Are Cyprus banks canaries in the coal mine?

Martin D. Weiss

Even while Cyprus’s largest banks sink into oblivion, some of the world’s most respected pundits and authorities are swearing up and down that “no one could have possibly known it would ever get this bad.”

Don’t believe them!

The fact is that, back in April 2012, Weiss Ratings issued D- grades to both the Bank of Cyprus and Cyprus Popular Bank, two of the banks at the center of the latest financial maelstrom. And we downgraded them even further — to E- (meaning on the very brink of failure) — in December 2012.

You should also not believe authorities who tell you that the crisis is “over,” “stabilized,” or even just “contained.”

Nothing could be further from the truth!

Recent runs at Cyprus banks may be just a sneak preview of what’s in store for other, far larger, European banks in similar straits.

In a desperate attempt to prevent — or at least slow down — a fatal run on all their banks, Cyprus authorities are imposing the most heavy-handed, Draconian measures since World War II …

* Severe capital controls, blocking the exits for nearly all funds that might seek safer havens outside of Cyprus. That means all global funds — not just from Russia — who have sought the higher yields of Cyprus banks are now FROZEN.

* Massive losses — from 40 to 80 percent — on uninsured deposits.

* Severe restrictions on ALL withdrawals of all deposits, whether leaving the country or not.

* Plus, a small army of police and private security guards at bank branches across the island to keep a lid on possible trouble — for “the comfort of the bank staff and our clients.”

The big problem:

The more restrictions they impose, the more likely it will be that the contagion of bank runs will spread to other European countries.

Here’s the key:

Anyone who restricts the free movement of capital is in direct violation of European Union treaties.

And yet, all three members of the so-called Troika — the IMF, the ECB, and the EU — have stamped their seal of approval on the capital controls imposed by Cyprus on its bank depositors.

What message does THAT send to global investors who have trillions of euros and pounds on deposit in Europe?

The answer is very simple. The message is “better get the hell out of Europe while you still can, before the Troika helps some other country slap on more capital controls, trapping your money there, too.”

That’s not exactly a way to make millions of big-money bank depositors feel warm and fuzzy.

Canary in the Coal Mine

Look …

IF Cyprus banks were the only ones buried in mountains of bad debts, the only ones skating on thin ice with virtually zero capital, or the only ones waiting in line for their next infusion of rescue money … then … maybe, the damage to depositor confidence might be minimized.

But that’s absolutely not the case! Hundreds of endangered banks around the world have fallen into similar traps.

Or IF those endangered banks were small and inconsequential, then, perhaps, the crisis of confidence might blow over.

But again, that’s not the case. Some of the most endangered banks are among the largest banks in the world, especially in Europe, where the contagion is most likely.

You shouldn’t have to ask which ones they are … because we already named them months ago. But just in case you missed our earlier release, here’s our updated list of the largest endangered banks in the world:

Click for larger version

These are huge banks, all with at least $1 trillion in assets — all knee deep in bad loans … all in or near the same condition as Cyprus banks were a year or two ago.

Of greatest concern right now? The giant banks with a Weiss Rating of E-.

Remember: That’s our lowest possible rating before outright failure, and it’s the same exact rating we gave to Cyprus’s weakest banks before the latest crisis.

In this on-the-brink category are …

• Royal Bank of Scotland with $2.2 trillion in assets,
• Crédit Agricole (France) with $2.4 trillion, and
• Lloyd’s Banking Group with $1.5 trillion.

Not far behind, with E+ ratings (still very close to the brink) are

• Société Générale (France) and
• UniCredit S.p.A. (Italy)

And that’s just among the largest (with $1 trillion or more in assets)!

Bottom line:

1. The European banking system is a forest of dry timber that could burst into flames with the slightest spark.

2. No matter what defensive measures the European authorities can come up with, the euro is bound to remain under tremendous downward pressure.

3. And no matter where you do your banking, make sure your institution is among the safest. (For a free Weiss Rating of your banks, go to www.weisswatchdog.com.)

Plus, be sure to see this week’s articles with more specific investment recommendations (below).

Good luck and God bless!

Martin

 

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EDITOR’S PICKS There’s more than one way to skin a cat when it comes to emerging market investing by Mike Burnick There is no polite way to say it: Emerging stock markets have been absolute dogs this year in terms of performance. An Unexpected Beneficiary of a Recovering Housing Market by Tom Essaye Most of the focus in recent weeks has been on Europe, first the Italian political crisis and then the Cyprus drama. Meanwhile, the market has somewhat ignored the steady flow of strong economic numbers here in the U.S. Weiss rates USAA, Citizens strong, other Florida insurers weaker by the Palm Beach Post Grades from Weiss Ratings might surprise homeowners accustomed to hearing debates in Tallahassee about the risky shakiness of state-run insurer Citizens — it gets an A plus for financial strength.

THIS WEEK’S TOP STORIES My last article for Money and Markets by Nilus Mattive After writing more than 300 weekly columns for Money and Markets, this one will be my last. But before I get to why, please allow me to take a brief stroll down memory lane … The Seeds of War Have Been Sown … by Larry Edelson In a previous column, I showed you how the war cycles turn violently higher this year. I also addressed the issue of war, and its implications for the markets, at the Weiss Global Wealth Summit in January. Europe lets its true bank intentions slip! What it means to you! by Mike Larson Over the last few years, I’ve gotten used to politicians and central bankers messing up, misleading, or flat out lying when it comes to the financial markets, the economy, and their true intentions.

 

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