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Also path-dependency. Once you start following the austerity route, promising "painful but necessary change", you can't change tune, not without losing all your credibility. Because that means saying "I caused you all this pain for no good reason, I was just really stupid".

I think Cameron and the other people in the UK government are starting to understand they have screwed up very badly, but there is no going back any longer. There is no alternative.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sun Mar 17th, 2013 at 06:09:07 PM EST
[ Parent ]
And I was fine with that reading of events until they illegally - and this move blatantly is illegal under european law-  destroyed deposit insurance. There are no economic theories they could be operating under that could justify that, not even in their heads.

There were many other options on the table, and all of them - up to and including "Let the Cyprus banks go under, pay out deposit insurance" were much, much less likely to cause bank runs. Obviously so.

So this is a deliberate attempt at causing a bank run. Logically, it has to be. Please, someone explain to me a more likely goal served by this? Because thinking that the central bank is either run by outright villains or alternatively, is in thrall to a hostile power is not a pleasant place to be.

by Thomas on Mon Mar 18th, 2013 at 02:41:52 AM EST
[ Parent ]
A bank run in the periphery will be the likely outcome. So that leads to money flowing to Germany, Switzerland and out from existing banks in the periphery. In addition to profit motives, this weakens the governments in the periphery as bank restructuring is one of those things they can not afford while staying in the eurozone. And leaving the eurozone means quick and painful rebalancing of the current account plus that the previous austerity was for nothing. All of which the governments in the periphery is trying to avoid. So essentially we have a re-start of the eurocrisis.

Now, lets look at the actors. If (and that is a big if) Schäuble is to be believed it was the Cypriotic governemtn, the EC and the ECB that wanted this. The Cypriotic government has not much of a negotiating position, so I think they can be ignored here. Leaves the EC and the ECB, two legs of the Troika. Restarting the crisis and putting more countries under Troika managment will mean that the Troika - and in particular the ECB - will gain in power.

So both class warfare per TBG and an ongoing coup to gather the real power under the ECB fits.

If one wants to put a narrative on it, it is the ECB doubling down after being scared by the Italian election result. They can't attack Italy directly at the moment so they weaken the periphery collectively hoping for bank runs in Italy to scare the politicians there into forming a pro-austerity caolition. But that is just guessing.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Mon Mar 18th, 2013 at 04:11:16 AM EST
[ Parent ]
They can't attack Italy directly at the moment so they weaken the periphery collectively hoping for bank runs in Italy to scare the politicians there into forming a pro-austerity caolition.

Italian parliamentarians are perhaps as likely to be scared into forming a Euro-exit coalition : if we're going to be fucked over, let's do it ourselves rather than being done by the ECB.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Mar 18th, 2013 at 05:55:10 AM EST
[ Parent ]
Politically speaking bailing out Russian gray money in a tax haven is not possible. The German elections are too close. There simply is no majority. If Schäuble's behavior indicates that it is so, it is so. That man is smart.

That would mean risking letting Cyprus drop out of the Euro. They lacked the balls for that either. Hence a compromise that combines all of the disadvantages of the various options with none of the advantages.

by oliver on Mon Mar 18th, 2013 at 04:26:33 AM EST
[ Parent ]
The Russian money is a smokescreen. What's really politically unspeakable is the following: (quoted in the story body)
The ECB is hiding the results of a study about the distribution of financial wealth in the eurozone until after the decision about an aid programme for Cyprus, Frankfurter Allgemeine reports this morning, quoting unnamed central bankers. The intention of the delay is to prevent the data being used to question the programme. The ECB has been running these polls since 2006. Some of the national central banks, including those of Italy, Austria, Luxembourg and Spain, have published their own national results, but others have not. The article says the data contain "politically explosive material". For example, Italy's financial wealth, at a median value of €164,000, lies above that of Austria, at €76,000. While the Bundesbank has not published the data, the German median value is thought to be in a similar range - in other words way below that of Italy.
The German government cannot allow a discussion of wealth inequality and household savings in Germany which would demonstrate that the German working class has not only been shafted over the past decade with the much-touted "competitive reforms", but that they are also being shafted now.

And from Zervos in Business Insider (quoted by ARGeezer)

All of us should really take a moment to consider what the governments of Europe have done. To be clear, they initiated a surprise assault on the precautionary savings of their own people. Such a move should send shock waves across the entire population of the developed world.
In "less developed" parts of the world - and I think nobody will be offended if it's pointed out that the rule of law is probably more reliable in Germany than in Cyprus, and that the country is wealthier, people need much smaller "precautionary savings".

What this is doing is, at least in Cyprus, sending people on an "all cash" position (and I mean cash under the mattress, not cash in the bank as "all cash" would be understood by "investors") if not entirely off the Euro, into gold or other currencies.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Mon Mar 18th, 2013 at 05:57:10 AM EST
[ Parent ]
Got myself into a tangle there...
In "less developed" parts of the world—and I think nobody will be offended if it's pointed out that the rule of law is probably more reliable in Germany than in Cyprus, and that the country is wealthier—people need much smallerlarger "precautionary savings".


I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Mon Mar 18th, 2013 at 06:19:23 AM EST
[ Parent ]
One thing that would interest me in these cross-country comparisons of private wealth is the degree to which the differences are accounted for by differences in home ownership patterns. In Ireland for example, home ownership is extremely high, resulting in both hish figures for private wealth and huge figures for private indebtedness.

This is mainly for historical reasons. There is a huge historic antipathy towards renting, because it was always about an Irish tenant class paying rents to a British landed gentry - even during the famine when most people were starving. Owning your own property, be in house or farm, became a key symbol of national and class independence from Britain and the British ruling class.

In more recent times the inadequacy of public pensions and the rapaciousness of the private pensions industry meant that a key way of providing for your old age was to own your own house/farm and perhaps one or two other properties as well from which you could draw a small "pension" or income.

My point is that all of this makes it look like Irish people are relatively wealthy when in fact they are heavily leveraged and reliant on property ownership to provide basic income security. In Germany, I suspect, by way of contrast, there is no comparable insecurity about the reliability and adequacy of public pensions/health provision and thus no need to build up a comparable equity base in property or other assets.

I would be interested in whether a similar phenomenon is at work in Mediterranean countries, and on whether anyone has any hard data on this.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 18th, 2013 at 06:33:02 AM EST
[ Parent ]
 In Germany, I suspect, by way of contrast, there is no comparable insecurity about the reliability and adequacy of public pensions/health provision and thus no need to build up a comparable equity base in property or other assets.

It is also a tenant law thing. Strong laws protecting tenants give them stability and less desire to own. That said with their low homeownership rate germany is rather the exception in europe.

But of course all of this is well known and I see no direcht relation with the cyprus bailout.

And the russian money in Cyprus is real enough.

by IM on Mon Mar 18th, 2013 at 07:14:00 AM EST
[ Parent ]
I was more commenting on the alleged ECB report showing much higher levels of median wealth in Italy than in Germany and how difficult this makes it for Germans to contemplate bailing out allegedly wealthier countries who don't play by the rules.

Also, as an aside,  it is easy to grasp at a narrative alleging vaguely illicit Russian "grey" money when we don't know much about how this is different from trillions of other "investment" money looking for a home all over the world. If the Russians had put their money in senior bonds (like German banks?) rather than into deposits, would this have made it less grey? Is Russian or German money in Swiss banks any less grey?

It seems to me that individuals with some but not a huge amount of wealth are more likely to put their money into deposits rather than bank bonds - which are more the preserve of the seriously rich - but what do I know... this is a different world to the one which I inhabit.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Mar 18th, 2013 at 07:41:41 AM EST
[ Parent ]
Bonds are often traded at big nominal values, say 100 000 euros. You can buy bond funds, but then you have to live with a management fee, and there is also a long waiting period (like three days) to get out of your position, while both bonds and deposits can be liquidated immediately.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Mar 18th, 2013 at 07:46:44 AM EST
[ Parent ]
But of course all of this is well known and I see no direcht relation with the cyprus bailout.
Ahem
The ECB is hiding the results of a study about the distribution of financial wealth in the eurozone until after the decision about an aid programme for Cyprus, Frankfurter Allgemeine reports this morning, quoting unnamed central bankers. The intention of the delay is to prevent the data being used to question the programme.


I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Mon Mar 18th, 2013 at 08:12:11 AM EST
[ Parent ]
That is nonsense. This isn't the first study of this sort. The basic results are well known. Mostly a house owning thing. And there will be resistance to the cyprus bailout anyway.
by IM on Mon Mar 18th, 2013 at 08:25:24 AM EST
[ Parent ]
So the ECB's actions and beliefs as reported by the FAZ are nonsense?

In any case, it might be true that releasing the report int he middle of the Cyprus bailout debate mught have short term political implications. Media narratives, news cycles and all that.

What's extraordinary is that they had been "monitoring the effect of Cyprus on the markets" over 90 days and decided Cyprus posed no contagion risk, while at the same time making decisions about the release of unsurprising economic data based on diffuse fears of BILD Zeitung.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Mon Mar 18th, 2013 at 08:47:55 AM EST
[ Parent ]
I think the politicians were genuinely oblivious to the possibility of causing a bank run. (Yes, despite the European Commission telling them)

Also, it was the Cypriot President that insisted on no deposit haircuts above 10% (for deposits above €100k).

Here are the two most egregious elements of the deal: Schäuble not wanting to touch the senior bondholders, and the Cypriot President willing to renege on the deposit guarantee. Also the ECB saying "we're willing to let your banks fail which will put you on the hook for €30bn in deposit insurance".

So the calculus being presented to the depositors by the ECB is "either you give up €6bn or you lose €30bn", because Germany doesn't want to burn the bondholders and Cyprus doesn't want to burn the oligarchs.

The IMF wanted to leave deposit insurance intact and large losses for senior bonds and uninsured deposits. They also forced the issue because they wouldn't loan to Cyprus if the country's debt-to-GDP would end up above 140%.

Now, involving the IMF in loaning Euros to a Eurozone country is one of the most inexplicable things of this whole 3-year "crisis management" but such is life.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Mon Mar 18th, 2013 at 05:47:24 AM EST
[ Parent ]
I think we have to accept that the people at the ECB and EC operate under a different understanding of reality than we, and most economists, do. They are thoroughly influenced and even blinded by their ideology. It's a bit like the Iraq war. We understood it was absolutely stupid, even I who was just 17 at the time understood that, but all these highly educated and intelligent American officials did not.

The ECB+EC people believe that Europe's return of growth is dependent on investor confidence, because if confidence returs investors will invest and create jobs and hence demand, even if ironically don't admit the problem at the moment is a lack of demand.

Krugman has called this the belief in the confidence fairy. If we just behave virtuosly, she will arrive, wave her magic wand and make all the economic problems go away. They also believe that the one thing which scares investors the most is when bondholders have to take haircuts (in spite of the fact that the reason bondholders get higher rates than you get for deposits at the central bank is that they carry higher risk), followed by bondholders being converted to equity, or equity holders being invited to take part in rights issues.

It is unclear why they believe these things, as they are not in any way supported by evidence. According to surveys, investors currently refuse to invest not because they lack confidence (or because taxes are too high and regulations too paralyzing), but because there is not enough demand for their products. Why build a new factory when your old one is operating at half capacity? Further, why should you worry in the least over bond vigilantes when every country with a central bank which is doing its job can borrow at the lowest rates for several centuries?

Because this is ideology. It is belief. This is a world-view which says the world works in this way, and damn the consequences and evidence. This is the why Olli Rehn tells economists to stop researching this subject, because evidence will show that the current policies are not working, which will undermine confidence and hence stop said policies from working. Pointing out that confidence is not the crucial factor will result in the same kind of answer, in this Kafkaesque world of circular arguments.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Mar 18th, 2013 at 07:37:00 AM EST
[ Parent ]
Starvid:
It's a bit like the Iraq war.

The analogy is striking. Untold mayhem and suffering unleashed with cascades of "unforeseeable consequences" (mostly foreseeable), because of a mistaken belief which didn't stand up to serious scrutiny : the existence of WMD.

"Growth through austerity", on the other hand, seems to be much more tenacious as a belief : it only took a few months to deflate the WMD myth, but the ECB are laying waste to one country after another, without comprehending the visible disproof of their doctrine.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Mon Mar 18th, 2013 at 08:57:00 AM EST
[ Parent ]
This read is no longer supportable. Because if belief in confidence was the guiding star, then actions as arbitrary and unforeseeable as illegally bailing in depositories would be unthinkable. It would simply never occur to someone honestly ascribing to such a paradigm to do this.
They are not doing damage because they do not know better. Damage is the point.
by Thomas on Mon Mar 18th, 2013 at 11:40:56 AM EST
[ Parent ]
When they talk about 'confidence' they mean 'investor confidence'. If the 99% are involved in a bank run it is of little consequence as long as 'investors' are 'confident'.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Mon Mar 18th, 2013 at 12:59:23 PM EST
[ Parent ]
The point is the arbitrary and unforeseeable nature of the revocation of the bank guarantee. Why would investors think themselves safe from random and illegal confiscations when the people are not? They cannot. And thus, this move strikes directly at the heart of what they profess to hold most sacred. So they must be liars. The values they profess are not the values they hold, and they are attempting to sow chaos.
by Thomas on Mon Mar 18th, 2013 at 01:11:36 PM EST
[ Parent ]
The Cypriot banking sector was - and is - a cancer. Having a finance sector that pays nine times the interest of everyone else, and is holding assets 8 times your gdp is madness. This move does not end this state of affairs.
It does damage the savings of everyone in Cyprus, makes whole bondholders that should not be made whole, and undermines the faith in deposit guarantees across the continent. It is vile end-to-end. Evil, embodied in accounting.
by Thomas on Mon Mar 18th, 2013 at 01:19:01 PM EST
[ Parent ]
That's what I believe to be at the core of what drives the political classes, especially the German ones. To admit that their wonderful reforms of the German labour market in the previous are at the core of the problem is impossible.
by Colman (colman at eurotrib.com) on Mon Mar 18th, 2013 at 08:10:59 AM EST
[ Parent ]

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