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Sun Mar 17th, 2013 at 09:00:08 AM EST
Bringing over the discussion in the Weekend open thread.
The biggest news out of the European Council last Thursday and Friday is the "resolution" of the Cyprus banking crisis. The Cypriot President, Nicos Anastassides, issued the following statement explaining the situation on Saturday, March 16:
In the extraordinary meeting of the Eurogroup, we faced decisions that had already been taken and came across faits accomplis through which we were faced with the following dilemmas:
On Tuesday, March 19 we would either choose the catastrophic scenario of disorderly bankruptcy or the scenario of a painful but controlled management of the crisis, which would put a definitive end to the uncertainty and restart our economy.
A possible choice of the catastrophic scenario option would have the following consequences:
As a result of the above, the service sector would be led to a complete collapse with a possible exit from the euro. That, in addition to the national weakening of Cyprus, would lead to devaluation of the currency by at least 40%.
The second choice was the controlled management of the crisis, through the decisions taken and which can be summarized as follows:
- On Tuesday, March 19, immediately after the holiday weekend, one of the two banks in crisis would cease to operate, since the European Central Bank, following the decision already taken, would terminate the provision of liquidity. The second bank would suspend its work, and neither could avoid collapse. Such a phenomenon would instantly lead 8.000 families to unemployment.
- The State would be obliged to compensate depositors in response to the obligation regarding guaranteed deposits. The capital required in such a case would amount to about 30 billion euros, which the State would be unable to pay.
- A proportionate amount corresponding to the deposits of thousands of depositors for deposits over 100.000 Euro, would be led to a vicious cycle of asset liquidation, and these depositors would suffer losses of over 60%.
- Such an uncontrolled situation would push the whole banking system into collapse with all the attendant consequences.
- Thousands of small and medium enterprises, and other businesses would be driven to bankruptcy due to their inability to trade.
We are not aiming to gloss over the situation. The solution chosen may be painful, but it was the only one that would allow us to continue our lives without adventures. It's a decision that leads to the historic and permanent rescue our economy.
- Ensuring the liquidity of the banks and the rescue of the banking system through their recapitalization.
- Rescuing 8.000 jobs in the banking sector and thousands of others which would be lost as a corollary of not maintaining the operations of banks.
- Total rescuing of deposits, with just the exchange of a small percentage of savings with shares of the two banks. Currently, these shares do not have their full value, but with the economic recovery they will repay most it not all of the amount that will be cut.
- This option results in a drastic reduction of public debt, makes it manageable and sustainable and relieves future generations from the burden of repayment.
- It saves provident and pension funds and avoids taking other tough measures such as wage and pension cuts that were put on the negotiations table.
- It avoids further recession and the risk of the vicious circle of a second memorandum.
To me, the most important bit is the claim that
we faced decisions that had already been taken and came across faits accomplis
In an update to her blog post discussing why this is a big deal, Frances Coppola writes:
It appears that Cyprus came very close to actual default. This tweet from Yiannis Mouzakis shows that the ECB was preparing for collapse of Cyprus's two main banks:
Local reports, the blackmail to #Cyprus peaked at 3.00am on Sat when Asmussen called Draghi, said ECB to prep for collapse of two Cyp banksThe timing of this is exquisite and it is hard not to conclude, as Mouzakis does, that it was done to put pressure on the Cypriot government in order to obtain a deal at any price, regardless of the consequences for the Cypriot economy and for its people.
On the substance, Coppola writes
Plenty of people have questioned why small depositors had to be hit at all. The German financial minister, Wolfgang Schäuble, who appears to have masterminded the bailout plan, wanted large depositors to take a much larger hit so that small depositors could be protected. The IMF took a similar view. It seems that the Cypriot government did not agree. There is considerable speculation as to why the Cypriot government preferred to see small depositors hit. To me it seems most likely that it has to do with the Cypriot government's wish to avoid upsetting Russia, given Nicosia's hope that Russia will contribute to the bailout by softening the terms of its existing sovereign loan, and the considerable amount of money (some of it undoubtedly dirty) from Russian oligarchs that is held in Cypriot banks. But it is also possible that Nicosia is still hoping to maintain its foothold in the international tax haven network. Even with the 2.5% increase imposed as part of this bailout, corporation tax is a very competitive 12.5%, and the Cypriot government has encouraged growth of the financial sector by attracting deposits from overseas investors. Frankly I think this is pie in the sky. A 10% loss may be all in a day's work for corrupt depositors, but that doesn't mean they will continue to deposit funds in a country that imposes losses like that when there are others that don't. The large depositor haircut is a mortal blow to Cyprus's ambitions to be an international financial centre - and that has serious implications for its economy.
On Tuesday, Eurointelligence (quoted in the Newsroom
This is a stunning story. 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 political problem is that financially poorer countries are paying for wealthier countries. The two poorest in the eurozone - Estonia and Slovakia - are part of the group of creditors. (The German median wealth is likely to be shockingly low, because Germany has the lowest rate of property ownership in the EU, as a result of which wealth is highly concentrated.)
Steltzner puts the boot in
In a comment next to the article, Holger Steltzner, the paper's ultra-conservative economics editor, says the ECB is obviously afraid of a protest in the creditor countries since the data show that the poorer countries are bailing out the richer countries. The resolution policies of the euro crisis distribute wealth from those who follow the rules to those who break them. The deep reason why the ECB is withholding the data is because it has become a political actor. This damages the central bank's credibility. He is referring to an independent study by Credit Suisse, which shows that Belgians, Italian, Austrians and the French are richer than the Germans - in the case of the French, the gap is surprisingly large in favour of France, as a result of rising wages, he writes, which are now dogging the country's competitiveness.
So that's the political background to Schaeuble's "martermind" plan for Cyprus. He hopes that with a depositor haircut he'll be able to get the Bundestag to approve the plan later in April.
But it gets better! A day later, again Eurointelligence (quoted in the Newsroom) reported that
Jens Weidmann said he was opposed to proposals that the ECB should take further action to counter, through unconventional policies, to counter the credit crunch in southern Europe. He said this was not a matter for the central banks, but for national investment banks in the member states. He said there were many reasons why interest rates are high in several countries. One factors is the level of national debt. The article [in Börsenzeitung] also quoted Benoit Coeure as saying the ECB is seriously concerned about the broken transmission mechanisms.
And on Friday, after the first day of the Council,
There was not much of any substance on the EU summit beyond the usual fluff. The only thing of note was Angela Merkel’s seemingly failed attempt to get Cyprus off the agenda, as reported by Spiegel Online. Pressure is building up for a solution by the end of today, which she is resisting.
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