Better
a deal than no deal. The damage inflicted on Cyprus by the ineptitude and
malevolence of euro-group politicians and the troika is of catastrophic
proportions. Cyprus has to pick up the pieces and carry on. Cyprus will not go
down the drain. We have good, hard working, adaptable people. No crisis can
wipe out the opportunities. The
message of troika and the euro-group is loud and clear: Make sure that you do
not get into trouble because if you do, and ask for our help, we will make sure
it becomes your worst nightmare...And you will get into trouble because we have
been rigging the game all along.
Update, 27.3.2012:
{Bailout fatigue says: “The Cypriots got themselves into this mess, and they should get themselves out. We’ll lend them a bit more, but only if we’re sure they’ll pay us back.” Cyprus didn’t get itself into this mess. It joined the euro system in 2008 with low public debt and a clean bill of health from EU governments (back then, not a word was said about shady Russians). Its banks are in trouble not because they accepted too many overseas deposits but because they bought too many Greek bonds -- an investment sanctified by international banking rules (which called such investments riskless) that was destroyed by the EU’s ham-fisted resolution of Greece’s threatened default.}
Remember the annexation of Czechoslovakia? Remember the invasion of Poland? Remember how some European nations supported the Nazis. Remember how most of Europe did not raise a voice to great injustice?
Germany seems to be back pursuing the dogma of "Deutschland Uber Alles" inflicting upon what they seem to regard as "inferior" nations unprecedented economic calamity and human suffering. Continental Europe is once more in a state of complete confusion and disarray unable to react, paralysed by conflicting national interests, disrespect of the principles of democracy, solidarity or legal order, incompetent EU officials and institutions. The USA, UK and Russia should seriously re-consider the means to put Germany back on a short leash before it is too late.
European citizens should take a hard look at what the EU has come to under the
auspices of the current German political leadership: Disaster
Capitalism and Shock Therapy. This time it was Cyprus' turn.
Unless the citizens of Europe rediscover what democracy,
solidarity and free markets are all about, neither Spain nor Italy, nor France,
nor Germany itself will be spared.
Update, 27.3.2012:
Some people just do not get it:
- Cypriot banks were forced by
political decisions in the euro-group to accept a haircut of their Greek
sovereign debt holdings in 2011 that amounted to loses of €4.5 billion.
This loss comes to more than €4500 per Cypriot citizen. I do not have the
data for Germany's contribution but I would be surprised if it came down
to anything more than €50 per German citizen.
- Unlike German banks that were holding
Greek government bonds as a speculative investment, Cyprus Banks were
rightfully holding their liquidity in Greek sovereign bonds because Greece
was one of their major markets.
- As a result of this loss Cyprus Banks
and the Cyprus Government were subsequently downgraded to junk status, in
effect cutting them off the markets for their necessary re-capitalization.
- Cyprus had no other option but
to seek financial support for its banking institutions, from the
euro-group.
- Instead of the euro-group providing
financial assistance for the collateral damage inflicted by their previous
bad decisions they decided to go after depositors on the pretext that a
lot of them were Russian and that Cyprus' business model is defunct! Cyprus never had a single year
of recession from 1960 to 2011 with
the exception of the year of Turkish invasion in 1974.
- This led to a bank run and the
paralysis of the Cypriot banking system. At the same time Germany enjoys a
lower cost of government borrowing as evidenced by the near zero German
Government Bond yield at the expense of Spain's and Italy's which is
rising as capital flees from the euro-zone periphery to the core. All
along they claimed that Cyprus was not systemic and the bank deposits
haircut would not affect other markets!
- If the euro-group provided all the
necessary €17 billion for the required liquidity bail out assistance of
Cyprus, the loan contribution of the German Government would have amounted
to less than €70 per German Citizen. This is 64 times less that what the
euro-group shamelessly charged the average Cypriot citizen for the Greek
bail out, but they refused to do it and opted instead to sink Cyprus and
the euro-zone into this mess!
Update
28.3.2013:
The
German political leadership have better rethink what they have unleashed with
their decisions on the bail out package for Cyprus. It is not the Cyprus
business model they are proving defunct. This new weapon of mass destruction
must be contained and controlled before causing any more damage and suffering
to millions of people. I am nobody. I wake up early in the morning and for the
past couple of weeks I watch hits coming to this blog from at least 60
countries. The world is watching. Germany has the weight, the interests and the
means to make amends and whatever else is necessary. They should just do it. They
are adamant. They will not. Germany will not yield to pressure.
{Bailout fatigue says: “The Cypriots got themselves into this mess, and they should get themselves out. We’ll lend them a bit more, but only if we’re sure they’ll pay us back.” Cyprus didn’t get itself into this mess. It joined the euro system in 2008 with low public debt and a clean bill of health from EU governments (back then, not a word was said about shady Russians). Its banks are in trouble not because they accepted too many overseas deposits but because they bought too many Greek bonds -- an investment sanctified by international banking rules (which called such investments riskless) that was destroyed by the EU’s ham-fisted resolution of Greece’s threatened default.}
"Though
Cyprus only hit the front pages in the last month, its crisis has been years in
the making. Athanasios Orphanides was governor of the Central Bank of Cyprus
from 2007 to 2012, giving him a seat on the European Central Bank's governing
council and oversight of Cyprus' banks. In an interview with The Economist, Mr
Orphanides gives his views on how the crisis came about: exposure to Greece and
the global financial crisis; decisions by the former communist government (with
whom Mr Orphanides had a strained relationship); and flawed decisions by
Europe's governments."
I
wished Mr. Orphanides co-operated better with the government and exercised
better supervision of Cyprus Banks. If the government did not listen he should
have resigned in order to at least warn and alarm the public. I very much
doubt that he or anyone else warned the president of Cyprus of the actual
exposure of Cyprus Banks to the Greek PSI and
the proper course of action. I guess the president thought that the German
government had done the job right and arranged for everyone involved to
contribute in a fair way for the bailout of Greece. That is no excuse for him.
He often expressed thoughts that proved him naive. Now Mr. Orphanides is a
professor at MIT. What are the options for the people in the Cyprus
financial services industry or the thousands of businesses and individuals that
have lost their deposits and will soon have to shut down their business?
Some
eurocrats keep repeating that the EU institutions will help Cyprus recover from
this. They seem to forget that their job was to prevent this mess to begin
with. They forget that their job was to raise a voice when the German government
decided to swindle €4.5 billion out of Cypriot Banks for the Greek PSI and
subsequently send a bill of €4500 to every Cypriot. They want to forget that
their job was to make amends for the previous mistakes and not sink Cyprus into
this mess by allowing the German government to demand that Cyprus should pay an
extra €6000 per citizen as their own contribution, as a prerequisite
for any help. I very much doubt that by now they have any power or the
means to help Cyprus, even if they really want to.
Germany wants to teach Europe who is really in charge.
Update
31.3.2013
Joseph
Goebbels, Reich Minister of Public Enlightenment and Propaganda, would be very proud of Dr. Schauble - exploiting
the lowest instincts of the German people (racism, xenophobia, class envy and
insecurity), aggressively pursuing Germany's economic claims sooner rather than
later: The German taxpayer will not bail out the mistakes of rogue banks and
governments in the rest of the Eurozone. The Cyprus business model is
unsustainable and defunct. It is immaterial that the Cyprus business model never
had a single year of recession from 1960 to 2011, with the exception of 1974, a
year of war and occupation. It is immaterial that the banks of Cyprus went
bankrupt because of German policies demanded the Private Sector Involvement for
the bailout of Greece, without the due compensation to the ones unfairly harmed. It is immaterial that the blackmail for an immediate
deposit haircut would sink thousands of businesses and individuals into collapse
and despair. What matters is that Germany wins. What matters is that Blitzkrieg
proved once again to be a great success. Never admit mistakes, never acknowledge
ulterior motives. The truth is that denial will not help neither Dr. Schauble nor
Germany, neither Cyprus nor Europe..
CONCLUSION
If
Germany does not really care about the Euro, why should Cyprus? Cyprus is tiny
to do anything about it.
Remember the annexation of Czechoslovakia? Remember the invasion of Poland? Remember how some European nations supported the Nazis. Remember how most of Europe did not raise a voice to great injustice?
Germany seems to be back pursuing the dogma of "Deutschland Uber Alles" inflicting upon what they seem to regard as "inferior" nations unprecedented economic calamity and human suffering. Continental Europe is once more in a state of complete confusion and disarray unable to react, paralysed by conflicting national interests, disrespect of the principles of democracy, solidarity or legal order, incompetent EU officials and institutions. The USA, UK and Russia should seriously re-consider the means to put Germany back on a short leash before it is too late.
Update 3.4.2013
Banned from the Economist Online
If Dr. Schauble and his gang could pull this one on Cyprus without any European
Government or Institution wanting or managing to resist, why should I be
surprised if my opinion was banned from the Economist Online? I am not. I am
just thankful that the Economist allowed me to express my opinion to the
thousands of their subscribers while it lasted. I can imagine what kind of pressure
might have been exercised to the Economist from the German Government. No hard
feelings. I can understand. Thank you Economist.
You can see here below my comments that have been removed from the
Economist Online:
02:03 (10 hours
ago)
|
||||
Dear
Ioannis Economides,
Your account has been suspended on The Economist Online.
Thanks,
Comments Moderator
Economist Online
Your account has been suspended on The Economist Online.
Thanks,
Comments Moderator
Economist Online
The attached comment, posted under the pen name Ioannis
Economides, has been deleted from The Economist online. The comment was
removed because it breaks our comments policy:
http://www.economist.com/legal
We remind you that repeated violation of our comments policy may result in your being blocked from posting comments on The Economist online.
Yours sincerely,
Comments Moderator The Economist online
Your comment:
Christofias was living in his world of communist dream land. That was no
reason to swindle the Cyprus Banks. The rest of the eurogroup were minding
their own interests. They did not have that much to loose and the PSI was
reducing their own bill. It was not the Cypriot banks that were
speculating...it was the German ones!
It is not my paragarph, but the bloomberg's collumnist:
http://www.bloomberg.com/news/
[1]
Apparently he was not asleep while taking finance 101.
Sovereign debts are supposed to be considered low risk...that is until
politicians change their mind.
[1] http://www.bloomberg.com/news/
http://www.economist.com/legal
We remind you that repeated violation of our comments policy may result in your being blocked from posting comments on The Economist online.
Yours sincerely,
Comments Moderator The Economist online
Your comment:
Christofias was living in his world of communist dream land. That was no
reason to swindle the Cyprus Banks. The rest of the eurogroup were minding
their own interests. They did not have that much to loose and the PSI was
reducing their own bill. It was not the Cypriot banks that were
speculating...it was the German ones!
It is not my paragarph, but the bloomberg's collumnist:
http://www.bloomberg.com/news/
[1]
Apparently he was not asleep while taking finance 101.
Sovereign debts are supposed to be considered low risk...that is until
politicians change their mind.
[1] http://www.bloomberg.com/news/
The attached comment, posted under the pen name Ioannis
Economides, has been deleted from The Economist online. The comment was
removed because it breaks our comments policy:
http://www.economist.com/legal
We remind you that repeated violation of our comments policy may result in your being blocked from posting comments on The Economist online.
Yours sincerely,
Comments Moderator The Economist online
Your comment:
http://www.economist.com/legal
We remind you that repeated violation of our comments policy may result in your being blocked from posting comments on The Economist online.
Yours sincerely,
Comments Moderator The Economist online
Your comment:
Better a deal than no deal. Cyprus will come back.
The attached comment, posted under the pen name Ioannis
Economides, has been deleted from The Economist online. The comment was
removed because it breaks our comments policy:
http://www.economist.com/legal
We remind you that repeated violation of our comments policy may result in your being blocked from posting comments on The Economist online.
Yours sincerely,
Comments Moderator The Economist online
Your comment:
http://www.economist.com/legal
We remind you that repeated violation of our comments policy may result in your being blocked from posting comments on The Economist online.
Yours sincerely,
Comments Moderator The Economist online
Your comment:
Cyprus bail out: Could it be Germany's Nemesis?
http://economcy.blogspot.com/2
[1]
[1] http://economcy.blogspot.com/2
http://economcy.blogspot.com/2
[1]
[1] http://economcy.blogspot.com/2
Cyprus will not go down the drain, but it's banks will. What should Cyprus do now? Both the country and it's banks have junk status, financially. Foreigners will not place money in Cyprus banks anymore.
ReplyDeleteHowever. Iceland have showed it's possible to come back without a banking industry after a crash. More tourism, perhaps. High tech industries?
"That which does not kill us makes us stronger"
DeleteFriedrich Nietzche
We will make do. In five years time Cyprus will be making more money than ever before.
This comment has been removed by the author.
DeleteThis comment has been removed by the author.
DeleteIceland covered all domestic deposits, and devalued. That is what should have happened in Cyprus.
DeletePretty much this is what will happen in Cyprus if the path is continued
1. Unemployment will skyrocket
2. Cypros will turn into a cash economy
3. Many workers will not be paid, meaning strikes and riots
4. Due to tax dodging, businesses collapsing and people not being able to afford to pay, the government will run out of money
5. Massive cuts in government spending is required
6. Leads to an even worse downturn, and more riots.
7. All assets over 100K will be lost, the rest will be withdrawn
8. Tourist industry will collapse as well
9. Educated people will leave the island
10. Eventually the economy will recover and the economy will be rewinded back to 1980.
Ioannis: What makes you think the economy will be back in five years? Greece will use at least 15 years to return to its initial state. The situation in Cyprus are much worse.
The Cypriot state has so far reacted to this surprise economic attack with remarkable resolve, albeit without a plan:
Delete1. The government was realistic. Between a bad deal and a catastrophe they chose the bad deal. If they walked out of that deal the news of the story would probably have been that Cyprus refused help from the euro-group without too many details about what caused it. In that sense the Cypriot government’s stance helped expose the ineptitude and ulterior motives behind this unprecedented deal.
2. Global markets supported the Cypriot parliament to reject the deal and partially restore trust in the sanctity of insured deposits. At the same time the Parliament protected healthy Cypriot banks from any deposit haircuts, insured or uninsured, thus safeguarding their liquidity. Europe continues to be making a big mistake on the issue of the protection of uninsured deposits (at Germany’s temporary benefit).
3. The shut down of the banks protected Cyprus from uncontrolled Bank-runs. Capital controls implemented thereafter ensure that Cyprus will not run out of foreign currency for many years to come. The Banks in Cyprus are no longer closed. Payments are quickly being restored.
4. The responsibility for the loss of foreign deposits has shifted from Cyprus to the euro-group and the German Government, which caused the bankruptcy of Cypriot banks, primarily because of their policies of the Private Sector Involvement in the Greek bail out.
5. The absence of a plan makes Cyprus a small but formidable opponent. Its response continues to be unpredictable and evolves according to developments. I would not be surprised if the German Government decided to walk the whole thing back, assumed responsibility and compensated every depositor, while taking ownership and control of the Cyprus Banks. Most probably though, they will stubbornly insist to support their previous mistakes, as they have historically done in the past.
The decisions of the euro-group will cause the GDP of Cyprus to shrink by approximately 20-30% in 2013. That will be the sort of budget cuts required by the government in order to keep the budget balanced. The tax base in Cyprus is mostly dependant on indirect taxes (VAT), which are inherently very difficult to dodge. The freezing of the bank accounts of large depositors will expose tax-evaders, criminals and corrupt politicians. The criminal investigation of banking practices will expose bankers and their connections with the political elite. All these will put Cyprus in a very healthy path. The drop of real estate prices and the relaxed Mediterranean life-style will attract many wealthy individuals, Germans including, from all-over the world. The €10 billion financial assistance from the euro-group, if eventually approved by the German Bundestag, will help the government of Cyprus to make ends meet. Hydrocarbon deposits in the eastern Mediterranean could strengthen the cooperation of Cyprus with Israel and the USA, allowing Cyprus to transform into a more dynamic and libertarian economy, in addition to the economic benefits from the development of this new industry. Cyprus’ good relations with the Arab world could help Israel find better acceptance in the Middle East. Geography will continue to attract foreign companies. Healthy banks will support Cyprus establishing itself as an international business services center like never before (regardless of the opposition of Germany).
Albeit German misconceptions, Cypriots are hard working, highly educated entrepreneurial and most importantly very adaptable. They pursue success but can accept failure too. They can live frugally as well as affluently. Most of them will give a helping hand to their fellow citizens in need. Some of them will migrate temporarily overseas, but they will eventually return with lots of professional experience. Cyprus recovered very quickly from the loss of almost 70% of its GDP after the Turkish invasion in 1974, while more than one third of the population lost everything and was living in tents. Cyprus will do it again.
Yes, Cypriots are hard working, but even if everyone was German it would not make much of a difference. The economy will still crash. While GDP is likely to drop by 20-30% in 2013, it will not be the last year the GDP will drop.
DeleteYou are not correct when stating GST is the main income source. The GST in Cyprus is in fact lower than most countries, and its not impossible to avoid. Just don't run a formal business or understate your income. Thats very easy to do if you run a business with just cash. In fact what you will see is Cyprus going from a low tax country to a high tax country to pay the deficit.
But I think your first year estimations are right, because taxes are going to increase. 20-30% cut in revenue will lead to massive government cuts. That with increased taxes will reduce the income and spending of the people in Cyprus even more and starve off businesses. Then you will see another drop of at least 10%, and then the debt level will go out of control so Cyprus needs to default. That is not going to be easy. Every single year people will see their salaries cut, taxes will increase and formal businesses will die. The underground economy will be growing, but it won't be much help for the formal economy. Even if people don't want to cheat on taxes you won't be able to afford to.
When this is over Cyprus will be more like a banana republic to be honest. The people will be poor, educated people will leave. Taxes will be very high, and most people will avoid taxes just like in Greece.
Yes, in 1974 Cyprus recovered fast. But there are a few differences. First off, Cyprus was much poorer. It is much harder to recover when the income is high, because businesses needs to be recreated, and the whole financial industry is dead. Tourism can't flourish because while internal devaluation is reducing income, taxes are increasing costs. Greek wages have dropped by a lot, but costs haven't.
Cyprus is part of the euro. That will lead to a much more severe downturn that will last many years. Of course when the economy finally recovers it will grow fast, but it will take ages before it returns to current levels. Cyprus needs to leave the euro, because only then it can devalue and print money so some of the deposits can be saved, and the only way that can happen is if the Cyprus population march to the parliament and demand it, because they don't have your best interest in mind.
5 years time is way too overoptimistic even if you drop the euro. I predict about 10 years if you drop the euro and implement the right policies. If you don't and follow the current path it will take at least 20 years. And potentially the people could burn down the parliament and impose socialism, hence you will never recover. The situation is a lot worse than you think. Also, it is unlikely that anyone in power get prosecuted. Politicians do not prosecute themselves.
BTW: Those 10 billion you talk about. 7.5 of those are going straight back to Germany to pay matured debt. 2.5B is the actual bailout, which will go straight to the banks. Zero will go to the population.
BTW2: No one is going to be interested in buying property i n Cyprus any time soon. It doesn't matter how cheap the property is. People are scared of moving their money into Cyprus, especially under capital controls. Also, Cyprus is not the only country who have seen declining property prices. They can just as well buy a property in Spain.
BTW3: Those capital controls is going to last for years to come, as they can't let people with locked money move it out. That may be a good thing to keep the banks stable, but it certainly is not a good thing for the economy. That also means very little foreign investment, and businesses will have a hard time conducting businesses. Also, businesses is likely to collapse due to not having capital.
The first initial problem is that business will run our of capital. That is because most of their capital is seized and they got payrolls and costs to pay. Many businesses will die this month due to this.
DeleteThen a lot of businesses who have lost their capital, but is still surviving will die due to lack of customers. Your capital is cut down to 100K. You sell assets for 800K, but the business will eventually die because income exceeds expenses by a large margin.
And some businesses will move or shut down because their business is not profitable anymore
In total this will lead to a massive increase in unemployment and huge losses in tax revenue for the government. Then when the government cuts it will have to cut benefits for all of those unemployed, fire public workers and cutting wages. This will lead to riots and strikes, which means more businesses will leave.
Cyprus is currently stuck in a very bad negative cycle that will prove almost impossible to break. It will break eventually, but by then the whole economy will be set back to the 1980s.
It is no use arguing about the facts: 36% of Cyprus government revenues are based on taxes on the production and imports, 29% on income and wealth, 22% on social contributions. VAT is difficult to dodge because businesses get charged VAT when they buy goods and the only way to get it back is to declare their sales. People in Cyprus pay mostly by credit card rather than cash. They are not going back to a cash economy. That is the primary reason we did not evidence long queues at the banks after they have been closed for 10 days. It was mostly old people queuing that did not use credit cards or ATMs. It is not like transactions stopped in Cyprus because the banks were closed. Wholesale trade was the one disrupted mostly by this mess. Capital controls did not stop people investing in Cyprus up until 2004. This is an emergency measure under the circumstances and will last for as long as it offers more benefits than costs. The EU will not allow capital controls unless necessary. They violate one the basic freedoms of a free market.
DeleteA lot of people will get prosecuted for their mischief. Bank employees have gotten really agitated and they hold a lot of confidential information that have begun leaking. It will be very difficult for some private professionals or politicians who have been declaring low incomes to justify their high deposit accounts. Politicians can no longer stop this.
It is no use arguing about the future. I say that Cyprus has managed to come out of worst economic troubles before. I cannot think of any previous period that Cypriots were in a better position to deal with such a problem. After all, Cyprus did not become a financial service center without a deep knowledge of banking and finance. There can be no better advertising campaign than a good reaction of Cyprus to this externally inflicted calamity.
You have your motives to say what you are saying I have mine. It does not really matter what we say but what we do. I will be sticking around and I say there are some great opportunities. You say sell, I will be buying.
Let's continue this conversation in 2015.
- Why do you relate the additional capital (actually, the first estimation) needed to save the Cyprus banks to the population of Germany? Of course these numbers are low, but do they make any sense?
ReplyDelete- You mentioned the defunct business model of Cyprus banks. Is is it defunct, or not? What does it mean if approx. 80bn$ (>4 times the GDP of Cyprus) are invested in Cyprus banks, largely by Russians, and Cyprus banks invested approx. 40bn back in Russia. What is the USP of such a round trip business?
- What is your vision of Europe?
1. I relate any additional capital to save Cyprus Banks to the population of Germany so that I can be on the same page with populist German politicians that have been telling the German public that the bail-out of Cyprus would cost each German citizen €2000: http://www.youtube.com/watch?v=aETfqi9OREA
Delete2. Cyprus economic model is definitely not defunct. Just because you do not understand it that does not mean that I have to explain it to you or that there is anything illegal, unethical or unwanted about it. Even if there was no government should act as prosecutor, judge and executioner (that is unless we live in a dictatorship that we have not realized). In a single currency Union it should not matter the size of the Banking or any other sector relative to GDP. Obviously, Banking is (was) for Cyprus a major export industry. Germany has an oversized manufacturing industry but no one was complaining. I did not demand that you had to explain it to me. I did not complain that Germany was depending on Russia for its energy and helping the “Russian Oligarchs” that run Gazprom. On the contrary, we enjoyed purchasing and driving German cars or using German equipment. The good trade relations of Germany with Russia gave us re-assurance that we would live in peaceful world.
3. My vision of Europe was a united states of Europe were government(s) and European Institutions would care about all European citizens and where personal freedom would not be sacrificed against any other political objective. I have to admit that all I am thinking about these days is how to help my co-citizens escape from this nightmare whereby our “partners” demolished overnight what we have been building in Cyprus in the past 30 years.
I respect that it is and will be hard in Cyprus right now. I wish it was different. However, Europe is big, and many Cyprus people might find chances elsewhere in Europe.
DeleteYour conception of Europe is and was wrong. Europe is not a big mother that can take care for everyone. Of, course it is easy to say this sitting here in Munich. However, it applies also here. Europe is a Baby. It can hardly take care of itself. It might become a United States of Europe in some hundreds of years, when it is grown up. Until then it has to develop to become at least more effective, more efficient, and more united. By now it has not even a constitution. And you are already demanding fraternity!
To my knowledge the Cyprus bank sector relied largely on money laundry and risk shifting businesses towards European guarantees. I asked you to comment on this, but you refused. At least, it is confirmed by the round trip businesses with Russia an Asia. It is also false comparing these rent seekings, which are neither are based on innovations nor bring up new innovations, with competitive production and service sectors. Which method would you propose to adjust Germany's balance trade? It leads to nothing to always compare apples with peaches and, by this, justify one’s own advantages.
Europe with its coarse and clumsy controlling facilities did not let down the Cyprus people. The contribution of people with less than 100k was proposed by your own president. It should have been rejected, of course. Everything should have been communicated more sensitive! However, Europe just made a small step in the right direction. Although it might be hard to bear, but your solution might not be less Europe, or even zero Europe, but more Europe…of a Europe that we all have to fight for.
You do not respect anything. You are just saying that.
DeleteGovernments or eurogroup should not pick winners. Markets should.
I never said anything about my conception of europe. What I mentioned about my vision are basic obligations of any government. What are you mumbling about?
Money laundering is illegal. There are rules and courts to deal with that. I am not interested about the rest.
Who ever said that my President is any smarter than yours? Europe made a big step in the wrong direction. Deposit haircuts (either insured or uninsured)should be avoided with great effort. You do not have to believe me. Just observe the facts and use reason to come to your own conclusions. I guess you come from Germany.
You may think you will be spared. I hope you will. I do not wish to find out what would be Germany's reaction in that case. Maybe a third one? But please, do not pretend you did not know this time.
1. "Cypriot banks were forced by political decisions in the eurogroup to accept a haircut of their Greek sovereign debt holdings in 2011 that amounted to loses of €4.5 billion."
ReplyDeleteSo you think that without the involvement of the Eurozone, the Greek state would not collapse? The €4.5 billion were already lost long before the eurogroup "political decision". Moreover, the eurozone advocvated a 50% haircut (50% private sector involvement). But most Greeks wanted a 100% haircut (100% private sector involvement). Do you remember Syriza and their program?? They advocated a default on all Greek state debt. Cypriots should thank Angela Merkel for not allowing a 100% bancrupcy of the Greek state (the Greek bancrupcy was supported both by Syriza and the German public).
Please keep in mind that your Greek brothers were ready to incure even hevier losses on the private sector (thus on the Cypriot banks).
You should thank eurogroup for saving the 50% of the value of the greek bonds.
2. "Cyprus Banks were rightfully holding their liquidity in Greek sovereign bonds because Greece was one of their major markets. As a result of this loss Cyprus Banks and the Cyprus Government were subsequently downgraded to junk status"
But you can not blame eurozone for these losses. It was a bad decision to put so much money to Greece in the first place. Cypriot banks should have diversified their investments, in the same way Swiss banks diversify their investments.
3. "Cyprus had no other option but to seek financial support for its banking institutions, from the eurogroup."
Yes, Cyprus should have applied for assistance a lot earlier.
4. "Instead of the eurogroup providing financial assistance for the collateral damage inflicted by their previous bad decisions"
It was not eurogroup's decision that Greece collapsed. The eurogroup can not force Cyprus into accepting the assistance. The Cypriot government needs to apply for such assistance. It did not apply for the assistance.
"They decided to go after depositors on the pretext that a lot of them were Russian and that Cyprus' business model is defunct!"
No. They decided to go after depositors because there were too few bondholders who could carry the burden of restructuralisation.
You should also keep in mind that the insured deposits (bellow €100k) will be covered by european capital (German taxpayers), because the Russian (private) capital cowardly fled.
5. "This led to a bank run and the paralysis of the Cypriot banking system."
Noone forced the Russians (and other foreigners) to withdraw their money from the banks. Blame them for your problems. Go talk to them. Make apology for your past mistakes, promise to diversify your investments better (instead of putting all their money to Greece). Then they will return.
"capital flees from the eurozone periphery to the core"
Again: ask yourself a questin: why do Russians (and other foreign investors) move their money from Cyprus to Germany?
Why do you blame Germans? Blame the Russians. Blame other investors for withdraving their money from Cyprus.
You should thank Germans for providing their money when other investors (incl. Russians) cowardly fled the Cypriot banking sector.
6. "If the eurogroup provided all the necessary €17 billion for the required liquidity bail out assistance of Cyprus , the loan contribution of the German Government would have amounted to less than €70 per German Citizen. This is 64 times less that what the eurogroup shamelessly charged the average cypriot citizen for the Greek bail out, but they refused to do it and opted instead to sink Cyprus and the eurozone into this mess!"
Again. It was not Germans who sinked Cyprus. Investors who fled Cyprus are to blame. Please wake up and stop blaming Germans.
Blame the Greek government, because the Greek government failed to pay the money it owed to Cypriot banks. Blame the international investors (the Russians) for cowardly fleeing the Cypriot banking sector.
"In a single currency Union it should not matter the size of the Banking or any other sector relative to GDP. "
ReplyDeleteOf course it matters. Customers keep buying cars even in the time of crisis. That is why Germany is doing quite well. The car industry sinks, but very slowly.
But investment banking? Customers can withdraw their investments in one second.
As you can see, it is much riskier to base your GDP on finance services. This is not a question about of morality and ethics.
You have too many questions. I will try to cover most of them, although not one by one:
Delete1. Sovereign bailouts in a currency union should be arranged by other sovereigns, not the private sector. The Greek governments have a lot to be blamed about the Greek unsustainable debt but so does the ECB and the eurogroup. I would have no objection to Cyprus contributing its fare share for bailing out Greece. The Greek citizens of course would have to contribute the most (per citizen). Who was to be blamed is irrelevant, although the ones responsible should pay the consequences under the rule of law. A loss of €4500 per Cypriot citizen is not a fare share. Cyprus never complained for being a net contributor to the EU budget, unlike Germany. I personally understand that it is in our best interest to help the poorer or weaker members of our society to keep the pace with rest of us.
2. Cyprus Banks were not investing in Greek Sovereign bonds unlike Swiss or German Banks. Cyprus Banks are not investment Banks, they are retail banks. Plain vanilla, low risk, low profit, retail banking. They operated in Greece and held a large portion of their liquidity in the sovereign debt in the market they operated. Any diversification to other securities in markets they were not operating would be speculation (unless they were investment banks). It is the responsibility of the sovereigns to ensure that sovereigns do not default and if they mess up they should support each other and assume responsibility. Involving the private sector could have dire consequences, as evidenced in the case of Cyprus Banks, and should be done with extreme care. If the haircut contribution of Cyprus Banks was a double digit contribution per Cypriot citizen no-one would be complaining.
3. Russians and other foreign (and local) depositors move their deposits from the periphery to the core of the Eurozone because the policies of the eurogroup scare them off. Banking is about trust. Deposits are converted into long term loans. No Bank can survive a bank run. In the case of Cyprus depositors began withdrawing their deposits because Cyprus banks were severely downgraded after the eurogroup inflicted the blow of the Greek haircut on them.
4. You are wrong if you think that manufacturing is more secure than anything else during a crisis, especially retail banking. Just wait and see. Cyprus never had a recession from 1960 to 2010, with the exception of the year of Turkish invasion in 1974. It took un unfair political decision by Germany for Cyprus to have its first recession in 2011. But anyway, you wouldn’t expect Cyprus to manufacture cars, or would you?
5. I never preached morality of ethics, unlike populist German politicians. I support that it is in our common interest to support each other when things go wrong. That does not mean that the ones messing up should not suffer the most (per person). Also that we should all be equal under the law.
6. Banking is private business. If Cyprus Banks were defaulting because of bad management I would support that their stakeholders pay the price. However, Cyprus Banks are defaulting because of bad political decisions. No government or eurogroup has the right to pick up winners.
If I have friends like yourself, what do I need enemies for?
I was not talking about Greek bailout. I was talking about Greek default. Do you know what happened in Greece? Greek state was not able to pay their debts. I am sorry to say that (and I am sorry for "teaching" you), but you seem to forget the basics. Basically, there were two solutions:
ReplyDelete1) Default. Greek state is not able to service its debt. Do you know what default means? Dečfault means that the value of Greek bonds drops to zero, because Greece never pays them. In this situation, Greece does not need "bail-outs" or austerity measures. The losses go to the Greek bond holders (incl. Cypriot banks). They suffer a loss of 100% of the value of the Greek bonds. Greece can no longer borrow on international markets. Who wanted this solution (default)? Syriza. Because they wanted to avoid the austerity measure. German taxpayers, because they did not want to bailout Greece.
2) Partial default and partial bailout. Bailout means that the eurozone buys greek bonds (in situation when noeone else wants to buy them) in order to prevent a 100% default and safe at least some value of the Greek bonds. They have saved 50% of the value of the Greek bonds. The private bondholders (incl. Cypriot banks) were lucky that they saved 50% value of the Greek bonds. The alternative was 100% loss.
You have started the blame game. You have blamed eurozone for the losses the Cypriot banks suffered in Greece. This is a complete nonsense. Greece went to partial default (50% loss in Greek bonds value). If the eurozone did not intervene, it would go complete default (100% loss in Greek bond value).
Moreover, how can you blame eurogroup for the decision to bailout Greece? The decision was made collectivelly by all eurozone states, including Cyprus. So it was also your decision.
"Plain vanilla, low risk, low profit, retail banking."
If they run a "low risk retail banking" why did they put their money in the risky Greek bonds? As we saw, Greek bonds were not "low risk". The problem was that Cypriot banks believed that Greek state can not default. Bad risk management. Bad risk calculation.
"They operated in Greece and held a large portion of their liquidity in the sovereign debt in the market they operated. Any diversification to other securities in markets they were not operating would be speculation (unless they were investment banks)."
What? There is no rule that says "you have to buy sovereign debt of the country where you operate". Moreover, the deposits are fairly diversified. They come from Russia, UK, and other countries. The Cypriot banks therefore did not operate "on the Greek market", but on the international market. So why didnt they buy other bonds? Russian bonds, British bonds?
I will not be answering any more of your questions. You are not listening anyway. Over and out.
Deletehttp://economcy.blogspot.com/2013/03/germany-and-its-brethren-satellite.html
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ReplyDeleteI know you are not listening to me. Read something else:
Deletehttp://www.bloomberg.com/news/2013-03-27/cyprus-s-plan-b-is-still-a-disaster.html#disqus_thread
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ReplyDeleteWow. Censorship.
ReplyDeleteWhat is wrong with saying that the US currency union has a "no-bailout" rule?
I only replied to your proposal that "in currency union sovereigns are oblidged to bail out other sovereigns"
http://www.financialmirror.com/research-details.php?rid=25407&rt=News
DeleteOK, so you want a monologue?
ReplyDeleteI listen to your arguments well.
Relax. Stop accusing others of "Hubris". The Greek mythology teaches us that thinks are more complicated than they look at the first site.
Stop abusing your power.
http://www.bloomberg.com/news/2013-03-19/in-cyprus-europe-sets-a-new-standard-for-stupidity.html#disqus_thread
Delete"Cypriot banks are in trouble not because they accepted too many overseas deposits but because they bought too many Greek bonds -- an investment sanctified by international banking rules (which called such investments riskless)" (from Clive Crook)
ReplyDeleteHmm, I did not know that. Such rules should not be here in the first place. It was stupid to force Cypriot banks into buying Greek bonds.
Never too old to keep learning
DeleteBut still, you can not blame eurogroup for the losses from the Greek bonds. The market incured the losses.
DeleteThe eurogroup did all its best during the Greece bailout.
And you can nor remedy a bad rule ("government bonds are riskless") through the introduction of a new bad rule ("sovereigns are oblidged to bail out other sovereigns")
Come on, don't be such a blockhead! Never mind. If Schauble can, why shouldn't you. Let's write up new rules every time we face the same problem, so that the little guy can never win. Why not, you would argue. Isn't that the way nature works? I am not complaining. I am just confirming Einstein's theory of stupidity: "Only two things are infinite, the universe and human stupidity, and I'm not sure about the former". We will make do. In five years time, Cyprus will be making more money than ever before.
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