Quotulatiousness

July 6, 2013

Ireland’s oil and gas bonanza for the oil companies

Filed under: Europe, Government, Law — Tags: , , , , , — Nicholas @ 09:49

Ireland is thought to have substantial offshore reserves of oil and natural gas that are likely to be profitable with current technology, but due to a legislative change dating back to the 1980s, the Irish government may not get much benefit:

In a now legendary all-night sitting on September 29th, 2008 the Irish government agreed to guarantee all bank debts. O’Toole calls this the “most disastrous decision that was ever made by an Irish government”. At least two generations of taxpayers will pay off these debts. O’Toole makes an excellent job of charting the Irish path to disaster in his book Ship of Fools, in which he calls the accounts of Anglo Irish Bank the “most inventive work of Irish fiction since Ulysses”.

The oil off the Irish coast could be the way out of this misery. The oil could be the hope. If the former energy minister Ray Burke hadn’t rewritten the relevant laws as though the oil industry itself held the pen. And if Bertie Ahern hadn’t made an already bad deal for the Irish people even worse.

Burke was energy minister in 1987, when it was decided to change the provisions for oil and grass drilling licence allocation. Until then the state owned 50 per cent of all oil and gas found in Irish waters. In addition, companies had to pay royalties of between 8 and 16 per cent as well as 50 per cent tax. (1, see notes below)

The new rule gave companies 100 per cent of their find and abolished licence fees. In 1992 Bertie Ahern, then finance minister and later prime minister from 1998 to 2008, cut the tax for oil companies to 25 per cent — a provision that remains to this day. (2)

[. . .]

The reason this political inheritance is causing such animated discussion now is because of huge oil and gas reserves believed to surround the island. The company Providence estimates the volume of oil it discovered in the Barryroe field, south of Cork, at over 1.7 billion barrels, of which at least 270 million can be pumped. Further test drillings in Irish waters have been similarly promising.

At the moment a barrel of oil costs, depending on grade, between $90 and $100, meaning there could be oil worth many billions of euro in the Irish sea bed. (3) Even the oil companies concede that Ireland is surrounded by massive riches. But the Irish will probably gain none of this thanks to men like Ray Burke and Bertie Ahern.

July 1, 2013

The rise and fall of economic powers

Filed under: China, Economics, History, Japan — Tags: , , , , , — Nicholas @ 10:30

Charles Hugh Smith has a guest post at Zero Hedge, talking about the theme of economic decline of great powers:

Our collective interest in the rise and fall of empires is not academic. The meteoric rise of China and the financialization rotting out global capitalism are just two developments that suggest we are entering an era where some great powers will collapse, others will remake themselves and others will gain ascendancy.

[. . .]

In 1987, pundits were predicting that Japan’s “5th generation” computing would soon dominate what was left of America’s technological edge. They were spectacularly wrong, as the 5th generation fizzled and Japan became an also-ran in web technology, a position it still holds despite its many global electronic corporations and vast university research system.

Japan’s modern economy was set up in the late 1940s and early 1950s to exploit the world of that time. Sixty years later, Japan is still a wealthy nation, but its relative wealth and power have declined for 20 years, as its political-financial power structure clings to a model that worked splendidly for 40 years but has not worked effectively for 20 years.

The decline is not just the result of debt and political sclerosis; Japan’s vaunted electronics industry has been superseded by rivals in the U.S. and Korea. It is astonishing that there are virtually no Japanese brand smart phones with global sales, and only marginal Japanese-brand sales in the PC/notebook/tablet markets.

The key dynamic here is once the low-hanging fruit have all been plucked, it becomes much more difficult to achieve high growth rates. That cycle is speeding up, it seems; western nations took 100 years to rapidly industrialize and then slip into failed models of stagnation; Japan took only 40 years to cycle through to stagnation, and now China has picked the low-hanging fruit and reverted to financialization, diminishing returns and rapidly rising debt after a mere 30 years of rapid growth.

There is certainly evidence that China’s leadership knows deep reform is necessary but the incentives to take that risk are low. Perhaps that is a key dynamic in this cycle of rapid growth leading to stagnation: the leadership, like everyone else, cannot quite believe the model no longer works. There are huge risks to reform, while staying the course seems to offer the hope of a renewal of past growth rates. But alas, the low hanging fruit have all been picked long ago, and as a result the leadership pursues the apparently lower-risk strategy that I call “doing more of what has failed spectacularly.”

Though none of the historians listed above mention it, there is another dangerous dynamic in any systemic reform: the very attempt to reform an unstable, diminishing-return system often precipitates its collapse. The leadership recognizes the need for systemic reform, but changing anything causes the house of cards to collapse in a heap. This seems to describe the endgame in the USSR, where Gorbachev’s relatively modest reforms unraveled the entire empire.

June 24, 2013

Irish bank bailouts based on lies and deception

Filed under: Europe, Government — Tags: , , , — Nicholas @ 09:39

In the (Irish) Independent, Paul Williams explains what the bankers did to force the Irish government to bail them out:

TAPE RECORDINGS from inside doomed Anglo Irish Bank reveal for the first time how the bank’s top executives lied to the Government about the true extent of losses at the institution.

The astonishing tapes show senior manager John Bowe, who had been involved in negotiations with the Central Bank, laughing and joking as he tells another senior manager, Peter Fitzgerald, how Anglo was luring the State into giving it billions of euro.

Mr Fitzgerald had not been involved in the negotiations with the Central Bank and has confirmed he was unaware of any strategy or intention to mislead the authorities. Mr Bowe, in a statement last night, categorically denied that he had misled the Central Bank.

The audio recordings are from the bank’s own internal telephone system and date from the heart of the financial crisis that brought the State to its knees in September 2008.

Anglo itself was within days of complete meltdown — and in the years ahead would eat up €30bn of taxpayer money. Mr Bowe speaks about how the State had been asked for €7bn to bail out Anglo — but Anglo’s negotiators knew all along this was not enough to save the bank.

The plan was that once the State began the flow of money, it would be unable to stop.

June 16, 2013

Chinese banks have a “hidden second balance sheet”

Filed under: China, Economics — Tags: , , — Nicholas @ 10:40

It’s been a while since I posted one of my links to articles about the Chinese economy. Time to redress that now:

“There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling,” she told The Daily Telegraph.

While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. “It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property,” she said.

[. . .]

Fitch warned that wealth products worth $2 trillion of lending are in reality a “hidden second balance sheet” for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25pc in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.

Mrs Chu said the banks had been forced to park over $3 trillion in reserves at the central bank, giving them a “massive savings account that can be drawn down” in a crisis, but this may not be enough to avert trouble given the sheer scale of the lending boom.

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. “They have replicated the entire US commercial banking system in five years,” she said.

The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.

June 6, 2013

IMF forced to admit that the Greek bailout “included notable failures”

Filed under: Economics, Europe, Greece — Tags: , , , , — Nicholas @ 08:58

In the Guardian, Larry Elliott, Phillip Inman and Helena Smith round up the IMF’s self-criticisms over the handling of the bailout package imposed on Greece:

In an assessment of the rescue conducted jointly with the European Central Bank (ECB) and the European commission, the IMF said it had been forced to override its normal rules for providing financial assistance in order to put money into Greece.

Fund officials had severe doubts about whether Greece’s debt would be sustainable even after the first bailout was provided in May 2010 and only agreed to the plan because of fears of contagion.

While it succeeded in keeping Greece in the eurozone, the report admitted the bailout included notable failures.

“Market confidence was not restored, the banking system lost 30% of its deposits and the economy encountered a much deeper than expected recession with exceptionally high unemployment.”

In Athens, officials reacted with barely disguised glee to the report, saying it confirmed that the price exacted for the €110bn (£93bn) emergency package was too high for a country beset by massive debts, tax evasion and a large black economy.”

Under the weight of such measures — applied across the board and hitting the poorest hardest — the economy, they said, was always bound to dive into an economic death spiral.

May 16, 2013

The causes of the “Great Recession” by Tyler Cowen

Filed under: Business, Economics, Government, USA — Tags: , , — Nicholas @ 09:11

According to Professor Tyler Cowen, the Great Recession was caused by a number of different factors. Cowen outlines 4 distinct and complicated problems which led to the downturn:

• A drop in the aggregate demand (http://en.wikipedia.org/wiki/Aggregat…)
• A “horribly” performing banking sector
• Problems with monetary policy
• An increase in the “risk premium” (http://en.wikipedia.org/wiki/Risk_pre…)

Prof. Cowen explains why one economic model isn’t sufficient to explain the economic downturn. He shows how several different economic models can be used to explain both the cause and the effects of the recession.

May 4, 2013

This is why cash-rich Apple is borrowing money on the bond market

Filed under: Business, Economics, USA — Tags: , , — Nicholas @ 09:20

In one word, taxes:

What a crazy world. Apple, a company with $145 billion of cash, is issuing some $17 billion of debt to buy back its own shares. Why doesn’t it just use its cash to do the same thing? First, because a lot of that cash is overseas, and bringing it back to America would incur a tax charge. Second, because interest rates are low and debt interest is tax-deductible, making this look a great arbitrage.

But think of it from the point of view of the hard-working American taxpayer. Apple’s money will still sit overseas and not be invested at home to create jobs. Apple’s tax bill will fall, as it offsets the interest payments against its profits. The buy-back will probably push up the share price in the short term, boosting the value of executive options; profits from those options will probably be taxed at the long-term capital gains tax rate of 15%, lower than the rate many workers pay. Organising a bond issue, rather than using a company’s own cash, incurs costs in the form of fees to bankers on Wall Street; the same bankers taxpayers helped support five years ago.

April 24, 2013

More on the currency choices facing an independent Scotland

Filed under: Britain, Economics, Europe — Tags: , , , , , — Nicholas @ 10:49

John Kay works through the short list of options about money that a newly independent Scotland would need to decide about:

Speculation about Scotland’s currency future would begin on the day Scotland voted for independence — or the day on which a poll showed that this result was likely. Scotland would have three main options — the euro, the pound sterling, or its own distinct money.

The euro is the official currency of the EU, and Scotland would in principle be committed to its adoption. But there would be little enthusiasm for that course in either Edinburgh or Brussels, and Scotland — like the UK — would not meet the criteria on debt and deficits for joining the euro. A vague Scottish aspiration to join the single currency at some distant date would probably satisfy everyone.

The sensible outcome would be continued currency union with England — or with the entity that, in deference to Wales and Northern Ireland, participants in the Scottish debate call rUK — rest of UK. Scotland might ask for — and get — a Scottish economist on the Bank of England’s Monetary Policy Committee (not a representative of Scotland — the rules of the committee preclude representative roles). But that would be the extent of Scottish influence on monetary policy.

[. . .]

If I represented the Scottish government in the extensive negotiations required by the creation of an independent state, I would try to secure a monetary union with England, and expect to fail. Given experience in the eurozone, today’s conventional wisdom is that monetary union is feasible only as part of a move towards eventual fiscal union. But desire to break up fiscal union was always a major — perhaps the principal — motive for independence in the first place.

Scotland could continue to use the pound unilaterally, whether the Bank of England liked it or not — as Ecuador uses the dollar and Montenegro the euro. But this is not really an attractive course, and the only countries that have adopted it are those — such as Ecuador and Montenegro — whose monetary histories are so dire that they prefer to entrust their policies to foreigners.

April 22, 2013

Not news: nearly 90% of all spreadsheets have errors

Filed under: Business, Economics, Technology — Tags: , , — Nicholas @ 08:02

I’ve said it before, spreadsheets are great organizing tools and provide opportunities for both financial whizzes and ordinary folks to make splashy, expensive errors:

Microsoft Excel makes it easy for anyone to do the kind of number crunching once reserved for accountants and statisticians. But the world’s best-selling spreadsheet software has also contributed to the proliferation of bad math.

Close to 90% of spreadsheet documents contain errors, a 2008 analysis of multiple studies suggests. “Spreadsheets, even after careful development, contain errors in 1% or more of all formula cells,” writes Ray Panko, a professor of IT management at the University of Hawaii and an authority on bad spreadsheet practices. “In large spreadsheets with thousands of formulas, there will be dozens of undetected errors.”

Given that Microsoft says there are close to 1 billion Office users worldwide, “errors in spreadsheets are pandemic,” Panko says.

Such mistakes not only can lead to miscalculations in family budgets and distorted balance sheets at small businesses, but also might result in questionable rationales for global fiscal policy, as indicated by the case of a math error in a Harvard economics study. By failing to include certain spreadsheet cells in its calculations, the study by Harvard economists Carmen Reinhart and Kenneth Rogoff may have overstated the impact that debt burdens have on a nation’s economic growth.

There’s a reason I nominated Microsoft Excel as “The Most Dangerous Software on Earth“.

April 21, 2013

EU banking governance as situational comedy

Filed under: Bureaucracy, Economics, Europe — Tags: , , , — Nicholas @ 09:14

In the Telegraph, Jeremy Warner pokes a bit of fun at the EU’s self-inflicted media pratfalls over the Cypriot banking “bailout”:

For the last time, I never used the word “template”. Thus said Jeroen Dijsselbloem, President of the Eurogroup, at his IMF press conference on Saturday. This is about whether the troika’s disastrous mishandling of the Cypriot bailout should be used as a model for future banking insolvencies in the eurozone. The row shows no sign of abating. OK, so Mr Dijsselbloem never did use the word “template” in originally welcoming the Cypriot defenestration, but that’s what he meant, forcing him quickly to backtrack when it was pointed out to him that his remarks might prompt a run on banks elsewhere in the eurozone.

But hold on a moment. Wolfgang Schauble, the German finance minister, said on Friday that Cyprus did provide a model in terms of bailing in depositors, so who’s right? Well it is sort of a model, Mr Dijsselbloem said at his IMF press conference, in the sense that common principles would in future be applied to banking resolution, but each case would no doubt be different and have its own defining characteristics. All clear now?

April 15, 2013

Tabatha Southey and the “Grapes of Math”

Filed under: Economics, Humour, Liberty, Technology — Tags: , , , , — Nicholas @ 10:14

In the Globe and Mail Tabatha Southey hears the laments of readers “We need a new John Steinbeck for the Great Bitcoin Depression”, and she delivers:

Pa was a simple man, a techno-anarchist by trade, and long after the Bitcoin bust, he stayed on with the mining. “Don’t know nothin’ else,” Ma said, although she once suggested migrant IT work, at least until her own contract was renewed at the hospital where she worked most of her grown days for a pediatric endocrinologist’s wage.

Pa sat on the sofa, the whir of the computer fans all but drowning out the Cato Institute podcast he’d downloaded the night before. He’s there, frozen in my childhood, Pa, mining, mining, mining, with nothing but his iPhone, his laptop and, for a while, my sister’s old Tamagotchi, which he found in the couch cushions while looking for the remote, to amuse him.

Dodging viruses like crop-dusters, Pa is experiencing hard times. He never did come to trust that ol’ anti-virus software. Said it was reporting on him to the Federal Reserve. And always the dust, the dust, the dust, which may have been because Pa never did get round to changing the furnace filters. His time, he said, best spent elsewhere.

Pa, oh, Pa. He never did stop spreading the word of Ron Paul on completely unrelated news items.

April 12, 2013

The Economist explains how Bitcoins work

Filed under: Economics, Technology — Tags: , , , , — Nicholas @ 09:28

A brief overview of the much-talked-about digital currency:

BITCOIN, the world’s “first decentralised digital currency”, was launched in 2009 by a mysterious person (or persons) known only by the pseudonym Satoshi Nakamoto. It has been in the news this week as the value of an individual Bitcoin, which was just $20 at the beginning of February, hit record highs above $250, before falling abruptly to below $150 on April 11th. What exactly is Bitcoin, and how does it work?

Unlike traditional currencies, which are issued by central banks, Bitcoin has no central monetary authority. Instead it is underpinned by a peer-to-peer computer network made up of its users’ machines, akin to the networks that underpin BitTorrent, a file-sharing system, and Skype, an audio, video and chat service. Bitcoins are mathematically generated as the computers in this network execute difficult number-crunching tasks, a procedure known as Bitcoin “mining”. The mathematics of the Bitcoin system were set up so that it becomes progressively more difficult to “mine” Bitcoins over time, and the total number that can ever be mined is limited to around 21m. There is therefore no way for a central bank to issue a flood of new Bitcoins and devalue those already in circulation.

And a bit more technical detail:

All transactions are secured using public-key encryption, a technique which underpins many online dealings. It works by generating two mathematically related keys in such a way that the encrypting key cannot be used to decrypt a message and vice versa. One of these, the private key, is retained by a single individual. The other key is made public. In the case of Bitcoin transactions, the intended recipient’s public key is used to encode payments, which can then only be retrieved with the help of the associated private key. The payer, meanwhile, uses his own private key to approve any transfers to a recipient’s account.

This provides a degree of security against theft. But it does not prevent an owner of Bitcoins from spending his Bitcoins twice—the virtual analogue of counterfeiting. In a centralised system, this is done by clearing all transactions through a single database. A transaction in which the same user tries to spend the same money a second time (without having first got it back through another transaction) can then be rejected as invalid.

The whole premise of Bitcoin is to do away with a centralised system. But tracking transactions in a sprawling, dispersed network is tricky. Indeed, many software developers long thought it was impossible. It is the problem that plagued earlier attempts to establish virtual currencies; the only way to prevent double spending was to create a central authority. And if that is needed, people might as well stick with the government devil they know.

To get around this problem, Bitcoins do not resemble banknotes with unique serial numbers. There are no virtual banknote files with an immutable digital identity flitting around the system. Instead, there is a list of all transactions approved to date. These transactions come in two varieties. In some, currency is created; in others, nominal amounts of currency are transferred between parties.

April 9, 2013

Bitcoins as Tulips or viable virtual gold?

Filed under: Economics, Law, Liberty — Tags: , , , , — Nicholas @ 10:27

In the New Yorker, Maria Bustillos reviews the history of bitcoins:

In many ways, bitcoins function essentially like any other currency, and are accepted as payment by a growing number of merchants, both online and in the real world. But they are generated at a predetermined rate by an open-source computer program, which was set in motion in January of 2009. This program produced each one of the nearly eleven million bitcoins in circulation (with a total value just over a billion dollars at the current rate of exchange), and it runs on a massive peer-to-peer network of some twenty thousand independent nodes, which are generally very powerful (and expensive) G.P.U. or ASIC computer systems optimized to compete for new bitcoins. (Standards vary, but there seems to be a consensus forming around Bitcoin, capitalized, for the system, the software, and the network it runs on, and bitcoin, lowercase, for the currency itself.)

[. . .]

There is an upper limit of twenty-one million new coins built into the software; the last one is projected to be mined in 2140. After that, it is presumed that there will be enough traffic to keep rewards flowing in the form of transaction fees rather than mining new coins. For now, the bitcoins are initially issued to the miners, but are distributed when miners buy things with them or sell them to non-miners (such as jumpy Spanish bank depositors) who desire an alternative currency. The chain of ownership of every bitcoin in circulation is verified and registered with a timestamp on all twenty thousand network nodes. This prevents double spending, since no coin can be exchanged without the authentication of some twenty thousand independent cyber-witnesses. In order to hack the network, you would have to deceive over half of these computers at the same time, a progressively more difficult task and, even today, a very formidable one.

[. . .]

A casual review of Nakamoto’s various blog posts and bulletin-board comments also confirms that, from the first, Bitcoin was devised as a system for removing the possibility of corruption from the issuance and exchange of currency. Or, to put it another way: rather than trusting in governments, central banks, or other third-party institutions to secure the value of the currency and guarantee transactions, Bitcoin would place its trust in mathematics. At the P2P Foundation, Nakamoto wrote a blog post describing the difference between bitcoin and fiat currency:

    [Bitcoin is] completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust. The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts… With e-currency based on cryptographic proof, without the need to trust a third party middleman, money can be secure and transactions effortless.

* * *

Much of what has been written so far about bitcoins has centered on the perceived dangers of their relative anonymity, the irreversibility of transactions, and on the fact that they can be used for money laundering and for criminal dealings, such as buying drugs on the encrypted Web site Silk Road. This fearmongering is a red herring, and has so far prevented the rational evaluation of the potential benefits and shortcomings of crypto-currency.

Cash is also anonymous; it is also used in money laundering and illegal transactions. Like bitcoins, stolen cash is difficult to recover, and a cash transaction can’t readily be traced back to the source. Nor is there immediate recourse for the reversal of transactions, as with credit-card chargebacks or bank refunds when one’s identity has been stolen. However, I find it difficult to believe that anyone who has written critically of the dangers of bitcoin would prefer an economy where private cash transactions are illegal.

Update: Meet the $2 Million Bitcoin Pizza.

Floridian Laszlo Hanyecz thought it would be “interesting” to be able to say he paid for a pizza in bitcoins. He worked out a deal where he transferred 10,000 of his bitcoins to a guy in England, who ordered him two pizzas from Papa Johns.

Today, one Redditor notes, those 10,000 bitcoins would be worth about $2.3 million, thanks (in part) to folks fleeing unstable and politically risky state currencies in Cyprus and elsewhere.

Some news outlets are covering this as a “doh!” story. But these pizzas were a huge publicity boon for Bitcoin, contributing to the success of the currency today. If Lazslo had been a hoarder, perhaps his bitcoins would be worth very little now. Cashing in bitcoins for pizza when they were worth a fraction of a cent each is not obviously smarter or stupider than selling now would be, with bitcoins trading at $234. It’s a bet on which way the market is headed, that’s all.

April 1, 2013

Canadian government pre-approves Cyprus-style haircuts for bank depositors

Filed under: Cancon, Economics, Government — Tags: , , , — Nicholas @ 09:39

Not only can it happen here, but Stephen Harper’s Conservative government is making it explicit that it will happen here:

The politicians of the western world are coming after your bank accounts. In fact, Cyprus-style “bail-ins” are actually proposed in the new Canadian government budget. When I first heard about this I was quite skeptical, so I went and looked it up for myself. And guess what? It is right there in black and white on pages 144 and 145 of “Economic Action Plan 2013″ which the Harper government has already submitted to the House of Commons.

This new budget actually proposes “to implement a ‘bail-in’ regime for systemically important banks” in Canada. “Economic Action Plan 2013″ was submitted on March 21st, which means that this “bail-in regime” was likely being planned long before the crisis in Cyprus ever erupted. So exactly what in the world is going on here? In addition, as you will see below, it is being reported that the European Parliament will soon be voting on a law which would require that large banks be “bailed in” when they fail. In other words, that new law would make Cyprus-style bank account confiscation the law of the land for the entire EU.

I can’t even begin to describe how serious all of this is. From now on, when major banks fail they are going to bail them out by grabbing the money that is in your bank accounts. This is going to absolutely shatter faith in the banking system and it is actually going to make it far more likely that we will see major bank failures all over the western world.

What you are about to see absolutely amazed me when I first saw it. The Canadian government is actually proposing that what just happened in Cyprus should be used as a blueprint for future bank failures up in Canada.

March 31, 2013

The deep strangeness of the Cyprus bank haircuts

Filed under: Economics, Europe, Greece, Russia — Tags: , — Nicholas @ 11:36

At Forbes, Tim Worstall has some thoughts on the oddities now apparent in how the Cyprus banking crisis has played out so far:

Now that we’re seeing the real numbers coming out about who loses what in the Cyprus haircut/bank consolidations there’s something very strange about the numbers. Whiffy even, and that’s not with a good odour to it either. For, as far as I can tell at least, the haircuts are far larger than they need to be in order to make good the damage that we were told about. I’m therefore coming around to the idea that this wasn’t what we’ve been told it was, a story of Russian offshore deposits and tax avoidance. Rather, it’s two banks which invested regular domestic deposits into just terrible opportunities and then lost it all.

I don’t think I can make the case absolutely but I think it’s a case worth at least investigating.

[. . .]

But back to the point I’m trying to work through here. We’ve been told that the immediate cause was all about all that foreign money which flooded the country’s banking system. Yet when we look at the amount that is being raised by the haircuts it doesn’t look as if the two bankrupt banks had all that much of those foreign deposits. It looks very much like the banks which had the deposits didn’t invest badly and thus didn’t go bankrupt. So the problem isn’t therefore one of all that foreign money.

Rather, it’s a problem of where those two banks invested their deposits. And it looks as if this was largely in Greek Government and Cypriot Government bonds. Which is why they are bust.

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