One day after we reported that Latvia’s central bank governor – and ECB Governing Council member – Ilmars Rimsevics was detained by Latvia’s anti-corruption authority on Saturday on suspicion of accepting a bribe of more than €100,000, prompting both Latvia’s Prime Minister and the president to call on Rimsevics to resign, Latvia now appears to have a full-blown banking crisis on its hands, after the European Central Bank froze all payments by Latvia’s third largest bank, ABLV, following U.S. accusations the bank laundered billions in illicit funds, including for companies connected to North Korea’s banned ballistic-missile program.
The troubles started on February 14, when Latvia began investigating ABLV over suspicions of illegal trading related to North Korea’s weapons system. The investigation was launched after the Treasury Department charged the bank on Feb. 13 with having “institutionalized money laundering as a pillar of the bank’s business practices,” which proposed preventing the bank from opening an account in the U.S.
That decision immediately made ABLV a pariah to other financial institutions, effectively cutting its access to the dollar and funding flows from the world’s most important market, and forcing it to rely exclusively on the ECB as it sole-source of funds.
As the WSJ reported, in proposing the ban on ABLV, Treasury said the bank managed transactions for clients connected to several long-sanctioned North Korean firms.
These include North Korea’s Foreign Trade Bank, the institution that manages Pyongyang’s foreign-currency earnings, revenue that U.S. and United Nations officials say go directly to North Korea’s nuclear and missile programs.
According to the Treasury, ABLV’s alleged illegal activity also included funneling billions of dollars in public corruption proceeds from Azerbaijan, Russia and Ukraine through shell company accounts.
ABLV, Latvia’s third-largest lender by assets, is based in Riga but has an office in Luxembourg and a subsidiary in the U.S. It is also supervised directly by the ECB under a new system of eurozone bank supervision introduced during the region’s recent financial crisis, under which national authorities remain responsible for enforcing money-laundering laws.
On Monday morning, the troubles for ABLV cascaded when the ECBsaid that it had instructed Latvia’s banking supervisor to impose a moratorium on the country’s third-largest bank, which freezes all payments by the bank on its liabilities.
“In recent days, there has been a sharp deterioration of the bank’s financial position. This follows an announcement on 13 February by the US Department of the Treasury’s Financial Crimes Enforcement Network from February to propose a measure naming ABLV bank an institution of primary money laundering concern pursuant to Section 311 of the USA Patriot Act,” the ECB said in a statement.
“A moratorium was considered necessary given that the bank is working with the Latvian central bank and authorities to address the current situation.”
Meanwhile, sensing that a bank run may be imminent, Latvia’s central bank said it had extended a loan of €97.5 million to ABLV following a request by the bank.
The loan was granted against high-quality securities that exceeded the amount of the loan, and state resources weren’t used, the central bank said.
As the WSJ also reported, in a related development Latvian state police on Monday said they had launched a criminal investigation into a complaint a high-ranking official in Latvia’s financial sector had extorted bribes from a Russian businessman, Grigory Guselnikov. The Latvian official wasn’t named. State police announced the probe at a joint press conference with the anticorruption agency, where details of the probe into Mr. Rimsevics were revealed.
And this is where the banking crisis could spread beyond just ABLV: Guselnikov is the largest shareholder of AS Norvik Banka, another Latvian lender that lodged a request for arbitration against Latvia with a World Bank division in December. The bank complained of “unfair, arbitrary, improperly motivated and unreasonable regulatory treatment accorded to the Bank by the Latvian authorities.”
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On Monday, Latvia’s Prime Minister Maris Kucinskis convened a two-hour meeting of cabinet ministers on Monday to discuss the two cases. He suggested after the meeting that the central banker, Rimsevics should step down, at least while the investigation is going on, local news agency Leta reported.
Latvia hopes to contain the sudden central bank chaos by announcing that Rimsevics’ duties will be carried out by his deputy in his absence, however it remains to be seen how effective this last-minute attempt to avoid a depositor panic will be. The ECB declined to comment on Rimsevics’ detention.
Latvian President Raimonds Vejonis said on Twitter on Sunday that the country’s National Security Council would review the situation in the Latvian bank sector this week.
Finally, for those wondering if there is risk of a systemic bank crisis in Latvia, we offer the following Bloomberg quote from the Prime Minister as of this morning:
LATVIAN PM SAYS ABLV NOT SYSTEMIC FOR LATVIAN DEPOSITORS
Unfortunately, any time a politician tells depositors not to panic it’s usually too late.
Earlier today we discussed a report by Goldman Sachs which, when summarized, suggested that unless something significant changes in the coming years, the current US fiscal policy will lead to a debt catastrophe. In an unprecedented warning, the bank which spawned Trump’s chief economic advisor Gary Cohn, ironically the architect behind Trump’s fiscal strategy, warned that “the continued growth of public debt raises eventual sustainability questions if left unchecked.”
It is worth highlighting that for Goldman to warn that the US fiscal and debt trajectory is unsustainable is quite unprecedented, especially since it is the bank’s former President and COO who has put the US on that path.
And while we urge readers to get acquainted with Goldman’s list of concerns, all of which are very troubling, there is one specific chart which lays out clearly why the US is now headed for “banana republic” status amid developed economies when it comes to US debt sustainability, or in this case lack thereof.
That chart is below, and it shows total projected US Federal Debt on one axis, and US interest expense as a % of GDP on the other. The result is the red dot in the top right.
This is how Goldman puts it:
The US appears to be headed into uncharted territory—at least for US fiscal policy—regarding the relationship between interest expense and the debt level.
As shown in Exhibit 11, interest expense considerably exceeded the current level during the late 1980s and early 1990s, though the debt level was moderate. By contrast, the debt level was slightly higher during and just after World War II than it is today, while the level of interest expense was similar.
However, we project that, if Congress continues to extend existing policies, including the recently enacted tax and spending legislation, federal debt will slightly exceed 100% of GDP and interest expense will rise to around 3.5% of GDP, putting the US in a worse fiscal position than the experience of the 1940s or 1990s.
While Goldman is absolutely correct, all else equal, we doubt all else will be equal in a few years when US debt is well above 100% of GDP, and the blended US interest expense is the highest it has ever been in US history. As we noted earlier, while a sovereign debt crisis appears inevitable under the conditions laid out be Goldman, the only loophole is “if the Fed proceeds to monetize the deficit once again as it did in 2009-2015, sending yields plunging as the next and final episode of QE is unveiled.”
Which, we concluded, “is precisely what will happen, and is also why Goldman is already starting to load up on all Treasuries it can buy.”
And while the next episode of QE will in no way resolve the looming US debt crisis – and in fact make it even worse eventually – it will at least again kick the can for a few more years, something in which the Fed has demonstrated a remarkable effectiveness time and again. Meanwhile, as even Goldman now admits, the incremental debt incurred as part of the next episode of debt monetization “would put the US onto an even less sustainable long-term trend.“
After a strong rally from the $6,000s, bitcoin ultimately saw a near 100% growth in market value as it now sits atop its rally in the low $11,000s. Currently, the market is testing well-known, strong resistance levels and is seeing quite turbulent shakeouts and rallies as it decides what the next market move will be. On a macro view, we can see that bitcoin is testing the strength of the daily 50 EMA:
Figure 1: BTC-USD, Daily Candles, Macro Trend
The red square at the top of the trend represents a macro distribution trading range that ultimately led to the decline in value of the last couple months. At the time of this article, we are currently testing the lower boundary of this trading range:
Figure 2: BTC-USD, 4-Hour Candles, Retest of Distribution Trading Range
In a typical markdown phase of a market cycle, it is quite common for a distribution trading range to break down through the bottom, see a strong drop in price, and then see a rally that leads to a retest of the lower limits of the prior distribution trading range.
The markdown from the top of the market cycle has been well defined by the red, dotted channel sloping downward in the image above. This current rally has the price pushing beyond the limits of the channel and shows a break of the current downward trend.
One thing that should be noted however is that a breakdown of a downward trend doesn’t necessarily mean that it will become an uptrend. It’s entirely possible that a break from the downward trend could lead into a consolidation period that yields a new downward trend — we’ve seen this time and time again.
At the time of this article we are currently seeing turbulent swings in price as the market decides what its next move will be. At the top of this rally from $6,000 to the $11,000s, we see a trading range starting to form:
Figure 3: BTC-USD, 30min Candles, Possible Trading Range
A bullish case for this trading range could be considered if we manage to break above it and find support on the top of the trading range. This sign of support would be a bullish signal to the market that we are no longer interested in lower values and that the market is ready to continue its markup campaign.
However, if we break above this trading range and fall back inside the trading range, it would be a very bearish sign that the we are actually forming another distribution trading range, indicating that the top of the current rally is over. At that point we could expect to begin a new markdown campaign in the following days and weeks.
Thus, this current resistance level is pivotal and will serve to mark either the end of the uptrend or the beginning of an even stronger move to higher values.
Bitcoin has seen a strong rally since it bottomed out around $6,000.
Currently, it is finding turbulent market activity as it tests well-known and established resistance levels.
If we manage to find support on the trading range outlined in Figure 3, this will be a strong indication of a continuation to higher highs. However, if pushing upward we don’t find support on the top of the trading range and manage to fall back inside the trading range, this is a strong bearish signal that a potential markdown in price is in store in the next few days and weeks.
Trading and investing in digital assets like bitcoin and ether is highly speculative and comes with many risks. This analysis is for informational purposes and should not be considered investment advice. Statements and financial information on Bitcoin Magazine and BTC Media related sites do not necessarily reflect the opinion of BTC Media and should not be construed as an endorsement or recommendation to buy, sell or hold. Past performance is not necessarily indicative of future results.