Cyprus and the reality of banking

Deposit haircuts are both inevitable and the right thing to do

By Detlev Schlichter

I, too, was shocked yesterday morning. Not so much by the news that depositors at Cypriot banks would face a haircut, or a ‘levy’ or a ‘tax’, on their deposits as a contribution to yet another Eurozone bailout package funded by taxpayers in other counties but by the reaction in the press. Here was, according to the majority of the international commentariat, yet another example of the ineptitude or outright meanspiritedness of the Eurozone policy elite, another example of imposing needless and counterproductive hardship and brutal ‘austerity’ on innocent citizens in small and troubled countries. The Daily Telegraph on its front page spoke in usual hyperbole of a ‘EU raid on savings’ and, naturally, of another ‘threat to the recovery’. What agitated most commentators was that the ‘sanctity’ of deposit insurance had been carelessly violated as even deposits of less than €100,000 were, at first at least, supposed to be subjected to a reduced haircut as well. Those types of deposits are supposed to enjoy a ‘guarantee’ that magically shields them from the harsh reality of bankrupt banks and bankrupt states. Undermining this ‘guarantee’ could have wide-reaching consequences beyond tiny Cyprus as it has the potential to undermine the trust in banking systems in Greece, Spain and Portugal.

I agree that this move is risky. The international banking system is highly levered and in large parts has been teetering on the brink of disaster for many years. Anything that affects depositors can have grave consequences. But given the state of affairs, any meaningful attempt to deal with the banking systems’ problems must inevitably entail risks. The questions are the following: Are the right type of risks being taken? And what would the alternative be?

Banking is a risky business because banks are highly leveraged enterprises. (Sorry to break that news to you.) In a fractional-reserve banking system ‘deposits’ are not deposits (i.e. contracts for safe-keeping) but loans to banks and thus loans to highly leveraged businesses.

Most people in developed countries have become used to not worrying about the health of individual banks. They have, over the course of decades, been conditioned to believe that all banks are regulated by the state and ultimately protected by the state. – Yes, but only so that the banks can take even more risks and become even more leveraged. State ‘protection’ has now created a banking monster that is swallowing up the resources of the state itself. And this can hardly come as a shock surprise in early 2013!

The naïve believe that bank deposits are always ‘money good’ because they are backed by the state and the state, after all, is an endless cornucopia, was maybe understandable, or at least excusable, until about 2008, when then Prime Minister of Ireland, Brian Cowen, in the middle of the Irish banking crisis, had the genius idea to simply declare a state guarantee for all deposits at Irish banks. Hey, problem solved! Obviously, Cowen didn’t do the math and didn’t realize how big that guarantee was going to be. Well, he was found out by the markets – and Ireland, the country, went bankrupt.

After Lehman, after Ireland and Iceland, and after Greece, I think you must have lived in a cave for the past 5 years to really think that banks are safe because they are guaranteed by their governments. Come on! Please get real.

Excuse me but my sympathies for Cypriot depositors is somewhat limited. If you are a depositor in a Cypriot bank, whether of deposits of more or less than €100,000, who did you think was guaranteeing your deposit? The Blue Fairy? Did you really think that in such a small place with such a bizarrely bloated banking system – one that for years and, by now, very publicly had been investing in Greek government bonds! – your government had the resources to protect all depositors? The bailout of Cyprus’ two largest banks will cost the equivalent of 60% of GDP! And after what happened in Greece, did you really think that the Germans were willing to cover the whole bill?

I am a free market guy. I am in favor of laissez faire so I always like to see placards that read “Hands off”. One could see such placards at demonstrations in Cyprus yesterday: “Hands off Cyprus”. That is great. But be careful what you wish for. A proper hands-off policy means letting the chips fall where they may. That would certainly mean no bailout and thus total collapse of the Cypriot banking system and the Cypriot economy. Don’t forget that Cyprus and its banks and its depositors are still being bailed out with other people’s money here.

That is also what some of my libertarian friends don’t seem to get when they speak, as some of them did yesterday, of another incident of the ‘the state stealing from its citizens’ or of confiscating their property. As much sympathy as I usually have with these views, in this instance they are simply mistaken. If this were expropriation it would mean that the act of abstaining from this expropriation – of the expropriator simply doing nothing – would mean that the ‘victim’ keeps his property. But if the EU did nothing in this situation – “hands off”, laissez faire – it would mean that most depositors, including those under €100,000, got wiped out completely. The choice is not between keeping everything and paying a ‘levy’, but between paying a ‘levy’ and losing almost everything.

Some commentators will object here and say that, for the sake of a more cheerful public sentiment and for the sake of the nascent recovery, the bailout should be more generous and protect more Cypriots to a larger degree. But that would mean either more expropriation (and now the word is indeed appropriate) of taxpayers in Nordic countries, or more money-printing by the ECB. And this is where many commentators are either short-sighted or indeed hypocritical.

Using the printing press to cover any excess committed by banks and governments, no matter how outrageous, must mean inflation and this certainly hurts all savers, including those with savings of less than €100,000. I found it particularly galling that many of the commentators who are now posing as defenders of the small saver are usually among the loudest proponents of exiting the euro, issuing new and weaker currencies and using debasement to gain short-lived competitiveness – all measures that defraud the domestic saver. All those who persistently argue against ‘austerity’ and for more stimulus, more debt, weaker currencies, higher inflation, do not care at all for savers. As Keynes famously suggested, they want to kill the rentier class, whether the rentiers are big or small. And now they claim to be the advocates of savers?

Of course, there are notable exceptions. In today’s Telegraph, Jeremy Warner does a good job explaining how costly the bailout of British banks has been – and still is – to British savers, not least via higher inflation, zero interest rates and endless quantitative easing.  I also thought that Simon Nixon’s piece in the Wall Street Journal yesterday was informative and balanced. But they are the exception.

I am no friend of the EU and I feel uncomfortable finding myself in a position in which I have to defend their policies but I feel that those elements for which the EU gets most viciously attacked in the media – ‘austerity’, letting Greece default, at least partially, bailing in depositors – are most sensible to me as these policies are, in principle at least, based on an acknowledgement of the underlying problems and as they do not seek near-tem comfort in the deceptive and damaging policies of endless fiscal transfers and money-printing

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Cyprus and the Death of Deposit Insurance

Can Cyprus happen in US ?

By Robert Tracinski 

From the beginning, the European crisis has been a story of small countries on the Eurozone's "periphery" revealing fundamental problems at the heart of the system. Now a very small country on the outer edges of the periphery—the tiny Mediterranean island of Cyprus, with about a million inhabitants and 0.02% of Europe's GDP—is triggering the latest wave of the crisis.

This is not really about Cyprus, of course, but about the precedent that is being set there. In exchange for an infusion of capital into the nation's banks, Cyprus is being asked to impose a "special bank levy" that would take 6.75% out of all bank deposits up to 100,000 euros, and 9.9% above that.

This is described as a "wealth tax," except that it's not a tax. A tax is a regular rule that operates uniformly according to a pre-determine formula. A one-time, ad hoc seizure of money isn't a tax. It is confiscation. Or we can use a plainer word for it: theft.

The big news isn't this bank heist, but who is pulling it off. The plan was imposed, not by some wild-eyed revanchist Communists, but by the finance ministers of respectable European countries, who thought up the idea and imposed it on Cyprus. Like Willie Sutton, they know where the money is.

There are special circumstances that made them think they might get away with it. Cyprus is a small island with a large banking center that holds deposits many times larger than the local economy. A lot of this money comes from Russia, and Cyprus is reputedly a tax haven for Russian "oligarchs" (politically connected billionaires) and mobsters. In an American context, you might compare Cyprus to the Cayman Islands, which have been so vilified just having a bank account there is enough to end a politician's career. Just ask Mitt Romney.

But in showing us what they'll do to an unsympathetic target, Europe's leaders are showing us what they would like to do everywhere: dig themselves and the crony banks out of a tight spot through the mass confiscation of wealth. It's the ultimate bailout plan: they just take whatever they need.

And there is more to it than that. This is confiscation, but it a particular kind of confiscation with particular implications. It is the end of deposit insurance. Depositors, particularly small depositors, are supposed to have an ironclad guarantee that their money will always be there, no matter what—that they won't wake up one Monday morning to find that 6.75% of it is gone.

That's why the Cyprus heist is really important. It is a warning that the whole system of deposit insurance is coming unglued.

Teaching students to think racially

Race theory is dividing university students

by Dennis Hayes 

You may never have heard of ‘critical race theory’, but it dominates academic and institutional thinking about race in the UK today. The University of Birmingham, for instance, recently opened a new research centre for ‘Race and Education’, headed by a leading critical race theorist.

The question of what critical race theory actually means is contested even by its practitioners. Many accept that it is not really a ‘theory’ at all, but rather a ‘perspective’ or a set of beliefs about racism. Or, to be more blunt, it is a political position pretending to be a theory.

For all its supposed academic credentials, critical race theory boils down to one simple claim: ‘If you are white you are racist!’ This absurd ‘theory’ is now in the mainstream of higher education. It is not only promoted by lecturers and professors who work in the area; it is increasingly the perspective of university managers, staff developers and equality and diversity officers, too.

Critical race theorists will dismiss my claim as absurd, but that is because they avoid saying what they really think. The fact that their basic, shared assumption is never stated - that is, if you are white you are racist - allows their views to be promoted and adopted by institutions and those who fund their theorising.

Yet there is an obvious and nasty consequence of their ‘theory’ - namely, the view that anyone who criticises their approach is also probably racist. That’s because critical race theory embodies a metaphysical truth that cannot be questioned. If you do question it, you provide evidence for its veracity and you are likely to be censured or disciplined.

The critical race theory perspective is devious. First, racism is held to be endemic in society, and a catalogue of examples is used to prove this, while counter-examples are ignored. Second, racism is declared to be complex - so complex, in fact, that any clear views on the subject are dismissed as white or liberal prejudice. Third, refuge is taken in relativism, and the ‘theory’ is declared to be a perspective that is both academic and a political or social-justice project.

Porn: no longer a dirty little secret

A serious crisis of values – one that censorship won't solve

by Frank Furedi 

In the nineteenth and twentieth centuries, pornography consisted of printed or visual material that was available only on the margins of society. Individuals who bought pornographic literature would feel embarrassed if they were seen by others. Salacious and obscene magazines were kept in brown envelopes; buying porn was a dirty little secret between shop assistant and consumer.

That was then. Today, pornography has gone mainstream. It has been so normalised that people talk openly about ‘my porn’. Porn talk is a part of modern-day conversation.

Some of today’s debates about pornography are just a clash of views over what constitutes ‘good’ or ‘healthy’ or ‘appropriate’ porn. ‘We need better lesbian scenes, not ones that blatantly pander to men, with heterosexual actresses looking vaguely nauseated as they gingerly trail their fake nails across each others’ breast implants’, argues one commentator and avid connoisseur of porn.

Of course, the normalisation of a culture of pornography has not gone unchallenged. Some use the term ‘pornification’ to describe the proliferation of self-conscious and explicit exhibitions of sexual themes and activites. Earlier this year, Britain’s shadow health minister, Diane Abbott, warned that British culture is ‘increasingly pornified’ and is damaging young people. Last week, a proposal was put before the European parliament calling on the EU to ‘take concrete action on discrimination against women in advertising’ via a ‘ban on all forms of pornography in the media’. The parliamentarians’ response captured the spirit of our times. They insisted that the proposed ban on porn should be dropped but they voted to regulate the media portrayal of women. In other words, porn is okay but the media degradation of women is not. This curiously selective approach towards censorship reveals officialdom’s acceptance that pornography is now an integral part of the European way of life.

The cultural significance of pornography

Historically, debates about pornography have focused on its alleged harms and its moral corruption of society. There have also been arguments about the very meaning of pornography. The question of what makes a particular picture or literary passage pornographic has been a source of dispute between artists and their moralistic critics for years.

According to the Oxford English Dictionary, pornography is ‘the explicit description or exhibition of sexual subjects or activity in literature, painting, films, etc, in a manner intended to stimulate erotic rather than aesthetic feelings; printed or visual material containing this’. This definition links pornography to obscenity, which the OED defines as ‘the character or quality of being offensively indecent, lewdness’. Of course, definitions offer only limited help for clarifying the problem of porn, because the idea of what constitutes lewdness is to some extent always open to interpretation. Throughout history, important literary and artistic achievements have been condemned by moralists as pornographic.

Cyprus Rejects Deposit Levy in Blow to European Bailout Plan

Searching for Plan B

By Patrick Donahue and Georgios Georgiou 

Cyprus’s parliament rejected an unprecedented levy on bank deposits, dealing a blow to European plans to force depositors to shoulder part of the country’s rescue in a standoff that risks renewed tumult in the euro area.

Cypriot legislators in the capital Nicosia voted 36 against to none in favor of the proposal in a show of hands today. There were 19 abstentions. Hammered out by euro-area finance chiefs over the weekend, the deal had sought to raise 5.8 billion euros ($7.5 billion) by drawing funds from Cyprus bank accounts in return for 10 billion euros in international aid.

Stocks dropped and the euro fell to a three-month low against the dollar at the prospect of impasse in Cyprus. European officials including Dutch Finance Minister Jeroen Dijsselbloem had said that Cyprus must contribute to its own bailout, while stressing that the Cypriot situation is unique. German coalition lawmakers said that Cyprus can expect no aid without meeting the terms.

“Cyprus has rebuffed the outstretched hand” of its partners, Hans Michelbach, a German lawmaker from Chancellor Angela Merkel’s Christian Democratic bloc and the ranking member on parliament’s finance committee, said in an e-mailed statement. The vote is “an act of collective unreason” and “the people of Cyprus must now pay a high price.”

Nicosia Talks

Cypriot President Nicos Anastasiades, who said the plan’s alternative would be the “indescribable misery” of a collapse in his country’s banking sector, is due to meet with political party leaders in Nicosia at 9 a.m. tomorrow, his office said before the vote. Cyprus’s banks and stock exchange will remain closed at least through tomorrow.

Anastasiades spoke by phone with Merkel today for the second time in as many days, German government chief spokesman Steffen Seibert said in a text message, declining to give details of the conversation.

Saddam Hussein’s Revenge

One more such victory as Iraq, and we are undone

By PATRICK J. BUCHANAN

Ten years ago, U.S. air, sea, and land forces attacked Iraq. And the great goals of Operation Iraqi Freedom?

Destroy the chemical and biological weapons Saddam Hussein had amassed to use on us or transfer to al-Qaida for use against the U.S. homeland.

Exact retribution for Saddam’s complicity in 9/11 after we learned his agents had met secretly in Prague with Mohamed Atta.

Create a flourishing democracy in Baghdad that would serve as a catalyst for a miraculous transformation of the Middle East from a land of despots into a region of democracies that looked West.

Not all agreed on the wisdom of this war. Gen. Bill Odom, former director of the National Security Agency, thought George W. Bush & Co. had lost their minds: “The Iraq War may turn out to be the greatest strategic disaster in American history.”

Yet, a few weeks of “shock and awe,” and U.S. forces had taken Baghdad and dethroned Saddam, who had fled but was soon found in a rat hole and prosecuted and hanged, as were his associates, “the deck of cards,” some of whom met the same fate.

And so, ’twas a famous victory. Mission accomplished!

Soon, however, America found herself in a new, unanticipated war, and by 2006, we were, astonishingly, on the precipice of defeat, caught in a Sunni-Shia sectarian conflict produced by our having disbanded the Iraqi army and presided over the empowerment of the first Shia regime in the nation’s history.

Only a “surge” of U.S. troops led by Gen. David Petraeus rescued the United States from a strategic debacle to rival the fall of Saigon.

But the surge could not rescue the Republican Party, which had lusted for this war, from repudiation by a nation that believed itself to have been misled, deceived and lied into war. In 2006, the party lost both houses of Congress, and the Pentagon architect of the war, Don Rumsfeld, was cashiered by the commander in chief.

Two years later, disillusionment with Iraq would contribute to the rout of Republican uber-hawk John McCain by a freshman senator from Illinois who had opposed the war.

So, how now does the ledger read, 10 years on? What is history’s present verdict on what history has come to call Bush’s war?

Of the three goals of the war, none was achieved. No weapon of mass destruction was found. While Saddam and his sons paid for their sins, they had had nothing at all to do with 9/11. Nothing. That had all been mendacious propaganda.

Where there had been no al-Qaida in Iraq while Saddam ruled, al-Qaida is crawling all over Iraq now. Where Iraq had been an Arab Sunni bulwark confronting Iran in 2003, a decade later, Iraq is tilting away from the Sunni camp toward the Shia crescent of Iran and Hezbollah.

What was the cost in blood and treasure of our Mesopotamian misadventure? Four thousand five hundred U.S. dead, 35,000 wounded and this summary of war costs from Friday’s Wall Street Journal:

“The decade-long [Iraq] effort cost $1.7 trillion, according to a study … by the Watson Institute for International Studies at Brown University. Fighting over the past 10 years has killed 134,000 Iraqi civilians … . Meanwhile, the nearly $500 billion in unpaid benefits to U.S. veterans of the Iraq war could balloon to $6 trillion” over the next 40 years.

Iraq made a major contribution to the bankrupting of America.

As for those 134,000 Iraqi civilian dead, that translates into 500,000 Iraqi widows and orphans. What must they think of us?

According to the latest Gallup poll, by 2-to-1, Iraqis believe they are more secure — now that the Americans are gone from their country.

Left behind, however, is our once-sterling reputation. Never before has America been held in lower esteem by the Arab peoples or the Islamic world. As for the reputation of the U.S. military, how many years will it be before our armed forces are no longer automatically associated with such terms as Abu Ghraib, Guantanamo, renditions and waterboarding?

As for the Chaldean and Assyrian Christian communities of Iraq who looked to America, they have been ravaged and abandoned, with many having fled their ancient homes forever.

We are not known as a reflective people. But a question has to weigh upon us. If Saddam had no WMD, had no role in 9/11, did not attack us, did not threaten us, and did not want war with us, was our unprovoked attack on that country a truly just and moral war?

What makes the question more than academic is that the tub-thumpers for war on Iraq a decade ago are now clamoring for war on Iran. Goal: Strip Iran of weapons of mass destruction all 16 U.S. intelligence agencies say Iran does not have and has no program to build.

This generation is eyewitness to how a Great Power declines and falls. And to borrow from old King Pyrrhus, one more such victory as Iraq, and we are undone. 

Cyprus, Why Now?

Follow The Money

by Steve Hanke

While the Cypriot Parliament may be dragging its feet on a proposed rescue plan for Cyprus' banks, the country ultimately faces a choice between Brussels' bitter pill... and bankruptcy. Cyprus' newly-elected President, Nicos Anastasiades, has quite accurately summed up the situation:

"A disorderly bankruptcy would have forced us to leave the euro and forced a devaluation."

Yes, Brussels and the IMF have finally decided to come to the aid of the tiny island, which accounts for just 0.2% of European output -- to the tune of roughly $13 Billion. But, this bailout is different. Indeed, the term "bail-in" has emerged, a reference to the fact that EU-IMF aid is conditional upon Cyprus imposing a hefty tax on its depositors. Not surprisingly, the Cypriots, among others, are less than pleased about this so-called "haircut".

Still, the question lingers: Why now? The sorry state of Cyprus' banking system is certainly no secret. What's more, the IMF has supported a "bail-in" solution for some time. So, why has the EU only recently decided to pull the trigger on a Cyprus rescue plan?

One reason can be found by taking a look at the composition of Cyprus' bank deposits...

There are three main take-aways from the chart:

1. European depositors' money began to flow out of Cyprus' banks back in 2010.

2. Indeed, most European depositors have already found the exit door.

3. Over that same period, non-Europeans (read: Russians) have increased their Cypriot exposure.

If the proposed haircut goes through, Russian depositors could lose up to $3 billion. No wonder Vladimir Putin is up in arms about the bail-in. Perhaps a different "red telephone" from Moscow will be ringing in Brussels soon. 

A bird in hand is worth two in the bush

Cyprus Bank Deposit Levy and Natural Gas Bonds

By Anthony Alfidi

Cyprus' president has pledged to cover the value of its imminent savings deposit levy with an equivalent value of natural gas bonds.

 It's hard to say whether Cypriot savers should take this promise seriously without some analysis of its viability.

Let's use the European bailout sum for Cyprus of US$13B as a proxy for the amount of savings about to be confiscated from Cyprus' resident depositors.  I need a proxy because I have no idea how much the government of Cyprus will actually collect from this levy.  The natural gas revenue needed to back the bonds that would make savers whole would likely come from the Aphrodite field.  Title to this field is unclear; Turkey has made a competing claim for the sovereign right to control drilling.  There is currently no pipeline from Cyprus to either Turkey or Crete which could deliver the gas to market; that would cost US$1B to build and Cyprus has no money.  Building a $10B LNG terminal is ten times as unlikely, because Cyprus is still broke.  The energy supermajor that ends up building it will get the lion's share of the revenue from the gas field as compensation for its costs and will have to deal with the likelihood of being shut out of other projects in Turkey. 

The lack of drilling and delivery infrastructure means that no Aphrodite gas will go to Europe until 2018 at the earliest.  A lot can happen with the price of natural gas in five years.  The wide availability of shale gas in the U.S. will keep the price down in North America.  Europe's need for gas is met mainly by Russia, and Gazprom can adjust its rates at will to pressure Russia's neighbors. 

There is no single European energy market and the price of natural gas by country varies widely.  The caloric value of natural gas is about 1000 BTU per cubic foot (cf), so this gives us a way to find the value of the Aphrodite field if we have a single market price.  I will use the U.S. price because the CME trades the Henry Hub futures market in natural gas, giving this particular commodity some price predictability for several years.    BTW, that's the instrument that global hedge funds will use to speculate on gas prices and that energy producers will use to hedge delivery contracts. 

The current U.S. natural gas Henry Hub spot price is $3.72 per million BTUs.

The Aphrodite field contains an estimated gross mean average of seven trillion cubic feet (i.e., 7 tcf) of natural gas, according to Noble Energy.

Math:  ($3.72 / 1M BTU) x (1000 BTU / 1 cf) x (7 tcf) = $26.04B total present value

The good news for Cyprus is that the total value of their natural gas discovery is about $26B, twice the value of what Cyprus is expected to receive in the bailout.  This begs the question:  Why didn't Cyprus just pledge the value of its gas field as collateral for the bailout instead of giving in to Brussels' demand that they shake down depositors? Brussels may trust cash up front more than the expected future value of gas revenues, given the competing sovereign claims and lack of infrastructure.  A bird in hand is worth two in the bush. 

The savings levy itself is not quite a done deal until a majority of the fractious Cypriot parliament votes for it.  This will be fun to watch. 

Beware of Greek-Cypriots bearing debt

Temporary Insanity and Permanent Loss

Του Γιώργου Καισάριου 

Κατ’ αρχάς να ξεκαθαρίσουμε κάτι. Εγώ δεν βρίσκομαι εδώ ούτε για να σας χαϊδέψω τα αυτιά, ούτε για να σας πω αυτό που θέλετε να ακούσετε, ούτε για να συμφωνήσετε μαζί μου. Κάποιοι με πληρώνουν για να σας δώσω μια χρηματιστηριακή και οικονομική εκτίμηση των πραγμάτων, διότι έχουν εμπιστοσύνη στην κρίση μου και στο ότι αυτά που λέω έχουν οικονομικό και χρηματιστηριακό νόημα.

Ούτε ήθελα να είχε κουρευτεί κανείς στην Κύπρο ούτε να είχαν μηδενίσει οι ελληνικές τράπεζες ούτε να πάθει κανείς ζημιά από τα ελληνικά ομόλογα. Το γεγονός ότι σας έλεγα πως θα εξελιχτούν τα πράγματα έτσι από την αρχή (πριν μερικά χρόνια δηλαδή), έχει να κάνει με το γεγονός ότι αυτό ήταν το χρηματιστηριακό πόρισμα που είχα βγάλει με το δικό μου το σκεπτικό, με βάση αυτά που γνωρίζω και κατανοώ στο πως λειτουργούν οι αγορές και η πραγματικότητα των αριθμών.

Το τι θα κάνετε εσείς με αυτή την εκτίμηση που σας παρέχω, είναι δικό σας θέμα. Δεν είμαι εδώ ούτε να σας πάρω από το χεράκια και να σας πω τι να κάνετε ούτε να πάρω την απόφαση για εσάς.

Όσον αφορά τα της Κύπρου...

Όσοι ζητούσαν να μην γίνει κούρεμα στις καταθέσεις, ζητούσαν κάτι το παράλογο. Εν ολίγοις, ζητούσαν να πληρώσουν την τρύπα στους τραπεζικούς ισολογισμούς των κυπριακών τραπεζών (8 δισ. ευρώ περίπου) οι Ευρωπαίοι, με σκοπό να μην πάρουν καμία χασούρα οι της Κύπρου, ενώ κουρεύτηκαν καταθέτες στην Δανία και μηδενίστηκαν ομολογιούχοι στην Ολλανδία. Ζητούσαν να τα δανειστεί αυτά τα λεφτά η Κύπρος, ουσιαστικά κάνοντας την κυπριακή οικονομία μη βιώσιμη με ένα χρέος 150% του ΑΕΠ, όπου στη συνέχεια αυτό το χρέος θα έπρεπε να κουρευτεί και να πάρει χασούρα ο Ευρωπαίος φορολογούμενος. Τέλος, ζητούσαν να πληρώσουν οι Γερμανοί  για να πάρουν τα λεφτά τους οι Ρώσοι καταθέτες. Με το συμπάθιο, αλλά αυτά που ορισμένοι ζητούσαν δεν είχαν καμία λογική. Όσο αναφορά τον κύριο Πισσαρίδη, σχετικά με το τι έλεγε πριν μερικές μέρες, καλύτερα να μην σχολιάσω να μην στεναχωρήσω τους φίλους στην Κύπρο.

Στα κουρέματα τώρα...

Κατ’ αρχάς είναι υποκριτικό να βαφτίζουμε το κούρεμα, «φόρο επί των καταθέσεων». Θα έπρεπε να χαρακτηριστεί αυτό που πραγματικά είναι, ένα κούρεμα. Δεύτερον, κακώς πειράχτηκαν οι καταθέτες κάτω από 100.000. Θα ‘πρεπε το κούρεμα να το πάρουν μόνο αυτοί που έχουν πάνω από 100.000 και κανένας άλλος. Επίσης, αν κατάλαβα καλά από διάφορα δημοσιεύματα, για κάποιο παράξενο λόγο θα σωθούν οι ομολογιούχοι πρώτης κυριότητας. Αν ισχύει αυτό, είναι έγκλημα.

Το ΔΝΤ (σωστό για άλλη μια φορά) είχε προτείνει να γίνει κούρεμα 40% στις καταθέσεις άνω των 100.000 ευρώ. Αν κατάλαβα καλά, αυτό θα ήταν αρκετό να καλύψει και τα 8 δισ. που λείπουν από το τραπεζικό σύστημα. Από χτες αλλάζουν οι πληροφορίες σχετικά με το ποσοστό του κουρέματος στους κάτω των 100.000 ευρώ. Δεν αλλάζει τα δεδομένα, το κούρεμα θα έπρεπε να γίνει μόνο σε καταθέτες με 100.000 και άνω.

Επίσης κάτι ακόμα. Ο νόμος στην Κύπρο είναι σαφής. Όταν μια τράπεζα πέφτει έξω εξασφαλίζονται οι καταθέσεις έως 100.000 ευρώ και μηδενίζονται οι άλλοι πιστωτές της τράπεζας (ομολογιούχοι) και στη συνέχεια κούρεμα παίρνουν οι καταθέσεις πάνω από 100.000 κατά αναλογία των χρημάτων που λείπουν.

Με λίγα λόγια, ήδη υπήρχε το νομικό πλαίσιο για να διευθετηθεί το ζήτημα. Καμία ανάμιξη δεν θα έπρεπε να είχαν οι της Ευρώπης σε αυτό το ζήτημα. Το γιατί δεν έχουν ακολουθηθεί αυτές οι διαδικασίες από τις αρμόδιες αρχές της Κύπρου και γιατί έχουν καταργηθεί οι κανόνες της αγοράς σε αυτή την περίπτωση είναι μια άλλη συζήτηση.

Κάτι ακόμα. Δεν είναι δυνατόν να κουρεύτηκαν καταθέσεις σε τράπεζες που δεν είχαν πάρει καθόλου ρίσκο και δεν είχαν αγοράσει ελληνικά ομόλογα που πλήρωναν τόκο 0,5% και δεν είχαν πρόβλημα και να κουρευτούν και να έχουν ίση μεταχείριση με τράπεζες που πλήρωναν 5% τόκο.

Τα κουρέματα έπρεπε να περιοριστούν αποκλειστικά στις τράπεζες που είχαν το πρόβλημα και όχι σε όλο το σύστημα. Δεν ξέρω πως άφησαν οι Ευρωπαίοι να γίνει αυτό, διότι αν μη τι άλλο αυτό το βλέπω και παράνομο. Θα έπρεπε να κουρευτεί και το 100% των καταθέσεων άνω των 100.000 αν χρειαστεί και να μην πάρει η μπόρα όλο το σύστημα. Την ευθύνη για αυτό την έχει η κυβέρνηση της Κύπρου. 

Άσχετα αν αυτό το κούρεμα επί των καταθέσεων έγινε με έναν τρόπο που διαφωνώ, γενικά συμφωνώ στο τι έγινε, έστω και όπως έχει αποφασιστεί. Ο λόγος είναι διότι μειώνει το συνολικό χρέος που θα χρειαστεί να αναλάβει η Κυπριακή Δημοκρατία και επιβαρύνονται λιγότερο οι μελλοντικές γενιές. 

Επιπτώσεις στις αγορές

Αυτό που έγινε στην Κύπρο είναι ένα σήμα στην αγορά ότι δεν θα μπορεί από δω και πέρα να βάζει λεφτά σε επικίνδυνες τράπεζες χωρίς ρίσκο.

Αυτό θα έχει σαν αποτέλεσμα να ενδυναμώσει το ευρωπαϊκό τραπεζικό σύστημα, διότι οι αρμόδιες αρχές θα επαγρυπνούν από δω και πέρα και θα παρακολουθούν από πολύ κοντά το ενεργητικό των τραπεζών στην δικαιοδοσία τους, με σκοπό να προλαμβάνουν καταστάσεις, αντί να αφήνουν τα προβλήματα να γιγαντώνονται χωρίς να κάνουν τίποτα μέχρι που είναι αργά.

Σαφώς αυτές οι εξελίξεις θα υποβαθμίσουν τον ευρωπαϊκό τραπεζικό κλάδο. Αλλά για όσους με παρακολουθούν εδώ και μερικά χρόνια, έχω πει ότι ο τραπεζικός κλάδος στην Ευρώπη έχει πτωχεύσει προ πολλού απλά δεν το ξέρουν οι πολιτικοί. Και σαφώς αυτό που έγινε στην Κύπρο μπορεί να γίνει και αλλού (και θα πρέπει να γίνει), διότι δεν μπορεί αγαπητέ αναγνώστη να γιγαντώνεται το χρέος των κρατών για να σωθεί το φεουδαρχικό κεφάλαιο της Ευρώπης.

Τα τεκταινόμενα στην Κύπρο είναι επίσης μια πολύ καλή δικαιολογία για να επισπευστεί στην Ευρώπη μια πανευρωπαϊκή αρχή εκκαθάρισης και εποπτείας τραπεζών, που αυτόματα και χωρίς καμία παρέμβαση από τις εθνικές πολιτικές ηγεσίες, θα παρεμβαίνει και θα εξασφαλίζει τις καταθέσεις κάτω από τα 100.000 ευρώ, κουρεύοντας ταυτόχρονα λοιπούς πιστωτές και μεγάλους καταθέτες. Είναι ο μόνος τρόπος να σταθεροποιηθεί το σύστημα και να υπάρξει εμπιστοσύνη.

Τέλος, μπορεί να νομίζουν οι της Κύπρου ότι αδικήθηκαν, αλλά αυτό που έπαθαν δεν είναι τίποτα μπροστά στην τιμωρία που έχουμε υποστεί εμείς και το κόστος που έχουμε πληρώσει εδώ στην Ελλάδα. Ακόμα και αν περάσει αυτό το κούρεμα έτσι όπως το διαβάσαμε, οι κουμπάροι στην Κύπρο να θεωρούν τους εαυτούς τους πολύ τυχερούς, διότι πληρώνουν ένα πολύ μικρό κόστος για να λυθούν τα προβλήματά τους (τα περισσότερα τουλάχιστον) και να μην έχουν κανένα παραπάνω και να μην το πουν ούτε του παπά. 

Cyprus - Oh The Irony!?

Mattresses now hold a 10 per cent premium

By Ben Davies
In history seemingly innocuous events portend more serious outcomes – albeit we recognize them in hind(e)sight. This is the dramatic irony of history. Just as a single shot in Sarajevo, took out a largely unknown European aristocrat, Archduke Franz Ferdinand, who would have known then that the world would plunge into World War I. The Cypriot savers must have thought the authorities were being highly ironic, of the Socratic kind, when they were told they were receiving a bail-out, except it was a “bail-in”. I don’t know the Greek/Turkish for – you are having a laugh, but I bet that’s what they are saying. So what is a bail-in?

A bail-in takes place before a bankruptcy, and involves losses being imposed on bondholders, something that has rarely taken place throughout the GFC and euro crisis. In fact taxpayers (the government) have consistently bailed-out the private sector in full. The Cypriot bank rescue is no exception, except this time there is a bail-in and ironically again not of bondholders but of the depositors first. This is a direct contravention to the usual legal claims on the capital structure.

So there you have it – on Friday 14^th March Cyprus became the 5^th country to receive an EU bail-out (in), except this one was a bail-in but one with a significant and severe twist of fate. The Cypriot government in Nicosia is scheduled to vote on a EU bail-out plan which calls to extract a “tax” on bank depositors (savers) some €5.8 billion: 6.75 per cent for anyone with less than €100,000 in a Cypriot bank account, 9.9 per cent for anyone with more than that.

This is an unprecedented assault on individual property rights and every individual in the developed world should take notice, and far from stabilising the eurozone, the bail-out likely heightens contagion risk across the EU.

Why bother holding a bank account when your government can expropriate your savings? Far from containing a bank run in Cyprus it will exacerbate it, absent capital controls, and likely begin significant depositor flights across the European periphery.

These events I believe signify one of the most alarming developments in the Eurozone crisis and by dint the global economy since the financial crisis began.

Cypriot Disputes and Levies

For a sovereign entity so small, Cyprus is a country that has had more than its fair share of international controversy and disputes. Cyprus has a long and convoluted history with the British, Turks and Greeks, whose tensions have wreaked havoc across Europe over two World Wars. This weekend marked yet another period of disquiet in the history of this troubled island.

Cyprus is reeling from an oversized and ailing banking system.  Technically bankrupt, domestic banks stand at €126.4 billion in size, or over 7 times the size of the economy.  Without a bail-in, depositors would be wiped out and Cyprus would undergo economic collapse, bringing along with it all the attendant social misery and deprivation of a depression. 

Ironically Cyprus is no stranger to levies.  The British extracted taxes in the 19^th century to cover the compensation they owed to the Ottoman Sultanate, who had conceded the island to the British.

In 1878, under the Cyprus Convention, the Cyprus became a protectorate of the British in a secret agreement between the United Kingdom and Ottoman Empire. The Greek Cypriots believed the British would eventually help Cyprus unite with mother Greece, just as with the other Ionian Islands. The indigenous Cypriots believed it their natural right to reunite the island with Greece; after all the very first census showed the population was comprised of 74% Greeks and 24% Turks.

Fast forward half a century and most of us over the age of 40 refer to the Cyprus dispute as that of the conflict between the Republic of Cyprus, and Turkey, over Turkish-occupied North Cyprus. My knowledge of the origins of the Cyprus dispute is a little sketchy but as I understand it, the dispute originally was born out of the Cypriots’ desire for self-determination away from the British Crown, which had unlawfully declared itself the constitutional ruler after Greece failed to fulfil its WWI obligations to invade Bulgaria; in return the Republic of Turkey recognized British rule of the island.

Cyprus Blight Could Spread

The Honey-Pot is drying up

By Doug Kass

Is this the real life?  Is this just fantasy?  Caught in a landslide,  No escape from reality....  Because I'm easy come, easy go,  Little high, little low,  Any way the wind blows  Doesn't really matter to me  To me....  Didn't mean to make you cry  If I'm not back again this time tomorrow  Carry on, carry on as if nothing really matters.

                                       -- Queen, "Bohemian Rhapsody"

Over the weekend the EU imposed a tax on bank deposits in Cyprus as part of a bailout of that country. In its essence, the Cyprus government, in conjunction with the EU authorities, is confiscating bank deposits (although depositors get bank equity in return for the confiscated funds).

In trying to understand the motivation of this surprising move, we will probably hear that the northern countries in the EU grew increasingly uncomfortable with the rapid reduction in sovereign debt yields and the tightening in spreads that eased the pressure on the weaker southern countries to institute reforms. The intention might also have been to reduce moral hazard in Europe.

Investors were not expecting this at all. And consider the ill-timed nature of the decision, which was announced ahead of a European bank holiday on Monday, March 18.

Bottom line: This is a poorly thought-out move by a group of northern Europeans, who seem to have tired of taking the role of the go-to honey pot to the indigent southern Europeans.

The madness of this decision is unfathomable.... The leadership used a counter factual argument to justify it. "If we hadn't done this, it would have been worse...." Europe has found a new way to shoot itself in the foot.

                                     -- David Kotok, Cumberland Advisors

Though Cyprus is a small country, the potential implications of a bank deposit haircut seem significant. The news is a wake-up call to investors that the European sovereign debt issue is far from being resolved and that there remains additional downside risk to the already muted and modest economic projections for the EU.

Again, it is important to emphasize that not in any discussions or readings about the Cyprus situation that had I seen over the past few weeks was there a notion that insured deposits in Cyprus were at risk -- only uninsured creditors. Notwithstanding the likely ECB statements that this is a special one-off case, a European-wide bank run is likely to begin quietly now (see unintended consequences below), and a concomitant flight to safety seems the order of the day over the near term.

Whether a bank run and deposit flight accelerates will depend upon a number of factors, including the degree to which the market believes in the soothing assurances by the ECB that are certain to be announced by the opening of the NYSE on Monday.

Regardless of those assurances, concerns will rise regarding less bank bondholder protection as well as fears of more deposit seizures. Importantly, the European banking industry's interconnected and wholesale-dependent funding base exposes the region to heightened risk of contagion.

Cyprus offers a scary economic lesson for America

Government guarantees and other Pipe Dreams 

By James Pethokoukis

The need for cash is the mother of financial invention, as Cypriot savers and their wealthy Russian friends are finding out. While taxing guaranteed bank deposits is a new and potentially dangerous wrinkle, non-insured deposits have been confiscated in previous financial crises. Other cash-strapped nations, such as Argentina and Hungary, have nationalized private pensions.

American savers needn’t worry that Uncle Sam will order the FDIC to nick you bank deposits to help pay off Chinese lenders. But higher inflation has the same effect, while also helping government pay off its debt. If Cyprus owned the euro printing presses, they would undoubtedly be running them at high speed right about now. (The US, of course, does own its currency’s printing presses.)

And while deposit taxes aren’t on the US policy radar, other forms of wealth taxes are making their way into view. A New York Times op-ed back in November suggested one version:

American household wealth totaled more than $58 trillion in 2010. A flat wealth tax of just 1.5 percent on financial assets and other wealth like housing, cars and business ownership would have been more than enough to replace all the revenue of the income, estate and gift taxes, which amounted to about $833 billion after refunds. Brackets of, say, zero percent up to $500,000 in wealth, 1 percent for wealth between $500,000 and $1 million, and 2 percent for wealth above $1 million would probably have done the trick as well.

See, the math works! And, of course, no unintended consequences on savings and investment. By the way, don’t forget that many liberal policymakers think 401k plans a bad idea and would prefer eliminating their preferential tax treatment in favor of government-created “guaranteed retirement accounts.”

Of course, as Cyprus shows, you can see how government guarantees can sometimes turn out.

The Canary Just Died

The End Of Systemic Trust

by Lucas Jackson

“When it becomes serious, you have to lie."

                                   -Jean Claude Juncker, PM of Luxembourg, and the head of the Eurogroup council of eurozone finance ministers

Prior to yesterday, if you were trying to handicap how the unelected leaders of the Eurozone were going to react to a tough situation, you only had to refer to the quote above from Mr. Junker to understand their mindset.

But so long as someone at the ECB was willing to flood the world with free EURs (with significant backup provided the US Federal Reserve) the market closed its eyes, held its breath and took the leap of faith that all was well.

However, post the Cyprus decision, the curtain has been pulled back and wizard revealed with all his faults and warts.  The age of innocence is dead and with it died institutional and retail trust, confidence in the system writ large and the rule of law.

It would be hard to over-emphasize how significant the Cyprus situation is.  The EU demonstrated under no uncertain circumstances that they will destroy the rule of law to maintain their own power.  It was a recognition of tyranny that many of us have always assumed was the case but yesterday became reality.

The damage done here is not related to the size of the haircut - currently discussed between 3 and 13% - butrather that the legal language which each and every investor on the planet must rely on in order to maintain confidence in the system has been subordinated to the needs of the powerful elite.  To the power elite making the major decisions in DC, London, Berlin, France, Brussels, et. al., laws are like ice cream, easily melted.

Which begs the question, who is next?  Will it be Portugal?  Greece? Spain?  Italy?  France???

Will they impose a “one-time” tax on your bank account?  Your house?  Your stocks and bonds?  Retirement accounts?

The major banks of Europe are levered beyond anyone’s wild guess.  They cannot afford a hit to their capital base lest they be exposed for the over-levered giants they are.  This, of course, opens up the exposure all of these banks have to the greater than $1tr derivatives market where the failure of any one of these derivative banks could lead to the collapse of them all.