Quotulatiousness

March 22, 2013

Cyprus: the state of play on Friday

Filed under: Economics, Europe — Tags: , , , — Nicholas @ 08:35

In the Telegraph, Thomas Pascoe summarizes the situation in Cyprus as of Friday morning:

As it stands this morning, there is a Plan B on the table after parliament voted down the proposal that every bank deposit in the country be subject to a deduction. The new plan only affects those with deposits over €100,000; however, it will require those depositors to take a loss of up to 40pc. As part of this package, the nation’s two large banks will be saved. However, the structure of the deal requires that one of the pair, Laiki, will be split into “good” and “bad” banks, with large depositors left to chance it in the bad bank.

A word on the thinking behind it. While you and I perceive deposits as secure money (and I have argued that to touch them is an abuse of power), technocrats in Brussels take a different view. They tend to view deposits in the technical sense of being loans to banks. You give the bank your money in exchange for interest, and can call the loan at any time (provided not everyone else is doing the same thing, which is the situation now). The bank loans most of your deposit on again. When countries struggle with too much debt, those who have loaned them money get “haircuts”, or less back than they gave. Following this thinking, the EU’s argument is that if we lend money to failing banks, we too must take a haircut to keep them solvent.

[. . .]

So the compromise deal is an ugly one, involving a precedent (confiscation of deposits) which will cast a pallor over the entire European banking system. But the problems are equally great with any other solution. If the banks are left to fail, depositors lose everything except the scraps recovered by administrators. To argue that they, and the country, must be funded directly by the EU, requires the continued willingness of Germany to act against its own economic interests and support an entire continent on its shoulders, impossible without fiscal and political consolidation which no electorate would assent to at present (not that they are asked, usually).

In my opinion, there is no faster way to destroy confidence in your retail banking sector than stealing the money from depositors with no recourse. I have no idea why the European Union is so hell-bent on crushing the banks, but perhaps they have some looney-tunes notion that they can supplant the existing bank system with something directly operated by the ECB or the EU itself.

March 21, 2013

The choices for Cyprus don’t seem to include saving the banks

Filed under: Economics, Europe — Tags: , , , , — Nicholas @ 11:04

In Forbes, Tim Worstall sums up the real problem facing Cypriots:

There’s a very large portion of the European political elite who believe, take on faith (for there’s certainly no convincing real world evidence about it) that the creation of the euro is part of the inevitable creation of the European State. And as such it is entirely irreversible. It’s not just that people once in the euro shouldn’t leave it: it’s that it is simply inconceivable that anyone ever would leave it. Either wish to leave it or be allowed to leave it.

Wherein lies the danger to said European dreams and it’s tiny Cyprus that poses said danger.

As both Krugman and Yglesias point out, the Cypriot banking system is bust, gone. Even if it needn’t have happened this way having the system closed for at least a week is going to lead to bank runs when they finally reopen. The economy is most certainly going to stutter if not be deeply depressed as a result of that banking system going. Given that a substantial part of the economy is about offshore finance, and that that’s not going to survive the banking system crash, there will also, whatever else happens, be substantial declines in GDP.

It’s most certainly true that leaving the euro will cause all of those things to happen. But if they’re going to happen anyway then why not leave the euro? Why not bring back the Cyprus Pound? That is, do an Iceland?

[. . .]

But here’s the thing: there’s still that religious insistence among the federasts that the euro is irreversible, a part of the future of the politics and economy of the continent. And if Cyprus does leave and does recover without too much paid then what reason for Greece, or Spain, Portugal, to stay in? If going bust and going back to one’s own currency is, as Iceland showed (although they kept, rather than went back to), less painful that the austerity required to stay in the euro then, well, why stay in the euro?

March 18, 2013

Cyprus to offer small depositors a slightly less nasty haircut

Filed under: Economics, Europe — Tags: , , — Nicholas @ 10:05

Megan McArdle on the most recent “concession” by the Cypriot bank regulators:

Cyprus seems to have realized what I wrote yesterday: violating your deposit insurance guarantees is a better way to start a bank run than to stabilize a banking crisis. After Cypriots rushed to withdraw their money ahead of the new rules, the Wall Street Journal reports that the government has cobbled together a new proposal: small depositors will pay a 3% “tax” on their accounts (instead of 6.75%); medium depositors (those with between €100,000 and €500,000 will be taxed at the same 10% they were supposed to pay before; and those with more than €500,000 will pay 15%.

That may check the runs on the small accounts. Now the question is: what about the big ones? Will the foreign depositors view 15% as the simple cost of stashing their money out of the watchful eye of their own government? Or will they seek a new haven?

If the foreign money runs, it seems unlikely that Cyprus will be able to bail out the banks again; this desperate bank levy is, after all, what they were forced to do just to raise the $5.8 billion that the EU and the IMF demanded they contribute to the bank rescue. But the higher Cyprus raises the levy on large accounts, the more likely it is that the foreign money will flee to somewhere less shaky.

By “less shaky”, one has to assume a non-European bank…

Update: Cyprus has extended the “bank holiday” to Thursday.

Will the Cyprus bailout set the fuse to a new Great Depression?

Filed under: Economics, Europe, History — Tags: , , , — Nicholas @ 00:01

History may not repeat itself, but it’s quite likely that it paraphrases itself instead:

So, this is going to be a very sour reading of what has happened in Cyprus this weekend. It will also be a very partisan one, possibly even a partial one. But if Milton Friedman and Anna Schwartz were right in their insistence that it was actually the Federal Reserve that caused the Great Depression (which is something that Ben Bernanke himself has insisted that the Fed will not repeat) then one way of interpreting what has happened is that the European Central Bank has just set us all up for another Depression. The trigger is that “tax” of a little over 6% on all depositors.

This isn’t an analysis that you’ll be able to get all economists to sign up to. But the basic story told by Friedman and Schwartz in A Monetary History of the United States was that the 1929 crash was indeed a serious crash. But it would not have led to the Great Depression without the Federal Reserve making some serious mistakes. Two of which were to allow the intertwined collapses of both the money supply and the banking system. Given that it is the banks that create credit and thus the wider money supply they are, to a great extent, the same thing.

[. . .]

But please note the central part of Friedman’s argument. Yes, there was the crash. Yes, there would have been a deep and painful recession as a result. But the tipping of that recession into depression was a result of the cascading series of bank failures in the absence of deposit insurance: that led to the calamitous shrinking of credit and the money supply.

So let us now look at Europe and the eurozone. Certainly there’s been a crash (or even a Crash). We’ve so far avoided the depression part (although not everywhere. Greece is certainly in one, Spain possibly and looking out my window at rural Portugal I see certain signs of a reversion to a non-cash economy.) but the important question is whether we manage to continue to do so?

[. . .]

Yes, I do know, they’ve called it a tax: but here we’ve got to make reference to that duck thing. The difference between a 6% or more “tax” on your bank deposit and a failure of the previously agreed deposit insurance to protect your deposit is quackery enough that it’s a duck.

As I’ve said before the importance of this is moot at present. It depends on who believes what. If the citizenry believe that they don’t have deposit insurance any more (whether we call this a tax or a duck) then we will see more mass withdrawals from banks and we will see more bank failures. And cascading bank failures are exactly the thing that will tumble us into a new depression.

March 17, 2013

Cyprus delays emergency parliamentary session over banking haircut

Filed under: Economics, Europe, Government — Tags: , , — Nicholas @ 09:50

Apparently not all the politicians in the Cypriot parliament are on-board with the mandatory levy on savings accounts:

Cyprus’s parliament has postponed until Monday an emergency session to vote on a levy on bank deposits after signs that lawmakers might block the surprise move agreed in Brussels to help fund a bailout and avert national bankruptcy.

In a radical departure from previous aid packages, euro zone finance ministers want Cyprus savers to forfeit up to 9.9 percent of their deposits in return for a 10 billion euro ($13 billion) bailout to the island, which has been financially crippled by its exposure to neighboring Greece.

The decision, announced on Saturday morning, stunned Cypriots and caused a run on cashpoints, most of which were depleted within hours. Electronic transfers were stopped.

[. . .]

Many Cypriots, having contributed to bailouts for Ireland, Portugal and Greece — Greece’s second bailout contributed to a debt restructuring that blew the 4.5 billion euro hole in Cyprus’s banking sector — are aghast at Europe’s treatment.

Cyprus received a “stab in the back” by its EU partners, the daily Phileleftheros said.

But it and another newspapers highlighted the danger of plunging the banking system into further turmoil if lawmakers sat on the fence.

March 16, 2013

More on the Cyprus banking situation

Filed under: Business, Economics, Europe — Tags: , , , , — Nicholas @ 11:44

At Forbes, Tim Worstall explains why the mandatory levy on bank accounts is an epic facepalm:

There’s nothing particularly bad about making depositors carry some of the load of a bank failure. Indeed, it has something to recommend it: if it happens occasionally then people will take more care over where they put their money and what the banks do with it.

However, there’s a very great difference between allowing depositors without government insurance to take losses and actually reneging on the previously promised government insurance. And it’s that second that they’re actually doing here. [. . .]

Under the system until yesterday all depositors in Cypriot banks were insured up to the value of €100,000 with any one bank. Today that solemn and governmental promise has been shown to be false. And not even the European Union nor the European Central Bank are going to make them stick to it. Indeed, very much the other way around. The EU and ECB are insisting that the Cyprus authorities breach this deposit insurance provision.

As I say, there’s nothing wrong with making uninsured depositors take some of the pain. Certainly nothing at all wrong with making those with large deposits take a haircut. The problem is when government has said “we’ll insure this” and when push comes to shove they say “err, no, we won’t”. And the problem with this is that it makes all future EU deposit insurance worth that much less.

The Cyprus “rescue” includes nasty haircut for savings held in consumer banks

Filed under: Economics, Europe — Tags: , , , , — Nicholas @ 11:23

The BBC reports on the way Cypriot bank accounts are being levied as part of the “rescue”:

Cyprus may be one of the eurozone’s tiniest economies — its third smallest — but for the next 48 hours or so, it may be the single currency area’s most important.

The point is that there could be serious repercussions for other financially over-stretched economies, such as Spain’s and Italy’s, from the nature of Cyprus’s 10bn-euro (£8.7bn) bailout — which includes, for the first time in any eurozone rescue, losses imposed directly on depositors in banks.

These losses, running to almost 6bn euros, stem from an emergency levy of 9.9% on bank deposits over 100,000 euros (£86,600) and 6.75% below that.

The levy serves as a caution to lenders to banks that they should take care where they place their funds and avoid banks which overstretch themselves — as Cypriot banks did.

But precisely the same arguments — for what is known as a “bail-in” by private-sector creditors — were put by liberal-market purists at the peak of the banking crises in Ireland and Spain.

In the end, eurozone governments were terrified that if lenders to Spanish and Irish banks were punished, there would be a devastating domino effect of withdrawals of funds from banks in other weaker economies — a domino effect that would jeopardise the survival of the eurozone.

So, reckless lenders to Spanish and Irish banks were not punished.

There’s a strong possibility that savers in other European countries with weakened banking systems to draw the correct conclusion quickly … and start pulling their money out of the banking system. And also expect the EU to react with draconian currency restrictions. It’s a potential banking sauve qui peut.

July 3, 2012

“The longer the euro area’s debt crisis drags on, the more it resembles an instrument of economic torture”

Filed under: Economics, Europe — Tags: , , , , , — Nicholas @ 08:47

The Economist on the long-drawn-out European financial mess:

THE longer the euro area’s debt crisis drags on, the more it resembles an instrument of economic torture. Like the medieval rack, every turn of the crisis tears Europe further apart. This week Cyprus announced it would seek a bail-out. Spain formally asked for money to recapitalise its banks. The Greek limb is close to being ripped off. How long can the Italian one hold?

Monetary union was meant to be a blessing. The euro’s founders dreamed that it would end chronic and divisive currency crises, promote growth and multiply Europe’s economic power. After the creation of the single market, the euro was the next step toward political union.

[. . .]

Now, after first blaming speculators, then profligate states, then, more broadly Europe’s lack of competitiveness, the cardinals of monetary union have belatedly come to understand that the main problem is the euro itself. A new report by a group of prominent economists — sponsored by Jacques Delors, the former president of the European Commission, and Helmut Schmidt, the former German chancellor — describes in telling detail how the euro is destroying itself.

Start with the European Central Bank’s “one size fits all” interest rate, which the report’s leading author, Henrik Enderlein of the Hertie School of Governance in Berlin, relabels a “one size fits none” rate. Differences in inflation are magnified: in countries with higher-than-average inflation (eg, Italy), the real interest is too low, fuelling more inflation; the opposite is true in countries where inflation is low (eg, Germany). Another problem is that the single market is far from complete, so that competition does not even out price differences across the EU. The market in services, which represents the biggest share of economic output, is still fragmented. Moreover, European workers are less likely to move in search of jobs than, say, American ones. A further curse is that countries of the euro zone do not independently control their own money. Because each lacks its own central bank to act as a lender of last resort, troubled countries can more easily be pushed into default as markets panic. Lastly, cross-border financial integration has spread far enough to channel contagion from one country to another, but not so far as to break the cycle of weak banks and weak sovereigns bringing each other down.

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