Submitted by Tyler Durden: Overnight, Reuters published an article highlighting something we noted first over three years ago: the unreasonably large size of a local financial sector as represented by its total assets compared to the host nation's GDP.
More importantly, Reuters points out the similarities between Cyprus and Iceland in one key metric: total financial assets to the underlying GDP: "The [Cyprus] banking sector is now roughly eight times the size of the economy compared to 10 times for Iceland and over four times for Ireland before their crises. Banks in both countries used cheap funding to gorge on speculative investments." The issue for Cyprus of course was the composition of the liabilities matching these assets, which were mostly in deposit form, which was the alleged reason why the Eurogroup decided to proceed with deposit haircuts in order to shrink the overall financial balance sheet: arguably there were no other liabilities it could haircut. And yes, Cyprus is very comparable to Iceland in that regard.
That much is known.
What may not be known is that it is specifically the fact that the underlying economy was tiny by comparison, i.e., small, relatively inert, non-aggressive government, in both Iceland and Cyprus that made them a depositor's safe haven... until of course confiscation day.
What is certainly not known, at least for now, is that slowly but surely financial markets and more importantly depositors, will start looking at all countries that have a very high ratio of financial assets, and thus deposits, to host GDP, as an indicator of where the "Cyprus Virus" may strike next.
Which is why we present readers with a pop quiz: the chart below show the ratio of total financial assets to host nation GDP. The tragic cases of Cyprus and Iceland are well-known, as per Reuters, and highlighted on the chart. We urge readers to guess what the supposedly very stable countries X and Y are on the chart, whose total financial system assets to GDP are approaching those of Cyprus, especially since depositors in their banking systems may be due for a very unpleasant surprise next if indeed Iceland and now Cyprus are the case studies.
Hint: Russian billionaire oligarchs are quite familiar with both X and Y.
We will provide the answer shortly after Bernanke's press conference today in which he will once again reaffirm he will monetize US debt as long as the US runs a $1+ trillion budget deficit, i.e., forever.
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Pop Quiz Answer: Presenting Countries "X" And "Y"
Submitted by Tyler Durden: In our pop quiz article earlier today, we asked the question of which two countries - notable among the uber-wealthy Russian oligarch class - are approaching the same ratio of financial assets to GDP as seen in both Cyprus and Iceland, and which has been blamed for the recent onslaught against Cypriot savers.
We were not surprised to note that the vast majority of readers figured out that one country, noted as X, was Switzerland, where as we have discussed over the years, just two banks, UBS and Credit Suisse alone have three times more assets than the total Swiss GDP. The top 10 Swiss banks with total assets as reported by Bloomberg are shown on the chart below:
This implies that, as has been known for decades, Switzerland is one mega-banked country, and it should come as no surprise to anyone that the vast majority of bank liabilities are in the form of deposits.
Are Swiss deposits as a fraction of total liabilities as high as in Cyprus? The full, accurate breakdown is not very clear, especially since many banks are rather "loose" with how they define their liabilities out of legacy deposit secrecy concerns. However, it is accurate to say that when it comes to funding, the Swiss financial system does have a preponderance of deposits on the right side of the balance sheet.
Does that make deposit tax levy in the country that was formerly synonymous with bank secrecy, and where having a bank account used to be a symbol of wealth and success, feasible? Absolutely. Does it mean it will actually happen? We have no idea. But then again nobody had any idea a week ago that Cyprus would shock its depositors on Saturday with news that up to 9.9% of their savings would be expropriated.
What would make a Swiss bank tax levy it more likely is if, following ongoing exposure of tax evasion in Switzerland or for any other reason, depositors decided to pull their money out of banks in bulk, forcing a funding collapse and a vicious financial system contractionary cycle, which might then force the local government to follow through with a Cypriot type act. It certainly would not be unprecedented: it was only several months ago that various Swiss banks implemented negative deposit rates. All a deposit tax levy would do would be to collapse the ongoing "taxation" from negative rates in a one-time event.
Finally, with Russian oligarchs a key source of marginal funding of Swiss deposit accounts in the past several years, should the witch hunt against Russian wealth escalate beyond merely the Eurozone, due to political pressure or otherwise, it would make this particular class of Swiss bank clients especially vulnerable to an unwelcome, and unexpected (but long ago predicted) tax on their wealth.
So much for country X Switzerland.
Moving to country Y, we were surprised to see only two readers suggest, correctly, that it was Singapore, with a total financial asset to GDP rate of 7.7x.
Although, in retrospect, it is perhaps not all that surprising, and it means that Singapore is doing a great job of preserving the fact that it is now the defacto target of the world's uber wealthy depositors, who no longer have faith in the Swiss banking system, mostly due to the loss of banking secrecy which for centuries made Switzerland the preferred target of accrued wealth from around the world. In other words, Singapore is doing precisely what its depositors want it to do - stay off everyone's radar as much as possible.
Below, again from Bloomberg, is a breakdown of the top Singapore banks by assets. Here, even more so, it becomes obvious just how concentrated the assets are among the top 5 banks, which collectively have nearly 7x more assets than the host nation's GDP.
We fully expect the asset-to-GDP ratio of Singapore's financial system to soar in the coming months, as more ultra-wealthy "private clients" from around the world reallocate their savings from Switzerland, certainly from the Europe's periphery, and now - even from Europe's core in the aftermath of Cyprus, and into Singapore very much under the radar banks and financial institutions.
And while the Swiss confiscation risk is certainly out there, it is certainly anyone's guess if, when and under what conditions even the last bastion of savers, Singapore, will proceed with blatant wealth expropriation. If that happens, it is unclear where in the world, if anywhere, there will be a safe place fo inert capital, that is not invested in assorted risky assets (or is buried underground).
Which perhaps has been be the goal all along - after all the one thing the Keynesians in the world are suffering from (and are constantly shocked by) is the record low velocity of money. What better way to boost said velocity, and monetary circulation, than by making depositors themselves doubt the sanctity of their cash held in a bank.... Any bank, anywhere in the world.
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