The Cypriot fiasco

Colm McCarthy has a terrific piece in today’s Sunday Independent.

To his comments about money laundering hardly being something confined to Cyprus, I would add the following link.

It seems that we still don’t know how this crisis is going to end. But here is one big dilemma that I see. Implicit in Colm’s article is a recognition that a meaningful banking union is a pre-requisite for a sustainable EMU. That means common supervision, a centrally-funded deposit insurance system, and a common, tax-payer-friendly, and (where necessary) jointly funded resolution system. The core reference on banking union remains this piece by Pisani-Ferry, Sapir and Véron. This past week’s events have clearly reinforced the case for such a banking union, which necessarily involves some element of fiscal union. Without it, EMU is a dangerous place to be.

And here is the dilemma (aside from the fact that it is being made increasingly clear that the Germans are never going to be convinced that such a system would be one involving mutual insurance, rather than one-way transfers, and that the idea of a meaningful banking union may therefore be dead in the water in any event). Do the rest of us want to get even more deeply involved with a Eurozone whose decision makers are as incompetent as this lot? And do those of us who live in small countries really want to get more deeply involved in a club in which big, powerful countries and small, weak countries are not treated as equal members?

Update: according to the FT, German banks (among others) are going after the Russian business that has up to now been located in Cyprus.

Comments

comments

151 thoughts on “The Cypriot fiasco”

  1. Super piece as ever.
    To me now the big question is : how to design a reversal of the Euro project. There seems no way that the Germanic core will consent to the needed institutional frameworks for a banking union. So we cant go forward and cant stay as we are. That leaves only backward.
    How do we de-engineer the Euro without catastrophe? gosh, never thought I would come to this view….

  2. “That means common supervision, a centrally-funded deposit insurance system, and a common, tax-payer-friendly, and (where necessary) jointly funded resolution system. ”

    same as last year.

    There was a great piece in the NY review recently- the banker bonuses paid pre 2007 were not in face rewards for success- they were actually the insurance premiums to cover the failure that was imminent.

  3. “Do the rest of us want to get even more deeply involved with a Eurozone whose decision makers are as incompetent as this lot?”

    Question answers itself.

    There’s a related question. How did we get as involved as we are with decision makers as incompetent as this lot? Food for thought about the last twenty years of Ireland’s engagement with the EU and the EMU project in particular.

  4. The Euro is a great project that is supported by most people in Europe. Without it peripheral economies are exposed to the kind of currency speculation that brings interest rate rises etc.
    But before we ask do we want it we have to ask can it really ever work?

    The current political structure is the problem. We need something along the lines of the Canadian model. Certain things such as healthcare could be funded at a federal level and others at a local level etc. Most Europeans could buy into this but the question remains – is the German state just too self-centered to be involved in any type of meaningful union with anybody?

    So there is a general solution here. The problem is Germany

  5. Excellent piece. The EMU was always a case of ‘wasch’ mich, aber mach mich nicht naß’. For further integration, more crises are needed. We wouldnt have too wait too long for further integration.

  6. Eureka that is fiscal federalism. A longstanding idea that has never got buy in from any country that matters

  7. The last stanza of Hotel California inevitably comes again to mind.

    “Last thing I remember, I was
    Running for the door
    I had to find the passage back
    To the place I was before
    “Relax, ” said the night man,
    “We are programmed to receive.
    You can check-out any time you like,
    But you can never leave! ”

    The central issue remains that of the responsibilities that nation states willingly accepted with regard to the euro as currently designed. These cannot be palmed off on only some of the occupants of the hotel.

    The EU is not a federal state and comparisons with others that are serves very little purpose in terms of analysis, be the example chosen California or Vermont.

    The crux difficulty with regard to Cyprus simply cannot be hidden; the government is hopelessly insolvent and the money to create a basis for a sustainable pathway back to solvency could not come solely from official lenders. The Cypriot share had to be found somewhere. There may be arguments about the competency of the efforts to find it, and the roles played by those involved, but this painful reality cannot be circumvented.

    Gavyn Davies comment that Schaeuble went so far as to say that small deposits are safe “only on the proviso that the states are solvent”. But this is a statement of the obvious as matters stand.

    He asks the question; “Does that not drive a coach and horses through the separation of banks and governments, which was one of the principle promises made by eurozone leaders at their crucial summit of June 29, 2012?”

    He might rather have said that the promise in question was vacuous in the first instance as the only thing that the passage of time proves is that the fate of governments simply cannot be separated from the fate of their banks.

    In his opening sentence, he remarks that “the calmness of the financial markets in the face of the deteriorating Cyprus crisis in the past week has been remarkable.” Could the explanation be that the markets are well aware of this fact?

  8. @seafoid
    “same as last year. ”
    Never mind that, same as it has been since the crisis started. Since the inception of this site there have been calls for it. Since before then on other sites too.

    I’m not convinced that fiscal union is required in part. A credit line at the ECB until sufficient deposit insurance reserves have been built up would be enough. With an open-ended income stream, the same sleight-of-hand that both the Fed and the FDIC use could be put in place – “currently in deficit, future income to take care of that”.

    I also don’t believe that the geni can be put back in the individual currency bottle, at least not for the smaller countries. Icelandic (and Cypriot…) capital controls, soft currency, loss of savings (relative to import prices), a sharp drop in standard of living etc. would be the result for small countries currently in the euro. For a small saver, an absolute loss of deposit would be less damaging (probably for a larger saver too?).

  9. DOCM,
    Worth asking the question why Cyprus is insolvent? It started off with a debt GDP ratio of 70% but due to decisions made elsewhere (in part) it ended up close to 150%.
    Some would call these reparations others extortion. Cyprus main problem is that it allegedly got involved with the Mafia. Other than reports from an Intelligence Service, there seem to be little conclusive proof. Does this remind you of anything?
    As the days went on , it has become clear that there is another mafia state in Europe now..

  10. I suppose a return to the day where a failed bank is allowed to fail and government refuses to assume losses on private sector assets is impossible.

    To say that banks and governments are siamese twins is almost redundant these days because the “end game” is to avoid a EZ meltdown, a market induced debt Jubilee as it were. Maybe that is impossible. Before the crisis hit I heard on many occasions that to provide liquidity to a bank is a liquidity squeeze is essential, but to provide it to an insolvent one is only making things worse. We don’t hear that today, but is it still true?

  11. Willing to push against the crowd, Cormac Lucey has a thought-provoking article in today’s SBP. No free link available — but well worth seeking out.

    A taster from the piece:

    “It was the flight of deposits from Irish banks – as much as being locked out of the bond markets – that precipitated the Irish bailout of 2010. Yet our banks never stopped working and never closed. What would have happened to confidence if they had?

    Perhaps the ECB would never have let any Irish bank collapse, despite reported threats to the contrary. But if you’re going to play chicken with Frankfurt, you have to prepared at the very least for what is happening in Cyprus right now – closed banks, people on the streets demanding their money, a practically certain flight of deposits. If the ECB blinks, then maybe that’s it and it doesn’t get any worse.

    But what if it doesn’t? What would happen to the economy and society if there were general, chaotic bank failure?

    That is emphatically not to say that Irish governments have necessarily made the right choices during the economic crisis. But what Cyprus shows is that the “stand up to ECB and play hardball in Ireland’s interests” school of policy isn’t a risk-free option. Those who propose it often pretend that it is.”

  12. I think John theres a crucial difference between a country such as Cyprus which is quite clearly seen as disposable and Ireland, ten times larger. Watch – if the combined brain cell (singular) of the cypriot and troika manage to push cyprus out it will be the deathknell of the euro.
    Its galling to see so little empathy not to mind sympathy for a small divided nation. Far too many people here seem to have fallen for the koolaid of “hot mafia money” and ffs our government WELCOMED a grab at insured deposits. Colour me skeptical but….
    And Cormac, nobody, least of all those who proposed playing hardball ever suggested it was risk free. The proponents of riskfree go along to get along were all on the other side as they are now it seems. Welcomed….words fail me.

  13. A further point : the hardball I and others suggested was this : cut off paying pronotes, put the money to more rapid fiscal consolidation. Recall, Anglo was and is and will ever be dead. It was dead in 9/2008. We had salvagable banks in the other two. cyprus is alas much worse with pretty much all anglo all the time. But thats all water under the bridge now. We took on tens of billions of debt for no reason. The cypriots had a solid enough economy with capital inflows being ringfenced to 2004. After that the euro has been an unmitigated disaster. Now they are being punished for a) the requirement that all eurozone deposits be treated as local and b) the greek PSI mess.

  14. Colm McCarthy says:

    “Depositors in Greece, Spain, Italy and Ireland…will no doubt take notice, and the risk of bank runs has been magnified.”

    Perhaps Colm is writing from England but I will have to disappoint him and let him know that there has been no run on the banks here in Ireland, so far as I can see from my perch at the fire. It is possible that the other PIIGS are suffering meltdown and this is being hidden from us so as to prevent contagion.

    @ Prof Lucey

    As an avid Prof watcher, I am not at all surprised that you have joined McWilliams as an Exit fan.

  15. What matters is the reaction of the ordinary citizen.

    As is often the case in Ireland, it will be a rather nuanced affair with wall-to -wall Sergeant Wilson emanations (e.g. the Sindo this morning) in which many will enthusiastically join while at the same time holding the view “there but for the grace of God!”.

    Both sides in the argument can subsequently emerge fully vindicated.

  16. @ Brian Lucey
    Ta for the terminology.

    This is a tough game to play. I think the sensible thing is:
    1: To prepare for the collapse of the Euro
    2: To really try and save it. The Germans need a serious talking to – not only on the economic but also the foreign relations front. We should start boycotting their products

  17. @John McHale

    Both Finance Minister Noonan and ECB member Patrick Honohan were, I assume, involved in the original Cypriot bail-out terms.

  18. @DOCM

    ” The Cypriot share had to be found somewhere. ”

    As Tull points out, you conveniently ignore two issues central to the problems in Cyprus, Ireland, Spain and other countries.

    1. From the outset, sheltered creditors were given a cast-iron umbrella from the ECB/ German axis to get their money out. These creditors who should have taken the losses are now disappeared, their place in part made up of so-called official funding. There are practically zero unsecured bondholders left in Cyprus or in Ireland for that matter.

    2. Decisions taken not to hit official lenders in respect of Greece, have blown Cypriot banks out of the water.

    So why do you, an otherwise intelligent person, insist on using the phrase ‘The Cypriot share’?
    Do you really believe that, in justice, it should be called ‘The Cypriot Share’

  19. Would it be crazy to think that the behaviour of the Germans and other solvent countries in this matter could be due to perceiving Cyprus as an experimental testbed to measure the effects and contagion of a deposit grab or Eurzone ejection on the rest of the region?

  20. @John McHale
    “Perhaps the ECB would never have let any Irish bank collapse,….”

    Your point is well made. The phrase used at the time was that ‘Ireland would be forcibly returned to the stone age’.

    We can now conclude absolutely that not only was there pressure and, that although the gun was not smoking, it was fully loaded and aimed directly at the entire Irish banking system.

  21. @ Joseph Ryan

    I do not make the rules – such as they are – in Hotel California, I simply observe the way they seem to play out. The creditor occupants are willing to lend us their credit card i.e. borrow money on the markets and lend it on to countries in a programme or near to one (Spain). They are not willing to hand over large sums by way of transfer e.g. by OSI write-downs. This may have something to do with the fact that they can only get the money from their own taxpayers. (All countries in the ESM are, however, putting up the necessary initial capital with Ireland borrowing its share).

    It is worth noting that the rules governing these negotiations were not invented by the EU as the tone-setting involvement of the IMF confirms.

    It is true that the increase in OSI is largely a result of the rescue of the bondholders of banks of the creditor countries. Nobody is denying that. But the countries involved have also had to bear major losses in respect of their banks which does not simplify the political problem as far as they are concerned.

    On the rights and wrongs of the situation with regard to Cyprus, the honours are widely shared cf. this report from the Sunday Telegraph.

    http://www.telegraph.co.uk/news/worldnews/europe/cyprus/9949858/Cyprus-dreams-left-in-tatters.html

  22. There is something really surreal about the anti German, anti ECB, anti Euro frenzy in these parts.

    Banking Union? What does that mean? It seems to mean that when looney banks like Anglo and Bank of Cyprus run amok the ECB will pick up the tab, no questions asked. Maybe that’s how the US system works, I doubt it. It definitely wasn’t how I understood the currency union would work.

    My understanding at the time was that the main ambition, one in the making since 1979, was to remove exchange rate uncertainty from internal trading. I remember the claim was that this would achieve a modest growth in overall GDP of 5%. Anything resembling a Banking Union or a Fiscal Union or indeed a Political Union was certainly not on the agenda.

    For Monetary Union to work without those higher forms of union would need a continuation of the good discipline which qualified for membership in the first place and it also required sound banking supervision. The former was delegated to national governments by dint of political reality but has turned out to be naïve, the latter could and should have been centralised.

    Getting back to Cyprus, why is this being so firmly attributed to a failure of the Euro? Undoubtedly entry to the Euro enabled Cyprus to develop its grotesque banking system. But say they had managed to do so from outside the Euro. They would now be surely doomed. At least inside the Euro they have access to easy credit of 10,000 per man, woman and child and also they have a liquidity supplier of last resort. The Euro/ECB/Germany is not the bête noir here – all these crises are of the participants own making – thankfully the Euro and its institutions are available to prevent these crises leading to total meltdown. I for one am glad we are in the Euro.

  23. @BW II
    “Banking Union? What does that mean? It seems to mean that when looney banks like Anglo and Bank of Cyprus run amok the ECB will pick up the tab, no questions asked. Maybe that’s how the US system works, I doubt it.”
    No, it means that the ECB/banking authorities don’t let banks run amok.

    As for ignorance of how the US resolution system works (and its limitations), well, you may doubt what you don’t know, I couldn’t possibly argue with you about it.

    “But say they had managed to do so from outside the Euro. They would now be surely doomed.”
    Eh, no. They would be paying back in vastly devalued Cypriot Pounds. Not in much better a position – see Iceland – just a different one.

  24. @ Brian Woods II

    You can bet your bottom dollar, if you will pardon the pun, that all those paid in euros, including most, one would assume, of the contributors to this blog, are equally glad (assuming that they took the time to consider the alternative).

  25. @ yoganmayhew

    “vastly devalued Cypriot Pounds”? If there is one thing that the Cypriot people are united on it is that they do not wish to swap their euros (aka Deutschmark lite) for said pounds.

  26. @ yog

    I think Colm means rather more than centralised supervision. He genuinely means that banks should not be the responsibility in any sense of the local sovereign. I agree on the centralised supervision, ideally by Germans, but we just ain’t ready for centralised loss taking for all bank failures.

    Agree with you absolutely on the currency thing. Somehow the Cypriot Pound devaluing by 50% would be shrugged off as par for the course, but a levy amounting to no more than a year’s interest is regarded as tantamount to an act of war.

  27. @Brian Woods II – also glad we are in the Euro.

    I see the “Icelandic Option” being bandied around as a pain free alternative. That entailed Icelandic savers taking a ~30% effective hair cut through inflation/devaluation.

    Much worse than even the 6.75% that brought the crowds out on the streets in Nicosia

  28. @BW II
    You can’t have centralised supervision without central responsibility. That is what has already been tried and failed (the ECB is responsible for regulating capital flows in the ESCB, despite its attempts to wriggle out of the responsibility).

    @DOCM
    Absolutely, that is why the Cypriot Pound was always a rather feeble bluff and why the talks continue.

    @BW II
    “Somehow the Cypriot Pound devaluing by 50% would be shrugged off as par for the course, but a levy amounting to no more than a year’s interest is regarded as tantamount to an act of war.”
    Well, I’m not sure about it being shrugged off – the UK applied war powers to Icelandic bank assets. I agree with you, though, that there is a lot of noise about a pre-emptive strike.

    As Colm McCarthy points out, though, the pre-emptive strike is collective punishment. Rather than the depositors in the bust banks paying, the yield-chasers and the prudent were being punished equally. It appears that the latest plan still sees the prudent taking a shave.

  29. @Eureka
    The Euro … is supported by most people in Europe… .

    I have my doubts as to the trustworthiness of official European statistics in this domain (presuming these are your source): the claim that the Euro “is supported by most people in Europe” is indeed consistent with the Commission’s latest opinion poll data (53% pro Euro, 40% against it) while at the same time opposition to the EU as such has almost doubled since 2009 — from 15% to 29% in late 2012. And support for the EU has fallen (or ‘plummeted’ if you enjoy more colourful language) from 48% to 30% during the same period.

    Ergo, according to the Commission’s findings for 2012:

    53% of the EU population are in favour of the euro but only 29% are in favour of the EU .

    Worth looking into. Much appreciated if anybody can find a link discussing these inconsistencies.

    http://ec.europa.eu/public_opinion/archives/eb/eb78/eb78_first_en.pdf

    (page 16 for the EU data and page 19 for the Euro data)

  30. @BW II

    “It is possible that the other PIIGS are suffering meltdown and this is being hidden from us so as to prevent contagion.”

    Spain and Portugal in particular. A lot of lies going down in the EZ. Paid for lies.

    I think it’s all too late and we may well be at the beginning of the end now.

    There’s a great Leonard Cohen song (I forget the title) with the oft repeated line, “everybody knows.”

    Everybody knows now that Germany is only interested in running Europe in the best way that benefits Germany. Any other consideration is secondary – and the toothpaste is well and truly out of the tube now with this Cyprus fiasco.

    If people want to slate me for being anti-German or whatever then that’s up to them……. but “everybody knows.”

  31. @Brian Lucey
    So Iceland couldn’t have managed it either? IIRC there were plenty of foreign currency deposits/accounts in the Icelandic banks. Membership of a currency isn’t necessary to speculate in it…

  32. Why would the Cypriot Pound devalue by 50%? It happily managed within the ERM for four years. As far as I can see it hardly moved vs the Euro from 2000…..but not at the desk so hard to know

  33. @Brian Lucey
    “It happily managed within the ERM for four years. As far as I can see it hardly moved vs the Euro from 2000…..but not at the desk so hard to know”
    Erm, perhaps because it was within the ERM and the goal was stability within the narrow band…

    “Why would the Cypriot Pound devalue by 50%?”
    Because the state and banking system were bust? (The latter first and subsequently the former). Because the only way to get around the banking system bust would be devaluation? Because the amount in question is 70% of GDP?

  34. @Brian Lucey
    Another 2b required!

    Remarkable how these guys are so bad at simple math.
    Remember our own bank CEO that said they didn’t need any money.
    If anything is to be learned from this and other fiascos I believe it is that the hole in bank balance sheets gets deeper and deeper as stones are turned…so you might be right about 20b.

  35. Isn’t Cyprus’ problem that it has no credible negotiating posn? A euro exit would hurt more than a haircut of 10% or whatever. Jordi whatshisname the catalonian pol said a while ago that small countries were divided between the serious and the non serious. Maybe cyprus will be left hang with the orhers protected. To be credible cyprus would need to be a ‘poison shrimp’ and it was in reality more like a fat
    juicy self contented shrimp that the ecb ate for breakfast.

  36. Worth repeating what the former ECB governing council member said…
    ““The former governor also had some choice words for his former colleagues at the European Central Bank (ECB) as well as for the European Commission.
    “I would have expected them to support the European project. I would have expected them to protect the citizens of the smallest and weakest member states against discrimination. We have seen a cavalier attitude towards the expropriation of property and the bullying of a people.”
    Orphanides added that the week’s events had made “a mockery” of EU treaties, indicating that “in Europe not all people are equal under the law”.

    Strong words from a staid central banker and worth heeding.

  37. Handy to have links to the relatively local papers today if you are following things.

    Latest update from the Cyprus Mail:

    http://www.cyprus-mail.com/bailout/update-anastasiades-seeking-last-minute-cyprus-reprieve-brussels/20130324

    I thought this bit was a classic:

    “Anastasiades then headed to Brussels in a private jet sent by the European Commission to hold talks with EU, European Central Bank and IMF leaders ahead of a crunch meeting of euro zone finance ministers at 6 p.m. (1700 GMT).”

    And the latest in mainland Greece:

    http://www.ekathimerini.com/

    I presume everyone knows about the El Pais article (that was subsequently pulled), comparing Merkel with Hitler (“Merkel, como Hitler, ha declarado la guerra al resto del continente, ahora para garantizarse su espacio vital económico.”)

  38. What we are witnessing is a long slow motion version of a highway pile up. Countries and their banks are failing serially because there has been no attempt to short circuit the failures. The policy has been to provide enough aid to keep the cripples, crippled but alive. Every few months another casualty looms, now Slovenia and France. Slovenia will get the Cyprus treatment but France which can materially damage Germany in the short and long term will receive different treatment.

    The lack of an EZ wide deposit insurance scheme is a fatal flaw in any monetary union. The interest rate differentials are another flaw that will lead to the demise of the EZ. And of course the greatest flaw of all is the lack of a currency depreciation tool for individual countries. We might ask ourselves why we should remain saddled with balkanised deposit insurance and interest rates with no protection from bank runs and at the same time be denied the currency depreciation safety valve.

    There is no doubt in my mind but that Germany is benefiting from the slow motion bank run from the periphery to Germany and from the cheap labour being dislodged from the periphery into Germany. This explains Germany’s self serving behaviour, what it does not explain is why the 16 non German members of the EZ are cooperating with Germany in their own destruction.

    No doubt at some point a majority of the 16 will say enough is enough with seven already down and others lined up for the kill.

  39. “The Cyprus decision last weekend made the pretence official: we were only joking, folks, a portion of your deposits in Cypriot banks could be confiscated, guarantee or no guarantee. Depositors in Greece, Spain, Italy, Ireland and any other country with damaged banks will no doubt take notice, and the risk of bank runs has been magnified. Unforgivably, this seems to have happened by accident,”

    I highly doubt this was an “accident”, seem to me like a clear calculated decision by Germany to economically bugger their neighbors in order for more money to flow to the core. An economic equivalent of Blitzkrieg, the Cypriots are so dazed they dont know what has hit them and its wake is the destruction of their economy.

  40. Look closely at what people say. When Wolfgang Schäuble says, “…… because of a business model that no longer functions” he’s not talking about a business model that fell apart because it wasn’t very good but about one that he’s now completely banjaxed (for the greater good of ‘Europe’ – read Germany – of course).

  41. Alexis Tsipras leader of SYRIZA, the leftists Greek political group, who may well become the next prime minister of Greece, did not campaign on a position of leaving the euro last year.

    A majority in Greece still supports retaining it and a big majority in a poll of Italians expressed support for the currency in the aftermath of the general election.

    The citizens of those countries have memories of past currency turmoil, high inflation and thievery by governing elites.

    @ Mickey Hickey

    There is no doubt in my mind but that Germany is benefiting from the slow motion bank run from the periphery to Germany and from the cheap labour being dislodged from the periphery into Germany. This explains Germany’s self serving behaviour, what it does not explain is why the 16 non German members of the EZ are cooperating with Germany in their own destruction.

    You are puzzled because you’re wrong.

    It’s foolish to suggest that countries would deliberately set out to undermine their own economies – – starting with Germany.

    Then what was the reason for the change of attitude of the IMF of being a supporter of Ireland’s case but then setting out to destroy Cyprus?

    @ Brian Lucey

    Brian,

    You seem all over the place – – from dodgy historic allusions to pleading for a ‘divided nation.’

    The only way the Irish taxpayer would have been saved from funding Anglo Irish Bank would have been to let it collapse with big losses for depositors — as it was mainly funded by deposits. In late 2008 it had €50bn worth of deposits and €10bn of senior debt.

    You have advocated bank defaults in the past — others such as Shane Ross was also a bigtime advocate.

    As I had experience running companies in recession periods and one in a wartime period overseas, I did raise the inevitability of foreign material supplies being cut off to indigenous firms already enfeebed by a brutal recession, where there would be fear of Ireland leaving the euro.

    The easy brush-off was that the ECB would blink first.

  42. Trichet in Ft july 7 2012

    “I turn to the ecb’s insistence that govts in particular ireland’s should not allow defaults by their banks to creditors . What was the thinking behind that” ?
    Jc strong vigilance t: “This was something that was very lengthily and thoroughly discussed. The judgement was that at that time and in those circumstances the threat of contagion in ireland itself was such that it would have been extremely dangerous (to allow the Irish banks to default).”

    Voila.

    Reminds me of the old joke. Why did jct not sort out the ez crisis quickly? It took the contagious.

  43. How are we better protected outside the Euro? Iceland was outside the euro but has had similar problems? The question Ive never seen answered, whats the Ireland outside the euro for the past decade counterfactual? Thats not to say we shouldnt consider a change, but lets not keep walking blindly into major decisions. (Not that it matters, we’ll be last ones out regardless after our political class strip the place bare)

  44. @ MH

    “You have advocated bank defaults in the past…”

    To be fair to Brian, Michael, the Prof had much more imaginative solutions for Anglo.

  45. @rf

    How are we better protected outside the Euro? Iceland was outside the euro but has had similar problems?

    Iceland was not in the EU which is a significant difference, the EU certainly has benefits, EMU less so. Our property bubble could certainly have been inflated from foreign investment flows even outside the Euro but managing the risk and crash would have been easier (or even just “possible”).

    We have two local test cases of smaller non Eurozone EU countries (Sweden and Denmark) and it seems that average GDP growth was very slightly higher in Ireland than Denmark and equivalent to Sweden’s over the period 2000 to 2013 but that neither Denmark or Sweden has 24 billion euro in deferred banking crisis costs to deal with. I would call that a win for maintaining a sovereign currency (which is of course not cost free).

    I would be interested to see GDP, GNP, unemployment and national debt/GDP trends over the 1992 to 2012 period for Eurozone and non Eurozone EU countries. Anyone got mad data presentation skills?

  46. Getting back to that article, Colm makes some rather cheap points about the money laundering motif. No-one is saying Cyprus is being punished for money laundering. But bailing out Russian oligarchs whether involved in ML or not sticks in my craw, maybe Colm is more understanding of that constituency.

    His jibe about why not pursue them for the 100% under ML laws, is completely missing the politics of what happened this week. The Troika wanted very stiff haircuts on the over 100K, it was the Cypriots themselves who wanted the little folk to take a hit and it is the Cypriots who would tell Colm that the last thing they want is to pursue anybody for ML.

  47. @ Brian Lucey

    Icelandic Krona has fallen by 40-50% under capital controls. It’s probably a better fundamental economy than Cyprus. Fair to assume something similar happens in Cyprus, no?

    On the issue of facing down the ECB, I believe you said they would do “nada”. Maybe you didn’t claim it was risk free, but you didn’t seem to identify much risk in your strategy. This weeks seems to have shown that the ECB is more than willing to at least consider implementing the unthinkable.

    This week is not about the dangers of bank insolvency v a v depositors and deposit guarantee schemes (that’s a symptom rather than cause). It’s about the much broader fiscal remit a government has (or is willing to consider) when faced with a large unfunded cash call, particularly when tasked with recapitalizing or resolving some or all of it’s banking system, where it is deemed to have a sovereign responsibility to ensure financial stability (ie it can’t allow uncontrolled collapse).

    The deposit levy hitting the insured deposits was a monumental error in judgement for anyone with their fingerprints on this deal, and an error that has hopefully been learned from this week. But quite clearly the new German view on things is that oversized periphery banking systems must be reduced down in scale significantly going forward, including via creditor bail-ins and sovereign recapping if required so much for breaking the sov/banking link). This creates potential problems for small open economies like Ireland going forward, given our reliance on services and particularly the financial services sector, but our first mover advantage in restructuring our banking system is likely to see us ok in the medium term.

  48. “But bailing out Russian oligarchs whether involved in ML or not sticks in my craw”

    Well it shouldnt, because you cant actually live in the real world without being complicit in some sort of oligarcal criminality..take all your money out of the bank, put it under the matress and move to a hut in kerry(living of your own food) then talk to me..anyway money laundering russian oligrachs appears to be a non issue in the Cyprus case, so..meh?

  49. @beb

    The problem is still too much debt and not enough growth. Deleveraging will run and run. The market’s tendency to focus on the short term doesn’t help. There are too many people earning too much money in the financial branch and creating nothing of value.

  50. Colm’s article is correct that the money laundering angle is mostly a red herring in case of Cyprus. It is being misused and has nasty a xenophobic undertone.

    That said, the story of Cyprus as an international banking center is finished, and should never have happened in the first place. Not because of money laundering, and not because it does not suit Germany, but because Cyprus never had any comparative advantage as a financial center.

    The Cypriot banking system was basically one big, risky bet. What attracted deposits to Cyprus was not their heritage of English law or anything such but instead the extraordinarily high interest rates paid by Cypriot banks.

    Throughout the history of their expansion, Cypriot banks paid a premium of at least 2 percentage points over the rates paid by, say, German banks, and the since 2009, the premium drifted further up to around 3 percentage points. (In contrast, banks in Luxembourg are and have been paying a significantly lower deposit rate than German banks.)

    If a bank is these days paying 4% interest on its deposits, you can be pretty certain it’s not using the funds to by AAA government bonds earning 1,5%. To earn a margin, it must take risks, and for the Cypriot banks the riskiest bet was to get heavily invested in Greek government bonds. That risk paid off for a while, but went bad with the Greek restructuring.

    I agree that banking union is needed to prevent such tragedies in the future. But the point of the banking union would not be to bail out oversized banking systems in small countries, but to prevent, by better supervisory and regulatory environment, oversized banking systems from happening in the first place.

    BTW, for those above who seemed to misunderstand the term, the “Icelandic solution” refers to putting failing banks in resolution, wiping out equity and bailing in creditors. In the Icelandic case, that meant bailing in the bondholders (and a bit of Icesave depositors), in the Cypriot case it would mean deposits in excess of 100.000 €. The Cypriots resist this because they see it as the end of their offshore banking industry – and probably with good reason.

  51. @ PR Guy

    Here you go:

    Leonard Cohen’s “Everybody Knows”

    Everybody knows that the dice are loaded
    Everybody rolls with their fingers crossed
    Everybody knows that the war is over
    Everybody knows the good guys lost
    Everybody knows the fight was fixed
    The poor stay poor, the rich get rich
    That’s how it goes
    Everybody knows
    Everybody knows that the boat is leaking
    Everybody knows that the captain lied
    Everybody got this broken feeling
    Like their father or their dog just died

    Everybody talking to their pockets
    Everybody wants a box of chocolates
    And a long stem rose
    Everybody knows

    Everybody knows that you love me baby
    Everybody knows that you really do
    Everybody knows that you’ve been faithful
    Ah give or take a night or two
    Everybody knows you’ve been discreet
    But there were so many people you just had to meet
    Without your clothes
    And everybody knows

    Everybody knows, everybody knows
    That’s how it goes
    Everybody knows

    Everybody knows, everybody knows
    That’s how it goes
    Everybody knows

    And everybody knows that it’s now or never
    Everybody knows that it’s me or you
    And everybody knows that you live forever
    Ah when you’ve done a line or two
    Everybody knows the deal is rotten
    Old Black Joe’s still pickin’ cotton
    For your ribbons and bows
    And everybody knows

    And everybody knows that the Plague is coming
    Everybody knows that it’s moving fast
    Everybody knows that the naked man and woman
    Are just a shining artifact of the past
    Everybody knows the scene is dead
    But there’s gonna be a meter on your bed
    That will disclose
    What everybody knows

    And everybody knows that you’re in trouble
    Everybody knows what you’ve been through
    From the bloody cross on top of Calvary
    To the beach of Malibu
    Everybody knows it’s coming apart
    Take one last look at this Sacred Heart
    Before it blows
    And everybody knows

    Everybody knows, everybody knows
    That’s how it goes
    Everybody knows

    Oh everybody knows, everybody knows
    That’s how it goes
    Everybody knows

    Everybody knows

  52. “To be credible cyprus would need to be a ‘poison shrimp’ ”

    Careful now, whats there to stop the Cyprian government freezing all accounts of persons and companies who can not produce a Cypriot passport

    That would include Russians, but quite alot of British and yes German and other euro countries citizens accounts too. Enough to cause a shitstorm in each one of those countries.

  53. Seems “bail-ins” are fast becoming the new Official policy…
    http://www.reuters.com/article/2013/03/24/us-eurozone-finland-idUSBRE92N0BY20130324

    And our very own Lucinda has words of advice for all bailout countries.

    As regards our fragility…could Germany decide that we should reduce our debt mountain ( 200b) by means of a bail-in. It seems Frankfurt does not like competition…Luxembourg finance minister alludes to this today somewhere.
    Next in line may be Malta..and perhaps Lichtenstein.
    Germany has succeeded in obliterating the Cypriot Banking system regardless of the outcome of tonight’s meetings and with financial services accounting for 70% of the Cypriot economy she has also wiped out the economy.

    Just as well we have some software and chemicals to export. But will they be enough to sustain 200,000,000,000 of debt.

  54. Gavyn Davies amongst others thinks the deal to emerge will see Cypriot sovereign debt at about 145% of current GDP. Not completely clear yet.

    The mood music will be the familiar ‘…declining to 120% by 2018…’ or some such. Problem is, the Cypriot financial services industry is kaput in any plausible scenario. GDP is likely to fall 20% according to Cypriot and Greek economists better informed than us.

    This means that the debt/GDP ratio at end-2013 could hit, not 145% of GDP, but 180% of GDP, including a large pile of official lending enjoying seniority.

    In addition, deposit flight from the Cyriot banks will mean they need more ELA than can be provided, since the collateral haircuts are too large. This is a quite separate constraint from the point made by Jorg Asmussen, namely that the ECB cannot countenance ELA to insolvent banks. Neither can it countenance small haircuts on poor collateral from banks rendered solvent post the depositor levies.

    Exchange controls do not protect the banks from deposit flight, only from deposit flight abroad. If bank balances remaining after the haircuts have to be frozen, to avoid the need for more ELA, the GDP contraction could be even larger than the 20% local economists estimate. How does the ECB find some route to fund the solvent but illiquid surviving banks if Cyprus I is not to be followed (a la Grecque) by Cyprus – the Sequel?

  55. This week has advanced the sum of knowledge greatly. We now know for definite what the outcome would be of the Blazing Saddles policy advocated by some celeb economists, SF and the Technical Group. If we put a gun to our own head and threatened to pull the trigger, the ECB would make damn sure the chamber was loaded with a live round.

    We now know that the the alternative to acceptance of the current set of policies is exit from the euro and a move to primary surplus on D plus 1. There is no magic money tree. All improvements in the outcome must be carefully negotiated while we hope for the system to blow apart.

    Good to know as well that the Post war architecture in Europe is dead. We know live under a Teutonic hegemony.

  56. Which should probably be the conclusion vis a vis the euro (rather than mafia state germany, the new reich, or whatever)

  57. Meanwhile, a la reuters, while Herr Schauble (fresh from blaming Cyprus for being NotGermany) accepts the figures have worsened his preferred plan is ” the same as last week”
    tin ear, stony heart, cabbage brain.

  58. How does the ECB find some route to fund the solvent but illiquid surviving banks if Cyprus I is not to be followed (a la Grecque) by Cyprus – the Sequel?

    I presume that depositors simply become shareholders, in effect?

    I’m quite puzzled by the number of people who are referring to this as a bailout. It’s an odd way to describe the fleecing of depositors.

  59. It’s getting distinctly ropey with the Central Bank of Cyprus limiting withdrawals from ATMs to 100 euro as of 1 pm today.
    Capital controls already implemented? Are they running out of banknotes?
    And they can’t fire up the printing presses because they don’t know what currency to print.

    Wolfgangs comments from the NYT
    ASKED ABOUT THE REQUIREMENTS FOR A BAILOUT:

    “We haven’t got much further in the last week. The numbers have not changed, if anything they have worsened.”

    “I hope we will achieve a result today. But that, of course, depends on the people in Cyprus having a somewhat realistic view of the situation.”

    ASKED WHAT HE EXPECTED IN TERMS OF A SOLUTION:

    “What we agreed last week.”

    (Reporting by Annika Breidthardt and Ilona Wissenbach)

  60. Cyprus doenst have a printing press for notes. And noted dont matter,they can be stamped. Its electronic money that gets redenominated.

  61. If the Cypriot pound devalued by 50% it would be a boon for their tourism. It would soon recover. Also gas fields etc to help.
    It’s best option is to default completely, leave the Euro and get back on its feet.
    This is the right time for them to do it too from a seasonal point of view. There was life before the godamn Euro.
    Go Cyprus

  62. RTE: Michael Noonan states that it was Cyprus who wanted to hit depositors and so who were they (the other finance ministers) to object.

    He confirmed that deposits in Ireland will never be touched. So there, what’s there to worry about?

  63. For further evidence that taking out the Cypriot business model was an explicit objective of the negotiations from the German side:

    German Chancellor Angela Merkel told lawmakers that while she wanted to keep Cyprus in the eurozone, it must first recognise it had no future as an offshore financial centre for wealthy Russians and Britons, two parliamentarians told Reuters.

    Of course no distinction is made between legal and illegal activities. To be a rich Russian or Brit in Cyprus is evidence enough of wrongdoing. Putin and Cameron must be delighted that Merkel is so concerned about the revenues lost due to tax evasion by their citizens and companies, and is doing what she can to help out.

  64. @Eureka
    “If the Cypriot pound devalued by 50% it would be a boon for their tourism. It would soon recover.”
    Yeah really, there are that many tourist pounds that you can base a modern economy on them… this is such a canard, I can’t believe it keeps being repeated. Loads of countries are cheap to visit and stay. It only works when you are prepared to accept at best a second-best living standard.

    “Also gas fields etc to help.”
    Which would remain as politically fraught as they currently are.

    “This is the right time for them to do it too from a seasonal point of view. There was life before the godamn Euro.
    Go Cyprus”
    Well, you may wish that, the Cypriots appear not to.

  65. Eureka,
    If your living standards go from 100 to 50, how many years does it take to get back to 100. Ask BW 2

  66. I cant believe Merkel’s comments, so because Cyprus has British and Russian involvement the money must be dirty. I didnt realize the Germans still have a sore rear 60+ years on…

  67. Note that the capital controls that were voted through in Cyprus last week go way beyond exchange controls. They allow the CB to essentially control all withdrawals from bank accounts.

    – restrictions on daily withdrawals
    – ban on early termination of time deposits
    – compulsory renewal of time deposits
    – conversion of current accounts to time deposits
    – ban on non-cash transactions
    – restrictions on use of credit & debit cards
    – restrictions on use of checks
    – restrictions on transfers between banks

  68. @KO’R
    Best post in awhile!

    @ JR at 1.01pm
    “@DOCM ” The Cypriot share had to be found somewhere. ” As Tull points out, you conveniently ignore two issues central to the problems in Cyprus, Ireland, Spain and other countries.
    1. From the outset, sheltered creditors were given a cast-iron umbrella from the ECB/ German axis to get their money out. These creditors who should have taken the losses are now disappeared, their place in part made up of so-called official funding. ”
    +1

    @ PR 2.33pm
    “There’s a great Leonard Cohen song (I forget the title) with the oft repeated line, “everybody knows.” Everybody knows now that Germany is only interested in running Europe in the best way that benefits Germany. Any other consideration is secondary”
    +1

    @Mickey 2.56pm
    “What we are witnessing is a long slow motion version of a highway pile up. Countries and their banks are failing serially because there has been no attempt to short circuit the failures. The policy has been to provide enough aid to keep the cripples, crippled but alive.”
    +1

    @JMcH
    “But what if it doesn’t? What would happen to the economy and society if there were general, chaotic bank failure? ”

    Life will go on. Certainly short term pain, but Ireland will remain a great (indigenous) exporter, its FDI sector will remain substantially intact and benefit from reduced costs, Ireland will remain in the EU, etc. However, the most important benefit would be social cohesion and equity, with the pain being shared by the nation as a whole. That cohesion would be the catalyst for moving forward together.

    “That is emphatically not to say that Irish governments have necessarily made the right choices during the economic crisis. But what Cyprus shows is that the “stand up to ECB and play hardball in Ireland’s interests” school of policy isn’t a risk-free option. Those who propose it often pretend that it is.”

    Those like you (representing Official Ireland) who live in hope that something will turn up to save the day will have a rude awakening I fear in due course. You say this while at the same time denying that there is any other way other than the Official Way currently pursued. You deny also that the current path is not working too well (there are bright bits here and there). As PR says above, “everyone knows”. Despite all the positive spin, the numbers ‘ overall trend has been downwards and continues to be downwards (if one looks beyond the headline figures). What most people have mis-calculated (including myself), however, is how long the downward grind has taken and will take further before Ireland hits a tipping point. External factors outside the country’s control are also heavily impinging to disrupt Official Plans….and allow Official Ireland off the hook. However, debt is not sentimental or moralistic. What we are witnessing once again is simply the creditors getting repaid and the debtors being ‘worked’ to pay the debts. Nothing new has really happened. It’s the same old path we were discussing two years ago.

  69. @ Yogan
    For that population – not that many. And some decent markets around them – Russia, possibly a rising Turkish middle class, and Israel all close by. And don’t forget Europeans – 2 week packages for 700€ for example.

    @ Tull
    It’s blackjack. You either lose quickly or lose slowly in this German mess. Best to just run out of the Casino

  70. @EIS

    “I didnt realize the Germans still have a sore rear 60+ years on…”

    Only some of them…. but then some!

  71. @Bryan G
    I have to agree.
    it has become increasingly obvious that Germany is intent on wiping out the financial services sector in Cyprus. Schauble’s comments today merely reinforce the belief that it was preplanned. Vote again until you get it right.
    As regards the draconian Capital controls…surely they are illegal under the various treaties if they concern Euros.
    Perhaps they are designed for a new currency?

  72. Apparently the ECB now wants the Cypriots to guarantee the 9b ELA. So thats 9b ELA + 10b Bailout + 2b thrown in today for lols + 5.8b local…..= a lot….
    Aint gonna happen. In fact, cant be done.

  73. @yoganmahew

    There is only so many of the now dead Cypriot banking fraternity that can be trained up as waiters, concierge.

    @ All
    Cyprus, shortly, is going to need even more of the loving embrace of Russia, those whom Wolfgang thinks need to be thought a WWII lesson. This despite, supposedly knowing, what his obligations to the Euro were supposed to be.

  74. @PR GUY
    Apparently he has threatened to resign if bank of Cyprus is saddled with 9b euro in ELA
    owed to the ECB.
    Can’t see the Cypriots winning that one. Mario would be very peed off.
    But what good would his resignation achieve?

  75. @PR GUY
    Apparently he has threatened to resign if bank of Cyprus is saddled with 9b euro in ELA
    owed to the ECB.
    Can’t see the Cypriots winning that one. Mario would be very peed off.
    But what good would his resignation achieve?

  76. Seems the President is playing hardball and has blocked the transfer of the Greek branches of Cypriot banks to Greek Banks. Desperate measures…contagion in Greece tomorrow?

  77. @Michael Hennigan

    Far from undermining itself Germany is thriving on cheap money and cheap labour. Just look at the number of manufacturing plants that VW has announced it is building abroad (non EU). Cheap money gives German companies a decided advantage even over state funded Chinese companies.

    The 16 have yet to come to the realisation that their goose is being slowly cooked and are going along with the ride because that is the comfortable thing to do. A reluctance to change anything is the dominating factor in the behaviour of the 16. Germany wants to gut Greece so the 16 rubber stamp that, thereby encouraging Germany to continue with its campaign to inflict pain on any country that displeases Germany.

    Germany picks its victims then wages a PR campaign to impugn their integrity so as to make it easier to topple them. It does this while people who should know better stand idly by sitting on their hands with their mouths shut.

  78. @CMcC 5.11pm
    +1
    The slippage is inevitable assuming your 145% Debt /GDP restarting point. But what’s so surprising about that? This has been the way now for many years. Bleed, suck dry, look for a new spot to cut, bleed, suck, and so on. The debtor is only allowed enough to stay alive….Minimalistic approach is how debt collection works.

    There will be no let up in the creditor pursuits of debtor assets. Rules be damned is what we are seeing at present. This is just the Barbarians coming over the hill to plunder, rape & kill the poor natives. It’s animalistic….Big dog gets to eat; smaller weaker dogs get the scraps if anything at all. Any attempt to put “social graces” on this is mis-placed. This is Neville Chamberlain -esque denial of what’s really happening in Europe (once again).

    @Eureka
    “It’s blackjack. You either lose quickly or lose slowly in this German mess.” Exactly!

  79. Rehn, now waffling on in almost Kafkaesque language a few hours ago.

    “But Cyprus and the Cypriot people are a part of the European family. The European Union stands by them and will help to rebuild the Cypriot economy.”

    Nothing to worry about then, everything quite normal in the European family. The clue is in the word “rebuild”.

  80. Here is a statement from M. Noonan that requires clarification…from IT
    Minister for Finance Michael Noonan today ruled out imposing a Cyprus -style levy on Irish bank deposits.
    Speaking on his way into a meeting of Eurogroup finance ministers in Brussels, Mr Noonan said he expected a deal on Cyprus to be agreed tonight.
    “I think a deal will be done tonight but I think it will be late,” Mr Noonan said, adding that many of the details around the rescue package for Cyprus had to be worked out.
    “We would never hit depositors in Ireland. We believe €100,000 is sacrosanct,” Mr Noonan said, referring to the Europe-wide deposit guarantee that protects savings up to that amount.”

    What is the situation over 100,000…not sacrosanct?

  81. Jean Claude Junker :when the going gets tough, lie.

    No minister for finance will, or should, ever rule out (in reality – speaking to journos isnt reality) any way to raise finance.

  82. Head of Cyprus’s Orthodox Church weighs in.

    “Head of Cyprus’s Orthodox church urges exit before eurozone collapses”

    “The euro cannot last,” Chrysostomos told Realnews, a Greek newspaper. “I’m not saying that it will crumble tomorrow, but with the brains that they have in Brussels, it is certain that it will not last in the long term, and the best is to think about how to escape it.”

    http://www.guardian.co.uk/world/2013/mar/24/cyprus-orthodox-church-exit-eurozone

  83. In all humility, I’m way out of my depth here. I really can’t understand the anti German hysteria.

    I’m presuming that we are not blaming the Germans for Cyprus developing its banking version of Frankenstein. I also presume that the hegomoaniac lobby (the majority in these parts) are not in support of the Cyprus sovereign bailing out this Monster with borrowed funds. I conclude that their solution is a gift from the rest of us to Cyprus, why don’t we simply hand them the dosh and wipe the slate clean?

    That sort of naivetee is fine from the likes of Eureka but from esteemed Profs?! I must be missing sumfin.

  84. @Eureka
    “For that population – not that many. And some decent markets around them – Russia, possibly a rising Turkish middle class, and Israel all close by. And don’t forget Europeans – 2 week packages for 700€ for example. ”
    For that to work, Cyprus would need to have a lower standard of living than the Russian and Turkish middle-classes (so they would be lower cost than their customers). I’ve been to both countries…

    As I say, second-class (at best) service economy.

    @Robert Browne
    I think you might get some use out of defunct bankers breastfeeding shovels. Not sure they’re much good for owt else.

    @Gavin Kostick
    That’s a great quote from Chrysostomos and mirrors the discussion Mrs. YM and I have been having.

    @Brian Lucey
    Ah, but he didn’t rule it out – he just said it would never happen. He also didn’t mention which side of €100,000 is sacrosanct or whether it is the exact number down to twelve decimal places or whether €100,000 is being used as the ‘guarantee amount de jour’… who was the villain? Shylock? Not sure about that…

  85. BW2, Cyprus was doing quite fine until EU steered and cheered by Germany “sorted out” the Greek problem by kicking the can down the road to Cyprus, whose banks were quite fine except for the mistake of lending to fellow Greeks.

    They did not have an overbloated public sector nor a world record breaking property bubble like us, and only a few years ago they passed all of the criteria for euro membership acceptance.

    The Germans have decided to justify burning the Cypriot economy by blaming all the problems on Russians (and now Brits) who do business there.

  86. @Robert Browne

    The other important word in Olli’s statement is “family.”

    Don’t take sides with anyone against the family.

  87. @ Yogan
    “@Eureka
    For that to work, Cyprus would need to have a lower standard of living than the Russian and Turkish middle-classes (so they would be lower cost than their customers). I’ve been to both countries…”
    Not logical – doesn’t follow
    They joined the Euro in 2008 and had been doing very well up to then thank you very much so could easily regain competitiveness. Exit, default and devaluation would be very useful for them.

    But I doubt if they will do it.

    Still though – who would have thunk we’d be here right now. Anti-german sentiment rampant throughout Europe – failed governments all over the place.

    Olli knows Europe is over. If this was a family I’d just want to run away from home.

  88. BWII,
    I would not call it hysteria. It is more sceticism at where the dog whistling by the German establishment will lead.
    They have branded the Cypriots as shills for the Russian mafia and autistic. Combine that with a side swip at the Brits by conflating them with the afore-mentioned Russians. Talk about calling up old ghosts.
    We should also worry about who is next to be dealt with.
    Apart from everything tightening the nexus between sovereigns and banks as is happening in Cyrpus will lead inevitably to a sovereign defaults all over Europe and the destruction of the European economy for the third time in a century.

  89. @Eureka
    “Do we really have anything in common with these people.”
    Up to the march, I’d have said that the Irish, in general, have very little in common with the French. Now I have been proved wrong… 🙂

  90. I own an apartment in Paphos and have an account with Hellenic Bank (frozen of course). The apartment has lost value since it was bought in the mid-2000s (in Cypriot Pounds) but it was bought with the proceeds of a ‘boom time’ house sale in Ireland so no real loss then! Cyprus was doing quite well outside of the Euro and I believe it will recover in the years ahead. It is a fabulous island and, in terms of infrastructure, it is far ahead of Ireland. The war with the Turks has given Cypriot culture a strong unifying force. There are two British military bases on the island (and, boy, are the Cypriots glad of that now), the country is almost entirely fluent in English, the legal system is British based, and they even drive on the left hand side of the road. I can’t wait to return and spend a few days in the Troodos Mountains with Mrs B and the kids, eat the terrific food and fresh fruit, and visit the wineries. The Cypriots will get through this.

  91. @ Yogan
    Another non-sequitur. Tut tut. We have our problems but France is hardly a beacon for any kind of liberty, equality or fraternity any more. They really do have major issues to sort out.

    There are many many reasons to leave Europe but the main one is to shock it into saving itself. It really must cop on.

  92. http://online.wsj.com/article/SB10001424127887324789504578380473415855386.html
    Simon Nixon : unlimited ELA on anything > a cypriot capital control. Gosh. That would mean….GASP… no ECB shutters down moment

    “Meanwhile, a run on Cypriot banks seems inevitable. The only question is whether Nicosia tries to stem the pace of deposit flight by imposing capital controls or whether the ECB allows the Central Bank of Cyprus to relax its collateral rules sufficiently to permit it to provide unlimited Emergency Liquidity Assistance to a recapitalized banking sector.

    There’s no doubt which would be in the longer term interests of the euro zone. The introduction of capital controls would undermine the very fabric of the monetary union; “Effectively it means a euro in Cyprus is not a euro any more,” says Guntram Wolff of the think tank Breugel.

    Nor is it necessary. Under euro-system rules, national central banks can only provide ELA to solvent banks against collateral. But the Irish bailout showed that solvency can be a question of judgment rather than precise rules, while the concept of eligible collateral is similarly elastic.

    Providing unlimited liquidity to Cyprus would expose the European Central Bank’s balance sheet to risk, particularly if Cyprus does end up crashing out of the euro. But that may be the lesser of two evils: capital controls might pose an even greater risk if they lead to a wider loss of confidence in other weak peripheral banking systems.”

    Shocking stuff… Heretical.

  93. @ Bunbury
    Good buy – was only there once on holidays and its a great place. People friendly and decent. Land very beautiful. Definitely can survive with or without the Germans. If they were to leave (and assuming we could still afford it after another year of progressive impoverishment) we’d definitely be back again

  94. @Brian Lucey

    re: WSJ link
    “Providing unlimited liquidity to Cyprus would expose the European Central Bank’s balance sheet to risk, particularly if Cyprus does end up crashing out of the euro. But that may be the lesser of two evils: capital controls might pose an even greater risk if they lead to a wider loss of confidence in other weak peripheral banking systems”

    That is a very perceptive comment from Simon Nixon, and probably the only sensible thing to do. Therefore….it will not be done.

  95. I just don’t understand the hegemoaniacs’ argument. They argued that Anglo should be let go bust. The ECB have let it known that that option is perfectly available, indeed they will insist on it if no alternative is found.

    It has also been made clear that there will be no gifts and that that there will be no loans beyond what is already a stretched sustainability criterion. What is so wrong with that? And of course every other EZ participant supported it, our own Government positively enthused. Where is Lucey’s Teutonic Hegemony in all that?

  96. @Bond. Eoin Bond.

    If you need a good argument to help stem the inevitable deposit run from Irish banks in the next month, try this one.

    Given that Germany want to cut pesky Russian depositors in Cypriot banks by 20% or 40% or 50% or whatever figure Schaeuble decides, how much do auslanders think they get for their German bank deposits, when the euro collapses.

    For a more academic version of the same argument, reference Paul De Grauwe article on Target2 etc.

  97. Looks like the Eurogroup won’t meet till Monday. Sticking point is the 9b ELA money. Apparently their Nobel prize winning economist Christopher Pissarides told them to avoid the resolution of Bank of Cyprus at all costs as this would amount to bankruptcy.

    Down to the wire then.

  98. @ Bunbury,

    That’s the spirit old boy!!

    Only problem is trying to find the time to get over there I bet!!

    However you forgot to mention the beautiful olive trees.

  99. The ecb dont want to leave 9b in excess circulation. .. truly spoiling the so for a haporth of tar. The inflation fetishism is gone into overdrive

  100. @BWII
    “In all humility, I’m way out of my depth here. I really can’t understand the anti German hysteria.”
    The disconnect I think is with those who believe in some overriding ‘greater good’ in the EU /EZ project; those that advocate ‘solidarity’. The Germans are ‘bad’ in light of the ideals backing that approach. However, the German approach is “Bugger that, I’m not going to lose my money bailing out an unreliable debtor /bankrupt. If someone else wants to preach that, let them pay.” Tempered only by “Ok, I’ll have to contribute to maximise my recovery, but only so much [minimally] as I need to. Once bitten, I’ll be damned if I have to pay more than I need to”.

    Natural enough for the PIIGS and now Cyprus to now emphasise and obsess on the solidarity aspects….because it suits them of course. However, “It was the euro system, Sir, that caused the imbalances and therefore my current problems” is just too ‘rich’ for the Germans to buy into.

    Nah. This is just cold, self-interest, on all sides. The majority of Irish will stay with the status quo until self-interest dictates otherwise. Perfectly happy to take the EU Welfare for now, in the hopes of something turning up. However, be prepared…! If the Irish get a whiff that a 2nd bailout is on the cards, watch the speed of the departure of deposits in Ireland . The politicians, with insider info, will be in the vanguard…!

  101. The French are fueling the fire…
    “Pierre Moscovici, the French finance minister, accused Cyprus of bringing the crisis on itself by allowing banks to balloon in size fuelled by Russian investments, estimated at €20 billion.
    “To all those who say that we are strangling an entire people, Cyprus is a casino economy that was on the brink of bankruptcy,” he said.
    Mr Moscovici, echoing previous comments by Germany, insisted that the eurozone was not concerned about the impact of confiscating bank deposits in Cyprus, or of closing banks.
    “I am not worried at all about the risk of contagion because the economy of Cyprus, the banking sector of Cyprus, always is very specific,” he said.”..
    From the telegraph

    No contagion then…French arrogance?

  102. @ Fiatluxjnr,

    The previous political establishment of Cypress loved risk.

    They even stored over 2000 tons of explosives / munitions beside the country’s largest power station.

    The munitions stored in containers did not cope well in the sun.

    Despite repeated calls / recommendations for the munitions to be relocated to a secure area, nothing was done.

    Eventually the munitions went up… taking out the power station, killing over 12 people and injuring over 50 others.

    The country was plunged into darkness… taking almost 10% of the entire GDP with it. The power station is still mostly offline, only one unit out of 5 working!!

    Long before this financial crisis was obvious it was clear that somebody had left the Chimpanzee’s out of the cage! That’s communism for ya!

  103. @bw2

    “RTE: Michael Noonan states that it was Cyprus who wanted to hit depositors and so who were they (the other finance ministers) to object. ”

    Who? Not people who understood the implications, evidently.

    Didn’t some of them actually ‘welcome’ the move?

  104. Destruction of Cyprus’s banking sector is the goal.

    Why is Frankfurt a pale imitation of London and Zurich in wealth management. The answer is because of Dublin, Nicosia, Luxembourg, Lichtenstein, Valetta. Get rid of them one by one using the cover of keeping the EZ stable.

    http://www.welt.de/wirtschaft/article114733148/Zypern-Rettung-steht-auf-Messers-Schneide.html

    Excerpt-Google translate.
    Especially from Germany, the demand was loud, asking many wealthy Russian investor money to pay. Cyprus pursues a non-sustainable business model with high interest rates, low taxes and lax banking supervision, corporate too little to combat money laundering. Anastasiades defending this business model, it was said by EU diplomats.

    Abominable behaviour. To make things worse the Fench Finance Minister is now on the Schauble bandwagon.

  105. @ Mickey Hickey

    Frankfurt is not a big financial center because the Germans don’t believe in the primacy of finance. It’s contrary to the principles of ordo-liberalism, and seen as Anglo-American folly (as is Keynesianism).

    Most of this talk about reprehensible Cypriots/reprehensible Germans should probably be discounted as posturing. What the Cyprus case does show however, is that anyone who thought bailing in bank investors would placate “Hegemoaniacs” has been proved wrong. No, it seems that nothing short of direct transfers from EZ taxpayers will suffice; or even better direct transfers from the ECB (since hopefully no-one will notice).

  106. @skeptic01

    It’s contrary to the principles of ordo-liberalism, and seen as Anglo-American folly (as is Keynesianism).

    Rest assured that outside Germany it’s particular schism of hard money neoliberalism is seen as a strongly embedded reactionary political position and not economics as such at all.

    We can blame the architects of EMU for ensuring that ordoliberalism would come into conflict with conventional economics and win the institutional battles while losing the econometric ones.

  107. @ yoganmahew

    How can banks be prevented from running amok?

    Just to summarise our monetary system;

    Banks create the money of the economy when the advance loans and destroy it again when they process loan repayments.

    While they credit the customer’s accounts by the principal of the loan, P, they debit their debtors account by P but they record in house that they’re owed P + Interest, I. Hence it’s not possible for the economy to function without the complications of loan defaults.

    When they process a loan repayment they debit the borrower’s account by P + I, credit their debtors account by P and credit shareholder’s equity by I. The result is that money to the value of P no longer exists.

    If we take on more debt to banks than we repay this system can run smoothly. However when the rate of loan repayments is greater than the rate of new loans the money supply decreases and people struggle to repay debts even more, this discourages people from taking on more debt, hence the economy has no source of new money etc. etc.

    How can the banks be prevented from running amok under this system?

    If they create money sparingly it’s still the case that whatever’s in circulation has an even higher debt to the banks.

    If they lend only to those with the highest credit rating it’s still the case that they create money only to the value of P but debt to the value of P + I and it’s not possible for all loans to be repaid.

  108. The Greek writedown as the catalyst is mentioned very rarely and the russians are cited instead. Very interesting pr story.

    But it always seems to come back to the euro and its dysfunctional system logic. Maastricht seems like such a.long time ago. The lack.in each of those architects of the future.

    It is a.bit like the wizard of oz. This week the troika learnt about deposit insurance. Next episode the tin man will get a heart and after that schaeuble will learn about how to wind down a bank.

    Dont forget either we are still waiting for a new economic narrative to replace efficient markets. Modigliani and miller won a nobel in 85 for showing how dividends were irrelevant in an efficient market. And 28 years on dividends are back . Ask Aviva or Generali.

  109. Indo sez atm withdrawal.limit reduced to 100 euros now in cyprus. Couldn’t the prb have picked a time other than month end to fooster around with cyprus?

  110. @ Shay

    “Rest assured that outside Germany it’s particular schism of hard money neoliberalism is seen as a strongly embedded reactionary political position and not economics as such at all.”

    Well, when the economists of the US, UK and Mediterrean countries have finished patching up their economies after their latest series of near-fatal catastrophes, perhaps they will be kind enough to inform Germany how economics works.

    Oh I forgot, the catastrophes in those countries were all Germany’s fault.

  111. “Oh I forgot, the catastrophes in those countries were all Germany’s fault.”

    Why not go to the minmum effort of reading the (pretty short) OP so you know what you’re arguing against?

  112. It’s worth zooming out from Cyprus. The amounts are pretty small in the scheme of things. e.g. not even an Anglo Irish bank. So it’s reasonable to suggest that the actions of the Core countries are aimed at future hotspots or grabs for deposits. Therefore anyone who suggests Cyprus is different should be taken with a pinch of salt.

  113. Seafoid I can assure you that not too many involved at the sharp end of the markets thought the efficient markets hypothesis was ever anything more than a neat jumping-off point into the real world for novices, even back in ’85.

    @All

    Looks like Cypriot banks are going to be an interesting experiment in naff-all maturity transformation.

    Will there be a discount market for Cypriot Euro bank balances, given that ELA appears to have hit the buffers? If so, how far away will they be from effectively having a parallel currency?

  114. @skeptic01

    If the other countries in Europe could have Germany’s excellent apprenticeship system or its laudable suspicion of the financial sector (and the wealthy) or its respect for manufacturing that would be great, and if you are German I understand why you are very proud of your country’s achievements.

    However ordoliberalism is not one of Germany’s better gifts to the world, and it bears a resemblance to a much earlier one. Homeopathy.

    Ordoliberalism is the homeopathic equivalent of real economic policy frameworks – it does little harm to economies which are healthy (like Germany’s currently is) but is of no use for those which are injured (like Greece’s) and actively dangerous when used to halt the spread of contagion.

    There is no plausible ordoliberal cure for depression.

  115. The deal has been done. That was fun (kinda).
    A lot of Europeans were rattled.
    Will be interesting to see what happens next

  116. Well finally we have a result. No bank deposits are safe in the Eurozone. This can only have a bad ending.
    It’s galling to see Schauble boast that this is the result the German government wanted (Reuters).
    The secondary market in Cypriot deposits should be interesting tomorrow. I think Grumpy alluded to same above. What would you pay for deposits in Laika or BoC…perhaps 25% of face.
    Sorry, I forgot Cyprus is unique.

  117. Schaumburg can be held to that when their financial services sector implodes and unemployment starts to rocket and they end up with a fiscal crisis because deficit to GDP rises (mostly as a result of falling GDP).
    Biggest winner is City of London as Russian money heads there now.
    It has been a very strange 2 weeks. A genie is out of the bottle

  118. Gentlemen, far from shunning finance and wealth Germans in Frankfurt the bank capital of Germany look enviously at the multi million incomes in London, Zuriich and New York. Manufacturing is a hard slog, as is growing potatoes, rye and cabbage. Economists in Frankfurt do not see manufacturing getting any easier. They see inroads being made from China in particular but also Brazil (e.g. Embraer) Russia and many other countries in addition to Japan and Korea. In the US manufacturing wages are moving toward 3rd world status.

    There are circles in Frankfurt where wealth management is seen as the new Jerusalem.

  119. You’d imagine that this will make funding more difficult for Irish banks again.
    This isn’t the end, nor is it the beginning if the end – this is the end of the beginning

  120. It’s early and I may be bleary but something I spotted coming out of last night…. “One key element of the deposit tax is that it not require a parliamentary vote.”

    They’ve done it again. They’ve managed to get around the normal democratic stuff that gets in their way.

    Keep voting until you get it right. Or in this case, don’t bother voting again as we know what’s best for you.

    I also read that the actual % (25, 40, 50? Who knows?) will be ‘decided in the coming weeks.’

    Now that’s what I call a sword of Damocles (Damocles finally begged the tyrant that he be allowed to depart, because he no longer wanted to be so ‘fortunate’ – I can see many parallels between that story and Cyprus eventually wanting to leave the Euro).

    I wonder if the Cypriot parliament were duped into passing the legislation they did at the tail end of last week, thinking they were going to be allowed some kind of final say on the other stuff. It will be interesting to hear what comes out.

  121. “There is no denial that Cypriot people will go through tough times as a result of mistakes at the banking level and fiscal excesses,” said Sarris.

    He also confirmed that the Bank of Cyprus would take over the 9 billion euros of Emergency Liquidity Assistance that the ECB has provided to Laiki.

    It is not clear how much this set of measures will raise but Dijsellbloem said it the original figure of 5.8 billion euros should be disregarded.

  122. I think it is a positive act.

    The avoidance of zombie banking is painful, but better than Japanization? Now, there is a country that dons the Rising Sun Jersey! ‘Groupthink’ is the only think allowed. They are so attached to it, that they literally worship ancestors and will not emigrate, as exile is shameful. Remember when their banks were most of the “Top Ten”? They still exist. They lie to each other about the bad debts.

    Trouble is:

    http://1.bp.blogspot.com/-zp6sfIc1g1Y/UU9LlAtU2aI/AAAAAAAAObs/RyHXtagISBc/s1600/Screen+Shot+2013-03-24+at+18.50.45.png

    shows why this is bad news for Ireland! John Corcoran’s point about the fraudsters still being in charge is accurate. Sure, what harm?

    Good night?!

  123. We now know the new creditor preference in Europe. Money owed to Germans will not be haircut. Money owed to someone else will be haircut and that person will be branded as unworthy.
    In funding a bank, make sure you invest alongside the Germans, that should ensure you AAA status.

  124. @ Tull Mcadoo

    Have you a nationality breakdown of the senior and junior bondholders due to be burnt in Laiki?

    @ Mickey Hickey

    Far from undermining itself Germany is thriving on cheap money and cheap labour. Just look at the number of manufacturing plants that VW has announced it is building abroad (non EU).

    Your anti-German sentiment seems to have sent your judgement into a tailspin.

    The comment about VW is ridiculous.

    It’s one of the top 3 global carmakers and it doesn’t make decisions based on cheap labour. Big surprise that it is in future growth markets.

    The Audi unit has recently began assembling the A6 Hybrid in Malaysia and its retail price has almost halved.

    You likely don’t know, but as ex-Europe production has increased, so has the export of car materials from both Germany and other EZ countries.
    Portugal’s VW unit is one of the country’s biggest exporters.

  125. @pr guy

    I was thinking the same . How convenient. Reminiscent of the parachuting in of monti. How will future treaties word this phenomenon?

  126. M H wrote: “Your anti-German sentiment seems to have sent your judgement into a tailspin.” you will recognize the political geography of some on this board by their titles ‘Mickey Hickey’, ‘Tull McAdoo’, ‘Shay Begorrah’, ‘PR Guy’, ‘Eureka’, ‘bunbury’, ‘eis’. The Euro is our currency here in Ireland, the 99 per cent in Ireland would like to see it go from strength to strength.

  127. @Grumpy

    “I can assure you that not too many involved at the sharp end of the markets thought the efficient markets hypothesis was ever anything more than a neat jumping-off point into the real world for novices, even back in ‘85.”

    I wouldn’t doubt it. But post big bang a lot of spivs got into the business. It was easy money, wasn’t it? A bit like all the estate agents who jumped on the bandwagon in Ireland.

    Financial services wasn’t actually about reducing risk in the end. It intensified it. I am sure there were more than a few thinkers who saw what was going on but most people don’t think too hard especially if their incentives are misaligned.

    There was an interesting graph in the FT a while back that showed rebased growth stocks versus dividend stocks over the last 20 years. Growth drove momentum for a long while.

    And would anyone working in Laiki or ILPM have been at the “sharp end” ?
    Dumb money will always be with us, I bet.

  128. @ Duanaire
    It’s not anti-German so much as anti-Germany. There is something wrong with their culture of groupthink. They need to look at it.
    Germans as individuals are no different fundamentally from Irish or English people – there’s just something wrong with the way their society lapses into indifferent group think every few decades.
    Somebody posted a really interesting link about thinking styles in different cultures a while ago (apologies can’t trace it now). Individualism vs conformism and all that does influence choices and collective actions. Is German society. Somebody needs to ask questions about their need to punish others. What’s it all about?

  129. jeroen Dijsselbloem, the head of the Eurogroup has said, that the Cyprus restructuring deal should be considered “a template” for the rest of the single currency bloc. paving the way for future bailout arrangements. The European Union “…will never need to even consider direct recapitalisation” of failing banks. This constitutes the death knell of both the direct recapitalisation agreement reached last June at the EU’s summit and, any meaningful banking union. The message is clear. All plans to use the ESM in order to de-couple the banking from the public debt crisis are off the table as indeed we have been informed earlier today by Germany, just in case we were in any doubt.

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