What is Safe From A Bail-In (Loss Absorption) ?
I have been giving thought to this bail-in idea.
Bail In is the In Thing. A bail in during a crisis involves senior bondholders and senior creditors (aka depositors) as Cyprus has demonstrated. This is not unique, it will be universal. Contingency plans are being drawn up and put in place, in several jurisdictions for bail-ins to include depositors (outside the guaranteed deposit insurance programme) and bond holders.
Because when you have a bail-in, it does not constitute default. It is a credit restructuring event, just like Greece and the recent SNS Bank rescue.
Rules are changing everyday and it has become dangerous to be sitting on any form of recoverable cash, guaranteed or not. Perhaps that is why real estate is booming ? Taking a loan is better than placing a deposit ? Buying stocks ? Buying gold ? Buying corporate bonds ?
A UBS article I read recently took a jibe at the concept of return OF capital against the return ON capital. By bailing in depositors, the motives of depositors versus the motives of investors have been classed as one. The depositors just want their money safe while investors want more. There will be a price to pay in the erosion of confidence.
I suppose we are in the investor category and drawing from that, it looks like nothing is safe although we are fortunate to live in Singapore, a well run and capitalised banking environment.
But we will never know if governments will introduce a new property tax overnight, or a capital gains tax or worse, capital controls. Make no mistake, taxes are just as harsh as bail ins, except that you still have full ownership rights and control over your assets. But capital controls ? That is a whole new ball game and we are living in a world now which views that “capital controls aren’t obstacle to globalization just a tool to manage it”. Doesn’t that make Dr Mahatir a legend for what he did in the Asian Crisis ?
Thus we have the cEur vs the rest of Eur ? cEur = Cyprus Euro dollar, the untouchable.
I am taking away a big lesson, albeit vicariously, from the sidelines of this EU crisis.
1. This year is going to be a tumultuous one as I have mentioned in my 2013 outlook.When Doves Cry – Crisis of Confidence 2013
2. Hold some Gold (not gloating about my XAU/EUR yet, but it has broken 1250). My banker has clarified that Gold does not constitute a deposit, just in case.
3. READ THE FINE PRINT in all those bonds you buy. It would be a tragedy if you had bought a VTB paper but issued by VTB Cyprus, thinking that it was VTB risk.
4. No bank bonds for me until the Basel 3 rules stop changing and also because, the Dodd Frank Act is going to be killing US banks from 2H, but that is a story for another time.
5. Buy property only after doing thorough research on the tax structures and economic sustainability (and populist government regimes).
The storm is just brewing.
Australia : Gillard won’t rule out super raid on wealthy.
US : “any geographic venue that for whatever reason was once considered a global tax haven in the “Old Normal“, be it Switzerland, Greece, Luxembourg, Singapore, or as the case may be Lichtenstein, is now fair game for confiscation and otherwise expropriation of local capital.”
Marc Faber : “I Am Sure Governments Will One Day Take Away 20-30% Of My Wealth.”
Doing short term trades. Am short EURJPY today, was lucky to have manage a decent entry level >120.50. Target 119.60-119.80. S/L 121.00.
Interesting you had this post. I just bought more gold today and the representative was telling me that he has been seeing a lot more gold brought and stored under the Singapore Freeport.
Hi Derek
You could store a body in Freeport and no one would care or no one can do anything about it.
Conspiracy theory on gold :
So I guess another year to go before China is ready.