As well as proposals for an ‘Australian tax on bank deposits’ set to start on January 1st 2016 (A tax on your money you have already paid tax on!); and plans for increased capital controls in France in September 2015, which includes increasingly draconian legislation such as the following (1):
- “Prohibiting French residents from making cash payments of more than 1,000 euros, down from the current limit of 3,000 euros.
- In addition any cash deposit or withdrawal of more than 10,000 euros during a single month will be reported to the French anti-fraud and money laundering agency Tracfin.
It appears that counterparty risk to the existing financial system is set to ratchet up across the entire world in Q3 and Q4, culminating with the EU’s Bank Recovery and Resolution Directive set to go into effect on the 1st Jan 2016.
Just to give you an idea of where capital controls are heading, especially in the EU. Included in the EU Bank Recovery and Resolution Directive legislation is the following clause:
68) “In order to ensure that resolution authorities have the necessary flexibility to allocate losses to creditors in a range of circumstances, it is appropriate that those authorities be able to apply the bail-in tool both where the objective is to resolve the failing institution as a going concern if there is a realistic prospect that the institution’s viability may be restored,”
To summarise, when banks and other financial institutions start to fail in the EU, your deposits will be directly on the line to temporarily sure up their balance sheets.
Due to the extreme amount of leverage, derivatives and potential contagion between sovereign states and financial institutions worldwide, I would argue that it is almost impossible to restore the ‘viability’ of highly leveraged financial institutions at this time. This could lead us into incremental never ending bail-ins that gradually erode the hard earned savings citizens have made over generations.
Greece could potentially see the first use of this directive as Zerohedge identifies (2). Whilst the third bailout package for European Banks/Greece is currently being finalised and stands no realistic chance of spurring enough economic growth to reduce Greece’s debt to GDP ratio. It is possible that any shortcoming in shoring up Greek bank balance sheets, could end up on the shoulders of depositors following the implementation of the EU Bank Recovery and Resolution Directive legislation on January 1st 2016.
However, comparing the current debt to GDP ratio of Greece to other countries within the EU and we can see that the risk of Bail-ins and capital controls is not just limited to the relatively fringe country of Greece. Several other heavily indebted EU countries below could be next in line to use these bail-in tools when potential economic crises strikes.
Source : McKinsey, Zerohedge
One of my main arguments for owning alternate currencies such as precious metals and Bitcoins has always been to reduce counterparty risk to the existing financial system; and we can see that this risk clearly seems to be in a up-trend as we go into the fall of 2015.
With 2015 world GDP growth estimates dropping and the continued rout in commodity & high yield credit markets indicating real weakness in global demand. We could soon see economic hotspots spreading around the world that could lead us to the very real implementation of capital controls & bail-ins on a global scale.
Looking at the effect the Cyprus bank bail-in of 2013 and the recent capital controls in Greece had on the price increase of Bitcoin, it could potentially be a opportune time to take advantage of the current price weakness we are seeing in the alternative currency markets.