Cyprus and Capital Controls

Having failed to agree a bank resolution regime more than four years into the Eurozone banking crisis, the EZ authorities have, at the second attempt, come up with a resolution of the Cypriot banks. The haircuts of uninsured bank creditors appear to be 60% and more.

After a bank resolution, the surviving banks are solvent. Naturally, depositors may feel sore, and there could be deposit flight as soon as they re-open, even where the haircuts have been severe enough to make them adequately capitalised again. But not to worry, the central bank is there to deal with irrational deposit flight. It is after all the lender of last resort.

But lo and behold, the Cypriot government has imposed capital controls – even insured deposits not facing a haircut are restricted. But since the written-down assets of the surviving banks are now in excess of their liabilities (they have been resolved) these assets will be money-good at the central bank.

Not so apparently. If the ECB believes that the surviving Cypriot banks are now solvent, why is there any need for restrictions on depositor withdrawals? Is the ECB prohibiting liquidity provision through ELA after a bank resolution to which it has been a party? 

Of course the haircuts may, in the eyes of the ECB, be inadequate to ensure solvency. In which case why is the deal not modified further? Capital controls effectively create an inconvertible currency trapped in Cypriot banks, a precedent likely to be remembered when trouble strikes elsewhere. Do re-opening US banks decline to release deposits after the Feds have done their work, for the want of a lender of last resort?

140 replies on “Cyprus and Capital Controls”

One issue might be that if Laiki was solvent now, they need to explain why it could get ELA when it was insolvent.

Also, is Bank of Cyprus “resolved” or “restructured”? If it was liquidated, the deposit insurance fund would be bust after paying 1250 depositors.

Frank Galton:

Bank of Cyprus been ‘resolved’ in the sense that the liabilities have purportedly been written down by enough to match a realistic valuation of assets. Laiki has been closed. Some of the other banks were apparently never insolvent. Is there a LOLR for solvent banks or not?

@Colm the only thing I can think of is that the actual BOC resolution process it not yet complete and as a result it is still not a normal bank —

(b) 37,5% of this difference is automatically converted into Class A’ shares of the Bank of Cyprus, with voting rights and dividends.

(c) 22,5% of this difference is temporarily ‘frozen’ and possibly part or the whole of it, will be converted into Class A’ shares of the Bank of Cyprus with voting rights and dividends for the purposes of the bank’s resolution. In that regard, an independent valuer will be appointed for the valuation purposes of the Bank of Cyprus. Not later than 90 days from the completion of the valuation, all or part of that percentage might be converted into shares and the remainder returned to the depositor. To the extent that the 22,5% will be re-deposited, the interest will be calculated retrospectively together with a small increment.

(d) The remaining 40% of the difference is temporarily ‘frozen’ for liquidity purposes. However, the interest continues to be calculated for this deposit based on the existing interest rate, plus an increment of 10 basis points. This amount will be ‘unfrozen’ in a short period of time and will not be used for resolution purposes.

The current capital of the Bank of Cyprus (shares, securities convertible into shares, bonds) is converted into new shares as explained below:
The existing ordinary shares are converted into new shares of Class D’.
The existing securities which are convertible into shares are converted into new shares of Class C ‘.
Existing bonds are converted into new shares of Class B ‘.
Voting rights and dividends for the above-mentioned new classes of shares (B’, C’, D’) may be exercised only if the total dividends to be given to holders of Class A’ shares reach the original contribution plus interest at an annual rate of EURIBOR-3 months plus 10%. Class A’ shares have full voting rights and dividends.

Frank the capital controls apply to all banks. BOC, it is clear, is intended to be solvent when the details are clarified. Any coherent bank resolution process will include liberal liquidity support when the (now solvent) banks re-open.

We ‘re nearly a week on and I can’t do better than:

We know the ECB have a (perhaps understandable in a way) thing about not wanting to be swamped with self-issued bonds stamped with a supposed government guarantee to make them eligible- and as long as they stick to that line it is a collateral shortage not necessarily proof of solvency that appears to necessitate the capital controls.

I think docm’s link is important. Risk markets are still unwilling to turn their backs on high levels of bullish sentiment – they are hooked, for now. The question is, if they started to be willing to embrace more bearish scenarios, would the imposition of losses on senior bank creditors in Cyprus really have a big impact. Remember, if seniors had been hit by Ireland, the whole European banking system was supposed to go up in a puff of smoke!

The EU doesn’t get good decision-making at the best of times, but definitely not when the elites are anxious to get away on their vacances. Easter is a bad time to go bust.

The ongoing financial crisis looks increasingly like powerful (and very well paid) people who simply don’t have a clue. They are learning on the fly. Take the following piece from the NY Times this week on the “London Whale.”

Roll back to 2008. Who in positions of power understood the fundamentals of Irish banking? Certainly not Brian Cowen, yet he was the man in charge.

“Consider the following presentation written by Bruno Iksil, the whale himself, on Jan. 26, 2012, as the losses were growing. He called for executing “the trades that make sense.”

He proposed to “sell the forward spread and buy protection on the tightening move,” “use indices and add to existing position,” “go long risk on some belly tranches especially where defaults may realize” and “buy protection on HY and Xover in rallies and turn the position over to monetize volatility.”

That presentation was made to a JPMorgan group called the International Senior Management Group of the Chief Investment Office, which seems to have approved it.

If the proposal does not make sense to you, don’t despair. It is largely gibberish.

“This proposal,” the Senate report states, “encompassed multiple, complex credit trading strategies, using jargon that even the relevant actors and regulators could not understand.” The subcommittee asked officials of both JPMorgan’s Chief Investment Office, or C.I.O., and its regulator, the Office of the Comptroller of the Currency, just what that meant. Nobody seemed to know. (Mr. Iksil, safely overseas, chose not to talk to the subcommittee staff.)

Ina Drew, the bank’s chief investment officer at the time, who supervised the group, said she did not know. One risk officer at the bank said he thought Mr. Iksil was simply proposing a strategy of buying low and selling high. Of course, that is a fine strategy if markets cooperate. But anyone who simply proposed that would have been seen to be blowing smoke. Use all that jargon, and some people will assume you are actually saying something.

The comptroller’s office was able to explain some of what was said, but no one seemed to be sure just what a “belly tranch” might be. The subcommittee speculated it might refer to a security with more credit risk than the safest ones, but less risk than the riskiest ones.”

“Of course the haircuts may, in the eyes of the ECB, be inadequate to ensure solvency.”

If €50 billion (the equivalent of the Cypriot ~6billion) was taken from Irish deposit accounts last week, how much VAT and PAYE would arrive in government coffers in the next few months?

Cyprus will be utterly insolvent within a few months. The dogs in the street in Cyprus know this and so does any intelligent person in the ECB. Ergo capital controls.
Capital controls is merely a holding position before collapse and exit.

“even insured deposits not facing a haircut are restricted”

So even with this “insurance”, there are incentives for a “run” on the banks if this sort of outcome is possible…


Drew is not credible. I know galacticos don’t do responsibility but she is ridiculous.

@ Geronimo

Interesting that Jamie Dimon, JPM chief, was leading the Wall Street counterattack against Dodd-Frank until the whale capsized his yacht.

The lauded ‘Last Man Standing’ showed that it is easier to run a large non-financial company than a bank with a wide range of functions.

The New York Times reported in November 2008 that in September 2007, Citigroup’s then chief executive, Chuck Prince, had learned for the first time that the bank owned about $43bn in mortgage-related assets!

As to Irish banking 2008, people like Gordon Brown who appeared to believe that the business cycle was abolished could easily wave away the downsides. Subsequently, it was argued that painless defaults could be engineered.

@ All

A local committee on blame for the Cyprus crisis begins work Tuesday. The Irish one is still pending?

An example of a small country that does OK during a boom but is exposed by overdependence to one industry is provided by Slovakia.

China accounts for almost half global output of steel and European producers are feeling the heat because of demand problems.

Robert Fico, Slovakian PM has offerred US Steel subsidies for the coming five years to keep operating its plant in the structurally weak eastern region of Košice.

The business paper ‘Hospodárske noviny’ nevertheless is not optimistic:

“In the 1950s 60,000 people lived in Košice. Then the communists decided to build a steel works there. By 1970 the population had risen to 140,000, and today it numbers almost a quarter of a million. If the steel works are closed down, the population will sink to its pre-war level. … For now Fico has been able to avert that fate. But that’s far from being a long-term prospect. If one day people start talking about withdrawing the car industry from Slovakia, all that remains will be a dubious idyll comprised of a people with nothing better to do than tend sheep. A very small and hungry people.”

This from a Frenchman on France’s woes:

Has there been a French president since François Mitterrand who was truly a match for a German chancellor? If France has replaced Germany as “the sick man of Europe,” it is for political reasons, above all: vision, courage, and strength on the northern side of the Rhine, and vacillation, inertia, and weakness on the southern.

Of course, given its excessively low salaries and adverse demographic trends, Germany will continue to face difficulties. But to emphasize only these problems, as some French do, is pure escapism. German demography cannot be described as the solution to French youth unemployment, as though one could rest on a slogan such as: “They lack young people, our young people lack jobs – what a perfect match!” This widespread sentiment irresponsibly assumes that time is working in favor of France, regardless of whether it implements structural reforms.

I’ve got a dumb question to ask to everyone.

Former minister Mary Hanafin was on the radio this morning, almost telling us that wasn’t it wonderful how good in Ireland had it, being able to give its blanket guarantee of liabilities of all banks, worth over €400 billion in September 2008. Aren’t we all so lucky. We could have been like those unlucky Cypriots. Look at them now. That could have been us.

Well, okay.

But then former minister Hanafin, extended her point by repeating a qualification that is often used by the ex. Irish government – in saying, that on the night of the bank guarantee, when operating in ‘real time’ circumstances – they were led to believe that the Irish banks had experienced at liquidity squeeze and not a solvency problem.

It would be like, if there was a war somewhere in the oil producing/processing regions, and Ireland suddenly could not get petrol say, to fuel its fleet of cars, lorries and vans – and the Irish economy was in jeopardy, from suffering from a supply shock of some kind.

There is this often quoted excused used by the former Irish government, that the top fellows in the Irish bank, opened the lid on the enormous Irish bank, fuel silos, shouted into them and said,

‘Holly heck, I can hear echoes coming out of this thing. We are almost empty!’

So the top fellows in BOI and AIB rush down to Kildare street and keep our hard working minister up all night, trying to figure out what to do, to replenish the tanks.

But they were only lying. The fuel tanks weren’t empty. The fuel tanks were busted and broken, and basically only scrap metal value by that stage.

Former minister Hanafin on radio this morning, then ended her short history of the Irish bank guarantee, by ebulliently declaring that LIQUIDITY started to flow into the Irish banking sector, following the night of the guarantee (presumably from such places as the United Kingdom and France, whose ministers had not been so far seeing as to impose their own guarantees of all liabilities of all of their banks).

So on every count in the above, the Irish government really did out perform itself.

We didn’t end up like Cyprus. One-nil, to Ireland.
We were lied to by the banks. Call that, nil-nil draw (a result).
We acted whilst the other Europeans were napping. One-nil, to Ireland.

So the Irish bank guarantee was a straight hat-trick almost for the Brian Cowen/Ahern administration. Wonderful.

I have only one very dumb question to ask. If we are to stand over this narrative, that the top fellows at Irish banks, peered down into those fuel silos in September 2008, and heard their own echoes – and then it turns out – that wasn’t the case at all, and it was something else . . . . then why has no Irish banker being held accountable?

The Irish bankers did not arrive at Kildare street and say, our tanks are busted and they are scrap now, so what do we do? It was like, oh, it’s better to say that the levels are just low, and we need to fill them up slightly.

Someone along that chain (either bankers, or politicians, or both), had to have been telling porkies – and why is there no investigation? No records? No statements?

And then to come on Irish morning radio, and to use the poor old Cypriots as the bogeyman. Oh, big scary Cyprus. That would have been us.

Is this what we are saying now. That in order to exercise good, responsible government in times of financial crisis – the best thing is to lie through one’s teeth, to get the best deal for a small nation? Is that the play book that we are meant to use, to be part of a European union? Are the Cypriots being punished now, because they hadn’t enough savvy to make up a riddle, that the tanks aren’t busted, they are just empty?

Because that is what former minister Hanafin is taking credit for. We were smart enough to know how to do the trick of the loop, and we are better off for it. Maybe that is what people respected so much about old Fianna Fail, maybe that is what we ought to search for in our political representation? BOH.


The dog has not barked and is unlikely to.

So…. we can burn all the bondholders and wind up all the banks now?

Could we have always done this without the dog barking?

Here is a no holds barred account of the goings on in Cyprus …

They obviously don’t know whether the Bank of Cyprus will be solvent after the “merger” with Laika on Tuesday. Hence the need to hold 22.5% of deposits hostage for possible further share conversion. Another point worth remembering is that the President has said (during the negotiations) that bank of Cyprus would be bust within six months if it was forced to take 9b of ELA liabilities belonging to Laika. Was it a bluff?


Your point is important – unlike exchange controls in the old days which simply restricted transfers abroad into hard currencies, Cypriots additionally cannot settle bills locally, within Cyprus, in the domestic currency. Barter is the remaining option. Of course the insured depositors have been given an incentive to bail out.

The problem with the Hanifin narrative re liquidity is that there is a minute of a meeting involving the DOF where he refers to a capital deficit in Anglo. It has been referred to here before on several occasions.
There is also the question of why Anglo management were left in situ when there was a clear question mark over solvency of Anglo, not liquidity.


Hindsight imposes a form of rationality on situations and events in which irrationality was paramount. From the available accounts of what happened that night, it appears that Anglo was at the core of much of the discussion between government and the Banks on that fateful evening; that the banks wanted Anglo nationalised; and that the Taoiseach made clear, in most colourful terms, that Anglo would not be nationalised. The post-hoc justification for this was that nationalising Anglo at that point would have imperiled AIB and BOI. From the Dail reports in the days following the guarantee, it also appears that the then Minister for Finance, and the government generally, believed they were dealing with a liquidity issue for the main banks, not a question of their solvency. Only Michael Noonan, and one other FG TD, raised the question of the solvency of the banks in the Dail debates on the bank guarantee.

In time to come, the next generation of historians and political analysts will have great fun poring over the details of what actually went on that night, and subsequently, and who the main actors were in the debacle that unfolded and how their actions contributed to eventual disaster. Right now, there seems little point in dwelling on it, since the focus has to be on getting out of the mess in which we find ourselves, in all its various manifestations.

Brian O’ Hanlon

Excellent post. Clearly some well paid powerful people still don’t have a clue and will never learn. Does Mary Hanafin have a clue how foolish she sounds.


You are totally wrong. The past does matter. While the financial system probably can’t be made completely foolproof, it helps to know how they behave and how to design rules that keep them from crashing the family car. That is done with plane accidents all the time. As a result air travel has become much safer.

@ All,

It does have relevance to today I think. It’s not that difficult to ascertain if an institution is as grossly insolvent as our banks appear to have been, versus illiquid. And if it appears as though, the government was genuinely misled on that occasion, where are the prosecutions for misleading the government in such a manner?

It is like nowadays, if one misleads the revenue on the ‘market value’ of one’s home, one will be found liable.

But it appears as if lying about something as large as €400 billion to the minister for finance is no problem.

Former minister Hanafin can’t have it every way which way that she wants to have it – and it is important for small countries – to decide upon what standards that local governments shall be held to.

Okay, the banks lied to them, misled them etc.

Okay, its fine to let off the hook, those who did lie and mislead and jeopardise the solvency of an entire nation – and even send the CEO’s off into the sunset with huge bonuses and pensions.


But we can’t have it every way. What we are saying now, that by not getting to the bottom of things, but shovelling more and more manure on top of any truth that might be allowed to emerge from inquiry – what we are doing is the right thing. And furthermore, we are more savvy for doing it that way, than are all of those not-so-clever Cyprus people, who could not turn tricks, spin and conceal as efficiently as we can in Ireland.

Going forward, it is saying that to survive in the new Europe, that later are the tools, that the politician needs in their tool bag.

That’s fine. Lets say that is the case. Full marks to Cowen, Ahern, Hanafin etc.

All I am saying, in following down that sort of political road, where does it ultimately lead.

What I am trying to say, is that in the eyes of former Fianna Fail government ministers, based upon their model of performance in government, and duty to the citizens of the country – we should be thanking out lucky stars, that we were lucky enough to have had such savvy political operatives.

And if that is the case, then fine.

But is that what we are saying? Is that the yard stick by which are current crop of representatives are to be measured against? If one was to believe former minister Hanafin, then yes, it is.

This is my question. What are the signals that the next generation in office, are supposed to accept as valid from their electorate? If the Cowen, Hanafin model of local government is the legacy, and the one we should all follow, then fine.

But we ought to at least ask the question. BOH.


It is a very realistic proposition – that we will need to rely on public office holders – who understand how to exist in multiple parallel universes simultaneously, just in order to survive in the European environment.

And anyone who does not possess those set of skills, will not make it.

Whether that is a positive thing for ‘the Europe project’ or not, I will leave to your own debate. BOH.

@ Geronimo
I was talking to someone who works with engineers and bankers the other day . He was contrasting how the 2 tribes deal with failure . Engineers study it and learn for the next time. Bankers tend to sweep it under the carpet and learn nothing. He thought they had too much of other peoples ‘ money .

@ colm mccarthy

‘unlike exchange controls in the old days which simply restricted transfers abroad into hard currencies, Cypriots additionally cannot settle bills locally, within Cyprus, in the domestic currency. Barter is the remaining option.’

What then is the correct description for the controls which have been imposed on bank depositis in Cyprus ? What is the last occasion when controls of that type were imposed in western Europe ?

@ BO’H

Failte romhat aris and Happy Easter

‘It is a very realistic proposition – that we will need to rely on public office holders – who understand how to exist in multiple parallel universes simultaneously, just in order to survive in the European environment.’

‘Existing in multiple parallel universes’ may be necessary, as is economy with the truth on occasion, but it’s hard to be charitable about rank economic incompetence.

The FFers are enjoying their return from the dead. No harm to them but they has the reins of power for so long that they think it a natural state of affairs.

The events on the night of the guarantee are doubtless interesting, but they are not the central issue. The matter which FF need to address is how they could have allowed Irish bankers to get ino a position where they could hold the state to ransom. An OG of historic proportions, and all totally avoidable.

Lets talk about the relationships between goverment ministers, party handlers, developers and financiers. Into the frame too go the negligent or frankly corrupt professionals and senior public servants, who smoothed paths that should have been left rough, opened gates that were properly locked and generally subverted the constitutional order for which predecessors had sacrificed their freedom and even their lives. Poor show.

A question I asked earlier regarding EUrozone Finance Ministers is also featured in this interesting article

“How could sophisticated European finance ministers — along with senior officials of the European Central Bank and the International Monetary Fund — have signed off on such a counterproductive rescue plan? And if they could agree to that, what other damaging schemes might they grab for in some future crisis?”

@Paul Quigley

“What then is the correct description for the controls which have been imposed on bank depositis in Cyprus ? ”

Interesting question!

It is arguable that Cyprus does not have a currency right now. Or at least Cyprus does not a currency, in the normally understood meaning of that word.

On Marian Finucane’s program on RTE yesterday Mary Hanafin states that the 2008 guarantee “bought us time”

Bought us time to do what? Completely bankrupt the economy. Not a clue. Not a clue.

Tell me, do some people in dear ole Ireland really believe this person has any credibility?

The really and truly scary thing is that Mary Hanafin seems to be saying that if Ireland was in a 2008 financial crisis today, the government should do a repeat.

Good God!

Interesting to see the same desperate lurches as in Ireland and other countries in trouble.

‘Cyprus bets on casinos to help boost economy after savings raid’


‘Is Germany too powerful for Europe?’

Bit frustrating and goes all other the place, but covers a number of topics under discussion here.

Paul Quigley:

It is an exaggeration to say that Cyprus no longer has a currency, given the loss of internal convertibility of bank-held money in the domestic currency (the ‘blocked’ Euro) above a low daily limit. Cyprus has a currency consisting of cash and bank money below the limit, for what they are worth in terms of day-to-day financing of a modern economy.

But your statement is not much of an exaggeration.

An intriguing question is why the IMF signed off on this on March 16th.

It is of note that not only is the market not barking but neither is the man on the street (at the ATM) – none of those predicted bank runs. Academic blogsters are of course barking mad and wondering why everybody else seems to have a perspective on the relevance of Cyprus.

The capital controls precedent could be a useful one to use by a country planning to quit the EMU.

Jacob Funk Kirkegaard, a Danish economist at a Washington DC think-tank, has pointed out that uninsured depositors at IndyMac Bank a failed US bank, in 2008 were subject to a 50% haircut.

@ Gavin Kostick
In Asia, the Chinese have a reputation for gambling and Singapore has opened two casinos in recent years, one run by a Malaysian company that built a mountain casino resort in the early 1970s, north of Kuala Lumpur. Macau is China’s own gambling enclave.

Singapore has a high entry charge for local residents.

@ Joseph Ryan

I doubt if there is a conspiracy about the outflow of EZ deposits.

Most of the big deposits would be corporate ones and any financial manager who hadn’t been following the news in recent months about Cyprus must feel like a real plonker now.

Deposit outflows n Cyprus in February were at a three year high. March data will be interesting.
Interesting thwt some still equate bank runs with Its a Wonderful Life. Imagine …your restricted to a set limit from the ATMs and a much larger one from electronic transfers. Do you a) spend 12.5x longer doing all your transactions in cash or b) not.

The Cyprus situation is extremely strange. For instance, several Latvian banks have Cyprus branches. But they are just brass plates and maybe Telex machine. Because it was crystal clear what will follow, assets have been evacuated timely. Many clients decided to be a client of the Latvian main bank further, instead of Cyprus branch. Now there are prosecutions, investigations, EU backed repossessions of assets involving the events which happened already in February. This is something extreme.

Geronimo wrote,

The really and truly scary thing is that Mary Hanafin seems to be saying that if Ireland was in a 2008 financial crisis today, the government should do a repeat.

Good God!

Its like the best apple cider. Nothing added but time. BOH.

Once again I think it’s very important to acknowledge that the Cypriot levy on bank deposits destroys money.

We use the banks’ liabilities as money for the vast majority of transactions.

Another point which Colm raised was scepticism over the Cypriot banks solvency even after reducing their liabilities. The reason capital controls are in place is because the Cypriot banks only central bank only to only a fraction of what the have on ‘deposit’. There’s no reason economically speaking why the public couldn’t deal with central bank money directly, in effect making banks fully reserved.

@Joseph Ryan

“Capital controls is merely a holding position before collapse and exit.”

aka propping the damn thing up while the connected do what they need to do to protect themselves/get their positions sorted. Everybody knows the Cypriot economy is going to collapse, debt:GDP ratio and unemployment is going to ‘take off like a rocket’ – everybody knows the place is sunk and I would not even be surprised to see them exit later this year or early next.

Bank of Cyprus will be bust within months (even the Cypriot president has already told us this) and the balance of deposits not ‘taxed’ will be held on to and held on to and probably never be repaid.

Money was moved out of Cyprus by some of the connected in both February and March (and probably even during the ‘bank holidays’). I doubt we will ever find out what, what, where and when.

Funny but I bumped into a wealthy Greek Cypriot couple at the Hotel du Vin in Bristol today (nice place if you’re ever in Bristol city centre). Over here (quote/unquote’) ‘getting away from all the troubles at home.’

Re: I doubt we will ever find out…

but you could start by looking at the very very top of the political tree……

92% of Euro notes are printed by country central banks,8% by ECB.
The issuing central bank can be seen from the serial number.

Ireland is ‘T’, Germany ‘X’ and Cyprus is ‘G’.

If you had German ‘X’ 50 euro notes in your wallet would you be happy to accept Cyprus ‘G’ notes in exchange.?

I am beginning to wonder if I should accept payment in any Euro note. From now on, I will request Benjamins only.

Just cashed out 30 bitcoins 😀 (at 103 and rising) bought em this time last year at 4$ this Cyprus thing is turning out to be a good thing (provided my new euros dont get confiscated Cypriot style once they arrive in by bank!)

The other day, while I was at work, my cousin stole my apple ipad and tested to see if it can survive a 25 foot drop, just so she can be a youtube sensation. My apple ipad is now destroyed and she has 83 views. I know this is completely off topic but I had to share it with someone!

French bank exposure to Italy is Euro 265 ($344 US) billion.

Now that the precedent has been set by singeing the Cypriot depositors it would be foolish to leave sizable amounts in Italian, Spanish or French banks. Any one of the three are too big to fail and too big to bail.

The way depositors were treated in Cyprus will frighten a lot of people who will attempt to lessen their exposure by moving liquid assets out of the EZ. Capital controls are inevitable, just waiting for the next crisis.

Kevin Kelly has a interesting diagram of geographical sub-regions of the United States, in which US dollar currency tend to be exchanged, as far as the dollar currency is concerned.

I count about nine major regions, compared to 50 states. It is interesting that in the older parts of the US, the regions are tighter and more clustered.

I don’t suppose a similar map exists for the Eurozone. BOH.

@ Colm McCarthy

I’ve just read your ‘Plan B’ Independent article in detail and it’s the only media reference I can find to the fact that ‘The money supply is cut directly through the depositor haircuts’.

While other commentators described it as a tax or theft I was doing my best to highlight that when the banking sector decreases its liabilities the money supply drops by the same amount.

With this in mind I would question the logic of deleting money in an economy already short of money. Do you not see this as a huge flaw in the solution to the Cypriot financial crisis?

Is there anything to be said for preventing future crises by recording the balances of current accounts ‘in house’ at each bank and not on their balance sheet, thus keeping them 100% safe? I feel to record our bank balances not as money, but a risky promises to pay money, is unnecessary when such bank ‘deposits’ form such a large part of the money supply.

[As you may know I would go even further and question why arbitrary advances in technology should decide how much of the money supply exists as risk-free cash created without an equal debt and how much should exist as risky banks’ liabilities each with a matching debt.]


Dieselboom’s “Plan” is little more than doing the obvious. Why is everyone so upset? It is right there in the FDIC “Resolution Handbook”

Question: “If I have more than $250,000 in a closed bank and I am paid $250,000 by the FDIC, what happens to the amount in excess of $250,000?

Answer: “If for example, a depositor has only a single account with a balance of $255,000, he or she would be paid $250,000 through FDIC insurance and would receive a claim against the estate of the closed bank for the remaining $5,000 which is not insured. The depositor would be given a Receiver’s Certificate as proof of this claim and would receive payments as the assets of the bank are liquidated. “

Looking back on the 2008 Irish bank guarantee debate, virtually everyone believed that the uninsured depositors should get all of their money back. The hue and cry for several years was “Burn the Bondholders” but never “Destroy the Depositors.” Many of those uninsured deposits, especially in Anglo Irish Bank, probably belonged to the winners (land speculators, developers, lawyers, politicians etc) of the Celtic Tiger property boom. They got all of their money back and the Irish taxpayer got stuck with the bill. Uninsured means uninsured.

While I agree with you about uninsured depositors taking a hit, the hierarchy of banking creditors should be depositors<100k,
Other depositors,
Top of the list, then let senior bond holders and govt/ecb/IMF fight it out next,
Junior bond holders
Bank executives

In Ireland we still have bank share holders not wiped out
It is hard to see why an oap whose sole luxury is buying some non biomass fuel to heat himself is paying for this when the people who owned the banks were not wiped out
Or that the people working for the eu organisations who don’t pay income tax should be paid by the same hard hit pensioners

How does Mary (3 pensions) Hanafin do it with a straight face. Its beyond belief.

Geronimo refers to an interesting fact that is downplayed as it muddies the conventional narrative: almost half the sovereign cost of bailing Irish banks was in respect of a depositor bailout including foreign residents.

Anglo Irish Bank had deposits of over €50bn at end Sept 2008 and €10bn in bond debt.

The insured depositors were also bailed as the Central Bank fund to which the banks contributed 0.2% of deposits, had little in it.

I’m not saying they shouldn’t have been at the time – – just presenting the facts!

The covered banks had €154bn in deposits in Feb 2013.

Seamus Coffey has useful charts here on deposits since early 2008:

‘The logical consequence of Mr Dijsselbloem’s dictum and the reality of austerity and a deficient banking union is a future bail-in of Spanish bank bondholders and depositors.
The problem is that even insured deposits will then not be protected. Look at what happens in Cyprus, where capital controls affect small and large deposits alike. I would expect that to happen in Spain as well. Given the stated policy, it is logically irrational for any Spanish saver to keep even small amounts of savings in the Spanish banking system. There is no way that the Spanish state can guarantee the system without defaulting itself’

That was Ireland’s position in September 2008. Sovereign default, bailing in depositors, and also public pension liabilities looks inevitable.

Michael Finnegan

It ain’t just “an interesting fact” its billions of euros that Joe Soap got placed on his back.

Le Canard Enchainé, the French equivalent of Private Eye or the Phoenix has a very interesting piece on Cyprus this week.

They say the talks were run by Lagarde, Van Rompuy and Rehn and that Dijsselbloem was sidelined. His interview with the FT was apparently a solo run the day after.

“Sans doute frustré d’avoir ainsi été poussé en touche, le ministre hollandais a tenu à se mettre en vedette dès le lendemain quelques heures après la réouverture des marchés”.

“Doubtless frustrated at having been kicked into touch the Dutch minister tried to turn himself into a star the day after, a few hours before the markets reopened. ”

Probably no different to Hanafin really.

Another interesting Canard angle – they saved 2 banks in particular. Hellenic Bank, 3rd largest in Cyprus is owned by the Cypriot orthodox church. VTB is a Russian semi private bank which manages funds for several outfits that are close to the Kremlin.

It’s always the same crap innit.

Still trying to figure out why in Iceland, deposit haircuts and capital controls were great things, but in Cyprus they are the most evil deeds imaginable. No one seems able to answer this question.

And why, when some people previously suggested capital controls etc were a likely consequence of closing down large elements of your banking system (ie if we had gone ahead with such in Ireland), everyone scoffed at the notion, but now readily accept that, while evil (see above), they are also the only thing preventing Cyprus going completely bust in the immediate term?

Are people finally starting to realise that liquidating big parts of your financial system isn’t actually all that easy, and potentially catastrophically problematic? And far more catastrophically problematic locally than it will be elsewhere (ie Cyprus in flames, EZ markets say “meh”)?


Come on now. “everyone scoffed at the notion”.

Take a look at the deposit flows prior to late Sept 2008 and the same date in 2010. There were plenty of non-scoffers., those funds were not off for a spot of cultural enlightenment or sunshine by the pool.

I do recall some academics saying that the idea that a Euro in one country’s banking system might not be regarded as a real Euro, just did not compute though.

@Bond. Eoin Bond.

“Still trying to figure out why in Iceland, deposit haircuts and capital controls were great things, but in Cyprus they are the most evil deeds imaginable. No one seems able to answer this question. ”

The difference is almost five years. Almost five years for bondholders to collect their money under the cast iron umbrella of ECB/EZ policy, and large depositors to ponder where to put their money. All to replaced by official funding either to State or banks, that again according to EZ/ECB policy is sacrosanct.

The Iceland solution was the correct solution. Of course there would have been mayhem. It is now only too clear what lengths the EZ /ECB powers are prepared to go to in order to implode any polity or economy that is not toeing whatever the official line of the day is.

In that sense the Irish decision to learn from its very poor history of success in pitched battles and opt for a longer drawn out campaign, could even at this stage be viewed as having some merit. The pity of the Irish choice was that a very poor attempt was made to apply the burden of the policy decision taken to those in the best position to bear it.

But the comments from the Luxembourg PM, Juncker and their finance minister at least show that some countries are now realizing the necessity to fight an EZ policy that is based on the self interest of the major powers, and the devil take the minnows.

@Joseph R

Junker is now openly a lobbyist for Luxembourg, which has a very particular perspective on off-shore banking centres. Previously he was less openly such a lobbyist.

The Irish position is that it “took one for the team” (yuk). Without Ireland’s selfless action, the whole European banking system would have collapsed [don’t mention Cyprus]…or something like that….so the ESM should buy out Anglo and INBS at 2008 prices. And anyway, if it wasn’t a selfless act, Europe ordered Ireland to do it [insert evidence here].

@Eoin Bond

Because Cyrpus is in the Euro and Iceland isnt (or the EU)?

As Colm points out a Cyprus Euro != Euro from another Country.

Pretty fundamental no?


I was wondering why Cyprus with a banking sector approx 10* GDP was a casino while Luxembourg with a banking sector approx 20* GDP is more sober than the annual convention of Massey Funeral Enterprises.

Hubert Faustmann from Le Monde 26.3

“De nombreux autres pays ont un secteur bancaire hypertrophié comme L’Irlande, la Malte, les Pays Bas ou le Luxembourg dont les banques représentent vingt fois le PIB”

Numerous other countries have a massive banking system –
“Ireland, Malta, the Netherlands or Luxembourg where banks represent 20* GDP”

@ Actuary

which part of the Cyp vs Ice comparisons are you referring to? If capital controls, im simply pointing out how everyone in favour of the Iceland example generally refuses to even acknowledge that either cap controls exist and/or that they are a particularly bad thing. Because of the capital controls, Iceland’s economy hasn’t collapsed, not because of some superior capitalist model which put losses on creditors and gave everyone else a fresh start.

At the moment, a Euro in Cyprus is not different to a Euro in the rest of the EZ, though that is a rising danger if capital controls become a lasting feature, and you obviously are currently prevented from fully moving ur Cypriot Euros into another Euro jurisdiction. But over time u probably will be. Incidentally, if the Ice situation has taught us anything, its that the longer the capital controls remain in place, the less of a negative impact we will see in terms of Cypriot GDP, unemployment etc. But i wouldnt necessarily call that a good thing either.


Luxembourg has alot of German and French money in it
Cyprus has (allegedly) alot of Russian money in it

in a meerkat voice: Simples!

Was thinking about the whole Russian Mob money being in Cyprus bullshit on a stick we were told.

If you were a mobster laundering money via Cyprus (interesting how US companies doing it in Ireland are called “investors” but Russians are “mobsters”)
why would you leave your money then sitting in a bank account?
Would you not be buying up assets back home (as many have done) and for that matter “diversifying” elsewhere in Europe? Has anyone notice the amount of “Eastern european” food shops in existence now here and places like Germany now 😀

@ BEB et al

I wonder if one way of looking at the issue might not be simply be to view euros held in Cyprus as assets that are “frozen”. (There are, for example, formal agreed international arrangements for such in the fight against money-laundering). Euros retain their nominal value wherever they are located. But a secondary market is bound to develop, as it seems is the case with Iceland, if the capital controls are retained in Cyprus for any lengthy period.

The real political issues seem to me to be elsewhere i.e. the drive shaft in the euro vehicle is broken.

How to fix it?

The view of the OECD in its recent world overview report.

“Stronger monetary and financial support is needed to exit from recession in the euro area…

 The euro area remains vulnerable to negative tail risks because feedback loops between banking system fragility and government debt burdens have not been fully severed. It is essential that the credit
transmission mechanism be repaired. Rapid progress must be made to implement a comprehensive system of common banking supervision with clear crisis resolution and support mechanisms, as part of a process of
returning banks to good health. The recent Cypriot crisis, while an exceptional case, shows the importance of addressing banking crises directly and decisively, but also of putting in place the right institutions at the euro area level to maintain banking system stability.

 There is a strong case to ease monetary policy further, given weak demand and inflation well below the ECB’s objective. Policy rates are already very low, but some scope remains to reduce them further. More
specific forward guidance could be given by the ECB. Further thought should be given to how to expand quantitative easing. The risk of undue inflationary pressure associated with monetary easing is small, as the
transmission mechanism is impaired, especially in the periphery countries where banks face high funding costs. Aggregate euro area bank lending is still contracting.

 Existing commitments to structural budgetary consolidation should be met, while allowing automatic stabilisers to operate fully. This implies that nominal deficit targets are likely to be missed.”

Easier said than done! What hops off the page, however, is the sentence; “Further thought should be given to how to expand quantitative easing.” (?)

@ All


Larry Elliott of the Guardian on the “I’m not Spartacus” ploy which MN had the considerable sang froid not to use.

The hole in his argumentation is a political one in the following extract;

“So when Berlusconi says he cannot let the country fall into a “recessive spiral without end”, he strikes a chord.

If policymakers are alive to the threat posed by one of the six founder members of the European Economic Community back in 1957, they have yet to show it.”

They are IMHO well aware of it and the political response is the same as has been in other cases i.e. if Italians wish to inflict Berlusconi on themselves once again it is not the job of politicians in other countries to stop them. They can live with the consequences. The question is whether Italy can.


I saw a French cartoon about that.

2 Russians in a Cyprus hotel. one says
“We should have put our euros in Luxembourg
They are far too rich to p*** off the Troika.”


‘if Italians wish to inflict Berlusconi on themselves once again it is not the job of politicians in other countries to stop them. They can live with the consequences.’

Surely you mean that they fondly imagine that they can live with the consequences of failing to take the steps to head off the threat which Elliot describes.

None so blind as those who don’t want to see.
Iceland has low unemployment, decent quality of life and a sense of control over its destiny. Capital controls not a major price to pay
Cyprus has none of these + capital controls.
Cyprus should just default and devalue – same difference now

@ Paul Quigley

I am afraid not! This is now a case of senior hurling. What has aptly been described as the “Blazing Saddles strategy” of negotiation simply does not work.

Incidentally, it will not work for Cameron either.

That is not to say that some accommodation cannot be found. Such seems unlikely before the outcome of the German elections is known (assuming that things do not go off the rails in the meantime).

It is hard to see Germany staying above la merde which is slowly enveloping Europe. The UK is into year 3 of operation Gideon and to say it isn’t working is very generous. France has 10% unemployment. Italy can’t choose a government. De Nederlands are on a shaky scraw. The periphery is in a depression.

No sign of an end to the mess. I wonder when people are going to link neo plutocracy with the state of economic affairs. The apparent fate of journalism is also of concern.

@Paul Quigley

Surely you mean that they fondly imagine that they can live with the consequences of failing to take the steps to head off the threat which Elliot describes.

When Upton Sinclair said:

“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

he might equally well have used “class interests” for “salary”. The hard money austerians have seamlessly moved from one principle to another as their interests have demanded it, the only constant being their mendaciousness.

Here are the figures for the top ten contributors to the Irish Economy blog over the last thirty topics. The results are automatically generated but the numbers for total characters and average length are approximations as some quoting and all HTML markup is excluded .

Posts | Total characters | Average length of post | Author
[ 125 ] [ 73888 ] [ 591 ] 'docm'
[ 102 ] [ 46372 ] [ 436 ] 'fiatluxjnr'
[ 79 ] [ 55938 ] [ 708 ] 'carolus galviensis'
[ 76 ] [ 20025 ] [ 292 ] 'brian lucey'
[ 75 ] [ 29080 ] [ 387 ] 'seafoid'
[ 74 ] [ 38445 ] [ 519 ] 'brian woods II'
[ 67 ] [129284 ] [ 1929 ] 'mickey hickey'
[ 64 ] [ 42671 ] [ 666 ] 'joseph ryan'
[ 57 ] [ 26505 ] [ 465 ] 'pr guy'
[ 54 ] [ 29942 ] [ 554 ] 'grumpy'

A dishonorable mention to Mickey Hickey for excessive unmarked in-line quoting but the winner is the same as always, and as useful as ever if one is trying to track the current spin of the European neoliberal on the disaster of their economic policy.

@ Shay

Interesting stats. I ran those posts through a Sense Checker and got a zero divide error for Prof Lucey.

@Brian Woods II

Interesting stats. I ran those posts through a Sense Checker and got a zero divide error for Prof Lucey.

Be nice to Professor Lucey now. We all make mistakes, he acknowledged them. This is unusual in the Irish economic community from what I can see.

I think a rate limit for posters would help, possibly a higher rate should be allowed for people posting under their own name. I think the top ten contributors produce 46% of all posts which makes the experience of reading the blog a little claustrophobic, for lack of a better word.

the top 10 tends to vary a good bit over time apart from the person with the most posts.

Looking at the teacher conferences maybe the blog could reach out to that group and get a few posting. It looks like they could do with learning something about the economic situation as well.

Peculiar really…a Cypriot Euro in the London branches of Laika is worth a Euro system wide and is freely convertible whilst the native euro is still locked in. I wonder how long it will take to drain the reputed 270m in London.

@ All

I do not know why the resident self-appointed vigilante on this blog bothers. As a matter of principle, I do not reply to individuals that persist with ad hominem comments as they are, by definition, trolls. I do not know nor do I care why or with what purpose said individual persists with his approach. Others are free to respond as they see fit.

“As a matter of principle, I do not reply to individuals ”

You just replied to your bete noire.
Can’t you at least be consistent?

I haven’t posted in a bit! Can’t the averages slide now.

11.27 post here:

‘Eurozone unemployment up 2.1% since crisis began’

Compare to how the US is doing. There is something very wrong with the eurozone.

And the youth employment figues further down are in nightmare scenario.

On the Iceland front: I’m mainly a fan (and I don’t object to deposits over the guaranteed level taking a hit in a consistent, well publicized, equally applied system).

I’m mainly a fan as the Icelanders seem to have done a much better job of claiming and getting on with their own destiny so far. The ‘bail-out’ countries seem, on a newspaper reading basis, to be far fuller of anxiety, self-loathing and lack of agency. All of which is bad.

Oh yes, and don’t forget the Icelanders also wrote down mortgages in negative equity.

I haven’t banged on about culture for a bit, so here is an article showing how Iceland has really gone for culture, moving it into its second largest contributor to GDP.

‘Journey to Iceland’s cultural miracle’

Yes it’s a puff piece, but you get the general idea. There’s more to culture than The Gathering or setting up casinos.

The terms of the Cypriot bailout reported today seem exceptionally generous….without the haircuts… 2.5% with a ten year moratorium.
Will the best boy in the class get similar….and if so perhaps the idea of returning to bond markets at 4% + is not the best plan.


<Tangential self indulgent musing>
The ten year anniversary of the invasion of Iraq passed last month (at least 120K violent deaths, possibly 500K surplus deaths in total, an ongoing civil war, a modern country turned into a third world basket case) and it should remind everyone in the reality based community of two key lessons.

The first lesson is the obvious one that the political right can not be trusted when they are intent on attacking their current most hated windmill – they will dissemble and distract relentlessly in order to further their goals (even if those goals are misconceived and self destructive).

The second, and more practical lesson, was not to waste time debating the right as if they were persuadable. They do not believe in their arguments (Alessina‘s expansionary austerity anyone?) so it is absolutely fruitless to try and convince them the arguments are false. A tool can not be falsified.

When the European component of the global financial crisis finally comes to an end at least why not be one of the people to have the satisfaction of having called the liars and fools liars and fools to their faces?
</Tangential self indulgent musing>


“‘Eurozone unemployment up 2.1% since crisis began’”

EZ unemployed at 19,000,000 or 12%.
The EZ needs over 10,000,000 jobs to being unemployment down to German levels of about 5.4%. Perhaps Cyprus was the starting point in their efforts!

I seem to recall FDR setting a target of 4 million men back to work within one month of his taking office.

Any chance of Merkel putting that target in her election manifesto!


‘I am afraid not! This is now a case of senior hurling. What has aptly been described as the “Blazing Saddles strategy” of negotiation simply does not work.’

If only it was senior hurling. While things may get heated occasionally, there is an agreed set of rules, as well as an impartial referee. What we have here is several different, often conflicting games being played simultaneously on the same pitch. The military game is rightly eschewed, as a result of painful and repeated experience, but the big money game continues, with all it rotten and divisive consequences. As the Bob Dylan song went, ‘How many years ”’?’

To mix the metaphors, it’s no use Merkel and Schauble acting like the characters in Alice in Wonderland, and trying to put Italian and other ‘southern’ dormice into the austerity teapot. Can’t be done. Given the depth of their support for the globalisation/market-state process, and the activities of their big banks, the creditor states are also responsible for the imbalances in Europe.

Maybe the German leadership had a sniff of viable European solutions once, in the heyday of ordoliberalism, but they fell for the silly ‘end of history’ fairlytale. I guess the inlflux of so many ex-GDR citizens had a lot to do with that backward step. It’s ironic that the same ex-communist influx happened in Israel, blocking all exits from the Israeli-Palestinian conflict.

The US military adventures are over too, and the US economic footprint is shrinking. Britain’s ‘special position’ isn’t worth much these days, and Cameron got the answer he deserved. If European leaders can’t rise collectively to the current challenge, and rebalance in all respects, the continent faces the economic equivalent of relegation.

Did you ever see Chris Hedges’ speech to Rockford college from 2003? Youtube. Or the Get your war on books?
Get your euro crisis on would make a great book.
Hubris and ineptitude and our belief in technology. The last 10 years have been so strange.

To return to the original post – why are there capital controls in Cyprus? The only answer that appears to make sense is that there are limits to the ELA that will be provided, since bank accounting (for the purposes of solvency) and ECB accounting (for the purpose of valuing collateral) must be quite different.

Some background:

The ECB had wanted the banks – apart from Laiki and BoC to open last Tuesday – to open without any restrictions on withdrawals, but this move was blocked by President Anastasiades.

Thus the island-wide capital controls were a political decision. Perhaps the government is thinking of bringing in a systemwide deposit levy in the future and wants to keep the deposits in place for that purpose.

BoC is, by definition, solvent, since its doors are open, so why won’t the ECB provide liquidity as needed? We know for Laiki that over 20bn in collateral was posted to get the 9bn in ELA funds, and this collateral included Laiki’s own real estate/branches. Also it appears that the government bond of 1.8bn used to recap Laiki last year was not regarded as acceptable collateral for ELA. This points to the use of two parallel accounting systems – one valuing the assets from the point of view of the bank’s balance sheet, and another valuing those assets for the purpose of ELA collateral. Thus you can get the situation where there is an ECB-imposed liquidity constraint, even in a solvent bank.

So some more rules to add to the mix:

– Even if your bank is solvent and has no liquidity problems, it may be subject to capital controls (as a political decision)

– Even if your bank is solvent it must abide by a separate ECB-defined (but secret, since the rules are never published) collateral valuation process, and as a result may be subject to capital controls. Maybe there are also caps on aggregate ELA (e.g. as a % of GGD) that apply on a per-country basis.

The ECB collateral rules that apply should be transparent and public; instead the ECB operates as one of the least transparent CBs in the developed world, e.g. there are also rules on ANFA-holdings (e.g. the new gov bonds held by the CBI following IBRC’s liquidation) which are similarly “not available to the public”.

@ Fiat

“The terms of the Cypriot bailout reported today seem exceptionally generous….without the haircuts… 2.5% with a ten year moratorium.
Will the best boy in the class get similar….and if so perhaps the idea of returning to bond markets at 4% + is not the best plan.”

Are u aware of the current terms?

Michael Hennigan wrote,

Geronimo refers to an interesting fact that is downplayed as it muddies the conventional narrative: almost half the sovereign cost of bailing Irish banks was in respect of a depositor bailout including foreign residents.

Anglo Irish Bank had deposits of over €50bn at end Sept 2008 and €10bn in bond debt.

Well said Michael. Thanks. BOH.

Geronimo wrote,

How does Mary (3 pensions) Hanafin do it with a straight face. Its beyond belief.

The thing is, I’d have no problem sitting down and enjoying a hour of listening to Mary talk in that context – because it appears that she does have a good brain, and is able to articulate herself well to the audience in question in the United States. I’m sure that they valued obtaining a perspective from an ex. government minister from Ireland.

Where things really do get dodgy, I think, where an of the ex. government ministers and Taoiseach are concerned . . . is when I can sense clearly by the way in which they are trying over hard, to win some point of debate . . . that it is just obvious that their thinking on something was inferior four or five years ago – and is still very inferior today.

With all due respect, I think, that is what hurts citizens the very most. Because on the one hand, we know that Ms. Hanafin is capable of delivering a very good hour length lecture to a university, which spans a range of different topics . . . and we all know instinctively, that Ms. Hanafin, if her judgement was unsure on an issue, that she would possess a lot of self-awareness of that . . . . and still, for the sake of being loyal to some stupid flag, or party, or persons etc, while knowing that she is so far off the mark, when it comes to Irish economics.

That is the most hurtful, for the citizens in Ireland, when they realize that the best in their public life, cannot come clean, or don’t want to. Simply put, it wouldn’t be at all as insulting, if we knew that former ministers were actually as simple, as they make out. They aren’t. There are far from it. So they must be something else, behind the false-ness, that we are not privy to. That hurts. BOH.

Papers from the Financial Stability Board a BIS committee.

Key attributes of Effective Resolution Regimes for Financial Institutions.
Some people might find the preamble to be enough.

Recovery and Resolution Planning: Making The Key Attributes Requirements Operational.
Consultative Document

Stress scenarios page 9 are of note.

@Bond Eoin Bond.
Current terms have changed so many times that I may be mistaken that we are paying around 3.5% for various elements of the bailout package. If this figure is too high then it would appear to reinforce my argument that paying 4%+ in the Markets would be a bit flahulach. Perhaps you could enlighten me.

I have been right more often about this crisis than I have been wrong.
You can trawl back over my posts if you like but to be honest that’s not a major thing for me.
I’m in my mid 30’s – 3 kids – with a real interest in how all this works out. I am not embarrassed to say it but I want a good world for my kids to grow up in. Simples.

As I see it there are changes taking place.
1: European democracy: The spirit of democracy and freedom is strong but the vessel meant to protect it – i.e. the EU is so rotten that it’s dead. But the spirit and yearning is so strong that in time it will overthrow the European Union and replace it with something better

2: Paul Ferguson’s points about money creation and destruction are the most valid on this forum. I am probably going to misrepresent Paul here (and I apologise) but it seems that money really is a means to allow people to engage in contracts with each other. Every loan is a contract and every loan enables other contracts. Fundamental to these loans and contracts is an assumption of common sense and good faith. By not lending money banks prevent the generation of new contracts between citizens. By doing this they stifle the economy. This is not an accident – this is deliberate. By controlling money you control the types of contracts people can enter into.

3: Ireland is fundamentally quite solid. It has a lower population now than it had in Napoleonic times. It will take an active effort to consign us to poverty but it is possible that our government is incompetent enough to achieve this. Ireland needs to play the game up to the point that momentum is favourable and then must join with other enslaved economies to default en masse and kill the sovereign bond monster that is destroying the free world

4: Banking in its current form is an enemy of progress. It needs reform. It has to be the people within banking who do this (are you listening Eoin Bond). Banking in itself is a noble and decent thing – a cornerstone of civilsation and progress but it was taken over by very very arrogant idiots with no social conscience and they will take everything down with them

That’s the end of my little rant. I am still interested in my pan-european political party

Excuse the overdramatic language of the previous post – I get carried away sometimes

Apologies in advance for off topic reply.


I was unfamiliar with the Chris Hedges speech on the moral consequences of the invasion of Iraq but I knew of David Rees of “Get Your War On” fame through one of his other projects (My new filing technique is unstoppable.). No one lost a job or went to prison or even suffered in any meaningful way at all for cheering on or conspiring to instigate the horror of the Iraq war.

You are absolutely right that we need something like “Get your Euro on” to document the ongoing absurdity/tragedy of the European component of the global financial crisis, the ECB has even helpfully produced some creepy cartoon work seed material. Unfortunately the European Union’s fragmented and multilingual nature does not lend itself to a common satire – there is not even a common narrative of the crisis to dissect.

It might be a good thread topic, the blog’s own Gavin Kostick has produced the most internationally appreciated satire on the absurd multiple self inflicted wounds of the Eurozone crisis so far.

Now read Bryan G’s piece again everyone.

@ Bryan G

‘the ECB operates as one of the least transparent CBs in the developed world’

Europe is far from united, and government of finance is not the same as government of people. As DOCM says, its senior hurling, that is to say, serious power issues.
My understanding is that the ECB is a network of central banks, rather than a single homogenous corporate entity. It has complex internal and external institutional relationships and its banking activities are extraordinarily dependent on trust.

There is formal electoral politics, and there is institutional politics. It’s an absolute swamp in governance terms, and Draghi has to speak out of several, sides of his corporate mouth. As Pierre Bourdieu would say, it is social magic par excellence.

In the U.S. uninsured depositors often take a hit when a bank fails. In 2009, failed IndyMac bank was wound up by the FDIC. Uninsured depositors lost 51% of their deposits. See “Total Unpaid Deposit Claims”

The hue in cry in Ireland for years was “Burn the Bondholders” and the retort was “but if we burn the bondholders the law requires us to “Drown the Depositors” (I think “drown” is more in line with burn than “destroy”). And, “depositors shouldn’t lose a penny, not their fault.” They were sacrosanct, but, of course, the taxpayer wasn’t.

Who were the uninsured depositors? Perhaps powerful politicians who voted for the guarantee? We all know who they were.

For the Irish politicians-teachers (are you paying attention Mary and Enda?). Repeat after me:

Uninsured means uninsured.


Ireland’s natural state is poverty. Prosperity occurs when Ireland and its union partners and/or allies act intelligently in concert. Our only hope is that the EU continues to thrive. The EZ has a less than 50% chance of surviving. It may end with a bang or die a slow lingering death.

Educate your children and widen their options by having them learn a foreign language. I could go into an anti Gaelic rant but I will spare you.

Mickey Hickey

Right on Mickey it was all the fault of the Irish language. I think that was also the cause of the Air France crash over the Atlantic two years ago. I know it caused that traffic crash I was in 10 years ago when an idiot drove right through a red light and T-boned my car.

Thanks Mickey for figuring it all out. We can all sign off now.

It will take a while to understand the new rules/lessons/applicability of events in Cyprus but a quick look at the Irish banking landscape would appear to show lots of red flags waving over PTSB HQ.

– They aren’t profitable and it isn’t at all clear how they’ll become so (losing “eye-watering” amounts on trackers according to the CEO)
– They lost 1bn last year, nearly half the amount the government injected in the 2011 recap
– They are rated in “junk” territory by the ratings agencies with a negative outlook, (for both deposits (Moodys – B1) and bonds (B3))
– The ELG expired last week
– A large portion of their assets are tied up as collateral for public (ECB) or private bank repo, so the assets backing the deposits are much smaller than those deposits.

They seem to be offering the highest interest rates in town, but the risk/reward for having over 100k in PTSB would seem highly questionable, to say the least.

Based on the current trajectory the need for a future recap seems a real possibility (though the current capital ratio is high at 18% so it may take a while).

If that happened who is going to pay? Is one of the two pillar banks going to end up taking over PTSB’s ECB & private repo and insured depositors, playing the role of BoC? Would there be any uninsured depositors left in PTSB to cover the insured amounts, or would the State borrow from the capital markets (if it has market access) or from the ESM (and in this case would it be allowed to borrow further given its debt/GDP ratio) to cover the insured amounts?

@Bryan G

Yes, PTSB is an awful mess. They managed to earn less than 3% on all assets last year. The Post Office would do better. But on your last point:
“Would there be any uninsured depositors left in PTSB to cover the insured amounts, or would the State borrow from the capital markets (if it has market access) or from the ESM (and in this case would it be allowed to borrow further given its debt/GDP ratio) to cover the insured amounts?”

That would be the State covering the uninsured depositors then.
It looks like we would be back to Square one, again, the bondholders having been garlanded to freedom.

Under such a scenario, the State would effectively be subsidising uninsured depositors, in order to continue subsidising tracker mortgages. The mess gets messier.

Joseph Ryan and Bryan G

One would hope that the Irish taxpayer is left out of the PTSB mess. But you never know.

I’m sure there are pots of money in PTSB that could be tapped. The pension funds of the executives perhaps. It is a matter of grabbing these funds before they exit the jurisdiction. But rest easy, the Irish Central Bank and the ECB are on the job. They will move with lightening speed and come up with a wise and fair solution …. Fat chance.

@Mickey Hickey

“Ireland’s natural state is poverty”

Over what time period have you run the numbers, Mickey ?

Re the Gaeilge why does it always have to be a zero sum game? Can’t kids be bilingual or trilingual ? Most people in countries like India speak at least 2 languages. Many speak three- the local language, Hindi and English . The Erse is just another way of looking at the world. And why not? We need more dúthracht.

@ Eureka
You have indeed misinterpreted Paul Ferguson. Paul argues that all money should be CB moey and bank balance sheets should be maturity matched. Under the current system, you want a mortgage the bank manager sets you up as a 20 year asset and creates a money liability, by money meaning instantly transferrable for goods, services or other assets.

Under Paul’s proposal you would need to find a rich aunt who had accumulated her own CB money and is prepared to lend it to you for 20 years. Paul’s proposal would for sure prevent any future liquidity crises just as grounding airplanes would prevent any future air disasters.


the Danish mortgage model, one of the most successful and long running in the world, is essentially a maturity matched system.

The FT reports that Vladimir Putin, the Russian president, has moved to inject some moral fiber into the country’s top-level bureaucrats and state employees by giving them a three-month deadline to close their foreign bank accounts and divest themselves of offshore assets – or face the sack.

According to a new presidential decree, signed on Tuesday, thousands of Russian civil servants have until July 1 to file declarations of income and assets, which will be subject to stringent checks. No one would be above the law, said Sergei Ivanov, Mr Putin’s chief of staff, and anyone caught still in possession of the prohibited assets would be instantly dismissed.

Not only have neo-commies a taste for tax havens but President Hollande’s foie gras socialist responsible for countering tax evasion in his government on Tuesday admitted that he has €600k in a Singapore account that came via Switzerland.

Who can one trust?

Comparisons between Iceland and other small economies have limited relevance. It has the fish and geothermal resources to maintain a developed country standard of living on its own steam. Neither Ireland or Cyprus have. As a non-EU member, it has ignored agreed fishing quotas without triggering serious penalties.

Its experience does show that a small country needs allies as it had in its Nordic neighbours plus the IMF as a safety net.

Not all cross-border capital flows were for mere speculation in the ‘good times’ and the huge plunge since 2008 coupled with high household debt in some peripheral countries, cannot be fully offset by the ECB or unexpected gifts from creditor countries.

Italy is a prime example of a country that outsiders cannot save absent a government that cannot govern — a government that governs inevitably has to take some decisions that would annoy voters.

Political leaders have shown often that they have not been up to the task of responding to the crisis. They are not alone and there is a dearth of new ideas in response to a changing global economic situation.

Australia which provides Ireland with its Google advertising, has announced new measures forcing big companies to provide transparency on its annual tax arrangements. its likely to be followed elsewhere and will put pressure on companies such as Apple as to how much revenues it’s diverting to Ireland.

Swiss and Irish policymakers foolishly thought the exponential growth of tax avoidance would not trigger a backlash.

@ Michael

“Australia which provides Ireland with its Google advertising, has announced new measures forcing big companies to provide transparency on its annual tax arrangements”

I have been reading Private Eye for a while now. I will believe a crackdown on tax evasion when I see it.


A thoughtful post but I would not share your confidence about European democracy. EU wide concerns appear to have been subjugated by national concerns of the major powers, in ways that in past times led to violent conflict.

While not familiar with Paul Ferguson’s solutions, it seems to me that he is making the same point in relation to deleveraging, or in particular bank deleveraging to pay off ELA, that Karl Whelan made.
The money is being taken back and burned. Or at least burned as far as Ireland is concerned.

I could not share Mickey Hickey’s doom laden view that
“Ireland’s natural state is poverty” or that the Irish language is a contributory cause of our present predicament or that dumping the Irish language might help in revival.
One of the old seanfhocail, if implemented, would help enormously in revival;
‘ni neart go cur le cheile’

Joe Lee dealt very well with the language issue in his Ireland 1912-85. If my memory is correct, he saw our adoption of the English vernacular as a weakness, in that it obstructed the learning of language skills which other smaller countries like Denmark and Finland were obliged to acquire painfully. They emerged the stronger for it.

The politicisation of Gaeilge, and the ideologically driven, often hierarchy which built up around it can’t really be understood without a grasp of the Pale and planter culture more generally. Gaelic Ireland was a reaction to Britain-in-Ireland, both pretty much eroded by US-style consumer culture.

While there were grants etc for Geltacht areas, the rising nationalist bourgeoisie preferred to roosted in select spots like Taylors Hill and Dublin’s leafy southern suburbs. Meanwhile the ‘idealised Gaels’ of rural Ireland were taking the boat to Sasana.

Our language is not, and never was the problem. It is, and was, our politics.

@ Paul Quigley

Have you ever come across “Wars of Words” by Tony Crowley?

The history of Irish is tied up with the history of colonisation. And the fact it was English colonisation with its zero sum language game. Centuries of trauma post 1690.

The contempt and the passion for the language go very deep. 50 years of shopping centres and cars never wiped out the historical memories.
Who was it that said culture eats strategy for breakfast?

I was reading a magazine interview with a Hopi thinker from Arizona who said that native Americans get far more respect in Europe than at home. It is similar with the Gaeilge. It is no different functionally to any other lingo.

When Mary Hanafin blurted out on Marian Finucane’s program on RTE the other day that the 2008 guarantee “bought us time” she may have let the cat out of the bag.

That statement is very revealing and deserves further investigation. Bought us time to do what?

It certainly didn’t do the Irish taxpayer any good, far from it.

One interpretation is that it gave time to rich Irish politicians and their richer pals to set up offshore bank accounts and usher their uninsured deposits out of the country?

What else could it have meant? Perhaps they are not as clueless as I once thought.

@Joseph Ryan, Geronimo

I think uninsured depositors in PTSB are in a *very* weak position, standing as they are behind ECB repo, private repo, DGS-insured and ELG-insured depositors. Uninsured depositors in the pillar bank into which “good PTSB” might be merged are also vulnerable.

If the IMF “stagnant growth” scenario occurs, Ireland’s debt trajectory will be 150% debt/GDP, and thus borrowing to recap PTSB may not be allowed; instead the recap could well be creditor-funded. Even if back in the markets OMT will likely be used to keep a lid on the interest rate in the case of stagnant growth, so the final decision will rest with the Troika.

There is a possibility that with PTSB there could be very few uninsured depositors, so that even with a creditor-funded recap the numbers just don’t add up (since the interbank deposits & senior bonds are either government-guaranteed or asset-backed). In this case I think a way for the Irish government to borrow to avoid losses for insured depositors would likely be found somehow, possibly by taking it off balance sheet (as is done for ESM contributions). Or maybe there could be a deposit levy of some sort imposed, and Olli Rehn and his team could be wheeled out to explain how this is in no way shape or form to be confused with backtracking on the deposit guarantee.

It’s clear that PTSB is now a big problem; in IMF-speak there are “acute challenges that need to be addressed to assure its viability”. Why would anyone choose to have uninsured deposits there?


That is v interesting on Danish mortgages. But I presume that their banking model does cater for significant maturity mismatch. It seems to me that the ability of society to borrow short and lend long, which banking intermediation facilitates, has to be a good thing.

@Bryan G

One gets the feeling that, at this point, Ireland would be better off pre-empting a radical and painful banking solution, rather than wait for the inevitable collapse, when only ‘insured’ depositors or the State will remain to bear the cost.
Personally I would do it now rather than wait and would ‘tax’, residents who have already moved deposits abroad with whatever % hit resident depositor suffered.

I heard the brief comment on the IMF ‘stagnant growth’ scenario on radio this evening, Debt GDP to 150% by 2020. It is a very disturbing scenario.

@ Joseph Ryan
Democracy was born in Europe and has been killed and reborn countless times on this continent. The people have it in their blood.
Financialism is anti-democratic. It will be taken on.

We have a few very interesting months ahead. If N Korea kicks off the Israelis will use it to pressure the US into attacking Iran. Then we’ll have some real interesting additional problems to add to the mix.

@ Brian Woods II

I don’t think we’re ever going to agree on whether there would be enough money available for credit if banks were restricted to lending existing money only (and stopped destroying loan repayments) but I will note that there seem to be more rich aunties out there than you think.

Currently in Ireland the (M2 – M1) money supply is €85b, the (M3 – M2) money supply is €15b making €100b in savings accounts in some form or another. The M1 money supply is €91b. Hence we already seem to be saving more money than the economy uses for daily transactions.

P.S. My proposal most likely wouldn’t prevent future any liquidity crises.

Re: Ireland’s natural state is poverty.

I had access to ledgers that contained in fine detail what people bought weekly from the turn of the century (19th).

It was largely composed of Flour,Tea, Sugar, Salt, plug tobacco which later became Woodbines. The range of products and the amounts painted a bleak picture. I could call up the Great famine and the echo famines that lasted into the 1870s’.

We should all be down on our knees thanking our higher power for delivering us into the generous arms of the EU.

Language alone is not the problem it’s the whole convoluted culture that still hobbles us to the present day.

A few weeks ago a lovely lady, daughter of a well liked politician was elected to the Dail. I remember well when I was around ten years of age attending political rallies where we all sung a tailor made song to the tune of I’ll Take You Home Again Kathleen for a lovely daughter of a close relative and popular politician who had passed on. She was elected with a healthy majority.

What has changed in Ireland I ask myself. Did any political party decide that the country needs TDs’ with specific skills. If they did why were none in that race. ‘Tis da culshur dats doin us in.

@ Mickey

I have just started reading “the West of Ireland – new perspectives on the 19th century”

And it was verra poor.

“The expertise, investment and entrepreneurship required to successfully compete in the linen market demanded a protracted investment over a number of years involving a degree of technical sophistication which did not exist in rural Galway”

” Nolan and Taafe noted in 1823 that Galway manufacturers do not spin their flax enough for this is the thing that has kept the town of Tuam backward for the last 20 years”

Do you think that sort of ignorance and technical ineptitude is eternal destiny ?

Surely the education system can be harnessed for some sustainable political economy goals.

I really think Ireland has more potential than large swathes of the north of England.

There is no doubt in my mind but that the Irish can compete with the best on a level playing field. We got that when we joined the EU. With EU aid we were prodded to prosper mightily until we self destructed in 2008.

Competition world wide is ferocious and we are forced to look at countries as orchestras who are no better than their worst player. The whole system has to be operating with the precision of a Swiss (now Japanese) watch to compete effectively. In Ireland we have a culture that rewards mushiness in politics and big business. Back in the day the clan stuck together for the betterment of the clan. We have not progressed from that era, we send a clan representative to Dublin to bring back what the clan is due. Or in the case of a famous independent from South Kerry more than was due.

The country as a whole is seen as something adorned with harps, shamrocks, green bunting, the tricolour, hand over the heart patriotism, Maitir Machree and so on. Countries that are succeeding have a laser sharp focus on a mission not a yearning for an idealised paradise lost. Korea, Germany, Taiwan, Singapore are what we should be emulating not France or Italy with their glorious pasts. Discard what hinders us and grab on tight to progress.

Irish people have prospered around the world for hundreds of years. Given competent government there is no reason we cannot do it at home.

By the way I mentioned the daughter of a close relative being elected it was actually his wife. Just one example of how sentiment triumphs in Ireland.


yes, there is some mismatch in parts of the system. But the mortgage model allows a very large “systemic” element of it to be dealt with on day1. So mismatch is thereafter a deliberate policy outside of the normal lending practice, and therefore hopefully less of a problem and one easier to identify. It seems to work, with only small, non systemic banks getting into trouble there so far.

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