Smoke Signals Special: ‘Eurogroup will stop capital flight NOW’

The Slog

Is the European public being quietly alerted to an assets freeze? Will eurocapital controls be rushed through on this bank holiday weekend?

by John Ward

The Slog has posted endlessly about ECB boss Mario Draghi’s disappearing act since March 7th.Last Saturday, I posted this opinion on what Mario is busy doing:

‘The mystery of Mario Draghi the Invisible Man is more disturbing in some ways. I posted about Schäuble briefing bigtime against him the week before last, and I now think it boils down to two serious possibilities. The first is that Berlin has somehow neutralised the ECB boss, and told him to stay out of public and leave it to them. If so, he has managed very well to be AWOL during a classic Brussels-am-Berlin cock-up. But even as the ECB demanded a Nicosia decision by Monday and then demanded more money after the Moscow talks broke down, SuperMario was nowhere to be seen. That is odd.

The second possibility – and one I increasingly favour – is that from the outset Mario Draghi saw Cyprus as a distraction, no more: he knows that via his control over the banking purse-strings, he can bring the island to its knees any time he likes. Either he knew (or guessed) that the Berlin mentality would jackboot into the situation and use it as a test-case for (a) future events where threats are felt to be necessary and (b) setting the precedent for State theft of depositor funds under the guise of bollocks like Open Bank Recontruction (OBR) or fantasy ‘levies’. Of course, he would prefer to be away from that grubby operation, but I return to the key word here – distraction: Germany’s aim is control; Draghi’s aim is the survival of the euro, whatever it might cost. The two need not be the same, and in the long term probably won’t be….Personally, I suspect what he plans to do adds up to yet another form of citizen pauperisation alongside the bank robbery approach….’

In the last 48 hours, I’ve been getting some worrying signs from Out There. They suggest to me that a major move might be attempted this weekend. What follows is a compendium of why I suspect it’s a strong possibility.

A Spanish flea in the ear? A bit of odd behaviour from that Unsinkable Bank Santander. This circular was sent out to all its lucky customers during the last 48 hours. Entitled ‘IMPORTANT CHANGES TO TERMS AND CONDITIONS FOR
SANTANDER BUSINESS CURRENT ACCOUNTS AND BUSINESS SAVINGS ACCOUNTS’ (like what people just lost 85% of the value in Cyprus) it notes what the changes are  ‘For businesses with a business turnover up £250,000.’ That’s SMEs to you and me.

Especially notable is Para 1(b) which now reads as follows (my emphasis):

’1 b) Your Money
Any money held for you in an account with Santander UK plc will be held in its capacity as a bank and not as a trustee. In accordance with FSA requirements we areobliged to notify you that the client money rules on money do notapply to a Banking Consolidation Directive (BCD)  in relation to deposits within the meaning of the BCD held by that institution. As a result, the money will not be held within the client money rules of the FSA.’

If I can just put into English what this means, ‘We hereby abrogate all responsibility for the business funds you keep with us, because we can no longer be trusted. In fact not only can we not be trusted, if those nasty Government people spot we’re up the swannee and order us to restructure, all bets are off, and the chances are you’ll lose the lot because they’ll steal it for the bailout. Ithangyew.’

The interesting thing about the choice of SMEs for such a circular reflects the fact that, by far, their current accounts have far more ‘velocity’ than private Mr Average: that is, at any given time they could have £150,000+ in cash between outflow and inflow…even though their annualised turnover is under £250,000. Also larger (multinational) businesses would kick up a stink, whereas as Stephen Hester has taught us already, SMEs can be easily kicked around. And finally, mopping up 100,000 SME accounts at £100K average a pop is a far easier way to steal than snaffling fifty quid from two million private current accounts.

Bear in mind, this is a Spanish bank we’re dealing with here. Que viva Espagne and all that, but as long ago as June 2012, the relative credit-worthiness of Santander UK was downgraded by Moody’s; and at the start of December, Spain formally requested €39.5bn of European funds to recapitalise its banking system. It clearly wasn’t anywhere near enough; just fifteen days ago, the respected site Seeking Alpha had this to say:

‘….setting up Spain’s “bad bank” SAREB, Spain has managed to at least create the illusion that the growth rate of non-performing loans in the system has topped out….in fact, the percentage of bad loans in the system actually continues to grow, even though this is no longer visible in the official aggregated data…’

That’ll be the old leger-de-main and can kicking acrobat Act then. And although Santander was described by the Goforits in mid 2012 as “a stable bank storming through the crisis”, the tone has changed somewhat since then. Here are some more smoke signals for all you palefaces out there getting paler by the minute:

1. 25 Oct 2012: One-off charges for bad lending and dropping purchase of RBS branches as growth prospects slow. Santander UK profits down to £372m as fewer home loans agreed

2. 19 Jan 2013: Santander admits to a catalogue of ‘errors’, then has to be chased for a goodwill cheque

3. 31 Jan 2013: Santander suffers a sharp decline in profits as the domestic economy slumps, and bad debts rise.

So here we have a bank that needs more money. Guess what happens next….

4. 9 Mar 2013: Long-suffering Isa savers are finally seeing rates edge up as Santander launches new range.

But the instances of stalling just keep on popping up…

5. 18 Mar 2013: Santander bank account ‘glitch’ loses HSBC customer £5,500 following money transfer

6. 25 Mar 2013: Elderly couple who lodged a cheque from Canada into Santander during June 2012 still waiting for the funds to clear.

When even IT expects a meltdown, be very afraid. A disturbing tip pops into The Slog’s mailbox concerning Easter weekend and those wonderful banking blokes who gave you 2008. A top Wally in charge of City computer networks says there will be no complex updating and system repair done this weekend.

This is far more important than you may think. A four-day holiday is prime time for geeks and software nerds to sit in a dark trading room and debug everything. The idea of not doing it can only be explained by one thing – which the computer MoU confirms:

“All computer & program updates are cancelled this weekend as they are semi-anticipating mayhem next week in the markets and cannot risk having any maintenance work running over.”

Now then, what might produce market mayhem? And what else would you try to effect during a bank holiday? Seriously, I am that man praying that this smoke signal is wrong: I don’t have my affairs fully in order yet, and it does have a ring of truth about it. Perhaps also helping to explain everyone being in the dark about Draghi the Invisible Vampire over the last three weeks.

The Troika has learned the lessons of Cyprus. Cyprus taught us how quickly the big, hot and smart money disappears. It happened so fast, in fact, that the Cyprus Bank depositors left behind – the entirely innocent in most cases – will pick up the bill. Not oligarchs, not ESMs, not ECBs, and most definitely not Berlin: just ordinary savers who have amassed €100,000 euros during a lifetime. People like this are not the self-styled élite: they’re you and me and people we know.

Odd goings on at the ECB website. For Mario Draghi, it seems, weekly reporting of capital flight from the eurozone is too frequent: what Dracula in his dark underground cave would like is no reporting of it. Go to the ECB website, and you will note there that the Central Bank hasn’t released any financial stats for over a week now. You may also spot that the open-request search engine box has disappeared. Monetary, financial markets and balance of payments statistics haven’t been updated at all for over a month.

The imperturbable pondering the Unthinkable. I invested an hour yesterday talking to the Chairman of one of Britain’s largest and most successful wealth management consultancies. I told him I was in the process of moving out of Sterling – and Europe as a banking centre. I asked what he thought.

“Why would you not do that?” was his response. He then enlarged on his view: “Catch the Tube into central London now, and everyone is talking about whether their money is safe in a Western bank…or branches of such a bank in Asia. This sort of thing is unheard of in my lifetime. There is a sense of acceleration, and acceleration always happens just before the end”.

I mentioned the Slogpost about Djisselbloem’s plan for euro-wide capital controls.

“I’d be disturbed if he didn’t have one,” my friend replied, “But if he’s does have one, then he needs to get a move on. Cyprus has changed everything: the treatment of depositors there has removed any trust for the foreseeable future. If the eurogroup is going to introduce controls, now is the time….not in a month or so”.

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Yesterday in Frankfurt, Marketwatch opined as follows: ‘the precedents set by the Cyprus deal have undermined the euro in a very important way. The imposition of capital controls–a euro-zone first–now means that a euro held in a Cypriot bank account can’t be moved, withdrawn or even spent with the same ease as a euro held in a bank account in Germany, France or anywhere else in the 17-nation eurozone. Simply put, a “Cypriot euro” is worth less than a euro held in a bank account anywhere else.’

It makes the whole idea of EMU a nonsense: it is, in fact, the beginning of the end of EMU. In a client note after the true level of Cyprus haircut was announced, Deutsche Bank strategist George Saravelos wrote, ‘Economic and monetary union across the entire euro zone no longer exists. Even though [Cyprus] is very small, policy makers’ willingness to suspend cross-border euro convertibility is a meaningfully negative signal for the euro zone.’ The economics boffins at Nomura concurred: ‘Common currency, by definition, means that a euro in country A is equivalent to a euro in country B’ they wrote. UBS Head of Global Economics Paul Donovan told CNBC, “If you impose capital controls, effectively, the monetary union is dead.”. And perhaps most chilling of all, David Mann, Regional Head of Research for the Americas at Standard Chartered Bank says, “There is no point in anyone claiming they know what’s coming next. It’s [capital controls] gone from something hardly mentioned a week ago to something that is being taken absolutely seriously enough to be running into a real scenario. But it has to be instant. Bank runs can literally be electronic — they happen at a touch of the button.”

Well, we have a four-day weekend here, when all the fingers are away from all of the buttons. Stay tuned: if I come up with anything more concrete still, you’ll be the first to know.