It will first start as trickle, and then it will grow to the size of a brook, then as other brooks join it will grow to the size of a creek, and then as other creek join it then a small river, and as the small rivers join together a large continent draining river.
The trickles are just starting in Luxembourg, a country known for it’s banking, but not much else. Luxembourg is a country with banks deposits in significant excess of its gross domestic product, just like Cyprus. But just like Cyprus, Luxembourg cannot print enough physical currency to cover the entire electronic Euro currently held/deposited within the various disk drives of its banks.
Cyprus banks had deposits greater 10.8 times the GDP of the country. Luxembourg banks according to IMF in 2011 held deposits greater than 20 times the countries GDP. I suspect that deposit growth has been greater than Luxembourg GDP growth, meaning that deposit to GDP is even greater today. If you think Cyprus is bad, just wait. The “ChubbChubbs” are coming. It will sweep over the continent, each of the weak sisters being picked off one by one, as they succumb to monetary forces at work.
It was a good wave to ride while it lasted by the shore is close at hand the wave is starting to break lose form, it is really had to keep on your board in the spray and foam of a crashing wave. The smart surfers would have already pitched out, looking for the next wave.
So the really smart money is starting to slowly move those electronic Euro’s out of Luxembourg. I suspect a significant percentage of those electronic Euros’ that are being moved are also being converted to electronic Dollars. Given that of all the various world currencies that are convertible and not illiquid, and that have enough GDP to cover deposits being held within the confines of their banking system, the United States is it. At this time the exchange rate is rather favorable for jumping out of the Euro, not as good as it was a few weeks ago, but it is only going to get worse in the coming months.
Some of electronic Euro’s are staying in Europe. These electronic Euro’s are just going to other location in Europe, which for the moment appear to be safer. The reason for this is that individuals and companies need to cover operating expenses within Europe. But where to put those funds is the solvency question? As I look upon the GDP landscape the only European country with enough GDP to cover this flood of electronic Euro’s is Germany.
Another possible location is Switzerland, but even the Swiss have limits how many Euro’s they are willing to accept at the current exchange rates. A big large flow of Euro will destabilize their currency something the Swiss National Bank is battling everyday, but even their reserves are limited.
As stated in the CNBC article "The Insanity of the Cyprus Crisis". The ECB is not the FED. The ECB on its own has no ability to print money to rescue failing banks. The ability to print money falls to the various member National Country Banks that are members of the ECB who issue money in the name of the ECB. The ECB is responsible for just 8 percent of the notes issued the various National Country Banks. The National Country Banks are responsible for the remaining 92 percent, and the bad news it that their responsibility is limited to only those notes that they physically issued. The majority of the printing of Bank notes his handled by each member country. There is a country code printed on each note. For those who are interested “G” is the code for Cyprus.
The European Banking Authority, which has some limit responsibility in regulation bank the majority of the authority rest with the respective nations and their respective agencies, does not have the authority to borrow money (issue bonds) to rescue these failed banks, since it does not have any taxing capacity to back up any bonds.
What individual/corporation would put their electronic Euro’s in Italian Banks, Spanish Banks, Portuguese Bank, French Bank, Belgium Bank, or Dutch Bank? If I were a citizen of any one of the afore mentioned countries, I would be giving serious consideration to a minimum the amount of funds held in a bank.
The next question is when is a Euro note not a Euro note. Some would say that it is any such note with a Country Code of “G”, after all 92 percent of that note is backed by the full faith and credit of the Government of Cyprus.
We have gone from “one for all and all for one”, to “one for some of us and some for some of us”, the finally step will be “one for me and nothing for the rest”. It will be a very interesting summer, as another one bites the dust.