The Ongoing Death of the Euro: 1929 in Slow Motion

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It is hard I am sure for Americans to fully comprehend the disaster that played out in the recent Cypriot Euro debacle.

To get a feel for the panic that was swirling about in Europe the week before last I include a quote from the Irish Independent of 22nd March 2013:

Irish property speculators fear for cash in Cypriot account.

“A group of up to 30 Irish property speculators have been left sweating on their investments due to the Cypriot bailout crisis.

The group, mainly Irish nationals living in the Middle East, all invested in a fund to take advantage of the collapse in property prices back home in Ireland.

Under the scheme, each invested €20,000 or more with a property consultancy, which has been seeking to snap up cut-price Irish properties whose value is likely to increase in the coming years.

A further 20 British nationals are also thought to be involved in the scheme.

Investor funds were placed in a Cypriot client account.

However, the account cannot currently be accessed after banks on the Mediterranean island closed their doors last weekend.

And hundreds of thousands of euros could be wiped off the value of the fund should the Cypriot government cave in to pressure from the EU and IMF for a levy on bank deposits as part of a bailout deal.

Richard Jones (37), a project finance consultant from Ballyhaunis, Co Mayo, who is involved in the scheme, flew in to Cyprus earlier this week in an attempt to withdraw the cash before any proposed levy on the account.

"I came over yesterday because the banks were due to reopen, but they didn't," he told the Irish Independent.

"I found it hard to get into a hotel room here. Everything has been booked up by the Russians coming in to withdraw their cash. That just confirmed my decision to come out as there will be an almighty run on the banks once they reopen."

He said the clients' funds were held in a Cyprus bank because the country "has been seen as a gateway for investment from the Middle East into Europe".

"Most of my investors are very small -- around €20,000. But it is a lot of money to them. They are mostly Irish and British expats living in the Middle East and they see value to be had in Irish property now," he said.

Mr. Jones said he believed the current crisis signals the "beginning of the end for the euro".

He added: "I think what the EU has signaled is that bank deposits are no longer safe. At a single stroke they have reduced the European banking system to third-world status."

For businesses and individuals with substantial funds in the banks in Cyprus this crisis has caused ruination. As a result of the deal brokered with the IMF/ECB/European Commission “Troika” large account balances will be cut by 40% - 80% depending on the bank. What’s more the balance of funds remaining after this “cut” will be frozen until the situation has been fully stabilized. Many believe that it could be months, maybe years, before these client funds are returned to their rightful owners.

What a disaster the “bailout” turned out to be for the 50 Irish and British businessmen mentioned above. In total they will lose approximately 400,000 Euros from their investment project overnight. Third-world “Euro” indeed.

Flight of Capital

Now that the dust has settled somewhat we are being told that the “markets” have reacted favorably to the final Cypriot bailout.

However, this crisis is far from over. The “Rubicon” of the sanctity of deposits has been crossed.

In fact in my opinion it is just starting. No Eurogroup bank will ever be trusted again. Many believe that Italy and Spain have similar crises in the making and anxiety within Europe is again starting to rise. Can you imagine the “fear factor” welling within the citizens of Italy and Spain considering how ordinary Cypriots have been treated?

Rather than wait for protective capital controls to be introduced in Spain and Italy (given that there are 3 trillion Euros in private deposits in banks in these two countries) it is expected that “in-tune” entrepreneurs and “savvy” chief executives will start moving funds out of Eurogroup banks immediately. People no longer have any belief that their financial leaders will be able to deal successfully with a possible full blown Mediterranean banking melt-down. Confidence in the Eurogroup banking system has utterly vaporized such was the degree of mismanagement and incompetence displayed by the ECB board and the IMF on the 18th March last.

Given this collapse of confidence, funds have now started to flee the Eurozone. Case in point, I have just come across a story in a Dublin newspaper today. This piece announces that the head of one of the largest Irish industrial conglomerates, Cement Roadstone Holdings (CRH), has instructed his financial chiefs to move all free bank balances out of the Euro ever Friday and move it back for business every Monday. How it that for a vote of confidence in the Euro zone?

It is my guess that as more and more corporations adopt similar deposit protection measures the “possible” introduction of capital controls throughout all of Euroland will become a self-fulfilling certainty. With capital controls in place Brussels will be free to “tax” (expropriate) all captured deposits, at will, to fund any future banking “recapitalizations”. When the European financial controllers of Google, Apple, Microsoft, McDonalds, Facebook, Microsoft, IBM, Oracle et al wake up and realize that 40% - 80% of their corporate banking deposits could be “frozen” in any future Italian or Spanish banking crisis the writing surely will be on the wall for the Euro project. Thus in anticipation of the trap shutting I anticipate the current mild flow of funds out of Euroland to soon become a flood. However, do not expect this matter to be fully reported in mainstream media. Already it has been noted that The ECB has not published its full balance sheet data for the month end as normal.

The free movement of capital is a bulwark “right” of the European Union. Introducing capital controls to “save” the Euro is the total antithesis of this Euro free trade right. I believe capital controls cannot remain in place indefinitely in our world of “one-click banking”. Thus at some stage in the near future it is my guess that a decision will have to be made whether to save the European Union or save the Euro. I think at this point the outcome is obvious. It is just a matter of time and a few more mishandled “crises”.

The US Market Continues to Consolidate

Despite the banking crisis in Europe the American market continues to show great resilience.

From a fundamental point of view this strength is surprising but is understandable from a technical perspective.

With the onset of the April earnings season, given the remarkable market run-up since the New Year, I would expect some choppy price action over the next three weeks.

This activity should provide excellent buying opportunities to focused traders.

Dow Transports: Daily

tran 1 apr 2013

Dow Industrials: Daily

indu 1 apr 2013

Many clients have asked me whether this is a good time to invest in gold or silver. Technically I do not like the look of these commodities and intend to steer well clear of them.

GLD: Gold ETF: Daily

gld 1 apr 2013

SLV: Silver ETF: Daily

slv 1 apr 2013

Charts: Courtesy of StockCharts.Com

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About Christopher Quigley

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