewed danger of contagion in eurozone financial markets, and premature collapse in the Cypriot banking sector.
... The radical proposal is intended to produce a more sustainable debt solution for the country, cutting the size of Cyprus's bailout by two-thirds - from €16.7bn to only €5.5bn - by involving more foreign depositors and bond holders.
... By "bailing in" uninsured bank depositors, it would also involve more foreign investors...
Senior EU officials who have seen the document cautioned that imposing losses on bank depositors and a sovereign debt restructuring remain unlikely. Underlining the dissuasive language in the memo, they said that bailing in depositors was never considered in previous eurozone bailouts because of concern that it could lead to bank runs in other financially fragile countries.
But the document also makes clear that both options remain on the table despite public insistence by eurozone leaders that Greece was "unique" and would be the only country to default on sovereign debts.
Labelled "strictly confidential" and distributed to eurozone officials last week, the memo says the radical version of the plan - including a "haircut" of 50 per cent on sovereign bonds - would shrink the Cypriot financial sector, now nearly eight times larger than the island's economy... [The charts posted above shows the Bank of Cyprus as a % of GDP is still smaller than Italian, Spanish and British banks. If Cyprus is/was at risk, then logic dictates those areas are even more at risk, no?]
Cyprus's bailout, while small compared to Ireland, Portugal and Greece, has proven unexpectedly difficult because its size relative to the country's gross domestic product would increase debt to levels considered unsustainable both by the International Monetary Fund and the German government.
Here are excerpts from the comments section said article:
gntimus Feb 18, 2013
It's been a tradition by British media to secreted venom towards Cyprus in order to degrade the island and it's people. These so called secret memorandums and information that the "FT" has been leaking recently are anything but a coincidence. It is obvious to me that the ulterior motive behind there comments are mostly attributable to the Russian Deposits in the island and of course to the huge gas and possibly oil reserves hidden off the south coast of Cyprus within the EEZ. The bureaucrats of Troika are well aware that the revenues from the gas and oil reserves are multiples to the amount required to keep the Cyprus economy afloat, even in the worst case scenario (EUR 17.5 Billion). So, why would Cyprus need a haircut not just on Government Bonds but also on deposits? (This is outrageous)
philani33 Feb 11, 2013
I am amazed that FT is willing to post such articles especially when on the face of the article is clearly says that it has not been endorsed by its authors.
UoMCYstudent Feb 11, 2013
The Foreign Minister of Cyprus has stated early today that this article is not supported by any probable scenario.
a greek Feb 11, 2013
Under a shamefully deceiptful title you say this: A not-so-confidential memo that you say you saw examines three theoretical options for the financial rescue of Cyprus. One of them, that would force losses on depositors, was not endorsed even by the memo's authors, or anyone else, presumably it was put among the three as a theoretical example of the impossible. Yet, once it is printed in the FT, it becomes news, all nuance of non-endorsement and impossibility lost.
Although its editorials are generally balanced and constructive, the FT has printed thousands of articles trashing the euro since 2009. But this one sets a new record low for deceipt, scaremongering and underestimating the intelligence - nay, the reading ability - of its readers. Our trust is the FT's capital, and you have squandered it.
FionaMullen Feb 11, 2013
@Idalion Yes they mean expropriation of private money from what should be the safest form of keeping it other than under the mattress. And it doesn't just mean don't keep your money in Cyprus. It means don't keep it in the eurozone.
March 25. 2103 (roughly a month and a half later), the Cypriot government accepted a Troika bailout under the conditions it confiscate the capital of depositors with accounts over 100,000 euro.
From the Bitcoin forum I excerpt a post that puts things into perspective, re: bank account confiscation:
Most of the circulating assets on our business Current Account are blocked. Over 700k of expropriated money will be used to repay country's debt. Probably we will get back about 20% of this amount in 6-7 years. I'm not Russian oligarch, but just European medium size IT business. Thousands of other companies around Cyprus have the same situation. The business is definitely ruined, all Cypriot workers to be fired. We are moving to small Caribbean country where authorities have more respect to people's assets. Also we are thinking about using Bitcoin to pay wages and for payments between our partners.
Laiki Bank has offered details...
Let me make this clear. Roughly 50 days, from concept to confiscation of euros. This is not a long drawn out process, it's something that can happen very quickly. Bear Stearns collapsed over the weekend. Laiki Bank had a "bank holiday" weekend. And Lehman... Watch out for those weekends, y'all!
Next, Let's Realize That Cyprus Is Not A "Special Case", It Is Like The Template For Future Actions
Just the fear of another wave of bank collapse has government officials and regulators in fear. Why are they afraid? I made the cause of such fear clear to all as the Keynote Speaker at the ING Valuation Conference in Amsterdam in 2011.
With the knowledge contained in the video above, it's not hard to see the Infection spreads to North America as The Canadian Government Offers "Bail-In" Regime, Prepares For The Confiscation Of Bank Deposits To Bail Out Banks! Hold on, before you start worrying about your Canadian bank, you should be aware that the EU banks are still much, much, much worse off. Let's forget Cyprus for a minute and look deeper into the EU. This is a tweet from Edward Harrison, the producer of the BoomBust TV show (no relation to BoomBustBlog) and author of Creditwritedowns.com.
Governmental Debt Assumed From "Too Big To Fail" Banks Are The Levers of Bail-ins. Liqidity Crises Born From Asset/Liablity Mismatches Are the Impetus
Look at the government debt to GDP level that caused the Troika to act in the case of Cyprus, re: Capital Controls
Source: Trading Economics
Basically, once you pierce the EU area average AND have an oversized banking industry relative to GDP, expect a HIGH probability of capital controls in the form of a bail-in, etc. The problem is, there are a lot of EU residents and foreign entities that lend unsecured money (in the form of check, savings and demand deposite accounts) that are highly susceptible to getting "Cyprus'd". Check it out:
If you have money in bank accounts (in other words, you are an unsecured lender) in any of these countries, you literally have a fiduciary responsiblity to yourself to read the remainder of this article.
Capital Mobility & Banking System Bail-in Protection via Veritaseum "Smart Contracts"
Parties who are domiciled in free flowing capital hostile states that have tight capital controls, ex. China, India, have banned or limited BTC trading by banks and/or individuals can take advantage of Veritaseum contracts to gain multi-currency exposure without violating the law (this is not legal advice, and the counsel of an attorney is strongly recommended). Take note that the systems with the tightest capital controls have been the one's exhibiting the most aggressive stance to bitcoin. Unfortunately, they don't seem to understand what Bitcoin is and what it can do. Fortunately for those that seek relief from capital controls, they don't understand what smart contracts can do.
Cyprus banks closed on a Friday and announced confiscation of bank assets over the weekend. Veritaseum contracts could have been used to move monetary value outside of the Cyprus banking system assuming the participants had a store of Bitcoin (it is rumored that this is how some of the Russian money was removed over the weekend).
Let's assume a small businessman would like to purchase 150,000 EUR worth of bitcoin, yet is concerned that the BTC volatility may cause more of a loss than the Cypriot capital controls (highly unlikely, since the Cypriot capital controls resulted in 100% losses for large depositors). He buys the BTC then hedges his large BTC position into EUR. He proceeds to do that with a quarter of his monthly cash flows, building up a sizeable, fully hedged position in cyberspace and on the blockchain (thus, effectively offshore as it relates to the legacy bankings system) and outside of the fragile Cyprus banking system.
The Cyprus banks pull the trigger to confiscate funds and the Russian bank depositor has significant funds mobile and ready to deliver anywhere in the internet connected world within minutes, even on a Sunday afternoon.
How To "Bail-in Proof" Your Money, a Step-by-Step Tutorial
- Make sure you computer is clean - Malware, Virus and Trojan Free. Start with a brand new, unused computer if you can. Preferably, in the original packaging, unopened. If that is not practical from a financial or logistical perspective, thoroughly clean the computer that you are going to use with a deep (not quick scan) scan from a prominet anti-virus software vendor (ex. Norton, AVG, Kapersky).
- Ensure your privacy to the best of your ability. Install a compounding VPN system on your machine from a vendor that DOES NOT log your activity (ex. AIRVPN, FREEDOME, LIQUIDVPN), and get it up and running.
- Prepare your machine. Download the Oracle version of Java runtime on your machine if you don't already have it.
- Install Veritaseum's Smart Contract Aware, Value Trading Wallet - Go to Veritaseum.com download menu at the top of the screen and select Veritaseum Wallet, then the flavor of your choice. It's also recommended that you download the quick start tutorial as well.
- Open the wallet in "Live Mode", go to the wallet tab on top and copy out your wallet's address.
- Convert your fiat (government controlled) currency for bitcoin: Go to an exchange or BTC onramp provider to convert your fiat (likely EUR or USD in this case) to BTC (Bitcoin). Some popular services are (Coinbase, Local Bitcoins). Once BTC is obtained, send your bitcoin to our Veritaseum wallet via your copied address.
- Create a Veritaseum Contract that suits your situation: Click the "Markets" tab to create a contract that exchanges the value of you BTC from your native currency (presumably EUR) to the currency, currency pair, or asset exposure of your choice for the time period you wish it to be for (this is where the quick start tutorial comes in handy). In the example below, you will be selling (paying) the value of EUR for the value of USD for 45 days. Keep in mind, you can also trade the value of BTC for EUR, or EUR for the value of gold (GLD) which may retain its value relative to the EUR should additional bank bail-ins arrive. You have a choice of over 45,000 ticker exposures in all asset classes (bonds, stocks, forex, commodities and indices) from any major exchange in the world. You can even do forex pairs and use leverage to mute the effects of BTC price fluctuation.
- Wait for your contract to be accepted by a counterparty. Once accepted, it will be listed in your trades page like this...
- Remember, your funds are not "in contract" until someone takes the other side of the trade. Even without someone taking the other side of your trade you still have liberated your capital into the blockchain, where capital controls and bank holidays literally do not exist. Your money can be transferred to another location, either next door or to the other side of the world, within minutes and for pennies - literally!
Due to the weakness of the euro relative to the dollar, I see ample liqudity in the EUR/USD contracts. I will personally oversee it. So, come one and come all. Liberate your (likely) soon to be capital controlled capital (euros).
Important to remember:
- You are not exchanging physical euros for dollars. Veritaseum contracts are derivatives that give you the price movement of whatever it is you are contracted for. Thus you the equivalent of dollar/euro movement added to your bitcoin balance at the end of the contract, just as if you sold euros to buy dollars (or whatever asset combination you chose to employ.
- We are a software and research firm, not a financial institution. At no time at all do you have any exposure to our balance sheet (like Bank Laiki, Bear Stearns or Lehman).
- You are not, and never do, send your money or capital to us. Your tranactions are totally peer-to-peer from a monetary perspective. You either have you money in your private wallet (which you have, not us), or on the blockchain (the fortified cloud), at all times. When on the blockchain, all you need to do is click the "track transaction" button to see exactly where on the blockchain it is, the path it took to get there, and how long it has been there.
- Bitcoin has material price volatility and this platform is in beta status. We have methodologies to mute bitcoin volatility. Email us for more details or search our site.
We believe this system is considerably safer than any bank out there.
If you've read to the end of this article, you are obviously interested. I will assist anybody interested in mobilizing their capital. Anything mentioned in this article our team will assist with for free. More advanced techniques and strategies require a Veritas purchase. Contact us to get started now.