Cyprus’ central bank sent a letter to Bank of Cyprus on Monday, publicly ‘requesting’ that the bank’s -entire- board of directors resign.
It was only 18-months ago that one of the brokest banking systems in the world became the first modern example of financial cannibalism.
I’m sure you remember how it all went down in Cyprus last year… but I’ll review it anyhow because it just never gets old.
Submitted by Simon Black, Sovereign Man:
For days, weeks, months leading up to the big event, banks were operating as usual. People could log on to a bank website, check their account balance, and see a number printed on the screen.
As it turns out, though, there’s a huge difference between a number on a screen and a well-capitalized bank.
Cypriot banks didn’t actually -have- the money. They had huge liabilities, minimal assets, and were roundly insolvent.
Worse, they no longer had the ability to borrow money. Cyprus is part of the eurozone, and consequently, its central bank didn’t have the ability to print money in order to bail out the insolvent banking sector.
The government was too broke as well. So finally, devoid of options and forced to face its financial reckoning, Cypriot banks were shuttered for an extended ‘holiday’, and every person in the country had his/her bank account frozen.
People went to bed one evening last March and they assumed everything was fine. They woke up the next morning to find that they no longer had control over their savings. The money they -thought- was there was actually wasn’t. Their account balance was a gigantic lie.
Suddenly they had no means to pay the rent. Buy food. Fuel. Everything was on lock down.
Even after the freeze was lifted, Cyprus spent more than a year suffering through debilitating capital controls. If you wanted to send some extra cash to your son or daughter studying abroad, you had to submit your request to a committee.
This was clearly the height of economic freedom.
Now it’s been 18-months. And as we told you in July, things haven’t changed much. The capital controls have largely been lifted, but Cypriot banks are as broke as ever.
Two months ago, the country’s largest bank (Bank of Cyprus) was forced into selling shares in order to raise more capital. Surprise, surprise, the bank was still poorly capitalized.
There were hardly any takers, and the European Bank for Reconstruction and Development (EBRD), a supranational government financial institution, had to step in and take a huge chunk of the new shares.
The latest news is that the country’s central bank sent a letter to Bank of Cyprus on Monday, publicly ‘requesting’ that the bank’s -entire- board of directors resign.
This is clearly another favorable sign.
The lesson here is pretty obvious; these problems don’t just happen overnight. Banking systems (and nations) go broke after years… decades… of bad decisions.
And it’s not something that can be turned around after a few months of capital controls and clever propaganda.
There’s something rotten in the system itself. And nothing gets fixed until there’s a complete reset. Anything else is just a snake oil solution that kicks the financial reckoning can down the road.