The political benefits of staying in the Euro

On balance I agree with Paul Krugman’s views on whether Cyprus should leave the euro or not. And most people seem to also agree with him that there will be a Cypriot public debt crisis in the not too distant future. Given what is about to happen to their GDP, how could it be otherwise?

As regards the political benefits to Cyprus of staying in the Eurozone, which Paul advances as a possible counter-argument: the Telegraph links to a piece from the Netherlands suggesting that the EU is contemplating earmarking those future Cypriot gas revenues the island has been looking forward to, to ensure that the Troika gets its money back.

Completely logical, and utterly destructive.

81 replies on “The political benefits of staying in the Euro”

I think in general we make a mistake when we talk about best interests of countries.

As a rule countries act in the interests of the ruling class and to some extent the middle class. Not the young people, not the poor, not the unemployed. I am not saying this is a good or bad thing – just a fact.

Now it looks like in Cyprus everyone is going to be a loser either way – however, even if “Cyprus” were to gain more from leaving, the ruling class might lost more.

Ergo – no change.

“Completely logical, and utterly destructive”

Vindictive too.
The Dutch are going to need help when the sea level starts rising in earnest but will they get what they need?

@Kevin,

That piece in Dutch appears to be a report of a parliamentary debate. Yes? And we all know the stupid things that politicians will say in their national parliament, when they’re playing for political advantage with a domestic electorate!

Dijsselbloem seems likely to be tagged permanently with the nickname “Dijsselbomb” if he continues in this vein. The Finns were, of course, the first to insist on collateral in the bailout context and the Cypriots themselves tried to mortgage their future gas revenues. There is, however, no guarantee that these will ever flow because of the geographical location of the island, the fact that part of it is effectively occupied by Turkey, and the last mentioned has already indicated publicly that it is opposed to any such approach as the “finds” are in disputed territorial waters.

One must assume that the Dutch minister is simply desperate to get the necessary approval from his parliament.

Events, as Krugman actually concedes, are very unlikely to play out as he suggests. The dust has yet to settle. When it does, and the picture is clearer, a programme of EU assistance of some kind will almost certainly emerge.

There is also the element of “taking one for the team” to which C. McCarthy has repeatedly drawn attention in the context of the Greek bailout and the imposition of PSI cf. NYT

http://www.nytimes.com/2013/03/27/world/europe/europeans-planted-seeds-of-crisis-in-cyprus.html?pagewanted=1&_r=0&hp

I strongly agree that Cyprus should leave the eurozone and adopt a new currency. Now is a good time to make the change since capital controls are in place and the banks are closed. It is their moment to do something bold and beautiful with long term benefits. Eichengreen might be correct that it will not happen, but he is mistaken in claiming it should not happen at least in some cases. Perhaps Greece will follow?

The Dutch threat to expropriate the putative gas royalties is just another example of the central EZ powers rediscovering their appetite for neo imperialism. Do the Dutch have any gunboats to send to shell Nicosia.

@DOCM
Nowhere in the Times article there is a mention of the fact that Cyprus was offering its depositors the highest interest rates in Europe and that it is the reason why they invested so much in Greece ,which ,due to its near-bankrupt state was in turn willing to offer Cyprus banks even higher interest rates . Laiki Bank made a huge gamble and lost .

How do capital controls work in a single currency area ? ain’t gonna happen, the smart and connected money will get out. Interesting article in Bloomberg today suggesting Cyprus heading for 30% unemployment as banking industry will be toast and major problems ahead for tourism especially if an onshore / offshore Cyrprus euro rate emerges. So much for euro area solidarity !

@ Acturay

I agree. A general rule seems to be that the unrepresented get screwed. When you see a debate on tv about Austerity. There’s the union rep, there’s the government policy defender/opponent, there’s IBEC etc There’s never a man representing the young guy/gay in Oz/Canada, or all the young people on insecure T&C in the labor force or those on private sector pensions. The current burden of this crisis has fell mostly on the those involved in the construction industry, the young and the boom buyer, god help you if you’re in all 3 groups. Most other groups have paid a couple of precent more in tax or taken a small wage cut.

@ John Foody

Directly hit in Ireland might be 20-25% of the population with the remainder doing ok. But the lack of optimism hits everyone.

And all the biscuits with 100% extra free. You know there’s a crisis with biscuit deflation.

… the EU is contemplating earmarking those future Cypriot gas revenues the island has been looking forward to, to ensure that the Troika gets its money back.

Completely logical, and utterly destructive.

Destructive of whom and/or what? The EU itself? THe Euro? The periphery countries alone, or the periphery countries along with all the other Member States?

For those who are opposed to the progression towards a full-fledged ‘transfer union’, any policy that destroys the established order — and reverses this trend — might be quite welcome (provided, of course, that it doesn’t backfire on themselves).

‘Creative destruction’, perhaps — to use Schumpeter’s immortal term in a fresh context.

@ Brian Lucey

Surely the crisis is bigger than the Euro, fascinating and all as it is in its glorious dysfunction . The Tories don’t have the Euro and they are not making any headway whatsoever. The US is nowhere near terminal velocity. Japan is 20 years deflating.

We need a new model.

@Gregory Connor at 2:32 pm

I strongly agree that Cyprus should leave the eurozone and adopt a new currency […] It is their moment to do something bold and beautiful with long term benefits.

You may well be right about the ‘long term benefits’. But the question is: how long is long? If you’re a politician, even a week may be a ‘long time’ (shades of Harold Wilson), while if you’re over 90 even a year is ‘long’ because you’ll probably be dead within twelve months.

‘Beautiful’ as in a ‘terrible beauty was born’.

@seafoid at 4:00 pm
The Tories don’t have the Euro and they are not making any headway whatsoever.
Ten out of ten.

We need a new model.
Tell us more.

@CG

I would start with a bonfire of the plutocrats. 97.5% taxes.
Get the fockers’ money working for everyone.
How to use it rather than how to spend it.

I saw something in an interview with James Howard Kunstler recently. He was saying most of the infrastructure in the West is pretty shoddy. Houses in the US designed around perma cheap oil. All those suburbs. Heathrow. That sort of thing.

Start thinking a bit longer term. http://www.utne.com/Environment/Empire-of-the-Stunned.aspx

What to do with finance so it reduces rather than spreads risk
Carbon taxes. Bring back nuclear until we have some better ideas.
Develop proper KPIs .

Then address waste and all the crap we throw away.
But first we would need to get the conversation going.

Happy Easter.

I thought folk might be interested in the following Wiki comment on the Turkish controlled part of Cyprus.

“The economic disparity between the two communities is pronounced. Although the economy operates on a free-market basis, the lack of private and government investment, shortages of skilled labor and experienced managers, and inflation and the devaluation of the Turkish lira continue to plague the economy.”

It also notes that GDP per capita in the Turkish controlled sector is one third of the rest of Cyprus.

Two take aways from this.

First that “devaluation” of the Turkish Lira doesn’t seem to be the panacea, why would devaluation of the Cypriot Pound Nua be such a godsend to the Republic of Cyprus?

Secondly, even after a fall of 20% in GDP, it would seem that the part of Cyprus within the EU would still be significantly ahead of the part that ain’t.

The Capital controls announced are extraordinary….can’t use your credit card outside Cyprus and the decree seems to provide for repatriation of all funds earned overseas.
Funny Euros

@seafoid at 5:01 pm
(I saw something in an interview with James Howard Kunstler …

Anyone in Holy Oirland who has even heard of the great JH Kunstler is worth listening to — but that business of 97.5% taxation (‘soaking the rich’ in the populist lingo) is about as doable in a democracy as making water run uphill.

But first we would need to get the conversation going.

Let’s first provide our mainstream economists with a reading list, starting with Georgescu-Roegen.

Wall, as in talking to…

http://en.wikipedia.org/wiki/Nicholas_Georgescu-Roegen

@ Overseas Commentator

You may have noted from other comments that I have made that I do not subscribe any more than you do to the “taking one for the team argument” mainly because it cuts no ice with those supposed to be impressed by it. But the argument that Laika took a huge gamble could be applied with equal logic to bondholders in Anglo-Irish and they did not lose. I mention the topic simply because it is unlikely to go away (especially after the NYT article).

If the EU demands dibs on future gas revenue then Cyprus will leave the EZ. Russia is in a better position to maximize future gas revenue and are therefore in a position to outbid the EZ/ECB/IMF. Unless of course a decision is made to break the Russian hold on EU gas supplies.

Cypriots, Greeks and Lebanese are renowned around the world for their deal making. I have no doubt that the EC/EZ has met its match even if they are in a weak position.

@cg
The way things are going we should expect to arrive at a brideshead moment ie 1947 style. Capital has run out of ideas. Near 0% interest rates. I know 2 gilded age 5 star ex hotels around lake geneva. The one in villars sur ollon was empty for years and now hosts club med. Its counterpart in Evian les bains is now a load of apartments. Things fall apart. Nothing is guaranteed when ordinary.people are shafted. I got a great book @ christmas. Abandoned mansions of ireland.

the classically minded of you might remember the transition of the Delian League into the Athenian empire.

If the EU regards Cyprus’ gas its own then that will mark a new low.

What motivation to craft a reasonable deal when you can seize the collateral anyhow.

The US secured Iraq to guarantee oil supply and the risk of a Saudi change.

The EU is to then secure Cyrpus’ gas to avoid being caught at Russia’s pleasure.

How noble the EU – the Americans killed half a million the EU just bankrupt a million – and that’s how you win noble peace prizes

I don’t know why the yanks invaded iraq but it was a total flop. Geopolitically they lost so much influence. It was a nice intro to the Lehman moment. Shock and awe but not as intended.

@BW II

And you think the disparity between the two entities in Cyprus developed since one entity adopted the euro in 2008? Or maybe they have a longer and more complicated history. Please!

@seafoid at 6:57 pm

Capital has run out of ideas.

Capital has run out of capital. Ideas are a dime a dozen.

Sorry, first sentence shud be in italics:

Capital has run out of ideas.

Capital has run out of capital. Ideas are a dime a dozen.

@DOCM

Good link of NYT article
http://www.nytimes.com/2013/03/27/world/europe/europeans-planted-seeds-of-crisis-in-cyprus.html?pagewanted=1&_r=0&hp

Excellent article.
Laiki lost ~4.0 billion on Greek State bonds
BoCyprus lost ~2.3 billion

The losses imposed directly from Brussels/Frankfurt/Berlin/Paris etc. in 2011.
Now Cyprus is to be destroyed to recover 5.8bn.

Personally I hope Cyprus has the guts to bite the bullet and leave. If nothing else, the extent of the devaluation will give the EZ ptb food for thought, before the next weakling is attacked.

@Carolus Galviensis

“Capital has run out of capital. Ideas are a dime a dozen.”
Really.
You forget that it was ideas, with very little capital, that created the Europe we have had for the past 50 years.

I would argue the opposite. There is plenty capital, a lot of it in the hands of very greedy people. Europe has run out of ideas on how to live together.

Endless acquisition is the driver. So we get QE string pushing instead of national investment banks. Corporate margins are at record highs while economies stagnate. Capitalism is in a hole. Lots of ideas but very few are even remotely acceptable. When is wall st going to accept climate change is happening? It is all about the shale revolution instead. No answers.

@Joseph Ryan at 8:50 pm
Europe has run out of ideas on how to live together.

The problem about such ‘assertoric’ statements as yours or mine is that it would take a book to demonstrate their truth content. A book which nobody would read anyhow.
Of course what I’ve said is just another assertion. Whose proof would require yet another book.
Which nobody would read anyhow.
Sob.
The dogs bark, but the caravan moves on.
Whatever that means.

Gary O’C
Do not waste your breath on the desert air of bw2 ignorance. Like the sands round the feet of ozymandias it stretches boundless….

Paul Krugman wrote,

The obvious way to get there is through a large devaluation; yes, in the end this probably does come down to cheap deals that attract lots of British package tours.

Sounds like Temple Bar in Dublin, circa 1995, doesn’t it? BOH.

“The European Commission has decided, after a suggestion submitted by its President Jose Manuel Barosso, to set up a task force for Cyprus to help Cypriot authorities restore financial and social stability on the island.”

You couldn’t make it up…..

Bit of revisionist history going on here, no?

Previously….

2008 – Iceland did the right thing burning depositors
2012 – Greece was right to burn private sector sovereign bondholders

Currently…

2012 – Brussels/Frankfurt imposes losses on Cypriot banks holding Greek government bonds. It’s Brussels/Frankfurt’s fault
2013 – Cyprus wrong to impose losses on deposit holders

I know that’s a simplistic take on things, but there is a point here…

@seafoid at 9:28 pm
Endless acquisition is the driver …

Wimmin. Girls just wanna have fun. Plus a meal ticket for life. The selfish gene. The peacock’s tail.
I could write a book about it.
Just give me another 500 years.

BW2

Devaluation helps when your net assets are less than zero no?

Your value add should stay constant – in theory you get paid the same for it in a new currency (if you sell wine it should be the same euro/sterling price for example) but your loans are lower.

That is my reasoning why cyprus (and Ireland) should leave the euro. Obviously this leaves those with positive net assets greater than zero worse off but the country is better off.

The winners in this scenario dont vote though.

@Bond @ 10:16 pm
Nice.
Damned if you do, damned if you don’t.
The prerogative of the backseat drivers throughout the ages.

@Brian Lucey,

”…Gary O’C
Do not waste your breath on the desert air of bw2 ignorance. Like the sands round the feet of ozymandias it stretches boundless….”

Just like the lad who wrote the following report and recommendations in 2006

”….Irish banks have plenty of scope to increase their mortgage lending in a housing market that looks set to remain robust, according to new research.

A report by Dr …….
a lecturer in finance at Trinity College, says that mortgage lenders will be able to grow their business activity through high-interest loans to people with poor credit records – known as “sub-prime” mortgages – loans for investment properties, 100 per cent finance for first-time buyers and equity release loans….”.

The report by Dr…. was commissioned by mortgage servicing company Homeloan Management Limited.

Ah Mr Bond…
The point is not what is done but why it is done
Iceland acted to save its people (its people know this by the way)
Europe acted to save the bankers (its people know this too…)
And the only country where suicides have not risen and people’s health has remained stable in all the troubled economies is…..Iceland

We have doscussed this before – bankers have no clue how emotions of a people move. They’re heavy like the oceans – tossed and fretful in the squall and then they seem to recede in shock and submission only to later crash onto the complacent strand with the destructive force of war and revolution.
Europe will not go gently into the good night of debt based feudalism – watch out!

@Wolverine at 10:36 pm
The wolverine … is a stocky and muscular carnivore, more closely resembling a small bear than other mustelids. The wolverine has a reputation for ferocity and strength out of proportion to its size, with the documented ability to kill prey many times larger than itself.
O
http://en.wikipedia.org/wiki/Wolverine

Bit of revisionist history going on here, no?

Previously….

2008 – Iceland did the right thing burning depositors
2012 – Greece was right to burn private sector sovereign bondholders
2013 – Cyprus wrong to impose losses on deposit holders

Seriously, go back to your fantasy bond trading. If you actually _need_ us to explain the difference between Cyprus and previous events then you have absolutely nothing to add to the discussion, and if not, then you’re simply trolling. Either way, it’s time to stop posting.

@Eureka
“And the only country where suicides have not risen and people’s health has remained stable in all the troubled economies is…..Iceland”
Prove it.

This: http://www.who.int/mental_health/media/icel.pdf says the rate rose between 2005 and 2008, but there are many caveats to using annual data from a small population size.

@ Brian

They may have forgotten to check that the insurance would be valid in all circumstances, reckless banksters as they were.

On those Capital Controls..
Per Landon Thomas NYT..
“Under European Union treaties, restricting the free movement of capital is forbidden. Critics say that what is happening in Cyprus shows that union rules will be flouted when the International Monetary Fund, the European Central Bank and European Union leaders find it convenient to do so.

By imposing capital controls, European and Cypriot officials have effectively created two classes of euro: cash that can be freely spent, and cash that is locked up by capital controls, effectively diminishing its value.

“It has to be acknowledged that this is something entirely new,” said Nicolas Véron, a senior fellow at Bruegel, a research group in Brussels, and a visiting fellow at the Peterson Institute for International Economics in Washington. “This will shape expectations in other countries, and the issue is whether capital controls can be avoided in future episodes.”

Cyprus should make decisions based on its national interest and Christopher Pissarides, the LSE economist and adviser to the new Cypriot president, who writes in the FT today, should have a better idea what that is than all the distant foreign commenters.

However, once in the euro system, elites face a conflict of interest – – sacrifice their own self interest for what could be the common good — or face the music like the citizens at the bottom of the pyramid.

Yesterday the energy minister of Turkey, a key regional power and an ally of the US, warned off ENI, the Italian company, from getting involved in the gas project. Small countries need allies and in Asia the struggle to control energy supplies sees China in dispute with almost all its neighbours in the East China Sea and South China Sea.

Life is full of hypocrisies and Bloomberg reported last January: “Using techniques with nicknames such as the ‘Dutch Sandwich,’ multinational companies routed €10.2tn in 2010 through 14,300 Dutch ‘special financial units,’ according to the Dutch Central Bank. Such units often only exist on paper, as is allowed by law.”

National interest abounds and presumably that explains why Michael Noonan, current chairman of the Ecofin council of finance ministers, kept his trap shut through the drama. Contrast Noonan’s Trappist style with that of Richard Bruton, the über-spinmeister of the current government, who this week claimed credit for the start of EU-Japan trade talks.

@ seafóid

Yes, Japan reports a record 2012 trade deficit while Britain’s current account deficit rose to its highest level in almost 25 years last year.

Meanwhile, earlier this week an Irish commercial economist opined: “services exports continue to hold up remarkably well, and another strong performance is anticipated in 2013.”

Despite the crash, there is still an eager market for fairytales.

It would sure be grand if intercompany accounting transactions produced real wealth. Google is even booking Australian advertising sales in Dublin.

You and others above refer to the burden borne by a minority of the Irish population. With a grim decade ahead and high Irish long-term unemployment a given, all Richard Bruton can deliver on the jobs crisis are bromides while sticking with Fianna Fáil’s ‘smart economy’ delusions.

All this may well be explained by Bruton’s interest in avoiding clashing with Kenny’s sunny optimism and thereby risk his chances of someday becoming minister of finance!

“Finance Minister Michalis Sarris last night signed into law a temporary decree capping cash withdrawals per person per bank per day at €300, effectively banning cheques and controlling cash outflows from the country, allowing only €1,000 per person per journey abroad.

According to sources, the decree will apply across the banking system but allows a significant amount of discretion in its application.”

Discretion? In other words the smart and connected/influential money will get out.

Details of the decree can be found here:

http://www.cyprus-mail.com/capital-controls/new-limits-now-place-re-opening-banks-text-decree-included/20130328#comments

@Actuary

I see your point about leaving the euro but I don’t think there are any easy answers. Why did countries join the euro in the first place?
If you work in insurance you know about the merger mania of the last 20 years. How many pension consultants are there now compared to 1993? I walked past the offices of marsh mercer mclennan guy carpenter oliver wyman the other day.

Bigger was supposed to be safer than sole trading.

It looks like we would have difficulty going back to 7 building societies and 5 or 6 smaller banks. Maybe Ireland will just have 3 banks in future and 2 or 3 insurance companies.

Small entities are very vulnerable. Remember the spivs in Lahndon taking the p out of BLTD back in 2010?

It’s very complicated but the peripherals could do more

http://www.northernsun.com/1016.html.

A Cypriot business has all its funds over 100,000 frozen or sequestered.
Does that business. How does that business decide who to pay with what is left.

1. Pay staff.
2. Pay Suppliers.
3. Pay VAT to Revenue
4. Pay Payroll Taxes to Revenue.

Think about that and one realises that Cyprus will have been virtually shut down within a month.
Perhaps that was the intention.

Three articulated trucks were filmed on RTE News last night entering the Central Bank of Cyprus.
It sounds too much for notes.
They must intend to give out coin for the most part, even to people withdrawing €500. That at least is smart.
Either way, Cyprus is being being forcibly plunged into a very dark cycle.
Compliments of the Eurogroup and EU solidarité.

People overestimate how much money weighs. A million in fifties is about 12kg. So a hundred million would fit into a medium sized truck handy out.

For what it’s worth I think there is pretty much zero chance of Cyprus leaving the euro in the near future. The time to have done it was after March 15th, when the banks were closed and call a referendum. It would have annoyed the lard out of the Eurogroup but it’s such a big thing you’d need to get public engaged with that decision.

One of the huge losses in this crisis is the sense of agency and self determination in large amounts of the population. It’s demoralising.

What appears to be an advance copy, November, of the coming (?) MoU was posted by Dorothy Jones:

http://www.cyprus-mail.com/sites/default/files/Memorandum%20of%20Understanding%20on%20Specific%20Economic%20Policy%20Conditionality.pdf

and is well worth a look.

If I were in the Cypriot team I would be concentrating hard on getting some conditional language into this.

A side note, I think Karl Whelan made the point that one consequence of this may be that more people break up their accounts into parcels of under 100k. This would increase the amount ‘guaranteed’ across the eurosystem.

Finally on the ‘they had a bad system, it had to be changed’ meme. Even if you really believe it, catastrophically destroying it overnight is a terrible way of doing things. It shows a high-handed arrogance of the worst kind. Lots of industries come to an end and, with any luck, replacements are found. It is much better done on a phased basis. As ever, Sweden has good examples of that sort of thing.

Brian Lucey
That’s 10 million in 50 euro notes – the preferred denomination of the criminal lower classes – but we don’t have them in Eire
So I could not get a million into my Ryanair cabin baggage.

@BEB

I think an equally simplistic answer to your point here…

“Previously….

2008 – Iceland did the right thing burning depositors
2012 – Greece was right to burn private sector sovereign bondholders

Currently…

2012 – Brussels/Frankfurt imposes losses on Cypriot banks holding Greek government bonds. It’s Brussels/Frankfurt’s fault
2013 – Cyprus wrong to impose losses on deposit holders

I know that’s a simplistic take on things, but there is a point here…”

…is that size matters.

And by the way Iceland is not a EZ country so drawing too much in the way of comparisons is tricky.

You know my thoughts on this – banks are businesses just like any other and in business some good and bad decisions can make or break you. In the context of Ireland lending money by the billion load in to property deals at significantly less than the so called risk free rate prevailing at the time was a banking error and banks that made those lening errors and those that financed them should have been allowed to take their losses and fail. I appreciate that this too is simplistic but is it wrong?

What I believe to be wrong is to live in fantasy world that somwhow Govts or the agents ECB et al can somehow stop the capitalistic waters eventually finding their own level. They can’t. Cyprus is just another case proving the point.

Mr Market will have the last laugh here and bad business models will fail and those that support bad business models will be equally tarnished and hurt by their allegience to it i.e. the Irish citizens. In the words of Mr Buffett “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”. How true.

@Eureka
I looked, there’s no mention that Iceland has lower suicide rates that I can see.

Given that government spending in Iceland has been cut by 40% and they’ve had austerity well beyond what there is here, I’d be astonished if the health outcomes in Iceland are not similarly bad to the headlines in the Lancet study. If they are not, then cause and effect do not apply cross countries (Greek medical staff are more mercenary perhaps?).

@ Gary O’C

I am sure the Prof did not mean that, it is so inconsistent with his own example. At that time of evening he may have been tired and emotional.

In respect of your original comment, it is of course much more complicated than my simple two takeaways. Nonetheless here we have an unbiased observer, Wiki, taking it for granted that devaluation is bad news and yet, other than the logistics, most in these parts think devaluation is indubitably a good thing.

@ Actuary

I’m a bit rusty on the modern syllabus. Can you explain my following difficulties:

Difficulty 1: A is a selfish old retired actuary with €100K on deposit and €50k pension. B is a hard working young actuary with €100k mortgage and €50k salary (its only for exampe, don’t take the hump!).

After Exit at par & Deval at 50% the position is as follows: A has a pension of PN50K and a deposit of PN100K. B has a salary of PN50K and a mortgage of PN100K. I can see how A is worse off. The price of petrol has doubled and those holidays to Portrush cost twice as much. I am not immediately seeing how B is better off. Oh, I think I get it now, B is going to ask for a rise.

Difficulty 2:

This is where I risk some of my rusty old math.

Let P be the proportion of Government debt (D) which is denominated in Forex including “foreign” and official Euro. Then we have the following equations using the above assumptions:

D1 (in NP) = D0 x (P + 1)
GDP1 = GDP0
ergo
Debt Ratio after E&D = (1 + P) x Ratio Before

Let us slot in some plausible numbers. Let’s say that about 25% of Government debt is domestic and therefore capable of conversion i.e. P=.75. Let’s say the Ratio before is 120%, then the Ratio after is 210%

Indeed the external balance sheet argument is nearly as strong as the Eichengreen logistics argument for not exiting. Krugman ignores it and so too do you, Actuary, so I am obviously getting too old.

@ Brian

“Did the Cypriot banks not have insurance to cover them for the losses they made on Greek bonds?”

A common suggestion which shows the general misunderstanding of how CDS markets work in practice and who actually buys the “insurance”. The insurance costs money (obviously), so much so that it generally wipes out the point of buying the Greek govt bond in the first place (ie the attractive yield). So why buy a Greek govvie (with a poor rating and stigma), and then pay away all the excess yield via insurance premia? Why not just buy a German or French govt bond?

So people buying CDS insurance are typically doing it for the following reasons:
– for a speculative play on credit risk of underlying issuer
– on an arbitrage basis vs the underlying security (the CDS may be more expensive or cheaper than the actual cash bond)
– to hedge out exposure to the underlying issuer for reasons other than the actual bond (ie whats called CVA hedging, for other exposures to a country/sector)
– to dynamically hedge bond exposures for less liquid bond markets where it is not that easy to sell the underlying bond

I know very few guys who buy a bond and then at the same time buy insurance from a credit risk point of view. There’s generally very little point in doing that.

@ OMF

“Either way, it’s time to stop posting.”

You still looking into the NTMA quasi derivative syndication from January. Eager to hear of your progress.

Any update on the Bundesbank’s imminent renunciation of the promissory note deal too?

Thanks in advance.

@ wolverine

That is a churlishly selective quote from the writings of the Great One. Why don’t you mention His creative proposal on Anglo which would have saved the country 50,000,000,000 euro.

@ Yogan
It’s not that they went lower its that they didn’t experience a spike.
I think that the motives are more important than the actions in many ways. The govt is either for people or for the markets. People need to feel someone is on their side.

@ Bond
Is it a bit like each way bets in horse racing? The returns just don’t make it worthwhile sometimes.
So the banks go to leopardstown with my money back heavily to win. When they win they buy nice cars for themselves – when they lose they ask the government to shake down the kids for some more money.

Am in bad form today – hence a bit narks with Yogan (apologies) – but I have to say that banking in its current form is an absolute mess. It needs to be overhauled. There are people on here who seem to have very good ideas as to how it should be done. If you were to reform banking what would you do?

@ Eureka

“If you were to reform banking what would you do?”

I would centralise its supervision and have it run by Germans.

@BW2
I would insist on far higher capitalisation of banking . It is not supposed to be a get rich quick scheme if it is backstopped by joe public.
Even GS has vulnerabilities on the cap side .

Leverage also
needs tight control . You can’t have banks making 25% plus RoE s when the real econ is struggling for 12% without massive doses of leverage.
Lehmans had so little capital under all its leverage when the TSHTF.
Take away leverage and banks look more like utilities with utility style RoE s. No need for Wayne Rooney salaries .

@Eureka
“I think that the motives are more important than the actions in many ways. The govt is either for people or for the markets. People need to feel someone is on their side. ”
I agree, I just don’t think that Iceland are the robots you are looking for. Capital controls, a re-inflation of the property bubble, swinging cuts to spending. Large numbers of repossessions. These are not necessarily the actions of a government on the side of the people.

@OMF
“But it already is!”
With supervision comes responsibility. Like their ECB, the Germans want to have their cake and make someone else eat it in case it makes them fat…

@ yog

“the Germans want to have their cake and make someone else eat it in case it makes them fat”

WTF does that mean?

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