Debt, The EU, And Greece

I'm sorry Aetuis but using terms like "crashing" and "halfway sane" in one post and then claiming that what you meant was "decline in manufacturing" and "significant growth" is unbelievably frustrating. They are just not interchangeable terms in anybody's lexicon. Its a form of shifting goal posts that makes it very difficult to have a granular discussion. It's exactly the type of hyperbole that makes this discussion so tiresome as dejanzie points out. I agree that the eurozone was in recession in 2012, nobody suggested otherwise, but there are signs that the process of reducing the deficit (which caused the recession, I might add) and therefore improving competitiveness is beginning to pay some dividends with growth being predicted this year. None of which is attempting to suggestion that their aren't significant issues to address. And to be perfectly clear, I'm not suggesting everything is rosy over here either but we are not about to crack each other's heads open and feast on the goo inside.

So to address your claims, France's manufacturing declined along with everyone else's in Europe due to the deficit reduction programme across the eurozone. Germany, Holland, Austria, Luxembourg and Holland were all in recession during 2012 but are now showing signs of recovery and growth (see above link). Your claim about Finnish unemployment is incorrect as they changed how they collect the data in 2013 (read the article you linked). None of which is suggesting that we break out the champagne but terms like "crashing", "halfway sane" and "collapsing" are at odds with the facts on the ground. "Fragile" would be how describe it.

With regard to unemployment measurement, it really helps if you read the entire section of the Eurostat site that you qouted from. You'd find that the very next paragraph that you quoted is followed by the one I quoted. Lets just put them together as they appear on the site.

Eurostat[/url]]An unemployed person is defined by Eurostat, according to the guidelines of the International Labour Organization, as someone aged 15 to 74 without work during the reference week who is available to start work within the next two weeks and who has actively sought employment at some time during the last four weeks. The unemployment rate is the number of people unemployed as a percentage of the labour force.

In addition to the unemployment measures explained here, Eurostat publishes statistics of persons who fulfill only partially the definition of unemployment. These persons are not included in the official ILO unemployment concept and have a varying degree of attachment to the labour market. The indicators on underemployment and potential additional labour force participants supplement the unemployment rate to provide a more complete picture of the labour market.

I've bolded the point where you seem to stop reading. I'm not sure how I can make it more obvious or clearer. Eurostat measures long term employment, that is a given fact over here. The US mightn't but given that all of the Member States provide long term welfare support there is no benefit to massage unemployment statistics to the level that other nations do. It doesn't serve any goal.

As for Italian politics, my earlier analysis still stands. As for Grillo's pronouncements, he has nowhere near the power to do anything tangible. It's not a first-past-the-post system in Italy (and most of Europe bar the UK) and having 25% counts for nothing if you are not prepared to go into coalition. Besides the Italian people are 74% in favour of the keeping the euro and 69% don't even want a referedum on it. The markets know this and that is why we have had the relative clam that strangely enough hyperbolic blogs failed to predict.

Your claim that nothing is being done to change the labour laws is demonstrably false: Italy, Spain, Greece, Portugal and Ireland. I could keep going but one of the tenants of the austerity drive is to reform labour markets. To say that nothing has been done in that area, for bad or worse, is not true at all.

Ireland, yes, you will eat crow on that prediction :). The ECB didn't buy any of our recent bonds nor did they print money for people to buy them. They merely stated that countries in a program under the EFSF will be protected by the ECB. It's a guarantee of sorts. In the very article you quoted, Demetriades says that the OMT was not activated. We know our bonds are being bought by very hard nose individuals. And quoting our debt-to-GDP ratio or deficit proves nothing as I can assure you we are painfully aware how bad they are. However they are nowhere near as bad as the 80s' and we survived that. But, hey, thanks for the vote of support

Your claim that Estonia and Latvia entered 2008 with exactly the same economies and therefore had exactly the same experience of the crisis is not true. Estonia was joining the euro in 2011 and therefore had to maintain a much tighter control on its inflation, among other budgetary conditions, meanwhile Latvia was galloping as over 10% inflation. Also, Estonia is the richer of the two. They simply were not effected in the same manner during the crisis at all. But lets leave it there shall we, even when bailouts succeed you believe that the alternative would have been better. Fine, I can't really argue against that as I'd be trying to disprove something that never happened.

Now, the issue at hand, the Cyproit bailout. Your argument is that they should use the government backed deposit insurance. Ok. (Caution: Rough numbers incoming) Cyprus has a GDP of around €20 billion and a debt of around €15 billion. The banks in Cyprus have grown to the size of around €80 billion. Due to losses on various fronts, the banks need roughly €15 billion to cover all its liabilities. Your suggesting that Cyprus covers the banks liabilities and thereby increasing its debt to somewhere near 140% debt-to-GDP ratio. That isn't doable. The government may have promised to protect the depositors money but they were writing checks they couldn't cash (ba-dum-tish). Lets explore the alternatives.

You can do what Ireland did and guarantee all the deposits. Nobody believes you because their isn't a snowballs chance you can cover all the banks so depositors move their cash to other countries banks. Next thing you know the state is paying over the money anyway and has to be rescued by its neighbours.

Lets say you do what Iceland did. Well in that case you wipe out all foreign account holders and only guarantee deposits up to around €20,000. Not to mention all the other nasty stuff they had to endure but lets stay with the banks. So that would be worse than the Cypriot bailout but to be fair they were at 1000% times their economy not Ireland and Cypriot puny 800% times.

This article from the Economist that I quoted earlier outlines all of this quite well. While they didn't advocate haircutting depositors now, they didn't rule it out in the future either. Long story short, deposit insurance wasn't an option. Somebody, somewhere was getting a kick in the teeth and frankly Russian oligarchs are an easy sell.

I will say that it does seem that there is some last minute horse trading going on to protect those below the €100,000 threshold or at least reduce the hit. I'm glad. I thought it was a little harsh initially. Above that, it could be an even bigger haircut.

As for the Russian depositors, if they leave a €20 billion hole in the Cypriot banks the ECB will do what they had been doing for Ireland from about 2008-2011, provide Emergency Liquidity Assistance (ELAs). This is very cheap money, around 1%, lent to the banks on a short term basis. This is what Ireland survived off for years, we made up a huge percentage of the ECB's lending. Over that period then they will reduce the size of the banks to something more manageable for the Cypriot economy and thereby reducing the need for ELAs. The reduction of the their banking sector will happen if the Russian depositors stay or leave in reality. Ireland, Iceland and now Cyprus have found out that having financial sector 800% the size of the economy is problematic.

The big take away from this is how will this shape the banking union that is now forming in the Eurozone. Bank resolutions need to be developed and nobody is weeping over shareholders or bondholders getting wiped but depositors are finding out deposit insurance isn't a guarantee at all. Could be a few bruising meetings in Brussels to hash that one out.

Great report from the FT (Free registration required but if you're reading this thread I'll assume you already have ). Long story short it seems the Germans, Dutch, Finns, Slovaks and two more not named combined with the IMF called the shots on this one. Well, the Finns seemed to be taking the lead. Its seems these countries were not going to put themselves on the line for Russian depositors. I wonder how much history played in that decision. Anyway, they were even prepared to go only with the IMF because the Commission was dragging its feet on the depositor haircut. Unfortunately the Commission dirtied its bib during the Greek bailout and they didn't have much support in the Council. The telling facts though came from the ECB

But Mr Anastasiades soon learnt storming out was not an option. The European Central Bank had another shock for him: the island’s second-largest bank, Laiki, was in such bad shape that it no longer qualified for the eurosystem’s emergency liquidity assistance – the cheap central bank loans that teetering eurozone banks need to run their day-to-day operations.

The message, delivered by the ECB’s chief negotiator, Jörg Asmussen, meant that if no deal was reached, Laiki would collapse, probably bringing the island’s largest bank down with it, and saddling Nicosia with a €30bn bill to reimburse accounts covered by the country’s deposit guarantee scheme. It was money Nicosia did not have. All of the island’s account holders would be wiped out.

Cyprus could have walked away but if they did the ECB was not going to provide ELAs, as they would no longer be covered by the bailout program, which would have completely wiped out depositors. So the question was who was taking the hit and this is where it gets really interesting.

Backed into a corner, the only thing the Cypriots could do was mitigate the damage. Several officials suggested putting all of the burden on deposits over €100,000. Berlin was agnostic about where the axe fell. But Cypriot officials, with the backing of the commission, felt anything over 10 per cent would appear so onerous that it would make the situation even worse.
“The Cypriot president did not want to agree to a levy higher than 10 per cent,” said one top negotiator. “People were joking that he has only rich friends.”

So the Cypriots themselves blocked a levy above 10%, which is why we had the odd 9.9% levy at first, which meant they had to go looking for a levy of those below €100,000. Ignoring the Cypriots motives, the rest of the eurozone members should have opposed this. Seemed they did but not forcefully enough. Perhaps they felt the politically reality of it would force a reverse from the Cypriots. Perhaps they didn't care. Either way, it looks like the where the levy falls in entirely within the Cypriot government's remit.

And just to be clear, a lot of deposit insurance schemes only cover deposits up to certain amounts. Ireland has, oddly enough, altered its deposit scheme from all deposits to deposits under €100,000. I think both governments and depositors will take a long hard look at deposit insurance schemes in the future on the back of this.

I just want to add a little context from my end. I'm getting 2.4% of the capital of my pension taken off me, so I've got some sympathy for and shared experience with the people with less than €100,000 on deposit. Those over, I'm really not sure I can muster much. You were either boneheadedly stupid to leave that amount on deposit in Cypriot banks or there is something preventing them from moving it.

Sharp criticism from the Economist. Liveblog from the Guardian is really interesting. There is a claim from Schaeuble, Germany's Finance Minister, is they wanted to haircut the over €100,000 by 40% (nothing to do with Merkel's East German past, no sir) thereby preventing a need to hit the sub €100,000 depositors. This now being denied by Anastasiades and he is saying that the original deal was imposed. However the 40% haircut story is backed up by a story in the WSJ but actually coming from the IMF and its head, Christine Lagarde. That makes a degree of sense. This is the same woman who handed the Greek government a list of Greek Swiss account holders and told them to get cracking. Considering her left leaning political background, not hard to see.

Anyway, the horse trading is clearly on. The talk of lessening or eliminating the levy on the sub €100,000 is gathering a pace. The Dax, FTSE and STOXX all took a dip this morning but where rallying since lunchtime and that news trickled through.

Can we send John Boehner and his clique over to the Mediterranean and show them where their own policies are taking the US?

KingGorilla wrote:

Can we send John Boehner and his clique over to the Mediterranean and show them where their own policies are taking the US?

I'm not sure I understand what you are getting at. You think the Mediterranean's problem is their ideological adherence to small government? You haven't been to the Mediterranean, have you?

Kidding aside, applying US politics or economic policies to the EU or Eurozone doesn't work as a rule. Even Krugman has found that out and has resorted to cherry picking information from Europe to score points on the political front in the US. The Estonian Prime Minister summed him up quite nicely in a tweet in response to this blog post. I with Ilves on this one.

Well the good news today is the fear of a bank run elsewhere were unfounded, the European market posted small losses and the sub €100,000 depositors are looking to be saved from any haircut. I think/hope the issue is has been successfully localised in Cyprus now as long as cool head prevail.

Edit: just to be clear on the closed bank issue, the ECB has insisted that ATMs are to be fully stocked at all times and people are allowed to transfer €1000 a day electronically. This was policy for a while in Ireland as well. I had an issue trying to pay my fees in 2009.

Edit as I was typing the above edit: Cypriot State TV are reporting that the government is planning to start the levy over €20,000.

Axon wrote:

Well the good news today is the fear of a bank run elsewhere were unfounded,

I don't think you can state this unequivocally. The real test will be the next time an EU country comes under duress, particularly a smaller one. There's also the question of whether larger investors are moving money out of European banks; that wouldn't be likely to show up in obvious ways.

Edit as I was typing the above edit: Cypriot State TV are reporting that the government is planning to start the levy over €20,000.

This is disappointing. Breaching the €100,000 barrier signals that the Powers That Be do not regard deposit insurance as a compelling policy goal, merely a legality. That will erode trust in the deposit insurance regime.

Breaching that barrier doesn't raise a lot of money; IMO it's an unwise trade.

Axon wrote:

I'm sorry Aetuis but using terms like "crashing" and "halfway sane" in one post and then claiming that what you meant was "decline in manufacturing" and "significant growth" is unbelievably frustrating. They are just not interchangeable terms in anybody's lexicon.

Huh? France's economy is crashing, from a 29% drop in auto sales in the last quarter of 2012 to a sharp and steady decline over the last year in manufacturing. Do you have any idea how people would react to a U.S. PMI of 42 or 43? Well, no need to guess: those kind of numbers typically correspond with the start of major recessions.

"Halfway sane" was a reference to the Estonian and Latvian policies. The growth reference was a reference to just that, growth. There was no claim by me as to what I meant or that they are equivalent, although they are obviously related. I'm sorry, I fail to see how this is confusing or unclear.

And to be perfectly clear, I'm not suggesting everything is rosy over here either but we are not about to crack each other's heads open and feast on the goo inside.

Of course not, and I didn't imply that. However, simply reducing deficits is not enough - when a country or economic block has massive debt overhang, slowing the growth of that debt doesn't do anything. You seem upbeat about your country getting deeper into debt, which seems really ... well, weird to me - that's a cause for worry, not celebration.

Axon wrote:

Eurostat[/url]]An unemployed person is defined by Eurostat, according to the guidelines of the International Labour Organization, as someone aged 15 to 74 without work during the reference week who is available to start work within the next two weeks and who has actively sought employment at some time during the last four weeks. The unemployment rate is the number of people unemployed as a percentage of the labour force.

In addition to the unemployment measures explained here, Eurostat publishes statistics of persons who fulfill only partially the definition of unemployment. These persons are not included in the official ILO unemployment concept and have a varying degree of attachment to the labour market. The indicators on underemployment and potential additional labour force participants supplement the unemployment rate to provide a more complete picture of the labour market.

I've bolded the point where you seem to stop reading. I'm not sure how I can make it more obvious or clearer.

I didn't stop reading, you're misunderstanding their definition. The headline number is similar to U-3 in the United States, as they explain. In addition, just like the United States, they track other measurements of unemployment - but those are NOT the headline number. I've bolded the part in your comment where, in plain English, they explain that these measurements are not in the headline number.

Your claim that nothing is being done to change the labour laws is demonstrably false: Italy, Spain, Greece, Portugal and Ireland. I could keep going but one of the tenants of the austerity drive is to reform labour markets. To say that nothing has been done in that area, for bad or worse, is not true at all.

Good thing I didn't claim that, then. Of course attempts have been made to fix things. However, when things change, there's three possible outcomes: things can improve, things can stay the same, or things can get worse. This is what I said:

Aetius wrote:

True - and until earlier this year, Hollande was still pushing his additional hiring restrictions in France while virtually no progress has been made elsewhere at removing those barriers.

The reforms you've linked to made some minor improvements, but they've also made things worse in some respects - hence my comment that no progress has been made in removing those barriers. And they do need to be removed - not tweaked or weakened.

The ECB didn't buy any of our recent bonds nor did they print money for people to buy them. They merely stated that countries in a program under the EFSF will be protected by the ECB. It's a guarantee of sorts. In the very article you quoted, Demetriades says that the OMT was not activated. We know our bonds are being bought by very hard nose individuals. And quoting our debt-to-GDP ratio or deficit proves nothing as I can assure you we are painfully aware how bad they are. However they are nowhere near as bad as the 80s' and we survived that. But, hey, thanks for the vote of support ;)

No, they didn't - but they might as well have, because that's what a guarantee means. Everyone knows the OMT is coming, and these are people who are front-running it. And why would I vote to support economically foolish policies? I want to get the Irish economy going again, and for that to happen Ireland needs to stop accumulating debt and start paying it off. That's going to hurt, but it's far better than digging the hole deeper.

Your claim that Estonia and Latvia entered 2008 with exactly the same economies and therefore had exactly the same experience of the crisis is not true.

I didn't claim that, so ... not sure where you are going here.

Estonia was joining the euro in 2011 and therefore had to maintain a much tighter control on its inflation, among other budgetary conditions, meanwhile Latvia was galloping as over 10% inflation. Also, Estonia is the richer of the two. They simply were not effected in the same manner during the crisis at all. But lets leave it there shall we, even when bailouts succeed you believe that the alternative would have been better. Fine, I can't really argue against that as I'd be trying to disprove something that never happened.

Except that it did happen in Estonia, and the alternative was better, which I pointed out in comparison to Latvia. Again, not sure where you're going here.

Now, the issue at hand, the Cyproit bailout. Your argument is that they should use the government backed deposit insurance. Ok.

Umm, no?

(Caution: Rough numbers incoming) Cyprus has a GDP of around €20 billion and a debt of around €15 billion. The banks in Cyprus have grown to the size of around €80 billion. Due to losses on various fronts, the banks need roughly €15 billion to cover all its liabilities. Your suggesting that Cyprus covers the banks liabilities and thereby increasing its debt to somewhere near 140% debt-to-GDP ratio. That isn't doable.

You're right.

The government may have promised to protect the depositors money but they were writing checks they couldn't cash (ba-dum-tish). Lets explore the alternatives.

Correct. My noting that the government promised to protect depositors was merely an exacerbating factor in the government's decision to steal from depositors; I never said it was a good idea (it's actually terrible).

Lets say you do what Iceland did. Well in that case you wipe out all foreign account holders and only guarantee deposits up to around €20,000. Not to mention all the other nasty stuff they had to endure but lets stay with the banks. So that would be worse than the Cypriot bailout but to be fair they were at 1000% times their economy not Ireland and Cypriot puny 800% times.

Except that it wasn't - Iceland put the losses where they belonged, on the banks and their shareholders and investors, and their banks went under. Note that the decision was forced via referendum - it was not what the Icelandic government wanted. Iceland made many mistakes in their handling of the crisis, but that was the right call - just as it is right call in Cyprus. The people who took the risks need to go out of business.

The big take away from this is how will this shape the banking union that is now forming in the Eurozone. Bank resolutions need to be developed and nobody is weeping over shareholders or bondholders getting wiped but depositors are finding out deposit insurance isn't a guarantee at all. Could be a few bruising meetings in Brussels to hash that one out.

Establishing a banking union is a very bad decision, both long-term and short-term. The last thing Europe needs is banks that don't have any moral hazard and are desperate to take risks to get out of the hole they are in - that's how we got into this mess in the first place.

Axon wrote:

Well the good news today is the fear of a bank run elsewhere were unfounded, the European market posted small losses and the sub €100,000 depositors are looking to be saved from any haircut. I think/hope the issue is has been successfully localised in Cyprus now as long as cool head prevail.

That's because people are waiting to see if the Cypriot government and the EU actually are insane. If they go ahead with this, even the watered-down plan, it's going to set a precedent that European governments can simply go into people's bank accounts and take their money. There's already talk about doing the same thing in Spain. They may avoid an immediate bank run only to find themselves embroiled in large-scale long-term capital flight as people move their money to banks where it won't get stolen.

Yes, this could well have consequences down the road. However the talk of depositors, bondholders and shareholders taking a hit in future bailout outs was flagged a while ago as part of the resolution method within the new banking union. Its just few thought it would be done now. I think there is a calculation that Cyprus is the last bailout required as all other eurozone members are heading towards are more sustainable scenario (baring anything major, of course). I would support that assumption.

On the issue of deposit insurance, it has already been found out as only as good as the state backing it. Iceland and Ireland proved that conclusively. However, I do agree that hitting those below €100,000 is unwise. I'm with Lagarde on this one, they should have gone after the over €100,000 in the two bankrupt banks. That said, it does seem its entirely within the Cypriot government's remit to alter the terms of the levy(Both the FT and WSJ confirm that). Perhaps the rest of the Eurogroup members should have kicked up more of a fuss but on the flip side they didn't want to start dictating actually granular policy to national parliaments. That role tends to be left to the Commission but they were with the Cypriots on avoiding double digits. Hard to know from this remove.

Axon wrote:

On the issue of deposit insurance, it has already been found out as only as good as the state backing it. Iceland and Ireland proved that conclusively. However, I do agree that hitting those below €100,000 is unwise.

Oh, the EU has already broken/circumvented the deposit insurance promise in Ireland? I wasn't aware of that. (I didn't know about Iceland either, but they're not in the EU, so I presume whatever promise they broke wouldn't reflect badly on the EU.) Or are deposit insurance laws national, and not EU-wide?

Axon wrote:

I'm with Lagarde on this one, they should have gone after the over €100,000 in the two bankrupt banks. That said, it does seem its entirely within the Cypriot government's remit to alter the terms of the levy(Both the FT and WSJ confirm that).

Anastasiades seems to be balancing his electoral constituency against Russia, who have pointedly not fully committed to restructuring their €2+bn loan to Cyprus. (I'm sure he was also trying to save the "Russian tax haven" business, but that ship has sailed.) So in practical terms, I don't think I'd say it's "entirely within Cypriot government's remit." Russia is very important to them financially and economically, and they're being forced to proxy Russian interests.

On the other hand, it wouldn't shock me if he took his initial position to make the eventual outcome look more palatable to Cypriots. If the cut-off is €100k (or nearly so), it may pacify the electorate more now than it would have coming straight out of negotiations this weekend.

Ok, this is offically not good. Deal has been rejected. This could get quite interesting.

Edit: Aetuis, I'll respond in detail later (bed time here) but to address your theory that bondholders would provide the suffient funds to cover the deposits or its insurance won't work.

Seamus Coffey8. What about the bondholders?

For a start there are very few bonds issued by the Cypriot banks. At the end of February the total was €1.7 billion (compared to €68 billion for customer deposits). The Eurogroup statement includes a reference to a “a bail-in of junior bondholders” but it is not clear how much that will generate. There is close to no senior unsecured bonds in the Cypriot banking system. Any claims that depositors are being sliced to save bondholders is well wide of the mark. There are no bondholders to save so such an argument is a red herring.

Walken Dead wrote:

Oh, the EU has already broken/circumvented the deposit insurance promise in Ireland? I wasn't aware of that. (I didn't know about Iceland either, but they're not in the EU, so I presume whatever promise they broke wouldn't reflect badly on the EU.) Or are deposit insurance laws national, and not EU-wide?

They are the preserve of the Member State. In the case of Ireland, for example, we just couldn't credibly cover the insurance and depositors knew this. Cue deposit flight between 2008-2010 and the State filling the hole with taxpayers money. Eventually that ran aground. Iceland on the other hand, put their banks in receivership but there wasn't enough for all the creditors. Cue the wiping out of foreign deposit holders and those above €20,000.

Levying those below €100,000 would be a breach of the deposit insurance in Cyprus as well so we have three countries where the State promised to cover deposits and either couldn't or didn't. So rule going forward, beware small countries with oversized banking sectors

Walken Dead wrote:

Anastasiades seems to be balancing his electoral constituency against Russia, who have pointedly not fully committed to restructuring their €2+bn loan to Cyprus. (I'm sure he was also trying to save the "Russian tax haven" business, but that ship has sailed.) So in practical terms, I don't think I'd say it's "entirely within Cypriot government's remit." Russia is very important to them financially and economically, and they're being forced to proxy Russian interests.

On the other hand, it wouldn't shock me if he took his initial position to make the eventual outcome look more palatable to Cypriots. If the cut-off is €100k (or nearly so), it may pacify the electorate more now than it would have coming straight out of negotiations this weekend.

Well, here's hoping you're right because this could end very badly. I don't see the Finns and Germans backing down, way too much history there. My worry is given that everybody is happy to take the German's money and abuse them for not giving enough there might be a point where an example is made. This may very well be it.

Where are you located, Axon?

Aetius, your claim that a drop in car sales and manufacturing is proof that the French economy is "crashing" is a little hard to swallow when you read slightly more sober analysis in the FT using the exact same industrial sector and they simply call it a "drag" and not "buckled economy". In both articles, even the hyterical Torygraph Telegraph, state that the French economy grew in 2012 and the FT claims it will do so in 2013. At fractions of a percent, admittedly, but I struggle to see how this is "crashing". Lets park that there shall we and agree to differ as this all came about from my citing of Dan O'Brien's article and expressing concern that all the gains made in the last six months could easily be lost. Seems my faith in the man is not misplaced.

On the other issues, as a I stated earlier I'm not interested in closing the deficit overnight and paying down maturing from our current account. In the medium term that will require the debt to increase as the deficit is slowly reduced. However the plan is to stop adding to the debt in 2015 and start reducing it after that in line with the term in the Fiscal Compact. Of course I wouldn't support endlessly adding to the debt infinitely. I know you support doing it quickly. I don't.

Which bring us to Estonia and Latvia. Your claiming that you can say that because one didn't need to bailout the other didn't. I'm saying that is only true if they are both coming from the same base. They weren't and comparisons aren't helpful beyond the very superficial. To add context to that chart, Latvia was bailed out at the end of 2008. As I said, you think Latvia didn't need a bailout. I'm not going to argue with on this issue as we'd be arguing hypotheticals. Just don't compare Estonia and Latvia without providing some context.

Eurostat unemployment rates: We'll agree unemployment is high.

Labour reforms: Seeing as your Libertarian I don't doubt you think the reforms aren't good enough and as a Social Democrat I disagree and we'll have to wait and see on that.

Just to correct you on Iceland, the government nationalised the banks at a huge cost to the exchequer and placed the banks into receivership that did indeed haircut bonds and shares but found that after wiping out them out they didn't have enough for the rest of the creditors. They tried to solve this by placing a cap on deposit insurance at €20,000 and wiping out foreign depositors. The referendum you are referring to, it was called the Icesave Dispute, is the deal that was finally cut to pay back some of the foreign depositors not bondholders. The people said no but thankfully the government has quietly paid back some of the money within the terms of the current deposit insurance.

On Cyprus, you've a lot of objections but I'm not sure what you support. Bondholders aren't significant (I'm assuming you've seen the link above) enough to plug the gap so the money needs to come from somewhere. If its bankruptcy, you then have to accept depositors will be more or less wiped out. Genuinely, give me your best option with a few numbers to back it up.

I'm not sure why you think a banking union will create more moral hazard. The point of the union is to have a central supervisor and a set of rules to prevent the banking sector getting itself into this type of mess again. Another part of the banking union is to have a eurozone wide bank resolution process and it has already been accepted that depositors will be part of that process, after shares and bonds of course.

ZaneRockfist wrote:

Where are you located, Axon? :)

Paddyland.

Crazy speculation today. Everything from Russia getting rights to all of Cypriot newly found gas to Cyprus going back to the Cypriot pound. Banks not opening until next Tuesday. Good show from today's Planet Money explaining the background to all of this for those in the dark.

Axon wrote:

Crazy speculation today. Everything from Russia getting rights to all of Cypriot newly found gas to Cyprus going back to the Cypriot pound. Banks not opening until next Tuesday. Good show from today's Planet Money explaining the background to all of this for those in the dark.

Yves Smith (who has taken issue with Planet Money in the past; I didn't listen so I don't know if there are differences in their interpretations) also has a writeup of the current state of play here. It seemed reasonably evenhanded and comprehensive to me, notwithstanding her generally low opinion of the management of the euro crisis (which, in the interests of full disclosure, I mostly share).

One thing this whole crisis drives home is that economics is politics. Things like Russian or British/NATO airbases have economic value, and they may be strikingly different for different parties.

ECB gives a ultimatum. It will withdraw support on Monday. Markets went down on this news and I don't blame them. Minds are definitely focused now.

You have to remember that the ECB's role is to maintain stability in the Eurozone and there is a point, as they see it, where letting a bank fail in better than keeping it open. Of course, Cyprus accepting a deal with restore stability as well which does question the political accountability of the ECB in doing this, or even should it be. Similar situation happened in Ireland and I'm not entirely happy with it. I understand it but its a role the ECB was never designed for but I don't want its independence eroded either.

Axon wrote:

On the other issues, as a I stated earlier I'm not interested in closing the deficit overnight and paying down maturing from our current account. In the medium term that will require the debt to increase as the deficit is slowly reduced. However the plan is to stop adding to the debt in 2015 and start reducing it after that in line with the term in the Fiscal Compact. Of course I wouldn't support endlessly adding to the debt infinitely. I know you support doing it quickly. I don't.

Here's the problem with that position: no one complied with the Maastricht Treaty, so why would they comply with the Fiscal Compact? If Ireland couldn't finance its government operations in the boom years of 2002-2007 without borrowing, how is it going to do so in the lean years ahead? The fact is that politicians of all stripes simply cannot resist the siren call of debt - it's just too easy to gain the political benefits now and put the costs on future generations. That's why virtually every government in the world has a debt problem. Worse, the spending is targeted on things like bailouts that retard the economy and prevent it from adjusting to changes in the economic landscape. The combination of those two things means that if you want to actually have a long-term healthy economy, you need to first stop adding to the debt, and then start paying it off. Both require serious cuts to government spending. This is what Estonia and Latvia did - and they are already facing pressure to increase deficit spending again.

To add context to that chart, Latvia was bailed out at the end of 2008. As I said, you think Latvia didn't need a bailout.

Just to make my position clear: no country "needs" a bailout. That's like saying one "needs" to get mugged and robbed. All bailouts do is transfer wealth from taxpayers to large banks by having governments assume the banks' debts.

On Cyprus, you've a lot of objections but I'm not sure what you support. Bondholders aren't significant (I'm assuming you've seen the link above) enough to plug the gap so the money needs to come from somewhere. If its bankruptcy, you then have to accept depositors will be more or less wiped out. Genuinely, give me your best option with a few numbers to back it up.

What I support is what I've supported all along - an orderly bankruptcy for the banks. Sell the banks' assets and pay off the depositors as much as possible. In bankruptcy, the typical order of losses taken is shareholders, preferred shareholders, bondholders, other investors, and then depositors. Note that Coffey, while correct about the limited number of bondholders, ignores two important groups: shareholders and government bondholders. Indeed, those are the people this deal was designed to protect ... and they are the ones that need to eat the losses, not the depositors. The government should admit that it is bankrupt and cannot pay the deposit insurance, go through bankruptcy, cut spending levels to what citizens are willing to pay, and move on.

I'm not sure why you think a banking union will create more moral hazard. The point of the union is to have a central supervisor and a set of rules to prevent the banking sector getting itself into this type of mess again.

Because a banking union makes bailouts easier - it institutionalizes too-big-to-fail, as was done here in the United States. A banking union did not help us - in fact, the "central supervisor" was the one calling for and performing the bailouts - while itself being a primary culprit in creating the mess - twice in the last thirty years! As long as you have central banks printing and handing out money and then saving the banks from the consequences by taking the money from taxpayers, these sorts of messes will simply continue to occur - there is no reason for the banks to avoid taking impossibly excessive risks.

The best case is that the Cypriot government stands firm and the ECB sticks to their ultimatum and the banks go bankrupt, but I don't see that happening - I think the ECB will flinch and keep the banks supported until they pressure the Cypriot government into a deal they like. If they don't, and the banks go bankrupt, and the country survives and prospers, it will fatally undermine the case for the existence of the ECB itself.

As I explained earlier, the difference between the Fiscal Compact and the Growth and Stability Pact (this was the correction mechinism that followed the Masstrict Treaty) is that the mechanism now automatic. In the case of the GSP, the Council of Minister had to vote to apply the rules and as Germany and France broke them at the outset they became unenforceable given their voting weight. This time around voting weights have changed and you can only vote not to apply the sanctions. Also, budgets are sent to the Commission you signs off that the governments targets are realistic. This addresses the other issues where Member States just barefaced lied about their finances. We shall see if this works but as it stands all the deficit reduction we see across Europe is based on the Fiscal Compact rules so, as they stand, they seem to be doing there job.

Just to correct you about Ireland, it didn't increase its debt during 2002-2007 or ran deficits. In fact it recorded surpluses and built a €17 billion fund (I won't bore you with the details of what it was supposed to be used for). The problem in Ireland was the State built spending on consumption taxes, mainly stamp duty on property. Once the banks failed, the consumption taxes dried up. The same happen in Spain. So technically we both stayed within the confines of the GSP but it wasn't entirely honest either, something the Commission warned us at the time. The Fiscal Compact covers that issues, as I said in that previous post I linked to, with structural deficits not to be confused with plain deficits.

On bailouts, I'm just not going to agree with you. Call it mugging, robbery or whatever emotive analogy (one I don't even get) you like but that isn't going to impress me. I'm absolutely certain I could pull rank on emotive language but I don't because it doesn't serve the debate. A debate I had for years with you and Malor on one side, Goman on the other and me in the middle with no of us changing our minds. Lets just leave it.

On Cyprus, shares are now worthless so nothing much there. Now provide me a figure of the government bonds that Coffey missed, please. Needs to be close to €5.8 billion.

As for the banking union, I could say that the policy accepted going forward is to maintain lots of smaller banks and have a proper bank resolution process while maintaining the ECBs current policy. I could say that the ECB has already, quite publicly, threatened to remove funding of troubled bnks on two separate occasions (that I know of) in order to force fiscal policy. I could also say that having a banking union in the US is precisely the reason why its avoided the clusterf**k that Eurozone hasn't. I could say all these thing but I suspect they won't really make a difference.

Ok, the talk now is the Cypriots having failed to get the money elsewhere are no suggesting an either 20% or 25% levy on deposits over €100,000 in one bank, Laiki Bank. The question I have is if Laiki Bank is where the claimed laundered money is or is it in other banks?

Axon wrote:

The question I have is if Laiki Bank is where the claimed laundered money is or is it in other banks?

The issue isn't money laundering; if it were, then the proper remedy would be criminal prosecution and/or settlements and sanctions from regulators. The issue is solvency, and the proper remedy is to take it out of the creditors to the bank, of whom the depositors are one party.

...and in a proper resolution, wouldn't be touched until the bondholders and other unsecured creditors were wiped out, but "make the bondholders whole, that whole 'default risk is priced into the interest rate' thing is just pillow talk, baby," seems to be the policy these days.

Solvency resolution isn't where scores are settled. That's what courts are for.

You misunderstand. I'm not suggesting it as a means of settling an issue, Walken Dead, I'm merely pointing out that the axe might not fall on dirty money at all. It would be interesting who made that call, if it didn't, in the sense that could there be pressure on the Cypriots to avoid hitting those funds?

As for the proper resolution, I think you'll find that the bondholders have already been haircut. Cypriot banks are odd in that the vast majority of their securities are the deposits they hold. On the tiny amount of bonds they hold, roughly €1 billion, its made up of Greek government bonds which are not whole by any means. I've provided repeated articles stating the origin origin of the bonds and the amount. It doesn't really seem to be up for much debate. If you think there is another source of funds, please, provide me with figures. I would like to know.

According to The Guardian feed, it sounds as if this is going to be another late nighter. 4 or 5 in the morning so at least the US will get the news first. Peter Spiegel of the FT is worth keeping an eye on for information.

Edit: 35%-40%? Lagarde does not like tax avoidance, that's for sure.

According to Spiegal, they are winding down Laiki with the result of wiping out everything above €100,000. Bank of Cyprus to impose a 40% levy on same group. The rest of the sector remains untouched.

Need to go to bed. This is going to be interesting in the morning.

Thanks for your info, sir.

Axon wrote:

You misunderstand. I'm not suggesting it as a means of settling an issue, Walken Dead, I'm merely pointing out that the axe might not fall on dirty money at all. It would be interesting who made that call, if it didn't, in the sense that could there be pressure on the Cypriots to avoid hitting those funds?

Ah; I apologize for the misunderstanding.

That is interesting. The thing that tipped Laiki over appears not to be shady relationships, but exposure to Greece, so I imagine that if any shady money gets dinged, it will be incidental.

On the tiny amount of bonds they hold, roughly €1 billion, its made up of Greek government bonds which are not whole by any means. I've provided repeated articles stating the origin origin of the bonds and the amount. It doesn't really seem to be up for much debate. If you think there is another source of funds, please, provide me with figures. I would like to know.

I wasn't referring to bonds the banks hold (many of which are sour, like you said), but rather to bonds they may have issued. In a "normal" resolution (do those exist anymore?) they would be converted to equity (which would amount to wiping out their holders' investment) before deposits were raided. My impression was that the amount of outstanding bond debt from Laiki and BoC are a pittance compared to the hole in their balance sheet, but that no equity conversion had taken place, so the holders of those banks' debts were still going to be made whole. To preserve their investment (which ostensibly had higher default risk priced in than depositors) and wipe out depositors creates perverse incentives, I'm sure you'll agree.

However, I have not read the links you mention, and these may address that concern. I'll go back and check them out. (I was barely skimming your conversation with Aetius, so I may have missed them.)

No need for the apology, it wasn't clear in the first place. The misunderstanding was entirely my fault for being too cryptic. However it will be interesting post the bailout to see who actually got hit and who didn't (is that even possible?).

As for bondholders, it looks as if their fate is sealed within Laiki and BoC

Irish Times[/url]]Officials said senior bondholders in Laiki would be wiped out and those in Bank of Cyprus would have to make a contribution.

That is interesting from an Irish perspective. During our bailout, the IMF wanted to wiped out the remaining bondholders (who many sober analysts believe are actually Irish pensions and not foreign banks and is often claimed) and the ECB objected. Our government at the time decided to keep sweet with the ECB. I suspect due to the fact that we really burnt bridges in September 2008 with our guarantee combined with the fact that the ECB was keeping the lights on. Now that amount of bonds comes to roughly €6 billion but we may look for a deal on having to pay those in full at the time and any reduction in the servicing of our debt would be welcome.

You can be sure the Greeks and Portuguese will have spotted that as well.

Edit: I must not forget that this will be brutal on the Cypriot people. Anyway this was going to pan out was going to be tough. We've had nearly 5 years of corrections, I can assure you they hit my family, and we are coming to the end of it. I would not wish to face that pressure, stress and, above all, fear again.

Looks like the hit to 100,000E+ investors will be 62.5% of funds over that amount. The remaining 37.5% will be paid out in shares of Bank of Cyprus. Laiki deposits will be moved to BoC. Investors with under 100,000E won't lose funds.

Banks opened quietly on Thursday without the feared rushes, but that was before the deal was announced on Friday.