Are we not already seeing the mother of all financial crises?

A genuine question, to which many reasonable answers are no doubt possible:

If this is the cost of leaving the Euro, then what is the opportunity cost of Cyprus leaving the Euro now?

(I mean the opportunity cost to Cyprus, not the rest of us, which is the only thing that should concern Cypriots in a union where it is every nation for itself.)

67 replies on “Are we not already seeing the mother of all financial crises?”

My gut feeling, which is worth what I charge for it, is that ‘Cyprus’ would gain from leaving at this point. But as Maggie Thatcher might have said, there is no such person as Cyprus. A waiter with no bank account will probably stand a better chance of having a job next year if Cyprus quits now. But wealthy individuals may reasonably hope to salvage a bit more of their wealth by hanging on to nurse, for fear of something worse.

This is in German but google can help

Czech economist Tomáš Sedláček says the mainstream economic model taught in schools is like a religion and we have to deal with our numbers fetish.

Mathematik ist für Ökonomen so hilfreich wie Schachspielen für Kriegsstrategen: Es schult das Denken, und es hilft, vorauszuplanen. Aber wir wissen: Im wirklichen Leben bewegen sich die Pferde nicht in einer L-Form. Deshalb wird man nie ein guter Kriegsstratege, nur weil man Schach spielt.

“Maths is as useful for economists as chess for war strategists. It gets the thinking going and helps in planning ahead. But we know that in real life horses don’t move in L-shaped steps. Just because you are a good chess player doesn’t mean you’ll make a good war strategist . ”

Why does this remind me of LBS?

SCENE: Bailout Hell

Enter CYPRUS and HADES. CYPRUS, his once fine suit ragged and bitten, looking like he’s been thoroughly slapped.

Cyprus: What the hell was that dog?

Hades: I call him Troikerus the triple headed dog of the underworld.

Cyprus: My a*rse hurts – he seemed to be chasing me in here.

Hades: He does that. He’s more for keeping things in than out.

Cyprus: Why did I have to thank him for taking chunks out of me?

Hades: It’s traditional.

Cyprus: Okay, what’s the plan?

Hades: We, now we sign our agreed memorandum of bailout-hell punishment – it’s for your own good you know.

Cyprus: What are the options?

Hades: Behold, Greeciphus!

Cyprus: Haven’t seen him in a while. He appears to be rolling an enormously heavy rock to the top of that hill. Wow, that’s a real effort…. nearly there… he’s going to do it! Wait – it’s all rolled down again and smashed. Still, at least that’s over.

Hades: Not a bit. He has to go back down and re-assemble all that debt-rock and attempt to roll it over again.

Cyprus: What, all of it?

Hades: Sometimes we add a bit on, sometimes we take some off…

Cyprus: [muttering], Yeh, I know.

Hades: … It’s all good fun.

Cyprus: How long will that go on for?

Hades: Who knows – but look at the exercise he’s getting. Behold Portugalus!

Cyprus: That’s not so bad. Stood in clear cool water up to the lower lip with grapes above. Plenty to eat and drink. Hang on… the grapes seem to move away when he reaches and the water drops down when he goes to drink.

Hades: It teaches the sin of yearning for luxury.

Cyprus: It just looks annoying.

Hades: Plus it’s our nod to climate change fears – they’ll be desert in a bit you know. Behold Irelandia!

Cyprus: That’s not so bad, sat in a nice stone chair near the exit sign. Looks like she’ll be gone in any minute. Why doesn’t she get up and walk? Hang on. She’s dragging the chair with her… what’s going on there?

Hades: Look closer.

Cyprus: Why, her buttocks have fused with the stone chair! What’s this?

Hades: It’s the chair of no growth – it gets heavier the more she stays. She’s a sturdy sort, she’ll drag herself sooner or later, and I gather she has a few friends to pull her off eventually.

Cyprus: Won’t that hurt?

Hades: She’ll leave some skin behind – a handy reminder you wouldn’t want to come back. What are you doing…..?

Cyprus: What does it look like, I’m drilling for gas.

Hades: We’ll have to find you a suitably ironic punishment – how about strapped to a flaming wheel that spins between Moscow and Berlin?

Cyprus: Er.

Hades: Or, trying to fill a bath with a sieve, to show the impossibility of holding on to your banks.

Cyprus: The latter I think.

Hades: It’s quite excruciating after a while.

Cyprus: Well what’s a good option?

Hades: …

Cyprus: I see. What now? What’s that mighty quaking and groaning from on high?!

Hades: That’s the god of the earth, Shaeubellus, He’s above us now, ruling over the ground.

Cyprus: How come he isn’t in hell?

Shaebellus: [In a mighty, sorrowful voice] Why this is hell nor am I out of it.


The mother of all recessions.

In the 1830s there was a long recession in the UK. After stagnant growth and another dip in 1839 the leaders of the time began to suspect that the haphazard creation and destruction of money by banks was to blame.

Banks printed their own money at the time and hence created the money they lent. This meant every pound was issued with a matching debt. Reducing debts didn’t leave the economy in a better position because the money was out of circulation once repaid.

Cue the Bank Charter Act of 1844 which declared that only the Bank of England could print money with the status of legal tender. The banks eventually had to lend existing money only in this form.

However through the invention of the chequebook the banks’ liabilities could be accepted as money and these liabilities now form 97% of euros and they are accepted as payment of taxes.

We’re basically back in 1839 where something as important as the amount of money in the economy is decided by the mood swings of bankers.

If history repeats itself we’ll declare all bank deposits as legal tender. This would stop banks from destroying money they recieve as repayment of loans. It would also force the banks to deal with existing money only and we could expect some more stability in the economy.

I remember reading that piece by Eichengreen at the time. Its was and still is absolutey convincing and gave me comfort at a time when populist economists were trying to stir up a Euro Exit lobby. These days even McWilliams seems to have gone a bit shy on that one.

The Cyprus affair highlights yet another reason why the Euro is here to stay. Eichengreen was echoing my own assessment of the sheer process impossiblilty of exit (without utter chaos). Actually Cyprus appeared to have the option to process an exit. It seemed to have frozen the system in time. The new revelation is that nobody WANTS to leave the Euro, not Cyprus, not Germany, not Greece, not Ireland, no-one and I am not referring to the elite, this is the surprising popular consensus despite the alleged Euro bullying by the Teutonic Hegemonic.

The drama for the Place de Grève knitting women has abated but to turn the attention from bungling eurocrats, the main reason for this crisis is that the offshore centre was not ring-fenced from domestic banking and the two main banks grew out of control.

Old style crony capitalism was likely the explanation. Why was the IFSC not in play during the Irish bailout?

Cyprus missed the boat in 2004 and boarded the wrong boat in 2008.

The union that should matter is on the island but since the UN plan was rebuffed, the strong Turkish economy has resulted in an economic boost in the north while the Greeks in the south will hardly want to tender an olive branch from a weak position.

The potential for exploiting the gas reserves is also tied to the partition issue.

Unless it could have a cost-free default, what would it gain from an exit? More tourism and low-paid workers.

The problem with developing the financial centre like much else in the changing business landscape is that it is hard to be unique these days.

There are educated people in Riyadh, Dubai, Doha, Abu Dhabi etc capable of providing financial services to local and regional companies. The British expat is a disappearing specie in Asia.

I would guess that when the national accounts are examined some of the claimed services income maybe revised.

After all, Ireland could declare GDP growth in 2012, all thanks to the Dutch sandwich!

‘Pawel Morski’ on Twitter:

I can guarantee we’ll see a parallel market for Cypriot €. AFAICS would be legal. If anyone spots pricing, let me know.

I think he’s right. If he is, what’s the sense of saying Cyprus is still in the Eurozone?

There are many commentators who remind me of Baghdad Bob, assuring is that what we actually see happening in real time, can really never happen, because that would just be too absurd.

[…] Kevin O’Rourke asks a good question. He points out that the classic argument for the euro’s irreversibility, from Barry Eichengreen, was that any threat to leave the euro would set off “the mother of all financial crises”: a crisis of confidence that would collapse a country’s banks. I used to believe this, but eventually noticed that the logic would break down if a country had its banking crisis first, and was forced into an Argentine-style corralito. […]

@Brian Woods II

The new revelation is that nobody WANTS to leave the Euro, not Cyprus, not Germany, not Greece, not Ireland, no-one and I am not referring to the elite, this is the surprising popular consensus despite the alleged Euro bullying by the Teutonic Hegemonic.

Oh please, those with the control over the Euro are happy with the status quo while those countries who need policy change (the ones worst affected by the global financial crisis) have been given the option of either destruction (a la Cyprus) or utter submission.

EMU is a failure on multiple levels (economic, democratic, social) but the groups it benefits most (European reactionaries, the Deutsche-bloc and the core financial sector and hangers on) are determined that they will destroy any country trying to change it.

Do you see Sweden, Denmark or Poland rushing to join the Euro? It is a trap in which the periphery is trapped by an out of control Germany.

Michael Hennigan
Basic study of the situation would tell you that up to 2004 they did ring fence. They couldn’t thereafter as up to now we were in a union where all were domestic. To allege crony capitalism is to fling monkey poo from a safe distance.
The IFSC you say? Ever hear of depfa…?

More Euro-breakup “disaster porn”. The Four horsemen, ATMs and all that.

Know what I think econo-droids? I think that a euro-breakup wouldn’t be the mother of all financial crises. In fact, I think it wouldn’t be all that bad, ending up only really on par with standard currency devaluations in the end in terms of disruption and adjustment.

– Remember when RBS/Ulster Bank went down for a month? Remember all those riots that didn’t happen?

– Remember when Cypriot banks were closed for over a week? Remember how the entire continent didn’t erupt in flames and bank runs?

– Remember when the Greek bondholders were burned? Remember how the earth, amazingly, continued to spin on its axis.

Oh to be sure, there would be a reckoning in the financial markets. Bankers, bondholder, traders, fund managers, economists, the entire financial class would take a well justified battering. We might just see the end of the feckless incompetence that has saturated our economic system. I’m sure that prospect is pretty scary for people who have based their entire careers on betting, bailouts, and bullshit.

For the rest of us, a euro breakup may serve as a welcome Alfeiosean flood, to wash out 30 years of dung from the Augean stables that we call “The Market”.

A quote from Eichengreen’s article on how the economic costs of euro exit might be managed:

“If reintroduction of the national currency is accompanied by labour market reform, real wages will adjust. If exit from the Eurozone is accompanied by the reform of fiscal institutions so that investors can look forward to smaller future deficits, there is no reason for interest rates to go up. Empirical studies show that joining the Eurozone does result in a modest reduction in debt service costs; by implication, leaving would raise them. But this increase could be offset by a modest institutional reform, say, by increasing the finance minister’s fiscal powers from Portuguese to Austrian levels. Even populist politicians know that abandoning the euro will not solve all problems. They will want to combine it with structural reforms.”

Labor market reform, fiscal reform, institutional reform… Sounds like euro exit provides no panacea for those seeking to avoid austerity. So apart from gratification of nationalistic and ideological sentiments, what is the incentive to exit the euro?

Euro exit is an austerity and reform accelerator. The upside is the option of default and restructuring of an onerous debt burden plus easier monetary conditions from an independent CB.
The downside from The Fangs is their hard euro appreciates and they get to enjoy the benefits of being defaulted on ….from a great height

“Old style crony capitalism was likely the explanation.”

There is absolutely no argument anymore that ‘crony capitalism’in a country of 1 million is ‘the explanation’ for a continuing system wide breakdown in the EU. None..whatsoever!

@Brian Woods

What do you think the probability is that the following countries will have the Euro as their currency in 2020:



Myself I would put the probabilities as:

Greece 60%
Cyprus 25%
Ireland 80%

Hopefully we can all accept they are not all 100%?

@ Shay

Your final point is fair and I do not disagree. I think we have the following contradiction that most would wish the Euro thing had never happened but now that they are in most do not want to leave.

Okay, it is not because being in is good, it is because leaving is disaster. Notice the tense “leaving”. Having left may or not be a good thing, I think in Ireland’s case it would lead to a transfer of wealth from savers to earners. But the very act of “leaving” would be of apocalyptic proportions, to be sure, as Eichengreen explains.

@ Actuary

Don’t be letting the profession down. I would expect a few exponential e’s and pi’s in your assessment, not a crude finger in the air 80%.

Eichengreen’s summary of the reasons why exit from the Euro is NOT an option is entirely correct whatever Krugman, Europhobes, Germanophobes, European nationalists, ultra leftists, cranks, crazies and ill informed Americans may believe. The political, financial, legal and institutional forces aligned against exit and for wider the long term survival of the currency are irresistible. In the specific case of Cyprus the Troika made very clear that the price for a bailout was winding up the Cypriot money laundering racket. The Cypriot political class were under the risible delusion it could continue and have spent the last week bluffing and threatening all to no avail. The EZ has in fact shown commendable persistence and coolness of decision making. Future blackmailers probably need to bear this in mind.

@ GtfawayHolymoley

Making a fool of yourself again!

2004 refers to a United Nations political settlement proposal.

Your Depfa example proves my point — it was bailed out by the German government not Ireland.

Instead of the usual sniping, do try to string 2, 3 or even more sentences together to make a coherent point.

I think it is the mother of all financial crises, to return to the theme.
The world is more or less depending on China to keep growth going.
All of the OECD countries are in trouble, although the level of same varies.
There is no beggar my neighbour policy to get out of jail.
Output for many countries is still below 2007 levels. Youth unemployment is awful. Pension fund growth assumptions look ludicrous. Interest rates are on the floor. Political crisis in the US. EU a mess.

“It’s easier of course to play the anonymous troll.”

We’ve been over this! (Though you mightn’t remember it) ronan fitzgerald, rf are my intitials..not anonymous..all you have to do is ask..(you can follow me on twitter @ronanfitz22..; ) )
Anyway Im not saying there are easy answers..just that ‘crony capitlaism’ is not the problem

“These measures will form the basis for restoring the viability of the financial sector. In particular, they safeguard all deposits below EUR 100.000 in accordance with EU principles.”

Seems EU “principles” are malleable. If I remember correctly they ditched those when they agreed to haircut all Cypriot depositors about ten days ago.

Would you buy a used car from that lot?

@Pessimal Currency Area Theory at 12:41

Thanks for the link to Krugman’s NYT column. When he is not in his Rumpelstilzchen Giftzwerg mode (insulting economists who do not share his views as epsilon-minus semi-morons) Krugman can be very, very good indeed:

The theory of optimum currency areas says, in brief, that countries face a tradeoff between convenience and adjustment. Having your own currency raises transaction costs and makes business more difficult; but giving up your own currency means that you have to adjust to overvaluation through deflation, which is much more costly than devaluation. At this point, however, Cyprus has made doing business very difficult via capital controls, while retaining its inability to deal with overvaluation via currency realignment. So it has created a pessimal currency area, offering the worst of both worlds.

Back to school everybody.

Perhaps both Cyprus and the EZ should focus on more constructive activities such as sorting out the dispute with Turkish neighbours and getting on with the investment needed to produce all that nat gas. After the debacle of the last 5 years, Cyprus will need and should be given a helping hand with these issues.

Nomura’s guys have copped on fast:

“In addition, some deposits (such as smaller denomination deposits) would potentially also remain unrestricted. Hence, it would be a type of hybrid dual-currency system. The ECB would remain in control of liquidity provision as it pertains to unrestricted euros. The Central Bank of Cyprus and the Finance Ministry in Cyprus would determine the parameters around the restricted euros..

A partial break-up is also possible in the context of type 1 restrictions if the liquidity crunch leads to the need for other means of payments to appear to ensure the minimal functioning of the exchange of goods and services in the economy. Here again history is full of examples where parallel currency systems appear out of cash shortages in the form of promissory notes, either backed by local Treasury authorities or by business communities.”

Alphaville ref the note in a post.

Here’s the bit that precedes that extract:

“The restricted Cypriot euros in Cypriot banks would have an intrinsic value below that of other euros in the rest of the euro area. Given the capital restrictions, it may be hard to observe the value of these inferior restricted euros. But if a secondary market developed for such deposit balances (as we have seen happen in the past), we would expect them to trade at a discount to unrestricted ones. The discount would be determined by supply and demand, and the market clearing price for such balances would surely be below parity.
Since some euros in Cyprus would potentially remain unrestricted, we would view this as only a partial break-up of monetary union. For example, we would expect physical notes and coins to remain unaffected by the restrictions, although they would probably be facing a negative stigma (remember that the country of origin of euro notes can be distinguished by the letter code on each note).”

I try and plough my own furrow as an Actuary and acknowledge that a finger in the air % is about the best that can be done. I leave the rest of them and you to confuse precision with accuracy.

I was merely trying to state that the probability of some countries leaving the Euro is greater than zero and in my opinion significantly so.

I think this is important with all the “nobody wants to leave the euro” and “nobody can leave the euro” nonsense that gets thrown about.

I am not sensitive but do people really want to waste posts on a stupid forum with silly jokes about someones profession rather than debate / answer his / her actual points?

Any hope of commenters sticking ot the point and actually reading the article to which Professor O’Rourke refers to?

It’s here:

The euro: love it or leave it?
Barry Eichengreen, 4 May 2010
Originally posted 17 November 2007, this Vox column is more relevant than ever arguing that adopting the euro is effectively irreversible. Leaving would require lengthy preparations, which, given the anticipated devaluation, would trigger the mother of all financial crises. National households and firms would shift deposits to other Eurozone banks producing a system-wide bank run. Investors, trying to escape, would create a bond-market crisis. Here is what the train wreck would look like. …

Read on:

Then read Krugman’s column at the NYT:

I think it is almost impossible to calculate likelihoods such as x being in the euro in 2020. Even the most efficient asset allocation machine in christendom is subject to waves of panic and over exuberance. Very tricky.

@ Tull

“Euro exit is an austerity and reform accelerator. The upside is the option of default and restructuring of an onerous debt burden plus easier monetary conditions from an independent CB.”

That is one possible view, but my reading of Eichengreen’s paper is that the benefits of default/restructuring will be offset before long by higher interest costs, while the benefits of monetary easing (and devaluation) will be offset by higher wage claims – and the only way to achieve permanent gains is via reform. People can legitmately disagree on the relative benefits. There’s no doubt though that devaluation is always a politcally easier choice than deflation, especially if not accompanied by any reforms at all.

“Are we not already seeing the mother of all financial crises”

What we have witnessed are easily solvable banking and financial problems, that because of a political crisis have been turned into the mother of all financial crisis.


I take you point on a dual currency.

A Cypriot euro is definitely no longer a Frankfurt euro.

Compare and contrast: Draghi Bayern speech:

“Worse still, in the first half of last year fragmentation in the euro area had become so serious that some investors were questioning the future of our currency. Fears of a potential break-up were sending capital fleeing from the periphery to the core. For some in the financial markets, the most fundamental notion of confidence in a currency – that a euro is a euro regardless of where you are – was no longer a given. ”

One wonders which euro has Draghi got in his pocket right now.

@skeptic01 at 4:13 pm

The problem is of course attempting to quantify the largely unquantifiable pros and cons of exiting or remaining within the Eurozone — I tend to change my mind in line with whatever well-written op-ed I’ve read last.

Indeed I think there is only one thing we can be certain of by now — certain in the sense that one cannot take anybody seriously who holds an opposing view — is that the creation of the euro itself was a disaster in the making.

Yet it will probably NEVER be possible to determine whether leaving the Euro right now is the best of two bad choices. Because while we can’t wind the clock back or replay history, we CAN turn on the counterfactual waterworks, the cancerous what-iffing that permeates political and economic history.

Imagine Cyprus dumps the Euro tomorrow. The country will become more competitive, the balance of payments will improve — but chiefly because wages will plummet, possibly without much in the way of reform. And the what-iffers will be baying for blood.

While if Cyprus remains within the Eurozone, the other bunch of what-iffers will have a field day.

And if my grandmother had wheels, she would be a bicycle.

Hey, looks like we’ll get to see if I’m right earlier than expected.

Diesel-BOOM just blew it all up.

Things are looking grim in the FX markets. Dijsselbloem is already backtracking. Might be a bit late:

On the other hand, Declan Ganley seems to be pretty positive about the situation. See above Telegraph link and

Personally, I think the only possible response is rather obvious:

@ Actuary

Chill out, woman! You will need to develop a sense of humour to survive on this site.

Paddy Power, a few years ago was laying 4/1 against no exits by 2014. That’s a double negative, it means he thought there was a 80% chance that some country would exit by 2014. I remember at the time thinking it was the bet of the century, but he removed the offer quickly. It is not home and hosed yet of course but is looking good.

Making guesstimates about these matters in 2020 is a excercise in hubris, IMHO. Will the UK be in the EU and would that have any implcations for Ireland? Will Turkey be in the EU and would that have implications for Cyprus?

Will Fierce Doherty be Minister for Finance? Will the Commies get back into power in Cyprus?

One of the surest ways for these grand schemes of the elite to fall apart is when the populace start rebelling. But there is the amazing thing. For all the torching of banks in Greece, and anti Merkel anger in Cyprus, the people of these countries know that they must stay in the Euro, they want to stay in the Euro, exiting the Euro would trigger massive popular resentment.

My judgement, the Euro is here to stay. Any scheme which has survived what it has survived and which the markets continue to back has to be respected.

Hiya Mike H
2004 was when Cyprus and Greece. Joined the eu. So the Greek deposits which had been ring fenced became local. So, back to you.

UCCs finest economic grad has made rather a mess of the wholew thing hasn’t he

From the Daily Telegraph:

Cyprus bail-out: savers will be raided to save euro in future crisis, says eurozone chief
Savings accounts in Spain, Italy and other European countries will be raided if needed to preserve Europe’s single currency by propping up failing banks, a senior eurozone official has announced. …

I’ll say one thing for the Cyprus crisis. The standard of comments has improved immensely. Welcome back Carolus in particular. You were gone for an awfully long time.


Creepiest movie ending ever. eeeek.

@Brian Woods II at 5:50 pm

For all the torching of banks in Greece, and anti Merkel anger in Cyprus, the people of these countries know that they must stay in the Euro, they want to stay in the Euro, exiting the Euro would trigger massive popular resentment.

First, there is no logical connection between what ‘the people’ want and what ‘the people’ will get. I presume what you mean is that support for the Euro is so massive that no mainstream politician will even consider recommending an exit strategy.

That may be the case at present but there is no guarantee that the situation will remain unchanged. As top-down austerity continues to bite more and more voters may come to the conclusion that exiting the Eurozone can hardly make things worse than they are, and that the devil they don’t know MUST be better than the one they do.

My own view (at this writing, 19:21 CET) is that leaving the Euro will basically mean shifting from top-down austerity to the bottom-up version (chiefly loss of purchasing power due to devaluation and inflation) — and that it will happen anyway — regardless of what ‘the people’ like or what they want.

@ Carolus

“That may be the case at present but there is no guarantee that the situation will remain unchanged.”

I am old enough to remember when the people of Eastern Europe seemed destined to be forever under Soviet domination, when it seemed South Africa would never grant the majority power, when it seemed the IRA would never go away and Paisley would never budge, when the idea af a black Presie of the US or a black No. 1 golfer was as ridiculous as Ireland leaving the Euro.

So yep, I agree there is no guarantee the situ will remain unchanged. But somehow I feel the Euro lke the Middle East problem is here to stay.

@Brian Woods II

I am old enough to remember …

Gee, I am old enough to remember that fateful day on 30 July 1966 when England beat West Germany 4-2 to lift the World Cup….

… that fateful day when Gavril Princip assassinated some Austrian Prince Ferdinand Wosshisname ..

… that fateful day when Pontius Pilate ….

The film to watch is The Hunger, starring David Bowie and Catharine Deneuve:

Oops, sorry for off-topicking. icanthelpititsinmygenes.

Agreed Sarah

Some mighty hurling over the past fortnight with a good few contributors surpassing their own high standards. Even fresh insights from the world of arts. Makes you feeling like throwing away the keyboard, but it’s not over ’til its over, as they say in the Royal County.

Looks like Draghi has failed to kill off anyway, with his OMT and his promise to do what it takes. If this ferment keeps up the Dork will soon taking off his tracksuit 🙂

@ Carolus

I reckon you are at least 110. I think it amazing how some senior citizens are so au fait with the Internet.

@ Carolus

“Indeed I think there is only one thing we can be certain of by now — certain in the sense that one cannot take anybody seriously who holds an opposing view — is that the creation of the euro itself was a disaster in the making.”

When the euro was created, its architects presumably envisaged Europe on an accelerating path toward integration and believed that the half-constructed currency project would be completed in due course. In reality popular support for closer integration began fading away towards the late 90s and so it never happened. On the plus side, Europe became a lot bigger!

It is remarkable though that the euro itself retains so much popular support. It seems that many Europeans have developed a sense of ownership of the thing, and rather than blaming the currency itself, they blame each other (whether Germans or Cypriots, etc.) for “wrecking our currency”. The euro has become our shared problem.

Does anyone want to wade in on Karl’s original point from Forbes?

If the policy now is that bank creditors and not taxpayers should pay, does this mean we have a shot at going back to the table?

I presume no and what’s done is done and all that. But if Dieselboom is going to go around pronouncing the new policy, is it worth a try?

@ Sarah Carey

I don’t see how we have a shot at going back – the investors in Irish banks were all paid off and are long gone. The remaining question is largely about whether we can use the awful unfairness of it to push more of our costs onto European taxpayers. To me that doesn’t decrease the amount of injustice in the world.

I applaud Mr DieselBoom’s comments today, but after first botching the Cyprus bail-out and then wiping several billions off the market-cap of the big US banks today, I fear he is now persona non grata on both sides of the atlantic. We may not be hearing anything more from him for a while.

@skeptic01 at 9:17 pm

When the euro was created, its architects presumably envisaged Europe on an accelerating path toward integration and believed that the half-constructed currency project would be completed in due course.

Omit ‘presumably’.

On the plus side, Europe became a lot bigger!

Bigger isn’t always better, as many boring old phart will remind you. Bigger also involves LESS inter-state competition, variety and ‘diversity’ (ugh!), and that Gleichschaltung [the German for ‘forcible coordination’] is not everybody’s cup of tea.

It seems that many Europeans have developed a sense of ownership of the thing, and rather than blaming the currency itself, they blame each other (whether Germans or Cypriots, etc.) for “wrecking our currency”.

I’ll be plagiarizing that insight at the next opportunity. It’s even better than ‘well put’ (see BWII above).

@Sarah Carey at 10:00 pm

If the policy now is that bank creditors and not taxpayers should pay …
Sadly, bank creditors and taxpayers are often two sides of the same coin. As are bank creditors and the pensioners of today and tomorrow.

There are actually two ways of boiling the proverbial frog:

– slowly simmer the frog until it is eventually brought to a boil.
Frog won’t really notice wot’s happening until its too late.
Tried and tested with citizen-as-taxpayer. Sorta worked until now.

– immerse the frog in rapidly boiling water
Frog will kick up an almighty fuss, splatter the water about, mess up the kitchen.
Dry run on Cyprus as ‘test hamster’ (to mix metaphors).
Repeat not to be recommended if possible.


“My own view (at this writing, 19:21 CET) is that leaving the Euro will basically mean shifting from top-down austerity to the bottom-up version (chiefly loss of purchasing power due to devaluation and inflation) — and that it will happen anyway — regardless of what ‘the people’ like or what they want.

The “you’ll eat it and you’ll like it” policy of economic adjustment

Yes, this is the worst since 1929.

It is going to get worse.

The banks will shrink and suck money out of every economy in the EZ and UK. Economic activity will spiral down.

It is better to think strategically and make the adjustments quickly and intelligently. This will not happen. TPTB still have real assets to retrieve and replace with notes and promises.

Nothing is so bad that it cannot get worse.

Deflation is good not bad! It is also inevitable. It will mean all the current economic thinking is revealed to be not relevant. It will reduce government power as inflation bribery for votes is no longer possible.

The difference is, people thought the situation in Europe might improve and we may actually get some recovery policies enacted eventually; now, judging by the actions of the Troika and the latest mishandling of the crisis, we now know that will never happen.

The writing’s on the wall now, and I think it’s only a matter of time (even if it may take years still) before a country exits (possibly in the wake of an anti-austerity movement gaining enough political power to bring this about), which will then bring the rest of the EU along with it in due course.

We should be asking ourselves if it’d be worse dealing with the pain of exiting now, and starting to pick up the pieces and recover early, or if it’d be worse to keep on compounding the crisis with many more years of austerity, while delaying the inevitable exit we’re going to have to deal with anyway in the end.

Third Rock from main land Europe


I’ve said this somewhere here on the Irish economy blog in the past. It was in particular, someone in the insurance industry who first drew my attention to it. What had occurred during the 2000s decade was that the Euro had established itself as an alternative reserve currency, to compete with the dollar. The Americans of course, were seriously out of touch with that development, and falling back on their standard play book, for what to do in a crisis in 2007/08, put their play book into action, and to their horror, nothing happened.

What we see in Cyprus in particular is the grafting together of a new global reserve currency, the Euro (an item that has changed the global environment in all sorts of ways, that we have only began to understand), and a former offshore banking system/destination – which we tried to gather into something called a ‘eurozone’.

We try to analyse what is happening in Europe now, by trying to look inward. We try to figure out what mistakes were made, what should have been done etc. But what we do not seem to look at, is the impact that a new global reserve currency presence has on the global system.

What we are seeing is Cyprus, is the fault line located along the worst possible combination of tectonic plates – a rock in the Mediterranean which has been used to dump to vast monetary reserves, and the imposition of the new reserve currency standard, on that same rock in the middle of a sea. Needless to say, as in Ireland and IFSC shenanigans, or in Iceland, or any other small rock off the coast of Europe that one may care to look at – All of it happened in Cyprus, far above and beyond the heads of everyday Mr. and Mrs. Joe Soap inhabitant of those same rocks. BOH.

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