Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Tuesday, March 26, 2013
Greece ( which was unique ) Fin Min Stournaras says Cyprus bail in is unique...... Of Course he's correct - what happens in Spain and / or Italy next will be far worse.....
SocGen's ultra-bearish analyst Albert Edwards has his take on Europe post-Cyprus.
His prediction: Yes Europe is going to break up and yes, Cyprus is a worrisome template.
The Troika have managed to exponentially increase concerns on how safe retail deposits are in the eurozone. It matters not that the final Cypriot bailout plan did not touch smaller savers unlike the original proposal of a 6¾% tax (haircut) for ALL deposits under €100,000 in ALL banks (including foreign bank subsidiaries).
The fact that this plan was originally sanctioned, despite deposit insurance, will have shaken small saver confidence to the bone. It certainly has shaken my confidence. I know from first-hand experience the extreme difficulty for a European citizen to open an account in another European country – it is nigh on impossible for the man in the street. If ‘Joe Sixpack’ in Spain or Italy or wherever is thinking the Troika are circling their country in the future, it is entirely rational, as Mervyn King suggests, to panic! (The Bank of England Governor, Mervyn King once said it was not rational to start a bank run but rational to participate in one once it has started.) But euro-Joe Sixpack is left with the choice of stuffing his money under the mattress or buying ‘safe’ financial assets (maybe overseas mutual funds or gold?), or indeed spending the money on goods and services.
Meanwhile, in a story posted by Deutsche Bank Bernhard Speyer raises similar points:
The ramifications of this decision by the European institutions are no less serious, as it has undermined the agreement to create a banking union that they had just lavished themselves with praise for achieving. For by creating the impression that deposits are no longer safe as they strived to solve the financial problems of the Cypriot state, they have revived the vicious circle of fiscal and financial instability – the so-called “sovereign-bank nexus” – that the banking union is specifically designed to eradicate.
As became evident subsequently, it would have been possible to devise a bailout package that excluded small savers the first time around. Back when they rescheduled Greek government bonds the EMU states had already committed the “original sin” of stripping the aura of safety from an asset class previously regarded as secure – the negative repercussions of this decision are still apparent, although the policy was reversed subsequently. It is puzzling that the same mistake has been repeated with deposits that are insured.
Malta and Luxembourg are not Cyprus, say Malta and Luxembourg
Malta and Luxembourg have both denied claims that they could suffer the same fate as Cyprus as they both operate outsized banking sectors.
Malta's banking sector is eight times its GDP -- even more that Cyprus's is was. But the governor of the Central Bank of Malta, Josef Bonnici, insists that it's in much better shape.
Speaking to Reuters, Bonnini said Malta's banks weren't carrying the foreign sovereign debt that helped cause Cyprus's crisis:
The problems facing Cypriot banks include losses made on their holdings of Greek bonds, whereas Maltese domestic banks have limited exposure to securities issued by the (euro zone bailout) programme countries.
Luxembourg's banking sector is about 20 times its annual GDP, and is understandably worried by recent comments from Brussels. Its government said it is:
concerned about recent statements and declarations" on the alleged risks of outsized financial sectors.
Our Europe editor, Ian Traynor, wrote on Monday evening that Cyprus's fate has alarmed Malta and Luxembourg:
Malta's finance minister sat next to his German and Cypriot counterparts at the first Cyprus bailout meeting in Brussels 10 days ago and was extremely chastened by what he witnessed.
After experiencing Wolfgang Schäuble, the German finance minister, up close, he wrote an article in the Malta Times saying God help his country if it encounters similar problems in the eurozone.
Then there is Luxembourg, which along with Austria, is the eurozone's biggest champion of banking secrecy.
The central bank of Cyprus has confirmed in the last few minutes that the draft capital controls are ready.
A spokesperson for the bank said it hopes to brief the public on the situation by the end of the day, and repeated the line that they will be kept flexible, if possible.
Banks to reopen tomorrow, then?....
Protests planned in Nicosia tonight
Protests are mounting in Cyprus as the full extent of Monday's EU-IMF bailout sinks in.
The communist Akel party, in collaboration with a group of private citizens, is planning a mass demonstration at 5.30pm local time, or 3.30 GMT, outside the offices of the European commission.
They will protest against policies that many fear have put the tiny nation state on the Greek path of economic self-destruction.
From Nicosia, my colleague Helena Smith reports:
"There is a lot of fury and growing fury," said Giorgos Doulouka, the party's spokesman. "We all know what awaits us, that these polices are going to lead to a huge decrease in the GDP of our country, recession and cuts in pensions and benefits because the government won't be able to meet budget targets."
The protest, which is expected to draw thousands, will move onto the presidential palace. Anger has been underscored by panic among employees over what awaits the Bank of Cyprus, following the Greek Cypriot finance minister's announcement Tuesday that the lender will undergo restructuring and internal recapitalisation.
Helena has also just spoken to the former central bank governorAfxendis Afxendiou who says he thinks the banks, closed for the past 11 days, will re-open tomorrow.
Bank of Cyprus CEO fired - reports
Back in Nicosia, it appears that the chief executive of the Bank of Cyprus (BoC) has been dramatically fired.
Local media are reporting that Yiannis Kypri was ousted by the country's central bank, following the appointment of a special administrator to run BoC.
Reuters's Nicosia bureau has the details:
Cyprus's central bank has fired the chief executive officer of the Bank of Cyprus, an official at the island's largest commercial lender said on Wednesday.It follows the appointment of a special administrator to run the bank, which was saved from collapse this week under a painful European Union bailout for Cyprus.
The bank's chairman, Andreas Artemis, submitted his resignation on Tuesday.An official at the bank, who declined to be named, said local media reports that CEO Yiannis Kypri had been removed from the post were "valid".
The source was unable to confirm reports that the central bank had demanded the resignation of the entire board.
The reaction of BoC's staff will be interesting. Yesterday, hundreds of employees held a demonstration at the bank's HQ and were clearly furious with the actions of the central bank.
Capital controls: further reading
The government of Cyprus said yesterday that capital controls could be lifted in a few weeks. But in the past, these restrictions have lasted much longer.
Cyprus is on the verge of an unprecedented financial experiment: imposing controls on money transfers in an economy that doesn’t have its own currency....
“Thanks to political mismanagement, we now have a first: capital controls in the euro zone,” said Nicolas Veron, a senior fellow at Bruegel in Brussels and a visiting fellow at the Peterson Institute for International Economics inWashington.
“How long is temporary? It could turn out like Iceland, extending to many years.”
To anyone paying attention, reality is now painfully obvious. These bankrupt, insolvent governments have just about run out of fingers to plug the dikes. And history shows that, once this happens, governments fall back on a very limited playbook:
Direct confiscation
As Cyprus showed us, bankrupt governments are quite happy to plunder people’s bank accounts, especially if it’s a wealthy minority.
Aside from bank levies, though, this also includes things like seizing retirement accounts (Argentina), increases in civil asset forfeiture (United States), and gold criminalization.
Taxes
Just another form of confiscation, taxation plunders the hard work and talent of the citizenry. But thanks to decades of brainwashing, it’s more socially acceptable. We’ve come to regard taxes as a ‘necessary evil,’ not realizing that the country existed for decades, even centuries, without an income tax.
Yet when bankrupt governments get desperate enough, they begin imposing new taxes… primarily WEALTH taxes (Argentina) or windfall profits taxes (United States in the 1970s).
Inflation
This is indirect confiscation– the slow, gradual plundering of people’s savings. Again, governments have been quite successful at inculcating a belief that inflation is also a necessary evil. They’re also adept at fooling people with phony inflation statistics.
Capital Controls
Governments can, do, and will restrict the free-flow of capital across borders. They’ll prevent you from moving your own money to a safer jurisdiction, forcing you to keep your hard earned savings at home where it can be plundered and devalued.
We’re seeing this everywhere in the developed world… from withdrawal limits in Europe to cash-sniffing dogs at border checkpoints. And it certainly doesn’t help when everyone from the IMF to Nobel laureate Paul Krugman argue in favor of Capital Controls.
Wage and Price controls
When even the lowest common denominator in society realizes that prices are getting higher, governments step in and ‘fix’ things by imposing price controls.
Occasionally this also includes wage controls… though wage increases tend to be vastly outpaced by price increases.
Of course, as any basic economics textbook can illustrate, price controls never work and typically lead to shortages and massive misallocations.
Wage and Price controls– on STEROIDS
When the first round of price controls don’t work, the next step is to impose severe penalties for not abiding by the terms.
In the days of Diocletian’s Edict on Prices in the 4th century AD, any Roman caught violating the price controls was put to death.
In post-revolutionary France, shopkeepers who violated the “Law of Maximum” were fleeced of their private property… and a national spy system was put into place to enforce the measures.
Increased regulation
Despite being completely broke, governments will dramatically expand their ranks in a last desperate gasp to envelop the problem in sheer size.
In the early 1920s, for example, the number of bureaucratic officials in the Weimar Republic increased 242%, even though the country was flat broke from its Great War reparation payments and hyperinflation episode.
The increase in both regulations and government officials criminalizes and/or controls almost every aspect of our existence… from what we can/cannot put in our bodies to how we are allowed to raise our own children.
War and National Emergency
When all else fails, just invade another country. Pick a fight. Keep people distracted by work them into a frenzy over men in caves… or some completely irrelevant island.
While France's Hollande and Spain's Rajoy are double-teaming the 'unique, exceptional' nature of Cyprus, the non-template nature of the 'deal', the need for Europe-wide guarantees, and that the ESM should be used to recap banks and not depositors, none other than Dutch FinMin Dijsselbloem is at it again as he admits what many have suspected:
*DIJSSELBLOEM SAYS LEVY ON WEALTH IS DEFENDABLE IN PRINCIPLE
and, as if responding to the desperate French and Spanish leaders:
*DIJSSELBLOEM SAYS DEPOSIT GUARANTEE SYSTEMS ARE NATIONAL
Subject: All Banks To Impose "Capital Controls" within Weeks.
Things are happening as predicted. A whole lot of talk coming out of Europe that the Cyprus issue is under control and yet ALL CYPRUS BANKS ARE STILL CLOSED!
Cyprus making "Superhuman" Effort to Reopen Banks by Thursday
I'm sorry but the "cat is out of the bag" when it comes to FRACTIONAL RESERVE BANKING and it will NEVER crawl back in the bag. Yes, the Cyprus banks will open but depositors will not be able to take all their money out...EVER!
The name of the game will be Capital Controls...meaning that depositors will only be allowed to take out little bits of their money for as long as the system is under stress.
Which will be FOREVER!
The same will happen in Greece, Spain and Italy in the coming weeks with the same disastrous consequences. This will topple the $100 Trillion European Derivative Complex...
THEN GET READY USA!
The US media and market riggers are doing all they can to DUMB DOWN the Sheeple but they are starting to look more and more disingenuous. How many times can they say "everything is fine here" and have people believe them?
Stay alert and stay OUT of the system. It won't be long now.
On a day of conflicting views from European officials regarding how the eurozone will address bailouts in the future, Finance Minister Yannis Stournaras insisted on Tuesday that there were no plans to bail in depositors in other countries, as was the case in Cyprus.
“The eurozone is not insecure,” Stournaras said in response to a journalist’s question. “In fact, it was stated clearly at the Eurogroup that the solution chosen applies to Cyprus and not any other country.”
Stournaras’s comment came in the wake of Eurogroup chief Jeroen Dijsselbloem suggesting in an interview on Monday that uninsured depositors, as well as shareholders and bondholders, be asked to pay for recapitalizing failed banks, rather than the money being provided by the troika.
While Stournaras suggested this template would not be used elsewhere, the European Commission said it was a “possibility.”
“In the Commission’s proposal, which is under discussion, it is not excluded that deposits over 100,000 euros could be instruments eligible for bail-in,” said spokesperson Chantal Hughes.
Earlier, European Central Bank executive board member Benoit Coeure said Dijsselbloem was wrong to say bail-ins could be used again.
“Dijsselbloem was wrong to say what he said,” Coeure said. “The experience of Cyprus isn’t a model for the rest of the eurozone because the situation there reached a level that doesn’t exist elsewhere.”
Stournaras briefed President Karolos Papoulias and several opposition leaders yesterday about the Cypriot bailout deal. “I think the most viable option was chosen and it avoided a catastrophic euro exit,” he told Papoulias. “It may be painful but the next choice was even worse.”
“ Am I jumping the gun, Baldrick, or are the words “I have a cunning plan” marching with ill-deserved confidence in the direction of this conversation?” Edmund Blackadder
Jeroen Dijsselbloem has been pilloried for his remarks following the conclusion of a deal with Cyprus. But is the assault just self-interested finance apologists (like, presumably, me) appalled at having their snouts removed from the public trough? Or are digs about his qualifications proving justified?
First up – let’s be clear. The EU is pretty emphatic about what the future of bailouts looks like: No more blank cheques, the ESM will not become a TARP, and uninsured depositors are in the firing line, as are senior bondholders; taxpayers are not.In this both Mr Dijsselbloem and the rest of the European authorities are in agreement.
If the bank can’t do it, then we’ll talk to the shareholders and the bondholders. We’ll ask them to contribute in recapitalising the bank. And if necessary the uninsured deposit holders: “What can you do in order to save your own banks?” In other words, taking away the risk from the financial sector and taking it onto the public shoulders is not the right approach. If we want to have a healthy, sound financial sector, the only way is to say: “Look, there where you take on the risks, you must deal with them. And if you can’t deal with them, you shouldn’t have taken them on and the consequence may be that it’s end of story.”
Aside from the incitement to panic added to the end, there’s nothing new in the substance – the EU is clearly moving to bailins, as it should with a banking sector this vast. The EU Working Paper linked above is from June last year:
by removing the implicit certainty of a publicly-funded bailout for institutions, the option of resolution should encourage uninsured creditors to better assess the risk associated with their investments.
We’ve had a steady stream of denials that Cyprus is a template (a word which, incidentally, i can’t see either the FT using at all, or Reuters implying he used). We’ve had roughly nothing to contradict the principle that uninsured depositors are in the firing line. Pro tip: when someone says “insured depositors will be protected” they mean “uninsured depositors will not”. And there’s nothing new here – David Keohane has more detail, along with the far-from-trivial detail that this masterplan is part of a new regime that’s due to come in in 2018.
So far, so fine and dandy. There’s plenty to like about this in principle – it’s consistent, it’s transparent, it doesn’t put taxpayers on the hook for openended sums, and it’s progressive – things that hurt only people with more than €100,000 tend to be. In this case, the Eurogroup is being assaulted for doing no more than telling the truth.
However, there are two important problems here 1) depositors over €100,000 control enough money to overturn the European economy if they stampede; 2) there’s – to a fairly fine level of precision – zero evidence that the people in charge know what they’re doing. In short, the last thing the Eurozone needs right now is uninsured depositors thinking hard about the prudence of their investments.
Here’s two really interesting* tables
(it’s from Annex 3 & 2 here – 2007 data, but hard to imagine there’s been a fundamental change in the data, Ireland and Greece aside). So while the vast majority of individual depositors are covered, a very very substantial chunk of the European money supply isn’t. Capital movements accounting for a small fraction of this amount are a major cause of the severity of the peripheral slowdown. You cannot dick around with money on this scale unless you know what you’re doing. To suggest that the bailin legislation is a problem for the periphery and uninsured depositors is to say that the fire is downstairs. The FDIC is the chosen comparison for the optimists. But the FDIC works best with small banks (of which Europe has comparatively few); when Wachovia, Citi and Bank Of America ran into trouble, the FDIC was not left to do its job. And the US banking sector assets are around 80% of GDP, vs around 3x that for the Eurozone.
To raise the issue of depositor bailins now – five years ahead of schedule and with nothing in the way of a resolution regime would show impressive hubris had the Cyprus operation gone well. It didn’t. It was a complete disaster. If I had been in charge of European policy for the last week, I’d like to think I’d be suicidally depressed. I would be stuck in bed with a bottle of vodka, refusing to emerge unless finally coaxed out by someone willing to lie that the Cypriots would be willing to forgive me. From undermining the EUR100l deposit guarantee, to wiping out and freezing business working capital, to hammering businesses ahead of the April VAT payment, the execution alone is crammed with unforced errors A politically stupid plan, rejected by an equally culpable Cypriot parliament, was replaced with a worse one has inflicted massive, irretrievable destruction on the economy of Cyprus. There’s a great deal to be said for commercial experience and gradual rollout. If Coca-Cola had tested a new product that killed 10% of the focus group, it’s reasonable to assume that they’d hesitate with the global rollout of Cyprus Cola. Instead, Mr Dijsselbloem is clapping the dust off his hands, announcing that he thinks this all went rather well, and looking to have another crack somewhere else. And it appears he’s decided to start with further scaring already skittish large depositors.
source: Nomura
The European banking system cannot be remade piecemeal. We either hold things together until the resolution regime is in place or introduce a Roosevelt-style emergency Banks Act and remake the system. A major shift in uninsured deposits risks precipitating a crisis that hurts everyone – insured or not, periphery or core – or even outside the euro. Given that Europe’s banking experts looked at both Laiki and Bank of Cyprus and found they were good , yet we’re now hearing the Cypriot finance minister talk of 80% haircuts on Laiki, a little more humility – and even an admission that things went badly – would be far more reassuring than the current confidence.
In short, I’m howling because we have rank amateurs playing a high-stakes game without understanding either the rules or what’s at stake. Maybe our masters have plans for a controlled detonation of a massively complex and unstable system. But I see damn all evidence of that. Instead we appear to have a group of underqualified provincial politicians who, having been badly mauled by a housecat are looking to pick a fight with an alligator. (/rant)
SocGen's ultra-bearish analyst Albert Edwards has his take on Europe post-Cyprus.
Submitted by Tyler Durden on 03/26/2013 15:55 -0400
Greece's Finance Minister Yannis Stournaras (c) makes statements to reporters as he leaves the Presidential palace in Athens on Tuesday.
(it’s from Annex 3 & 2 here – 2007 data, but hard to imagine there’s been a fundamental change in the data, Ireland and Greece aside). So while the vast majority of individual depositors are covered, a very very substantial chunk of the European money supply isn’t. Capital movements accounting for a small fraction of this amount are a major cause of the severity of the peripheral slowdown. You cannot dick around with money on this scale unless you know what you’re doing. To suggest that the bailin legislation is a problem for the periphery and uninsured depositors is to say that the fire is downstairs. The FDIC is the chosen comparison for the optimists. But the FDIC works best with small banks (of which Europe has comparatively few); when Wachovia, Citi and Bank Of America ran into trouble, the FDIC was not left to do its job. And the US banking sector assets are around 80% of GDP, vs around 3x that for the Eurozone.To raise the issue of depositor bailins now – five years ahead of schedule and with nothing in the way of a resolution regime would show impressive hubris had the Cyprus operation gone well. It didn’t. It was a complete disaster. If I had been in charge of European policy for the last week, I’d like to think I’d be suicidally depressed. I would be stuck in bed with a bottle of vodka, refusing to emerge unless finally coaxed out by someone willing to lie that the Cypriots would be willing to forgive me. From undermining the EUR100l deposit guarantee, to wiping out and freezing business working capital, to hammering businesses ahead of the April VAT payment, the execution alone is crammed with unforced errors A politically stupid plan, rejected by an equally culpable Cypriot parliament, was replaced with a worse one has inflicted massive, irretrievable destruction on the economy of Cyprus. There’s a great deal to be said for commercial experience and gradual rollout. If Coca-Cola had tested a new product that killed 10% of the focus group, it’s reasonable to assume that they’d hesitate with the global rollout of Cyprus Cola. Instead, Mr Dijsselbloem is clapping the dust off his hands, announcing that he thinks this all went rather well, and looking to have another crack somewhere else. And it appears he’s decided to start with further scaring already skittish large depositors.
source: NomuraThe European banking system cannot be remade piecemeal. We either hold things together until the resolution regime is in place or introduce a Roosevelt-style emergency Banks Act and remake the system. A major shift in uninsured deposits risks precipitating a crisis that hurts everyone – insured or not, periphery or core – or even outside the euro. Given that Europe’s banking experts looked at both Laiki and Bank of Cyprus and found they were good , yet we’re now hearing the Cypriot finance minister talk of 80% haircuts on Laiki, a little more humility – and even an admission that things went badly – would be far more reassuring than the current confidence.In short, I’m howling because we have rank amateurs playing a high-stakes game without understanding either the rules or what’s at stake. Maybe our masters have plans for a controlled detonation of a massively complex and unstable system. But I see damn all evidence of that. Instead we appear to have a group of underqualified provincial politicians who, having been badly mauled by a housecat are looking to pick a fight with an alligator. (/rant)Many thanks to: @goodrichwatts, @katie_martin_fx, @lorcanRK, @toby_n and@harveyrobinson1 for their help with this post. and the Cyprus presentation is by @alexapostolides.
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