Co-organizer John Cotter and I are pleased to announce a superb line-up of speakers for the FMC2 half-day conference on bank resolutions mechanisms on Thursday, May 23rd at the Irish Institute of Bankers. To sign up for attendance at the conference, please contact Irene.ward@ucd.ie. Admission is free.
A genuine question, to which many reasonable answers are no doubt possible:
If this is the cost of leaving the Euro, then what is the opportunity cost of Cyprus leaving the Euro now?
(I mean the opportunity cost to Cyprus, not the rest of us, which is the only thing that should concern Cypriots in a union where it is every nation for itself.)
The Eurogroup statement following last night’s meeting on Cyprus can be read here.
Laiki bank is going to put into resolution with shareholders, bondholders and uninsured depositors taking the hit. The losses for depositors will be determined over the coming weeks but could be up to 40%.
Insured deposits of less than €100,000 will be moved to the Bank of Cyprus. Bank of Cyprus will be recapitalised via a debt-for-equity swap with bondholders and uninsured depositors. Junior bonds will be cut.
The official loans to be provided remain at €10 billion though no contribution from the IMF is currently in place. Some financial assistance from Russia is expected. Capital controls will be implemented.
This agreement does not require a vote in the Cypriot parliament and, although not confirmed, it is likely that the amount to be raised from the banking measures is greater than €5.8 billion. All insured deposits of less than €100,000 will be protected.
So how does Plan B compare to Plan A?
Colm McCarthy has a terrific piece in today’s Sunday Independent.
To his comments about money laundering hardly being something confined to Cyprus, I would add the following link.
It seems that we still don’t know how this crisis is going to end. But here is one big dilemma that I see. Implicit in Colm’s article is a recognition that a meaningful banking union is a pre-requisite for a sustainable EMU. That means common supervision, a centrally-funded deposit insurance system, and a common, tax-payer-friendly, and (where necessary) jointly funded resolution system. The core reference on banking union remains this piece by Pisani-Ferry, Sapir and Véron. This past week’s events have clearly reinforced the case for such a banking union, which necessarily involves some element of fiscal union. Without it, EMU is a dangerous place to be.
And here is the dilemma (aside from the fact that it is being made increasingly clear that the Germans are never going to be convinced that such a system would be one involving mutual insurance, rather than one-way transfers, and that the idea of a meaningful banking union may therefore be dead in the water in any event). Do the rest of us want to get even more deeply involved with a Eurozone whose decision makers are as incompetent as this lot? And do those of us who live in small countries really want to get more deeply involved in a club in which big, powerful countries and small, weak countries are not treated as equal members?
Update: according to the FT, German banks (among others) are going after the Russian business that has up to now been located in Cyprus.
This interview with Athanasios Orphanides will ring a few bells in Dublin. I remember in the autumn of 2010, when the ECB in a similar fashion threatened to pull the plug on the Irish banking system, thinking that this was not a credible threat, since such action would de facto mean expelling Ireland from the Eurozone. Would an unelected bunch of central bankers really be willing to do something so political?
I can understand why Irish policymakers were not willing to test this logic at the time, even though I was very angry with them for giving in to ECB pressure not to burn the Irish banking system’s creditors, and still think they shouldn’t have done so.
One thing seems certain however. The ECB cannot have it both ways. It cannot simultaneously threaten to expel a member state from the Eurozone, and also expect us to believe that it will do “whatever it takes” to save the euro.
What investors (and, to be honest, I) have forgotten is that Draghi qualified his pledge: the ECB would do whatever it takes “within its mandate”. It isn’t clear that investors will continue to believe that “it will be enough”.