93 replies on “Reuters: Euro zone call notes reveal extent of alarm over Cyprus; Mody: Rolling the Dice in Cyprus”
Very good Mody piece. Thanks for the link
“The problems in Cyprus now threaten international financial stability. If the idea of a European banking union is serious, now is the moment to advance it. That means reaffirming the commitment to deposit insurance, closing unviable banks, and recapitalizing the rest with European (not Cypriot) funds.”
In 1914 europe, with leaders insouciant , sleepwalked to the edge of disaster and then fell over. Nobody, really, wanted war (in 1914)
Ok we won’t get war but have we learned anything in the last 100 years?
So many of our economic (and social) problems come down to the foundations of the economy. i.e. how money is created and destroyed.
It’s an accident of technology that the banks’ liabilities are now the main form of money. Thanks to the chequebook and computers the banking sector has acquired the ability to directly create money, but they can only do so by recording a corresponding debt.
There’s no getting away from the fact that every liability has to have a matching asset. i.e. Every euro has to have a matching debt. I struggle to see how a banking union or adjusting taxes can resolve the debt crisis? If we reduce debt the money no longer exists. If we’re to expect more money in the economy someone has to take on more debt.
Five years into the crisis and counting why is there such little acknowledgement of the money-as-debt conundrum? Is it because our economists learned the outdated multiplier model of banking in which case lets update it to the model of banking that actually applies and start discussing how to
@ Brian Lucey
David Hume : “All plans of government, which suppose great reformation in the manners of mankind, are plainly imaginary.”
@ Paul Ferguson
Everything reminded Milton Friedman of the money supply. I imagine you have the same thing going on. It is interesting but in moderation.
“Nobody, really, wanted war (in 1914).”
The Austro-Hungarian army did. Not that it worked out well for them…
(It was the butler in the conference room with a paper knife!).
If the crisis in Cyprus, a runaway island representing 0.2% of the GNP of the EA, can bring down the euro, then the latter is indeed a house of cards. But is it?
Paul Krugman demonstrates that acceptance of a haircut of deposits over €100,000 was inevitable in any survival scenario. This is precisely what the Cypriots – it seems – refused to accept. It may be too late for Cyprus but there is little evidence – so far – that it is too late for everyone else.
In all likelihood, the outcome will be the inevitable haircut for holdings over €100,000 plus some face-saving additional element to ease its extent, coupled with a statement of undying love and support from the ECB with, possibly, capital controls. (There is sufficient lee-way in the treaties for the last mentioned).
@Paul F
Per Seafoid, I would refer you, respectfully, to Solow:
“Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers.”
While we are at it there is another one for the outer edges of the Euro-federalist community:
“Over the long term, places with strong, distinctive identities are more likely to prosper than places without them. Every place must identify its strongest most distinctive features and develop them or run the risk of being all things to all persons and nothing special to any…Livability is not a middle-class luxury. It is an economic imperative.”
Mody is really on the ball
“There has never been an official explanation of why lenders to a sovereign should not share the pain, despite the “no bailout” principle on which the eurozone was founded. Most observers cite the authorities’ concern that if any sovereign does not honor its debts, all sovereign borrowers will be penalized. But such contagion risk is trivial compared to the wildfire that could be ignited by imposing losses on small depositors”
Regarding Austria Hungary John Authers recently had a piece on their bonds- they delivered a positive return finally, 97 years on
“We’re over the Rubicon! Wowsers, this is exciting. I wonder why nobody thought of doing this before?
“What do we do now?!
“Well I’ve had a good hard think and we go back! Back over the Rubicon!
“Yeh, I never liked it this side of the Rubicon. People shout at us. Er, how do we get back over the Rubicon?
“Er, I dunno. It seems trickier than it looked.
“Maybe if all simultaneously declare that we never crossed the Rubicon, it will be okay?
“Yeh, well let’s try that, unless anyone has some other ideas? No. Okay on the count of three we just really, really wish hard that this had never happened.”
@ GK
It is not every day you will see me quote Paul Krugman.
“What can be done? First off, Cypriot banks cannot honor their debts, which unfortunately overwhelmingly take the form of deposits. So a default on deposits is inevitable.”
Which would you prefer; say 97% of your deposit or 0%?
That is the possible choice facing all deposit holders in Cypriot banks.
@ GK
Whichever side of the supposed Rubicon you happen to be on!
@ DOCM
If the only way to save the EZ involved you burning down your own house would you do it , assuming the hard money guys in Frankfurt thought it would work, their forecasting track record notwithstanding.
The potential for disharmony between the EU and Russia on Cyprus has still to unfold. In the world of finance, Cyprus has long been the gateway to the Russia, the Russian republics and Central Asia, and has a unique DTA network into that part of the world. Much of this FDI is mainstream (as opposed to ‘legitimate’ as defined in a European context…) and relates to oil, gas & other natural resources. Not unlike Ireland’s position as conduit for US investment into Europe /EZ. The potential therefore for disruption of FDI flow into Russia and that part of the world is immense.
Western Europe, particularly Germany, depends on Russia for a substantial amount of its natural gas needs. The only alternative has not yet been fully developed – importation of natural gas from Iraq & other via Turkey. Wouldn’t surprise me if we see Russia retaliate via its natural gas pricing /other.
EU /EZ needs to beware of upsetting The Bear.
@ DOCM
No, indeed, I noted that with interest.
I am working and haven’t time to knock up a considered post, but of the various Rubicons and various elephants to be encountered I was thinking of the Rubicon of hitting savers of under e100,000 within the Eurozone, hence the line at the top.
You should come along to Tiny Plays for Ireland 2, where some of the works, particularly ones by Graham Stull and Keith Farnan, seemed to have suddenly leapt into immediate relevance.
Has Paddy Power opened a novelty bet on a Euro breakup over the Easter weekend? I’d give 5/2 odds, but unfortunately I’d only be able to accept bets in euros. Can’t see there bing many takers.
@DOCM
Which would you prefer; say 97% of your deposit or 0%?
We’re down to false dichotomies now? That’s it then; this thing is going to go.
UPDATE: OMG! Paddy Power are still giving 2/1 odds on Cyprus being first out of the euro!
The wider repercussions of Cyprus – ‘too big’ banks threatening countries.
Turkey:
Call to peace
21 March 2013 Al-Mustaqbal Beirut
The head of the Kurdistan Workers’ Party (PKK), Abdullah Öcalan has called on his supporters to lay down their arms and pursue political means to achieve the goal of autonomy for the Kurdish region.
The head of the Kurdistan Workers’ Party (PKK), Abdullah Öcalan has called on his supporters to lay down their arms and pursue political means to achieve the goal of autonomy for the Kurdish region.
Another small nation kicked around by the big powers post WWI when the promise of their own ‘state’ was defaulted on.
@Kurds
In solidarity.
Delirium tremens hits the Cypriot media:
Meanwhile, a mood incited green in Cypriot cities, where people flocked to income machines Thursday to repel as most income as probable after a supervision announced that banks would sojourn sealed until subsequent Tuesday …
With annoy growing, Cyprus’s president, Nicos Anastasiades, was set to introduce a revised devise after Thursday to throw a argumentative taxation on bank deposits. …
From that indicate onward, a E.C.B. pronounced it would usually cruise a uninformed liquid of puncture funding …
The supervision on Thursday was formulation to introduce nationalizing grant supports from state-run companies and conducting an puncture bond sale …
The fallback was being cobbled together as Cyprus’s financial apportion pulpy his box in Moscow on Wednesday …
•ECB to Push Cyprus Over the Brink
•Cyprus Bailout: What to do Now?
•BRICs Cook the Climate (Part One)
•Julian Assange Previews Next Fall’s Zero Dark Thirty Propaganda Sequel
•Cyprus: Will the Mouse That Roared be Gored? (Updated)
•Cyprus Bailout: Stupidity, Short-Sightedness, Something Else?
More Cyprus:
Bank industry chief warns Cypriot banks must reopen in days Reuters. Someone might clue the Troika in.
A Cypriot game of chicken FT Alphaville
Europe Plays I-Didn’t-Do-It Blame Game on Cyprus Bank Tax Bloomberg and The Cyprus bailout blame game begins Financial Times. This had actually started over the weekend.
Cyprus Parliament’s gift to the Eurozone Yanis Varoufakis
End of an Era: Cypriot Financial Sector Faces Collapse
By Stefan Kaiser
The disastrous financial situation in Cyprus is largely a result of the country’s crumbling banks. For years, the island nation profited from its bloated financial sector, but now it will likely have to liquidate its two largest banks. In Nicosia, government leaders fear that could decimate the economy.
If Cyprus doesn’t receive billions in foreign aid within a few weeks, the country will default by June at the very latest. But insolvency could come even sooner for the country’s two largest banks. The Bank of Cyprus and Laiki Bank are only able to survive at the moment through emergency aid from the European Central Bank, which on Thursday threatened to cut off all liquidity on Monday if terms of a European Union bailout deal aren’t finalized with the government in Nicosia.
These Cypriots have balls. Unlike a certain Brian and another Brian and a Michael and an Enda.
ECB: Do you feel lucky, punk?
Cyprus: Go ahead, make my day.
Garo,
Odds on they split the Popular Bank and singe the big depos or convert them to equity,or some other risk asset.
What happens after that in Cypus or elsewhere remains to be seen.
Shafted on the alter of German expediency.
Yves’s critique of Krugman’s smug ‘FUBAR’ post on the Cypriot crisis is unsurpassable.
Excerpt: As for the size of the banking sector relative to GDP, Krugman seems scandalized that the banking sector is so large relative to its economy. Yes, this is a risky model, and Cyprus made the mistake of being overly dependent on one huge client, Russia. But Cyprus is hardly alone in being a financial center with banks that are a big multiple of GDP. Luxembourg is the really extreme case here, with a banking sector at over 20x GDP. England’s banking sector is 6x GDP. Swiss banks were 6.8x GDP in 2010 (Switzerland has forced much higher equity requirements on its banks, so its balance sheets have shrunk since then). Singapore also has an outsized banking sector. But let us remember that the EU has also set out to trash the Cyprus banking sector pretty much overnight with the deposit garnishing threat. It is important to recognize that while a restructuring was necessary, the severity of the crisis and the degree of damage that will be inflicted on the economy was not.
Naked capitalism now defending the right of small nations to have enormous banks? That made me laiugh.
Telegraph reporting on that possible bank resolution
“Finance ministers for the 17 euro countries are considering a plan to shutter the two biggest banks in Cyprus and freeze the assets of uninsured depositors, said the four officials, who asked not to be named because the talks are ongoing. The ministers are holding a teleconference tonight.
Cyprus Popular Bank and the Bank of Cyprus would be split to create a so-called bad bank, one of the officials said.
Insured deposits — below the European Union ceiling of 100,000 euros — would go into a so-called good bank and not sustain any losses, while uninsured deposits would go into the bad bank and be frozen until assets could be sold, said the four officials.
Losses to unsecured creditors, including uninsured depositors, could reach 40 percent under the plan, which has support from the International Monetary Fund and the European Central Bank.”
This confirms earlier reports out of Greece.
So the ECB and the IMF support haircutting depositors. Especially Russian depositors. The wsj has a story today on the Russian/ Cypriot bilateral taxation agreement between the two countries. Apparently it grants very favorable terms to Russian companies setting up through Cyprus which accounted for the largest FDI into Russia.
@Carolus Galviensis
I’m a fan of Yves Smith’s analyses for some time now. There is certainly more than a touch of the ‘vindictive’ about the EZ treatment of Cyprus.
Up to 40% losses on the uninsured depositors .. in other words, close to the result originally sought by Germany and the IMF – and opposed by the Cypriot government and the European Commission. It looks iike the Commission made a bad misjudgement in proposing the haircut on insured deposits, probably seeking to align itself as “good cop” on the side of the Cypriots who were desperate to limit the losses for big depositors. This whole debacle will further damage the Commission’s reputation in Germany – not good news.
Some interesting numbers on Capital Flight…
“Figures from the European Central Bank also confirm the growth of deposits in the eurozone’s hard core and the flight of capital from the European south where the economic climate is one of uncertainty. Despite the small trend toward the return of deposits to Greek banks in the last nine months, Greece has recorded losses of some 76.5 billion euros in its accounts since 2009. In the same period, Spain has seen losses of 166 billion and Ireland’s came to 21.7 billion. On the other hand, the German banking system has seen deposits grow by 267.7 billion euros, while the rise in deposits in French banks has beaten all records, climbing by 324.1 billion in 2009.”
Has anyone any views on how you impose capital controls in one Eurozone country…do cypriot 500 euro notes stop being negotiable in the rest of Europe?
@ Paul Ferguson
There are a lot of people on here who struggle to keep up with what happened yesterday let alone what will happen tomorrow.
The strength of any hypothesis is its ability to predict future events and account for past or current events
I think you are 100% correct in your focus. I think it will take time for others to catch up.
It remains to be seen whether the Russians will take this victim hood lying down. Medvedev is already on record saying they may have to look at their Foreign reserves of Euro some 42% of which are Euro.
Sceptic,
It should be noted that losses of this magnitude are due to the Greek OSI which Germany had some influence over.
It should also be noted that this will probably accelerate capital flight to the core or out of the EZ both of which benefit the Germans.
It lends further credibility to the notion that Germany is manipulating events to its own advantage in a way typical of Bismark to control events without assuming expending treasure.
This is not a sustainable policy in the medium term. In the end, the system will collapse.
This New York Times article makes for chilling reading… http://www.nytimes.com/2013/03/22/business/global/a-cyprexit-might-not-hurt-euro-zone-much.html?hpw&_r=0
…especially this part…
“From a financial standpoint, what is most noteworthy is that the combined debt of the Cypriot people, companies and government is 2.6 times the size of the country’s gross domestic product. Only Ireland, still struggling to recover from the banking collapse that required an international bailout in 2010, has a higher debt-to-G.D.P. ratio among euro zone countries.
As debts in Europe mount in inverse proportion to the ability of its citizens, companies and governments to make good on them, the view is forming in Berlin and Brussels that — especially in the wake of the latest Greek rescue — a signal must be sent that for the euro zone to survive in the long run, citizens and investors must start accepting losses.”
Berlin and Brussels …that says it all.
@ Tull
My interpretation is different. I see a Germany that is rightly insisting on conditionality for bail-outs – no government has the right to lend out taxpayer funds without conditionality – but is ultimately willing to be flexible when the integrity of the EZ is theatened.
I believe I’m in a minority of about 3 on this blog. Happy to be so.
@ Carolus Galviensis
+1
Wacky regulators allow banks to become WMDs and then the citizens object when someone offers money to help them ….
Yes, poor little Cyprus, smuggling and money laundering wannabe!
The Eurozone is likely to survive long-term as a smaller group given the prospect of a decade ahead of slow growth at best and this week the Cyprus crisis shows that the prospect looks firmer.
Politics usually trumped economics in admissions to the European Community and later the Union but that has been one of the serious flaws in the monetary union.
Given that Cyprus only joined the EMU in 2008 and the negative reaction in several countries to outsiders dictating terms, the European Commission has on the one side shown itself not to be competent to monitor economies that have faced durable problems while there are few examples of successful ‘nation building.’
Lorenzo Bini Smaghi, an executive director of the European Central Bank in 2005-2011, showed in his article this week in The Financial Times touting Ireland as a poster example for Cyprus, that his knowledge of the Irish economy behind the headline data was as good as my knowledge of the Italian economy — which isn’t saying much.
Is this superficial knowledge common among those making key decisions?
We have had rolling crises over a six year period and what we have seen at decision making and advisory level in both countries and in European institutions, are people with narrow life experiences who had never before the Grate Recession had to make a consequential decision in their professional lives. Wisdom however, usually comes after experience.
We may not like German’s risk aversion but while eaten bread is easily forgotten, they gave us billions in foreign aid for agriculture, roads and regional development when it was good to have. Mickey Hickey should know that when Liebherr opened its crane plant in Killarney in 1958 and later built international class hotels there, TK Whitaker’s ‘Economic Development’ (1958) had a clause on the importance of such hotel developments – – a few years later, an Intercontinental hotel opened in Ballsbridge, Dublin.
This week’s battle is seen as a David and Goliath one (where is President Hollande?) and it’s easy to empathise with faraway people fearful of an economic collapse, but try on this cap for hypocrisy: at the current rate, over a decade, Ireland will facilitate the erosion of the European corporate tax base by at least €600bn. Add in the Netherlands, Luxembourg and Switzerland, and that is a lot of money.
Solidarity is easy when there isn’t a price on it.
I marvel at the level of outrage when some of you were deaf to reason when you believed the free lunch had been invented.
Great Recession! – – it is grating though.
Well said, Michael H.
@ Michael Hennigan
Morning from a torrential Dublin – the lights of the CB are staying on ’til after 11pm again.
“The Eurozone is likely to survive long-term as a smaller group given the prospect of a decade ahead of slow growth at best and this week the Cyprus crisis shows that the prospect looks firmer.”
What has been in my mind is Draghi’s: “The euro is irrevocable!”, July 2012. I don’t think that squares with the ECB threatening to pull the plug on the Cypriot banks on Monday.
Also:
“We may not like German’s risk aversion but while eaten bread is easily forgotten, they gave us billions in foreign aid for agriculture, roads and regional development when it was good to have.”
Germany sent Ireland foreign aid? Did they? When was that then? I expect it only goes to prove your point, but that is news to me.
“The strength of any hypothesis is its ability to predict future events and account for past or current events.”
You hit the nail on the head there!
@ All
From this morning’s leader in the FT.
“Nicosia has to face reality. It cannot play hardball, as it has done since its MPs rejected the idea of a levy on bank accounts last Tuesday. Were the ECB to call time on the emergency liquidity assistance, the Cypriot banking system would face the prospect of collapse. The government would have no option but to print its own currency, which would depreciate rapidly. The losses for deposit-holders would be much steeper than under the rejected levy on deposits.
Some politicians may be concerned that hitting large depositors would mark the end of the offshore banking model upon which the economy relied. But this model is patently unsustainable. It would also be obliterated if the ECB cut off emergency liquidity.
Moscow would no doubt be furious. Russians have deposited billions of euros in Cypriot banks. Some of this money would be hit by a restructuring. But if the Russian government believes these losses are not deserved, it can reimburse its citizens. Of course, it would then have to explain why taxpayers’ money is being deployed to bail out those who use low-tax offshore centres. Moscow would discover that its position is no different from that of the EU governments it has attacked this week.”
@ GK
On Germany’s “foreign aid” to Ireland, I would also like to know.
It is true that there is such a thing as the EU budget to which all members states contribute and from which some receive more than they put in under the stipulations relating to economic and social cohesion in the treaties (regional and social policy) and agriculture, a policy which existed since the very inception of the then EEC.
If Germany is giving “foreign aid” to Ireland, it must also be doing so with regard to the other beneficiaries in relation to agriculture, for example. The latter is, however, a managed sector of the European economy (as it is in almost every other country with the exception of New Zealand). Incidentally, Germany is now a larger exporter of agricultural produce than France.
@ Michael Hennigan
“Solidarity is easy when there isn’t a price on it.”
Sounds insurancey. No sign of deposit insurance either. Or a plan for what to do with dud banks.
I think people are entitled to moan. It’s not as if the Troika are delivering growth. There is a lot of suffering for very little progress. And on the street a lot of ordinary people have given up.
Many areas are overbanked. Banking is in a serious crisis but it all falls on the small people. That ain’t right.
Michael H
What country in europe got a large , unprecedented, actual foreign aid in teh 1945-48 period? Was it a) Germany or b) Germany?
Eaten bread is indeed soon forgotten.
Your desire to make ireland look worse than it is (its bad enough thanks) and I suspect to keep using this blog as a cheap advertising for your own site (which is excellent and doesnt need such) is getting thin.
Roll on a screed ….
The only hot money in Europe is Russian money is Cyprus bank deposits. How convenient.
Bond sellers never, ever, sell bonds for ‘hot’ money. Bond sellers are far too responsible for that.
No hot money in Switzerland, Germany, Netherlands, Finland etc. or Dia linn, Ireland.
It all looks like a setup from the word go.
The bondholders get their money out, the really big depositors get their money out. Then carpet bomb whoever is left.
I note very little discussion on the financial position of Cyprus.
Correct me, if I am wrong, but in summary.
GDP ~17BN
Debt ~14BN
Debt / GDP ~80%.
Money demanded (for what I do not know) by the ECB from Cyprus ~5.8BN,
=30% of GDP.
Equivalent Ireland ransom note = 50BN
Equivalent Germany ransom Note= 800BN
Time to pay. Now three days.
Even Luca Brassi would have doubted the Don’s sanity if he sent Luca out on such an errand.
“It is worth recalling that the reparations payments demanded of Germany after World War I were among the factors giving rise to National Socialism. And Germany had its own Schuld reduced on three separate occasions: the Dawes Plan in 1924, the Young Plan in 1929—too late to prevent the rise of Hitler—and the London Debt Agreement in 1953.”
“It is worth recalling that the reparations payments demanded of Germany after World War I were among the factors giving rise to National Socialism. And Germany had its own Schuld reduced on three separate occasions: the Dawes Plan in 1924, the Young Plan in 1929—too late to prevent the rise of Hitler—and the London Debt Agreement in 1953.”
@ Gavin Kostick
Gavin,
Have you guys been doing anything about climate change since John Gormley was put into orbit around Planet Bertie?
We don’t use the term foreign aid but I saw a report somewhere that John Bryan, the farmers’ leader, was in Brussels with the béal bocht this week and after some meeting, he managed a smile at a press conference. Some years these gifts amount to 90% of average farm family income — I’m not sure farmers are as poor as they say but anyway, nothing put into the kitty (net of course) in more than 40 years as a club member is a good innings.
Do you not remember that big cheque for £8bn in structural and cohesion funds wangled from Chancellor Kohl in the early 90s by Taoiseach Albert Reynolds?
We deserved it of course.
All the FF hoojas descended on Dublin Airport to see the big cheque and
Albert had a firmer grip on it than Neville Chamberlain had returning from Munich with his surrender terms.
Net cash receipts in today’s money could be about €75bn.
@ seafóid
I agree that the plan to haircut insured deposits was stupid.
@ brian lucey
Brian,
That old reliable whataboutery is always a good crutch!
Recall we had a tangle about the ECB’s likely reaction to your mini-default proposal on the prom notes?
Thursday’s démarche settles that!!!
There is nothing much to be gained by replacing one canard with another. One can back in the history of any country and find spurious arguments to require it to do this or that in the here and now. What matters is what countries are currently signed up to collectively. Pacta sunt servanda.
It is clear that (i) they are not be doing so in relation to completion of policy undertakings, notably in relation to the single market and (ii) what they have signed up may be inadequate.
The head of the SPD certainly thinks that the latter is true as he has suggested a form of new Marshall Plan (which applied to Europe as a whole and not just Germany).
@ Michael Hennigan
The whole thing is so dismal.
Nobody really comes out of it with any , er , credit.
Pacta sunt servanda! The EU represents an agreement between all the countries involved, with the richer agreeing to provide some assistance to the poorer in return for open access to their markets, with a rigourous, not to say draconian, role given to the Commission in the area of competition to ensure a level playing field. You undermine your arguments by your refusal to recognise this.
Professor John McHale, coincidentally, has a very incisive commentary in the IT this morning on the subject.
Now I think of it, Fishamble also have the top writer-performer-political activist Donal O’Kelly under commission for a new work, ‘Scum of the World’, which deals tangentially with the issue. But I am now way off topic.
Did anyone expect the Irish Green Party to stop climate change?
@ Gavin Kostick
Politics always trumps economics
Climate change will overrule politics.
Voilà
not off topic at all.
Micky H
hope the weather in KL is better than here.
Demarch? Not yet. Fat lady not even in the taxi to the theatre.
Does Peter Spiegel of the FT, (on RTE one) right now, understand what happens if a bank collapses?
‘All deposits are wiped out’. Absolute rubbish.
Shareholders, ECB, bondholders would come first.
The status of official lender would suddenly morph to official enemy.
I appreciate he had to condense his explanation, but it was a very misleading exposition of the options facing Cyprus. Were all Icelandic depositors ‘wiped out’.
On a wider front was has happened in the EZ is very simple.
Bondholders and official lenders were protected using depositors as a backstop.
Many thanks for the very interesting link. This extract, in particular, struck me.
“Either we shift control and intervention rights to the European level as part of a fiscal union; or, in the sense of a return to the Maastricht framework, we strengthen the liability and independent responsibility of member states. Taken to its logical conclusion, this also means that we cannot – and must not – rule out the possibility of sovereign defaults.
As things now stand, however, it is not quite clear which of these two directions policymakers are leaning towards; they seem to be performing a balancing act, with one foot in the Maastricht world and the other in a fiscal union. In the long run, such a balancing act is painful and unhealthy”.
Are we going to get an answer this weekend?
Like Asmussen in a recent speech, Weidmann conveniently ignores the reality that member states agreed a single currency while imagining that they could still simply coordinate – i.e. rather than harmonise – their economic and social policies. It is impossible for the single currency to survive if a majority in Germany – government, business and skilled union membership – persists with this blinkered approach not just in terms of the periphery but in relation to other countries of the core whose economies are closley linked with those of Germany cf.
“Ordnungspolitik” cannot be reduced to an unholy alliance between the three parties concerned which results in inequality and poverty in Germany and widespread damage to the economies of neighbouring countries. As the contribution by Gabriel in the Guardian linked to above, this approach is no longer widely shared in Germany and the Linke party is no longer the only one denouncing it. But the parties are in electoral mode and no one knows how the electorate is likely to react. The timing could not be worse.
@JG
re: FT Podcast with Peter Spiegel. Good link. Certainly worth a listen.
Again, he says depositors would be ‘wiped out’, in the event of an exit from the euro. I would question his understanding of ‘bank restructuring’ in an extremis case as this would be.
More interesting is his insight into the absolute coordinated pressure currently being put on Cyprus, from all ‘EZ’ institutions and governments.
The euro is now a open prison for countries. ‘You may not like our dictates, but if you try to leave we will destroy you, your people and your country.
@JR they are creditors…tax dodging shower of unsecured creditors availing of 5% p.a. ahem “risk free” investments yeah right.
Has the free lunch suddenly being invented..lucky to get 60 cents back,given the sign posts and risk profile above 100.
Perhaps given the provenance of these creditors moving it was not an option !
Simple..pass me a Kleenex I’m crying a river here..
“There is very little chance that politicians would ever choose to use the model they developed in Cyprus in a country like Italy or Spain, where a run on the banks would have such profound implications. By the way, if you’re wondering why investors left so much money in troubled Cypriot banks, here’s a trivia question: Would you have been better off leaving your money in a bank in the United States or in Cyprus over the last five years?
The answer: You would have been better off in Cyprus, even after the bailout, when your money was “confiscated.” If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit — 12,760 euros — you would be left with 114,840 euros. The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year.” http://dealbook.nytimes.com/2013/03/18/a-bank-levy-in-cyprus-and-why/
I prefer lee’s proposal here’s your cd few worthless shares punt on future gas revenue..do svidaniya!
JR,
what about the Eur/$ exchange?
Troika now saying they/Cyprus/Kaiser Zoze/ Batman needs 900m more. Just when the cyrpiots were close to a deal. Methinks someone wants Cyrpus to fail out now…
@Tull
“what about the Eur/$ exchange?”
The exchange devaluation may bother the large depositors but it would have little effect on the majority of Cypriots, who probably have very little cash assets. They earn in Cyprus and buy in Cyprus. Any inflation threat, subsequent to devaluation, can be managed, particularly if the country has energy reserves.
The non payment of ‘official’ lenders and various other highwaymen would leave Cyprus in a better position.
Ask yourself the question, why are the creditor countries so insistent that nobody leave the euro?
What is the big problem with leaving?
If Richie Boucher manages to lose 50bn in BOI next year, guess who is on the hook. In order of priority.
1. The State
2. Depositors in all banks, credit unions, post offices, who still have funds in the State. AIB banks in UK will be exempt a la Cypriot subs in Greece.
3. Bondholders get off 100%.
4. Covered bondholders, my favourite type of creditor, get the collateral, but probably will succeed in pleading to be 100% made up.
PS. Those with pension funds should be happy that, pro-nuclear Mrs Merkel, says they should not be touched. But pension funds keep deposits in banks, don’t they.
So anti-nuclear Mrs Merkel may allow pension funds to be lumped in with depositors, just as long as they are not German pension funds.
However, I think Germany is underestimating the Russian reaction.
Not happy would be an understatement. I would not be at all surprised if there was a deposit levy on EZ bank subs in Russia.
But never mind that, the ECB balance sheet will be used to compensate those banks. Shure what is a central bank for.
@ Grumpy & Seafoid
All I’m really looking for, at the moment, is for economics to accurately teach how money is created and destroyed. My not-so-hidden agenda is for the next generation of economists to question if this if the current way in which money is created is the best way.
Economics doesn’t accurately teach how money is created.
Most economists learn/teach that banks take in money from savers and lend this out to borrowers and they indirectly create money through the multiplier effect in the process. This is not how banking actually operates.
If economists knew that banks create the money they lend and indeed created almost all of their ‘depositors’ they would see that recording the money the banks create as a liability of the banks is very outdated.
The other strong issue I have is that economics doesn’t seem to teach anything about how money is deleted through loan repayments and hence why they are encouraging debt reductions.
@ Eureka
Thanks for the support.
@Paul I read your posts and enjoy them,always interesting to have different views and you express yours extremely well,always polite,keep up the good work.
What if….JR re Peter Siegel from earlier today then,they get rightly fuc…..
“In that scenario, when banks reopened, deposit flights would likely lead to bank insolvency and the ECB would veto ELA. As a result, banks would likely default, and since the sovereign is not in a position to nationalize the banks and cover the deposit insurance, it would be likely to default as well,” BofA adds.”
After that pointless trip to Russia,back they come empty handed.Of course the terms got worse,so they should,this had to have an ending,happy or otherwise time kills all deals.
Lots chatter about the gas reserves etc decent summar here,it’s not behind a “pay wall” you just have register.
“Since Cyprus signed a maritime border agreement with Israel in 2010, it has become the second main beneficiary of the gas boom. The island straddles Israel’s most likely gas export route to European markets. Cyprus also lays claim to its own gas deposits. The Aphrodite field, which is adjacent to Leviathan, may contain up to seven tcf of natural gas — enough to meet Greek Cypriot domestic consumption needs for decades to come. Yet even that field is contested by others. The breakaway Turkish Republic of Northern Cyprus claims co-ownership of the island’s natural resources and has opposed Nicosia’s attempts to unilaterally secure offshore drilling contracts.”
“Foreign aid began
in Nineteen sixty three
Between the end of the Chatterley ban
and the Beatles’ first LP”
The great thing about setting year zero to 1963 or so is that the Marshall plan or the London Agreement has about as much relevance as Charlemagne.
If Germany was a person she would be the stuck up know it all with no friends. For years we have tried to overlook her past crimes and extreme selfishness but there comes a point when we all must walk away:
Point 2: She is opposing France and UK’s attempt to lift embargo on Syrian rebels (this might be linked to Russian non-intervention in Cyprus recently)
The point is that Germany is losing the plot again. It is imploding in a narcissistic self-righteous rage. For Europe’s sake it’s time for all peripheral nations to pack their bags and walk away.
How – collective synchronised default and perhaps a new currency union without Germany
Selling subs to impoverished and v unstable Egypt for example for at least 1.5 billion and Algeria coughs up 2.5bn
The more you look at it the more Germany’s economic model is built on the tears and blood of others.
Merkels Germany is an amoral rotten mess that must be ripped from the heart of Europe. The reason Godwins rule is no longer working is because the references are all too apt
There is an interesting paper from Karl Whelan in Forbes
“Revised TARGET2 Paper & Implications for ECB of Cyprus Exit”
in which he writes
“Now before people go getting too excited about this, I suspect Cyprus would continue honoring its TARGET2 obligations even after an exit.”
@Eureka,what does 20 Billion get you,a nod and a wink!
“Critics say the murky episode is further evidence of Cyprus’s unwillingness to displease – and “embarrassing subservience” to – Moscow. The case is reminiscent of when a Cypriot court in 2010 bailed Christopher Metsos – the alleged leader of a bungling Russian spy ring exposed in the US that included the glamorous Anna Chapman. Metsos promptly escaped.” http://www.guardian.co.uk/world/2012/jan/26/cyprus-russian-invasion
As this is the “Reuters” tread,excellent piece by Irish journalist.
“Before joining the euro, the Central Bank of Cyprus only allowed banks to use up to 30 percent of their foreign deposits to support local lending, a measure designed to prevent sizeable deposits from Greeks and Russians fuelling a bubble.” http://www.reuters.com/article/2013/03/22/us-cyprus-banks-idUSBRE92L0CQ20130322
@ John Gallagher
Great link
This is sad:
“The banks sold down some of their Greek holdings, but then got back into the market as yields rose. “When the Germans were selling, they were buying,” said Apostolides, referring to the German banks’ 2011 dumping of Greek debt.
Simona Mihai, assistant professor at Cyprus European University’s banking and finance department, said the banks’ exposure stemmed from a desire to help their nearest neighbors, and a belief that Greece could recover.”
The Germans have played the rest of Europe from the start of this crisis. They don;t suffer any desire to help anybody.
@Eureka the guardian one terrific,great writer top of his game,has book along similar lines.
93 replies on “Reuters: Euro zone call notes reveal extent of alarm over Cyprus; Mody: Rolling the Dice in Cyprus”
Very good Mody piece. Thanks for the link
“The problems in Cyprus now threaten international financial stability. If the idea of a European banking union is serious, now is the moment to advance it. That means reaffirming the commitment to deposit insurance, closing unviable banks, and recapitalizing the rest with European (not Cypriot) funds.”
http://www.northernsun.com/0069.html
In 1914 europe, with leaders insouciant , sleepwalked to the edge of disaster and then fell over. Nobody, really, wanted war (in 1914)
Ok we won’t get war but have we learned anything in the last 100 years?
So many of our economic (and social) problems come down to the foundations of the economy. i.e. how money is created and destroyed.
It’s an accident of technology that the banks’ liabilities are now the main form of money. Thanks to the chequebook and computers the banking sector has acquired the ability to directly create money, but they can only do so by recording a corresponding debt.
There’s no getting away from the fact that every liability has to have a matching asset. i.e. Every euro has to have a matching debt. I struggle to see how a banking union or adjusting taxes can resolve the debt crisis? If we reduce debt the money no longer exists. If we’re to expect more money in the economy someone has to take on more debt.
Five years into the crisis and counting why is there such little acknowledgement of the money-as-debt conundrum? Is it because our economists learned the outdated multiplier model of banking in which case lets update it to the model of banking that actually applies and start discussing how to
@ Brian Lucey
David Hume : “All plans of government, which suppose great reformation in the manners of mankind, are plainly imaginary.”
@ Paul Ferguson
Everything reminded Milton Friedman of the money supply. I imagine you have the same thing going on. It is interesting but in moderation.
“Nobody, really, wanted war (in 1914).”
The Austro-Hungarian army did. Not that it worked out well for them…
FYI Sony Kapoor
http://blogs.lse.ac.uk/europpblog/2013/03/21/the-cyprus-fiasco-has-all-the-hallmarks-of-a-classic-whodunnit-sony-kapoor/
(It was the butler in the conference room with a paper knife!).
If the crisis in Cyprus, a runaway island representing 0.2% of the GNP of the EA, can bring down the euro, then the latter is indeed a house of cards. But is it?
Paul Krugman demonstrates that acceptance of a haircut of deposits over €100,000 was inevitable in any survival scenario. This is precisely what the Cypriots – it seems – refused to accept. It may be too late for Cyprus but there is little evidence – so far – that it is too late for everyone else.
http://krugman.blogs.nytimes.com/2013/03/21/cyprus-the-sum-of-all-fubar/
In all likelihood, the outcome will be the inevitable haircut for holdings over €100,000 plus some face-saving additional element to ease its extent, coupled with a statement of undying love and support from the ECB with, possibly, capital controls. (There is sufficient lee-way in the treaties for the last mentioned).
@Paul F
Per Seafoid, I would refer you, respectfully, to Solow:
“Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers.”
While we are at it there is another one for the outer edges of the Euro-federalist community:
“Over the long term, places with strong, distinctive identities are more likely to prosper than places without them. Every place must identify its strongest most distinctive features and develop them or run the risk of being all things to all persons and nothing special to any…Livability is not a middle-class luxury. It is an economic imperative.”
Mody is really on the ball
“There has never been an official explanation of why lenders to a sovereign should not share the pain, despite the “no bailout” principle on which the eurozone was founded. Most observers cite the authorities’ concern that if any sovereign does not honor its debts, all sovereign borrowers will be penalized. But such contagion risk is trivial compared to the wildfire that could be ignited by imposing losses on small depositors”
Regarding Austria Hungary John Authers recently had a piece on their bonds- they delivered a positive return finally, 97 years on
http://www.ft.com/intl/cms/s/0/7602afd4-720c-11e2-896a-00144feab49a.html
Deposits under 100,00 to take a cut.
“We’re over the Rubicon! Wowsers, this is exciting. I wonder why nobody thought of doing this before?
“What do we do now?!
“Well I’ve had a good hard think and we go back! Back over the Rubicon!
“Yeh, I never liked it this side of the Rubicon. People shout at us. Er, how do we get back over the Rubicon?
“Er, I dunno. It seems trickier than it looked.
“Maybe if all simultaneously declare that we never crossed the Rubicon, it will be okay?
“Yeh, well let’s try that, unless anyone has some other ideas? No. Okay on the count of three we just really, really wish hard that this had never happened.”
@ GK
It is not every day you will see me quote Paul Krugman.
“What can be done? First off, Cypriot banks cannot honor their debts, which unfortunately overwhelmingly take the form of deposits. So a default on deposits is inevitable.”
Which would you prefer; say 97% of your deposit or 0%?
That is the possible choice facing all deposit holders in Cypriot banks.
@ GK
Whichever side of the supposed Rubicon you happen to be on!
@ DOCM
If the only way to save the EZ involved you burning down your own house would you do it , assuming the hard money guys in Frankfurt thought it would work, their forecasting track record notwithstanding.
The potential for disharmony between the EU and Russia on Cyprus has still to unfold. In the world of finance, Cyprus has long been the gateway to the Russia, the Russian republics and Central Asia, and has a unique DTA network into that part of the world. Much of this FDI is mainstream (as opposed to ‘legitimate’ as defined in a European context…) and relates to oil, gas & other natural resources. Not unlike Ireland’s position as conduit for US investment into Europe /EZ. The potential therefore for disruption of FDI flow into Russia and that part of the world is immense.
Western Europe, particularly Germany, depends on Russia for a substantial amount of its natural gas needs. The only alternative has not yet been fully developed – importation of natural gas from Iraq & other via Turkey. Wouldn’t surprise me if we see Russia retaliate via its natural gas pricing /other.
EU /EZ needs to beware of upsetting The Bear.
@ DOCM
No, indeed, I noted that with interest.
I am working and haven’t time to knock up a considered post, but of the various Rubicons and various elephants to be encountered I was thinking of the Rubicon of hitting savers of under e100,000 within the Eurozone, hence the line at the top.
You should come along to Tiny Plays for Ireland 2, where some of the works, particularly ones by Graham Stull and Keith Farnan, seemed to have suddenly leapt into immediate relevance.
http://entertainment.ie/theatre/feature/Tiny-Plays-II-Project-Arts-Centre/211/4053.htm?utm_source=entertainment.ie&utm_medium=navmenu&utm_campaign=fulllink
Has Paddy Power opened a novelty bet on a Euro breakup over the Easter weekend? I’d give 5/2 odds, but unfortunately I’d only be able to accept bets in euros. Can’t see there bing many takers.
@DOCM
We’re down to false dichotomies now? That’s it then; this thing is going to go.
UPDATE: OMG! Paddy Power are still giving 2/1 odds on Cyprus being first out of the euro!
The wider repercussions of Cyprus – ‘too big’ banks threatening countries.
http://economix.blogs.nytimes.com/2013/03/21/the-london-whale-richard-fisher-and-cyprus/?ref=business
Some good will come out of all this yet.
Although the “jobs for the boys” aspect needs to be cleaned up first:
http://dealbook.nytimes.com/2013/03/21/financial-windfalls-for-wall-st-executives-taking-government-jobs/?ref=business
Much of this type of issue in Ireland still. As always, best practice and Ireland don’t always gel:
http://cormaclucey.blogspot.com/2013/01/the-michael-torpey-story-read-it-and.html#!/2013/01/the-michael-torpey-story-read-it-and.html
Posted by grumpy on another thread.
http://ftalphaville.ft.com/2013/03/21/1434492/taxi-for-laiki/?Authorised=false
This link will probably work better.
http://ftalphaville.ft.com/2013/03/21/1434492/taxi-for-laiki/
@ All
FT news coverage has caught up with the latest developments. (N.B. reference to possible capital controls).
http://www.ft.com/intl/cms/s/0/5adf82bc-9201-11e2-851f-00144feabdc0.html#axzz2OCoewBVj
CARTOON OF THE DAY: KURDISTAN!
Turkey:
Call to peace
21 March 2013 Al-Mustaqbal Beirut
The head of the Kurdistan Workers’ Party (PKK), Abdullah Öcalan has called on his supporters to lay down their arms and pursue political means to achieve the goal of autonomy for the Kurdish region.
The head of the Kurdistan Workers’ Party (PKK), Abdullah Öcalan has called on his supporters to lay down their arms and pursue political means to achieve the goal of autonomy for the Kurdish region.
http://www.presseurop.eu/en/content/cartoon/3572931-call-peace
Another small nation kicked around by the big powers post WWI when the promise of their own ‘state’ was defaulted on.
@Kurds
In solidarity.
Delirium tremens hits the Cypriot media:
Meanwhile, a mood incited green in Cypriot cities, where people flocked to income machines Thursday to repel as most income as probable after a supervision announced that banks would sojourn sealed until subsequent Tuesday …
With annoy growing, Cyprus’s president, Nicos Anastasiades, was set to introduce a revised devise after Thursday to throw a argumentative taxation on bank deposits. …
From that indicate onward, a E.C.B. pronounced it would usually cruise a uninformed liquid of puncture funding …
The supervision on Thursday was formulation to introduce nationalizing grant supports from state-run companies and conducting an puncture bond sale …
The fallback was being cobbled together as Cyprus’s financial apportion pulpy his box in Moscow on Wednesday …
http://cyprustoday.net/news/index.php/mood-darkens-in-cyprus-as-deadline-is-set-for-bailout/
NakedCapitalism.com All Cyprus Today
•ECB to Push Cyprus Over the Brink
•Cyprus Bailout: What to do Now?
•BRICs Cook the Climate (Part One)
•Julian Assange Previews Next Fall’s Zero Dark Thirty Propaganda Sequel
•Cyprus: Will the Mouse That Roared be Gored? (Updated)
•Cyprus Bailout: Stupidity, Short-Sightedness, Something Else?
More Cyprus:
Bank industry chief warns Cypriot banks must reopen in days Reuters. Someone might clue the Troika in.
A Cypriot game of chicken FT Alphaville
Europe Plays I-Didn’t-Do-It Blame Game on Cyprus Bank Tax Bloomberg and The Cyprus bailout blame game begins Financial Times. This had actually started over the weekend.
Cyprus Parliament’s gift to the Eurozone Yanis Varoufakis
Cyprus crisis: The four scenarios
Cyprus bail-out: live Telegraph Financial Times
http://www.nakedcapitalism.com/
Der Spiegel – Just one entry today – In memorium
End of an Era: Cypriot Financial Sector Faces Collapse
By Stefan Kaiser
The disastrous financial situation in Cyprus is largely a result of the country’s crumbling banks. For years, the island nation profited from its bloated financial sector, but now it will likely have to liquidate its two largest banks. In Nicosia, government leaders fear that could decimate the economy.
If Cyprus doesn’t receive billions in foreign aid within a few weeks, the country will default by June at the very latest. But insolvency could come even sooner for the country’s two largest banks. The Bank of Cyprus and Laiki Bank are only able to survive at the moment through emergency aid from the European Central Bank, which on Thursday threatened to cut off all liquidity on Monday if terms of a European Union bailout deal aren’t finalized with the government in Nicosia.
http://www.spiegel.de/international/business/leading-cypriot-banks-likely-to-face-insolvency-a-890182.html
These Cypriots have balls. Unlike a certain Brian and another Brian and a Michael and an Enda.
ECB: Do you feel lucky, punk?
Cyprus: Go ahead, make my day.
Garo,
Odds on they split the Popular Bank and singe the big depos or convert them to equity,or some other risk asset.
What happens after that in Cypus or elsewhere remains to be seen.
Shafted on the alter of German expediency.
Just passing by and throwing some gasoline into the fire – here is a comparision of median household net worth in some Eurozone countries according to the Bundesbank:
http://gqjftw.blogspot.de/2013/03/bundesbank-household-wealth.html
A little spoiler Italy’s is more than 3 times higher than Germany’s
@David O’Donnell
Many thanks for the Naked Capitalism link.
(in full:
http://www.nakedcapitalism.com/2013/03/krugmans-bad-math-on-cyrpus.html ).
Yves’s critique of Krugman’s smug ‘FUBAR’ post on the Cypriot crisis is unsurpassable.
Excerpt:
As for the size of the banking sector relative to GDP, Krugman seems scandalized that the banking sector is so large relative to its economy. Yes, this is a risky model, and Cyprus made the mistake of being overly dependent on one huge client, Russia. But Cyprus is hardly alone in being a financial center with banks that are a big multiple of GDP. Luxembourg is the really extreme case here, with a banking sector at over 20x GDP. England’s banking sector is 6x GDP. Swiss banks were 6.8x GDP in 2010 (Switzerland has forced much higher equity requirements on its banks, so its balance sheets have shrunk since then). Singapore also has an outsized banking sector. But let us remember that the EU has also set out to trash the Cyprus banking sector pretty much overnight with the deposit garnishing threat. It is important to recognize that while a restructuring was necessary, the severity of the crisis and the degree of damage that will be inflicted on the economy was not.
Naked capitalism now defending the right of small nations to have enormous banks? That made me laiugh.
Telegraph reporting on that possible bank resolution
“Finance ministers for the 17 euro countries are considering a plan to shutter the two biggest banks in Cyprus and freeze the assets of uninsured depositors, said the four officials, who asked not to be named because the talks are ongoing. The ministers are holding a teleconference tonight.
Cyprus Popular Bank and the Bank of Cyprus would be split to create a so-called bad bank, one of the officials said.
Insured deposits — below the European Union ceiling of 100,000 euros — would go into a so-called good bank and not sustain any losses, while uninsured deposits would go into the bad bank and be frozen until assets could be sold, said the four officials.
Losses to unsecured creditors, including uninsured depositors, could reach 40 percent under the plan, which has support from the International Monetary Fund and the European Central Bank.”
This confirms earlier reports out of Greece.
So the ECB and the IMF support haircutting depositors. Especially Russian depositors. The wsj has a story today on the Russian/ Cypriot bilateral taxation agreement between the two countries. Apparently it grants very favorable terms to Russian companies setting up through Cyprus which accounted for the largest FDI into Russia.
@Carolus Galviensis
I’m a fan of Yves Smith’s analyses for some time now. There is certainly more than a touch of the ‘vindictive’ about the EZ treatment of Cyprus.
Up to 40% losses on the uninsured depositors .. in other words, close to the result originally sought by Germany and the IMF – and opposed by the Cypriot government and the European Commission. It looks iike the Commission made a bad misjudgement in proposing the haircut on insured deposits, probably seeking to align itself as “good cop” on the side of the Cypriots who were desperate to limit the losses for big depositors. This whole debacle will further damage the Commission’s reputation in Germany – not good news.
Some interesting numbers on Capital Flight…
“Figures from the European Central Bank also confirm the growth of deposits in the eurozone’s hard core and the flight of capital from the European south where the economic climate is one of uncertainty. Despite the small trend toward the return of deposits to Greek banks in the last nine months, Greece has recorded losses of some 76.5 billion euros in its accounts since 2009. In the same period, Spain has seen losses of 166 billion and Ireland’s came to 21.7 billion. On the other hand, the German banking system has seen deposits grow by 267.7 billion euros, while the rise in deposits in French banks has beaten all records, climbing by 324.1 billion in 2009.”
Has anyone any views on how you impose capital controls in one Eurozone country…do cypriot 500 euro notes stop being negotiable in the rest of Europe?
@ Paul Ferguson
There are a lot of people on here who struggle to keep up with what happened yesterday let alone what will happen tomorrow.
The strength of any hypothesis is its ability to predict future events and account for past or current events
I think you are 100% correct in your focus. I think it will take time for others to catch up.
It remains to be seen whether the Russians will take this victim hood lying down. Medvedev is already on record saying they may have to look at their Foreign reserves of Euro some 42% of which are Euro.
http://www.ekathimerini.com/4dcgi/_w_articles_wsite1_1_21/03/2013_489048
http://www.zerohedge.com/news/2013-03-21/global-financial-pyramid-scheme-numbers
Sceptic,
It should be noted that losses of this magnitude are due to the Greek OSI which Germany had some influence over.
It should also be noted that this will probably accelerate capital flight to the core or out of the EZ both of which benefit the Germans.
It lends further credibility to the notion that Germany is manipulating events to its own advantage in a way typical of Bismark to control events without assuming expending treasure.
This is not a sustainable policy in the medium term. In the end, the system will collapse.
@paulr
Another must-read post at zero hedge:
http://www.zerohedge.com/news/2013-03-21/guest-post-whose-insured-deposits-will-be-plundered-next
This New York Times article makes for chilling reading…
http://www.nytimes.com/2013/03/22/business/global/a-cyprexit-might-not-hurt-euro-zone-much.html?hpw&_r=0
…especially this part…
“From a financial standpoint, what is most noteworthy is that the combined debt of the Cypriot people, companies and government is 2.6 times the size of the country’s gross domestic product. Only Ireland, still struggling to recover from the banking collapse that required an international bailout in 2010, has a higher debt-to-G.D.P. ratio among euro zone countries.
As debts in Europe mount in inverse proportion to the ability of its citizens, companies and governments to make good on them, the view is forming in Berlin and Brussels that — especially in the wake of the latest Greek rescue — a signal must be sent that for the euro zone to survive in the long run, citizens and investors must start accepting losses.”
Berlin and Brussels …that says it all.
@ Tull
My interpretation is different. I see a Germany that is rightly insisting on conditionality for bail-outs – no government has the right to lend out taxpayer funds without conditionality – but is ultimately willing to be flexible when the integrity of the EZ is theatened.
I believe I’m in a minority of about 3 on this blog. Happy to be so.
@ Carolus Galviensis
+1
Wacky regulators allow banks to become WMDs and then the citizens object when someone offers money to help them ….
Yes, poor little Cyprus, smuggling and money laundering wannabe!
The Eurozone is likely to survive long-term as a smaller group given the prospect of a decade ahead of slow growth at best and this week the Cyprus crisis shows that the prospect looks firmer.
Politics usually trumped economics in admissions to the European Community and later the Union but that has been one of the serious flaws in the monetary union.
Given that Cyprus only joined the EMU in 2008 and the negative reaction in several countries to outsiders dictating terms, the European Commission has on the one side shown itself not to be competent to monitor economies that have faced durable problems while there are few examples of successful ‘nation building.’
Lorenzo Bini Smaghi, an executive director of the European Central Bank in 2005-2011, showed in his article this week in The Financial Times touting Ireland as a poster example for Cyprus, that his knowledge of the Irish economy behind the headline data was as good as my knowledge of the Italian economy — which isn’t saying much.
Is this superficial knowledge common among those making key decisions?
We have had rolling crises over a six year period and what we have seen at decision making and advisory level in both countries and in European institutions, are people with narrow life experiences who had never before the Grate Recession had to make a consequential decision in their professional lives. Wisdom however, usually comes after experience.
We may not like German’s risk aversion but while eaten bread is easily forgotten, they gave us billions in foreign aid for agriculture, roads and regional development when it was good to have. Mickey Hickey should know that when Liebherr opened its crane plant in Killarney in 1958 and later built international class hotels there, TK Whitaker’s ‘Economic Development’ (1958) had a clause on the importance of such hotel developments – – a few years later, an Intercontinental hotel opened in Ballsbridge, Dublin.
This week’s battle is seen as a David and Goliath one (where is President Hollande?) and it’s easy to empathise with faraway people fearful of an economic collapse, but try on this cap for hypocrisy: at the current rate, over a decade, Ireland will facilitate the erosion of the European corporate tax base by at least €600bn. Add in the Netherlands, Luxembourg and Switzerland, and that is a lot of money.
Solidarity is easy when there isn’t a price on it.
I marvel at the level of outrage when some of you were deaf to reason when you believed the free lunch had been invented.
Great Recession! – – it is grating though.
Well said, Michael H.
@ Michael Hennigan
Morning from a torrential Dublin – the lights of the CB are staying on ’til after 11pm again.
“The Eurozone is likely to survive long-term as a smaller group given the prospect of a decade ahead of slow growth at best and this week the Cyprus crisis shows that the prospect looks firmer.”
What has been in my mind is Draghi’s: “The euro is irrevocable!”, July 2012. I don’t think that squares with the ECB threatening to pull the plug on the Cypriot banks on Monday.
Also:
“We may not like German’s risk aversion but while eaten bread is easily forgotten, they gave us billions in foreign aid for agriculture, roads and regional development when it was good to have.”
Germany sent Ireland foreign aid? Did they? When was that then? I expect it only goes to prove your point, but that is news to me.
http://www.ecb.int/press/key/date/2012/html/sp120721.en.html
@ Eureka
“The strength of any hypothesis is its ability to predict future events and account for past or current events.”
You hit the nail on the head there!
@ All
From this morning’s leader in the FT.
“Nicosia has to face reality. It cannot play hardball, as it has done since its MPs rejected the idea of a levy on bank accounts last Tuesday. Were the ECB to call time on the emergency liquidity assistance, the Cypriot banking system would face the prospect of collapse. The government would have no option but to print its own currency, which would depreciate rapidly. The losses for deposit-holders would be much steeper than under the rejected levy on deposits.
Some politicians may be concerned that hitting large depositors would mark the end of the offshore banking model upon which the economy relied. But this model is patently unsustainable. It would also be obliterated if the ECB cut off emergency liquidity.
Moscow would no doubt be furious. Russians have deposited billions of euros in Cypriot banks. Some of this money would be hit by a restructuring. But if the Russian government believes these losses are not deserved, it can reimburse its citizens. Of course, it would then have to explain why taxpayers’ money is being deployed to bail out those who use low-tax offshore centres. Moscow would discover that its position is no different from that of the EU governments it has attacked this week.”
@ GK
On Germany’s “foreign aid” to Ireland, I would also like to know.
It is true that there is such a thing as the EU budget to which all members states contribute and from which some receive more than they put in under the stipulations relating to economic and social cohesion in the treaties (regional and social policy) and agriculture, a policy which existed since the very inception of the then EEC.
If Germany is giving “foreign aid” to Ireland, it must also be doing so with regard to the other beneficiaries in relation to agriculture, for example. The latter is, however, a managed sector of the European economy (as it is in almost every other country with the exception of New Zealand). Incidentally, Germany is now a larger exporter of agricultural produce than France.
@ Michael Hennigan
“Solidarity is easy when there isn’t a price on it.”
Sounds insurancey. No sign of deposit insurance either. Or a plan for what to do with dud banks.
I think people are entitled to moan. It’s not as if the Troika are delivering growth. There is a lot of suffering for very little progress. And on the street a lot of ordinary people have given up.
Many areas are overbanked. Banking is in a serious crisis but it all falls on the small people. That ain’t right.
Michael H
What country in europe got a large , unprecedented, actual foreign aid in teh 1945-48 period? Was it a) Germany or b) Germany?
Eaten bread is indeed soon forgotten.
Your desire to make ireland look worse than it is (its bad enough thanks) and I suspect to keep using this blog as a cheap advertising for your own site (which is excellent and doesnt need such) is getting thin.
Roll on a screed ….
The only hot money in Europe is Russian money is Cyprus bank deposits. How convenient.
Bond sellers never, ever, sell bonds for ‘hot’ money. Bond sellers are far too responsible for that.
No hot money in Switzerland, Germany, Netherlands, Finland etc. or Dia linn, Ireland.
It all looks like a setup from the word go.
The bondholders get their money out, the really big depositors get their money out. Then carpet bomb whoever is left.
I note very little discussion on the financial position of Cyprus.
Correct me, if I am wrong, but in summary.
GDP ~17BN
Debt ~14BN
Debt / GDP ~80%.
Money demanded (for what I do not know) by the ECB from Cyprus ~5.8BN,
=30% of GDP.
Equivalent Ireland ransom note = 50BN
Equivalent Germany ransom Note= 800BN
Time to pay. Now three days.
Even Luca Brassi would have doubted the Don’s sanity if he sent Luca out on such an errand.
@ Brian Lucey
http://www.nybooks.com/articles/archives/2012/sep/27/tragedy-european-union-and-how-resolve-it/?pagination=false
“It is worth recalling that the reparations payments demanded of Germany after World War I were among the factors giving rise to National Socialism. And Germany had its own Schuld reduced on three separate occasions: the Dawes Plan in 1924, the Young Plan in 1929—too late to prevent the rise of Hitler—and the London Debt Agreement in 1953.”
@ Brian Lucey
http://www.nybooks.com/articles/archives/2012/sep/27/tragedy-european-union-and-how-resolve-it/?pagination=false
“It is worth recalling that the reparations payments demanded of Germany after World War I were among the factors giving rise to National Socialism. And Germany had its own Schuld reduced on three separate occasions: the Dawes Plan in 1924, the Young Plan in 1929—too late to prevent the rise of Hitler—and the London Debt Agreement in 1953.”
@ Gavin Kostick
Gavin,
Have you guys been doing anything about climate change since John Gormley was put into orbit around Planet Bertie?
We don’t use the term foreign aid but I saw a report somewhere that John Bryan, the farmers’ leader, was in Brussels with the béal bocht this week and after some meeting, he managed a smile at a press conference. Some years these gifts amount to 90% of average farm family income — I’m not sure farmers are as poor as they say but anyway, nothing put into the kitty (net of course) in more than 40 years as a club member is a good innings.
Do you not remember that big cheque for £8bn in structural and cohesion funds wangled from Chancellor Kohl in the early 90s by Taoiseach Albert Reynolds?
We deserved it of course.
All the FF hoojas descended on Dublin Airport to see the big cheque and
Albert had a firmer grip on it than Neville Chamberlain had returning from Munich with his surrender terms.
http://www.youtube.com/watch?v=FO725Hbzfls
Net cash receipts in today’s money could be about €75bn.
@ seafóid
I agree that the plan to haircut insured deposits was stupid.
@ brian lucey
Brian,
That old reliable whataboutery is always a good crutch!
Recall we had a tangle about the ECB’s likely reaction to your mini-default proposal on the prom notes?
Thursday’s démarche settles that!!!
There is nothing much to be gained by replacing one canard with another. One can back in the history of any country and find spurious arguments to require it to do this or that in the here and now. What matters is what countries are currently signed up to collectively. Pacta sunt servanda.
It is clear that (i) they are not be doing so in relation to completion of policy undertakings, notably in relation to the single market and (ii) what they have signed up may be inadequate.
The head of the SPD certainly thinks that the latter is true as he has suggested a form of new Marshall Plan (which applied to Europe as a whole and not just Germany).
@ Michael Hennigan
The whole thing is so dismal.
Nobody really comes out of it with any , er , credit.
@ All
The position of the SPD as enunciated by Gabriel.
http://www.guardian.co.uk/commentisfree/2013/mar/14/germany-social-democrats-banking-reform
@ MH
Pacta sunt servanda! The EU represents an agreement between all the countries involved, with the richer agreeing to provide some assistance to the poorer in return for open access to their markets, with a rigourous, not to say draconian, role given to the Commission in the area of competition to ensure a level playing field. You undermine your arguments by your refusal to recognise this.
Professor John McHale, coincidentally, has a very incisive commentary in the IT this morning on the subject.
http://www.irishtimes.com/business/economy/europe/cyprus-bailout-drama-underlines-need-for-global-economic-co-operation-1.1334588
“What country in europe got a large , unprecedented, actual foreign aid in teh 1945-48 period? ”
Well also Ireland, no?And most of Western Europe?
Apologies! Professor John O’Hagan
“I suspect to keep using this blog as a cheap advertising for your own site ”
I dont know if giving out all your sites info for free, ad nauseum, is the best marketing strategy
“Well also Ireland, no?And most of Western Europe?”
Scratch this. I’ve just seen MH’s post above *sigh*
@ Michael Hennigan, et al.
No, I don’t think those qualify as ‘foreign aid’ for the points given above. But time to move on I think.
“Have you guys been doing anything about climate change since John Gormley was put into orbit around Planet Bertie?”
Not sure what to make of that. You could have a read of ‘Tiny Plays for Ireland’ which covers quite a range:
http://www.amazon.com/Tiny-Plays-Ireland-Jim-Culleton/dp/1848402147
Also, in the work I do with transition students as part of the Tenderfoot project, yes, climate change is always an issue.
http://www.civictheatre.ie/index.php/civic_arts/civic_young_arts
Now I think of it, Fishamble also have the top writer-performer-political activist Donal O’Kelly under commission for a new work, ‘Scum of the World’, which deals tangentially with the issue. But I am now way off topic.
Did anyone expect the Irish Green Party to stop climate change?
@ Gavin Kostick
Politics always trumps economics
Climate change will overrule politics.
Voilà
not off topic at all.
Micky H
hope the weather in KL is better than here.
Demarch? Not yet. Fat lady not even in the taxi to the theatre.
Does Peter Spiegel of the FT, (on RTE one) right now, understand what happens if a bank collapses?
‘All deposits are wiped out’. Absolute rubbish.
Shareholders, ECB, bondholders would come first.
The status of official lender would suddenly morph to official enemy.
I appreciate he had to condense his explanation, but it was a very misleading exposition of the options facing Cyprus. Were all Icelandic depositors ‘wiped out’.
On a wider front was has happened in the EZ is very simple.
Bondholders and official lenders were protected using depositors as a backstop.
That’s Central banking for you.
Jens Weidmann on European „Ordnungspolitik“.
But what does Jens Weidmann believe in? And why does he oppose much of the current ECB and ESM policies?
http://blog.openeuropeberlin.de/2013/02/jens-weidmann-on-european.html
A song for Jens Weidmann
@JR hope its not behind pay wall,Peter Spiegel etc earlier today.
http://podcast.ft.com/index.php?sid=45&pid=1773
@ Jesper
Many thanks for the very interesting link. This extract, in particular, struck me.
“Either we shift control and intervention rights to the European level as part of a fiscal union; or, in the sense of a return to the Maastricht framework, we strengthen the liability and independent responsibility of member states. Taken to its logical conclusion, this also means that we cannot – and must not – rule out the possibility of sovereign defaults.
As things now stand, however, it is not quite clear which of these two directions policymakers are leaning towards; they seem to be performing a balancing act, with one foot in the Maastricht world and the other in a fiscal union. In the long run, such a balancing act is painful and unhealthy”.
Are we going to get an answer this weekend?
Like Asmussen in a recent speech, Weidmann conveniently ignores the reality that member states agreed a single currency while imagining that they could still simply coordinate – i.e. rather than harmonise – their economic and social policies. It is impossible for the single currency to survive if a majority in Germany – government, business and skilled union membership – persists with this blinkered approach not just in terms of the periphery but in relation to other countries of the core whose economies are closley linked with those of Germany cf.
http://www.lesoir.be/210336/article/actualite/belgique/2013-03-19/vande-lanotte-et-coninck-portent-plainte-contre-l-allemagne
“Ordnungspolitik” cannot be reduced to an unholy alliance between the three parties concerned which results in inequality and poverty in Germany and widespread damage to the economies of neighbouring countries. As the contribution by Gabriel in the Guardian linked to above, this approach is no longer widely shared in Germany and the Linke party is no longer the only one denouncing it. But the parties are in electoral mode and no one knows how the electorate is likely to react. The timing could not be worse.
@JG
re: FT Podcast with Peter Spiegel. Good link. Certainly worth a listen.
Again, he says depositors would be ‘wiped out’, in the event of an exit from the euro. I would question his understanding of ‘bank restructuring’ in an extremis case as this would be.
More interesting is his insight into the absolute coordinated pressure currently being put on Cyprus, from all ‘EZ’ institutions and governments.
The euro is now a open prison for countries. ‘You may not like our dictates, but if you try to leave we will destroy you, your people and your country.
@JR they are creditors…tax dodging shower of unsecured creditors availing of 5% p.a. ahem “risk free” investments yeah right.
Has the free lunch suddenly being invented..lucky to get 60 cents back,given the sign posts and risk profile above 100.
Perhaps given the provenance of these creditors moving it was not an option !
Simple..pass me a Kleenex I’m crying a river here..
“There is very little chance that politicians would ever choose to use the model they developed in Cyprus in a country like Italy or Spain, where a run on the banks would have such profound implications. By the way, if you’re wondering why investors left so much money in troubled Cypriot banks, here’s a trivia question: Would you have been better off leaving your money in a bank in the United States or in Cyprus over the last five years?
The answer: You would have been better off in Cyprus, even after the bailout, when your money was “confiscated.” If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit — 12,760 euros — you would be left with 114,840 euros. The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year.”
http://dealbook.nytimes.com/2013/03/18/a-bank-levy-in-cyprus-and-why/
I prefer lee’s proposal here’s your cd few worthless shares punt on future gas revenue..do svidaniya!
JR,
what about the Eur/$ exchange?
Troika now saying they/Cyprus/Kaiser Zoze/ Batman needs 900m more. Just when the cyrpiots were close to a deal. Methinks someone wants Cyrpus to fail out now…
@Tull
“what about the Eur/$ exchange?”
The exchange devaluation may bother the large depositors but it would have little effect on the majority of Cypriots, who probably have very little cash assets. They earn in Cyprus and buy in Cyprus. Any inflation threat, subsequent to devaluation, can be managed, particularly if the country has energy reserves.
The non payment of ‘official’ lenders and various other highwaymen would leave Cyprus in a better position.
Ask yourself the question, why are the creditor countries so insistent that nobody leave the euro?
What is the big problem with leaving?
If Richie Boucher manages to lose 50bn in BOI next year, guess who is on the hook. In order of priority.
1. The State
2. Depositors in all banks, credit unions, post offices, who still have funds in the State. AIB banks in UK will be exempt a la Cypriot subs in Greece.
3. Bondholders get off 100%.
4. Covered bondholders, my favourite type of creditor, get the collateral, but probably will succeed in pleading to be 100% made up.
PS. Those with pension funds should be happy that, pro-nuclear Mrs Merkel, says they should not be touched. But pension funds keep deposits in banks, don’t they.
So anti-nuclear Mrs Merkel may allow pension funds to be lumped in with depositors, just as long as they are not German pension funds.
However, I think Germany is underestimating the Russian reaction.
Not happy would be an understatement. I would not be at all surprised if there was a deposit levy on EZ bank subs in Russia.
But never mind that, the ECB balance sheet will be used to compensate those banks. Shure what is a central bank for.
@ Grumpy & Seafoid
All I’m really looking for, at the moment, is for economics to accurately teach how money is created and destroyed. My not-so-hidden agenda is for the next generation of economists to question if this if the current way in which money is created is the best way.
Economics doesn’t accurately teach how money is created.
Most economists learn/teach that banks take in money from savers and lend this out to borrowers and they indirectly create money through the multiplier effect in the process. This is not how banking actually operates.
If economists knew that banks create the money they lend and indeed created almost all of their ‘depositors’ they would see that recording the money the banks create as a liability of the banks is very outdated.
The other strong issue I have is that economics doesn’t seem to teach anything about how money is deleted through loan repayments and hence why they are encouraging debt reductions.
@ Eureka
Thanks for the support.
@Paul I read your posts and enjoy them,always interesting to have different views and you express yours extremely well,always polite,keep up the good work.
What if….JR re Peter Siegel from earlier today then,they get rightly fuc…..
“In that scenario, when banks reopened, deposit flights would likely lead to bank insolvency and the ECB would veto ELA. As a result, banks would likely default, and since the sovereign is not in a position to nationalize the banks and cover the deposit insurance, it would be likely to default as well,” BofA adds.”
http://www.efxnews.com/story/17936/what-if-cyprus-exits-euro-policy-response-market-reaction-bofa-merrill?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Efxnews+%28eFXnews+%29
After that pointless trip to Russia,back they come empty handed.Of course the terms got worse,so they should,this had to have an ending,happy or otherwise time kills all deals.
Lots chatter about the gas reserves etc decent summar here,it’s not behind a “pay wall” you just have register.
“Since Cyprus signed a maritime border agreement with Israel in 2010, it has become the second main beneficiary of the gas boom. The island straddles Israel’s most likely gas export route to European markets. Cyprus also lays claim to its own gas deposits. The Aphrodite field, which is adjacent to Leviathan, may contain up to seven tcf of natural gas — enough to meet Greek Cypriot domestic consumption needs for decades to come. Yet even that field is contested by others. The breakaway Turkish Republic of Northern Cyprus claims co-ownership of the island’s natural resources and has opposed Nicosia’s attempts to unilaterally secure offshore drilling contracts.”
http://www.foreignaffairs.com/articles/139069/yuri-m-zhukov/trouble-in-the-eastern-mediterranean-sea?cid=nlc-this_week_on_foreignaffairs_co-032113-trouble_in_the_eastern_mediter_4-032113
http://brianmlucey.wordpress.com/2013/03/22/capital-controls-in-europe-past-present-and/
Capital Controls…some union.
@ John Gallaher,
Thanks, I’ll keep plugging away.
“Foreign aid began
in Nineteen sixty three
Between the end of the Chatterley ban
and the Beatles’ first LP”
The great thing about setting year zero to 1963 or so is that the Marshall plan or the London Agreement has about as much relevance as Charlemagne.
If Germany was a person she would be the stuck up know it all with no friends. For years we have tried to overlook her past crimes and extreme selfishness but there comes a point when we all must walk away:
Point 1: She is refusing to pay nazi ghetto workers compensation
http://m.spiegel.de/international/germany/a-890485.html
Point 2: She is opposing France and UK’s attempt to lift embargo on Syrian rebels (this might be linked to Russian non-intervention in Cyprus recently)
Point 3: Merkel is prone to temper outbursts unfitting of any leader
http://m.spiegel.de/international/germany/a-890453.html
It will soon be time for a boycott of German goods
And continuing arms exports to despotic oppressive tyrants
Germany arms sales to Saudi
http://www.globalresearch.ca/multibillion-weapons-exports-germany-arms-the-persian-gulf-monarchies/5324343
The point is that Germany is losing the plot again. It is imploding in a narcissistic self-righteous rage. For Europe’s sake it’s time for all peripheral nations to pack their bags and walk away.
How – collective synchronised default and perhaps a new currency union without Germany
German arms trading becomes more disgusting
http://www.upi.com/story/UPI-90791362769859/
Selling subs to impoverished and v unstable Egypt for example for at least 1.5 billion and Algeria coughs up 2.5bn
The more you look at it the more Germany’s economic model is built on the tears and blood of others.
Merkels Germany is an amoral rotten mess that must be ripped from the heart of Europe. The reason Godwins rule is no longer working is because the references are all too apt
Germany’s Dilemma – Sacrifice Cyprus or Make Sacrifices Itself… http://wp.me/p1xJaL-GG
There is an interesting paper from Karl Whelan in Forbes
“Revised TARGET2 Paper & Implications for ECB of Cyprus Exit”
in which he writes
“Now before people go getting too excited about this, I suspect Cyprus would continue honoring its TARGET2 obligations even after an exit.”
@Eureka,what does 20 Billion get you,a nod and a wink!
“Critics say the murky episode is further evidence of Cyprus’s unwillingness to displease – and “embarrassing subservience” to – Moscow. The case is reminiscent of when a Cypriot court in 2010 bailed Christopher Metsos – the alleged leader of a bungling Russian spy ring exposed in the US that included the glamorous Anna Chapman. Metsos promptly escaped.”
http://www.guardian.co.uk/world/2012/jan/26/cyprus-russian-invasion
Hmm,bit of a shortfall,may explain the lack of enthusiasm.
http://www.reuters.com/article/2013/03/22/us-eurozone-cyprus-gas-idUSBRE92L11H20130322
As this is the “Reuters” tread,excellent piece by Irish journalist.
“Before joining the euro, the Central Bank of Cyprus only allowed banks to use up to 30 percent of their foreign deposits to support local lending, a measure designed to prevent sizeable deposits from Greeks and Russians fuelling a bubble.”
http://www.reuters.com/article/2013/03/22/us-cyprus-banks-idUSBRE92L0CQ20130322
@ John Gallagher
Great link
This is sad:
“The banks sold down some of their Greek holdings, but then got back into the market as yields rose. “When the Germans were selling, they were buying,” said Apostolides, referring to the German banks’ 2011 dumping of Greek debt.
Simona Mihai, assistant professor at Cyprus European University’s banking and finance department, said the banks’ exposure stemmed from a desire to help their nearest neighbors, and a belief that Greece could recover.”
The Germans have played the rest of Europe from the start of this crisis. They don;t suffer any desire to help anybody.
@Eureka the guardian one terrific,great writer top of his game,has book along similar lines.