Cyprus Bailout: Stupidity, Short-Sightedness, Something Else?
cyprus.com
cyprus.com
I don't agree with this analysis. Its a one sided argument against the current plan. Which is fine, but its certainly not the whole story. Part 15, the solution, is absurd. It has all the problems outlined in the previous 14 points. It is no solution, because there isn't a reasonable no pain solution. People are literally saying anything that pops in to their heads because the cant cope with the idea proposed already. I get that, but there isn't really an alternative. The country, or to put it another way, a big group of people, have gone way too far in to debt. An individual in the same circumstances would go bankrupt, but that is not an option for a country, as far as I know. In the end, they have to settle the debts. Not only that, borrow more money to survive.
What interests me is the reaction of the people. It all seems a bit civilised. There isn't much worse a government can do to its people, yet the people seems incredibly calm about it. I am still surprised that the people haven't stormed their parliament. This i the real test. How far can you push a population? Looks like you can push them pretty far.
Also, I still cant get my head round peoples who vote in governments then trying to separate themselves from the actions of that government. Or take out loans, then blame the banks for handing those loads out. Or scream hysterically about socialism, when its capitalism and its basic law of supply and demand that has caused the whole mess.
The biggest joke of all, in the UK at least, is that with a disaster caused by banks dishing out toxic loans, the banks are now under pressure to loan out more. Half the problem is people now working to pay off loans, reducing the amount of money that can be spent in general. We want them to borrow more, when their jobs are uncertain?
In the end, the problem is greed and impatience, and us the people demanding that we are loaned the money to satisfy that.
Im sorry, but IMHO, the whole system is a wreck, and no one wants to take responsibility for any of it. Governments are too interested in protecting votes, and that is making them avoid any harsh but effective solutions.
Anyway, point being, I'm not seeing any realistic long term solutions anywhere. The Cypriot idea is interesting to me, and rather than knee jerk against it, I am interested in seeing how it pans out. I mean, what if it works? The UK is said to have triple dipped, so what ever is going on here isn't much cop, we are just scraping along the financial gutter. Could a one off injection of all our money save the day? Its our country, our debt.
I'm stopping now. I'm boring and confusing myself....
[1] http://en.wikipedia.org/wiki/Sovereign_default#List_of_sover...
Btw, defaulting was an absolute disaster for Argentina
I think that Greece and Argentina will make a good examples for comparisons of different approaches, when both recover economically (if they do recover, that is).
[1]http://www.nytimes.com/2008/09/28/opinion/28iht-edbildt.1.16...
I may be exaggerating, but think of it as Switzerland losing it's bank sector. How would you begin to build up a new economy which, as of yet, biggest sector is banking, for instance. Think of the large population that would be instantly out of work.
At least, that's my guess at why an insolvency wouldn't be the best option for Cyprus.
Source: http://en.wikipedia.org/wiki/Economy_of_Switzerland#Internat...
What about what Iceland did? They actually held the people that ran the banks accountable and let them fail.
This is the foundation or your argument and it is wrong. At best, it's an assumption.
The best treatise on this subject, imo, is David Graeber's : Debt: The First 5000 years.[0]
Graeber is an anthropologist -- he's about to take the Chair as Professor of Anthropology at LSE -- so it is far from being a dry financial read.
It's a fascinating text that will, if not change, certainly make you rethink any assumption you have about debt and money. In fact, in the early chapters he disconnects debt from money entirely.
From page 2: "Surely one has to pay one's debts". It tackles your comment head on, but not in the way you might expect.
The current deal only impacts depositors with more than 100K in the banks - more than this wasn't insured anyway.
"You should basically never hit non-insured depositors either."
Why? Since when is there a guarantee that banks are 100% safe? If people deposit large (i.e. over deposit guarantee limits) in a bank to benefit from the high interest rates they are taking a risk with a reward - if this goes wrong then why should other more prudent people have to bail them out?
"bank customers would pay a levy of 6.75% or 10% on their bank deposits... The EU and IMF have demanded the levy in return for a 10bn-euro ($13bn; £8.6bn) bank bailout." [1]
We don't really know which individual came up with the idea... but the EU were okay with the original plan to take money from those with <100k as part of a bailout, as long as the Cypriots got it passed locally as a "tax" to avoid any potential legal issues with the EU directive on protecting deposits.
[0] This is true even more since contrary to Greece or Ireland, there’s no indication whatsoever that Cyprus will ever pay back 10 bn €.
http://www.cyprus-mail.com/cyprus/cyprus-banks-pass-eu-stres...
Many think the bank stress tests are a joke and only exist to raise investor confidence. If true, then those people so quick to criticise Cyprus, might soon find themselves sharing the same fate.
In December 2012, the FDIC and Bank of England published a paper saying:
"deposit guarantee schemes may be required to contribute to the recapitalization of the firm... insofar as a bail-in provides for continuity in operations and preserves value, losses to a deposit guarantee scheme in a bail in should be much lower than in liquidation."[1]
In a nutshell:
"...the new system raids the Deposit Protection scheme, gives it to the bank instead of you and when that fails to save the bank…then what? The bank fails again and there is no money left in the Deposit Guarantee scheme."[2]
[1] http://www.bankofengland.co.uk/publications/Documents/news/2...
[2] http://www.golemxiv.co.uk/2013/03/plunderball-the-new-euro-b...
It's trying to avoid avoid reality. What you are saying is that no one should ever be hit. banks shouldn't fail. The reality is that banks do fail. They fail because of bad management. They fail because of bad financial environment. They fail because of bad regulation. Whatever. They do fail. That is reality.
We need rules that define what happens when they do fail. We need to be able to survive bank failures the way we can survive failures of other companies.
We can't just keep deciding that banks should never fail again.
Poorly managed banks should be allowed to fail just like any other business - creative destruction is a vital part of a free market economy.
However, what to do now that "too big to fail" banks are so common?
In Cyprus, I'd say put these banks into some sort of bankruptcy. Give everyone haircuts in whatever order a court (remember rule of law?), not some dark room full of politicians, beuarocrats and bankers decides is correct. Then have the Cypriot government or the EU (we also need to figure out who is liable here) make good on the promises to insured depositors.
I don't see how dooming the next generation of Cypriot taxpayers to high taxes and low public services in order to save uninsured depositors who benefited from the high interest rates these risky accounts yielded from taking a haircut. Not from a legal perspective, or a moral one. It doesn't sit well with socialism or with capitalism.
I don't buy the argument that it will in any way preserve choruses ability to borrow in international markets.
So what would happen if the Cypriot government couldn't handle the payouts required?
Here is the full list:
http://www.financialstabilityboard.org/publications/r_121031...
If you are management at one of these banks, you essentially have a risk-free business, and can do whatever you want without fear of bankruptcy or prosecution.
Establishing a business in southern europe is risky anyways in the past 5 years with national governments failing left and right. The red tape and the ability of the state to impose arbitrary "urgent taxation" (has happened twice in greece already) hurts all business planning in an already shaky business environment. For me, cyprus was an obvious choice because of its "most lawful" status (the country is in the EU and in the euro for years, which requires a high level of transparency, and it is not in considered a tax heaven by OECD), plus when you don't do business in your home country you have the freedom of choice. Compared to the bailed-out european south, cyprus was actually the safest option. From my experience, i did have to provide adequate documentation for all business transactions and the red tape overhead was much reduced.
The whole handling of the situation until now is a hugely chaotic freak show, a pretense battle between white knights of capitalism and socialism, and a huge display of how ineffective it is to run europe without a central trustable government.
Thank our friends in Westminster who first bullied their way in and then have been blocking further European integration for the last 40 years.
I wouldn't assume the spanish, italians, french are very much in favor of it either (given that they will have to accept a de facto german authority)
[0] http://www.germany.info/Vertretung/usa/en/__pr/P__Wash/2013/...
> Recent surveys confirm that over 85 percent of citizens in each country have a good or very good image of the other.
or http://www.nytimes.com/2013/01/23/world/europe/france-and-ge... .
My point was that there wouldn’t be such a thing as a ‘German authority’ to accept in a united and democratic Europe and that at least the French don’t appear to be entirely opposed to the idea of working closely with Germany.
(Oh, and Merkel isn’t all that popular in Germany – (un)fortunately, her social democract contender is the guy (not necessarily seriously) suggesting to send the cavalry into Switzerland[0] and pirates to Cyprus.)
[0] http://www.euractiv.com/elections/outspoken-spd-chancellor-c...
[1] http://www.spiegel.de/politik/ausland/spiegel-gespraechsreih...
While Cypriots were queuing in the ATMs to withdraw 300€ tops (then reduced), Laiki Bank was open in London, and accepting all withdraw orders.
http://www.zerohedge.com/news/2013-03-25/have-russians-alrea...
The same thing happened to Cyprus banks with branches in Russia.
I'd be more than a bit pissed if I was from Cyprus, though if I was a wealthy Brit or Russian, I'd be very pleased about this...
Also all the big accounts with a large haircut will now cause almost all businesses to be affected. It will be very hard to see any business surviving this cashflow crunch in Cyprus.
The only question now is who's next?
The way the greek problems were handled by the EU under german "leadership" could be interpreted the same way (extremely stupid or conspiracy).
“Never attribute to malice that which can be adequately explained by stupidity.”
I doubt there's any conspiracy at work here, it's just the outcome of large scale politics.
Wikipedia: "In the "Capitulations of Santa Fe", King Ferdinand and Queen Isabella promised Columbus that if he succeeded he would be given the rank of Admiral of the Ocean Sea and appointed Viceroy and Governor of all the new lands he could claim for Spain. He had the right to nominate three persons, from whom the sovereigns would choose one, for any office in the new lands. He would be entitled to 10% of all the revenues from the new lands in perpetuity. Additionally, he would also have the option of buying one-eighth interest in any commercial venture with the new lands and receive one-eighth of the profits.[31]"
So the alternative is to take money people have saved for pensions rather than hit bank depositors over 100K???
Depositors are only taking a loss at bankrupt banks where their money was wiped out by bad investments, and now EU and Cypriot taxpayers are refunding a portion of it.
It's open season on savers now.
Well, fix that.
Until they fail, cause a world-wide recession and main street has to bail out wall street.
> Is the EU unwilling to save their banks?
Ideally, it indeed would be unwilling to save bloated up banks unrelated to the local financial needs.
> fine, let them bail themselves (which is what they are doing). Why the fuck do they have to order a whole nation what to do?
They tried to get money elsewhere, but even Russia didn’t feel like helping out. Now they want European money and I would assume it only to be fair to require that in order to get that money, they have to ensure they won’t need it again in the near future, i.e. scale down their bloated banks which apparently threaten the actual economy on the island.
> What's next? ask luxembourg to start herding cows?
Basically, yes[0]. Though nobody minds banking as long as you don’t request other people’s money to continue banking and last time I checked, Luxembourg didn’t need a bailout.
[0] It might be pointing out that you can run a nice economy not relying on banking even when not herding cows.
> automobile industry, steel industry, coal mining, ceramic industry and computer science and information systems industry.
Bremen (547000, 10.2% unemployment rate), from Wikipedia (paraphrased)
> Airbus, EADS Astrium, OHB-Systems, Mercedes-Benz, Beck & Co […] Anheuser–Busch InBev (Beck's Brewery), Kellogg's, Kraft Foods (Kraft, Jacobs Coffee, Milka Chocolate, Milram, Miràcoli), Frosta (frosted food), Nordsee (chain of sea fast food), Melitta Kaffee, Eduscho Kaffee, Azul Kaffee, Vitakraft (pet food for birds and fishes), Atlanta AG (Chiquita banana), chocolatier Hachez (fine chocolate and confiserie), feodora chocolatier
Hamburg (1.8 mil, 13.9% unemployment rate), from Wikipedia (paraphrased)
> Berenberg Bank, M.M.Warburg & CO and HSH Nordbank […] Port of Hamburg […] Blohm + Voss […] civil aerospace industry. Airbus […] E-Commerce […] Media businesses employ over 70,000 people
I'm not saying it's not desirable to be well diversified, it's just unrealistic to do it overnight (or over-decade for that matter)
The real lesson here is probably that, while size is not a sufficient prerequisite for economic stability, it might well be a necessary one.
Uh... if you pay 1% or less a year in interest as they in USA. Many Cyprus banks were paying north of 5% a year so they'd have to make maybe 7%-10% a year to break even after expenses and taxes.
8. You never, ever, ever, hit insured depositors.
Great point, expect that no one is touching them. Deposits over EUR 100K are being hit /frozen, those up to EUR 100K are not touched, which just happened to be the insured amount. The banks could have bought private insurance and threatened to take down the next AIG with them (Now that's leverage), but they apparently didn't.
The real fault lies with the banks and Cyprus gov (or the people, indirectly). They could have cracked down on these shady deals and limited the bank's exposures to Greek debt. They didn't and Germans /N Europeans don't want to ask their taxpayers to bail another country. Someone has to pay, it clearly can't be the taxpayers given the ratio to GDP so it's the depositors and bank owners. To summarize:
There is no money.
No one wants to give them more money.
Banks are broke and as usual you can lose all the money that is not insured. It says so, or it should say so on the tiny print.
Who would ever vote for a politician who tries to constrain the growth of a financial sector that appears to be able to generate money out of thin air?
We forget how bank operate: they ask you to trust them with your cash and in return they promise to safeguard your capital and even give you interest a year. Well, what if their investments lose most of the money and the government cannot bail them out? They go kaput!
I don't think it is accurate to say that the 2008 financial crisis had a single cause. If you think it was the boom in sub-prime mortgage lending in the US and the resulting popularity of CDOs and CDSs how did that cause the Irish problem (insane property speculation), Iceland (asset speculation in other countries used borrowed cash), Greece (fiscal irresponsility) etc.
Yes, that's the current decision. The linked article was written at the time the Parliament was about to ratify haircut of the insured depositors along with the rest.
(There's no timestamp on the page, but I saw this text around 21th of March.)