Developing Nations Put Nuclear on Fast-Forward

Fast reactors can shrink nuclear-waste stockpiles, but can designers tame the inherent hazards?

By Peter Fairley 

Fast reactors, whose high-speed neutrons can break down nuclear waste, are on the road to commercialization. That message has been advanced forcefully by Russia, China, and India.

At a global conference sponsored by the International Atomic Energy Agency last week in Paris, Russia and India described large demonstration plants that will start operating next year and further deployments that are still in the design phase. China, meanwhile, described a broad R&D effort to make fast reactors comprise at least one-fifth of its nuclear capacity by 2030.

By breaking down the longest-lasting and hottest components of spent fuel from light-water reactors, fast reactors would need only 2 percent of the space required by a conventional reactor to store spent fuel. Fast reactors would also reduce the time that the waste must remain in storage from roughly 300,000 years to just 300. “Are they going to eliminate the need for geological repositories? No. But it will reduce the burden,” says Thierry Dujardin, acting deputy director general for the Organization for Economic Cooperation and Development’s Paris-based Nuclear Energy Agency.

Despite that enticing promise, however, the inherent hazards of today’s state-of-the-art fast reactors also loomed large at the Paris confab, which concluded a few days before Monday’s two-year anniversary of the Fukushima accident in Japan. At the conference, Dujardin said that fuel safety and prevention of severe accidents need to be “high priorities” for fast reactor research.

The problem with most fast reactors in construction or development is the molten sodium that cools their cores. Molten sodium is highly corrosive and explodes on contact with water and oxygen. Most dangerous, however, is that the sodium-cooled fast reactor, or SFR, exhibits what physicists call positive reactivity. Unlike conventional reactors, which experience their fastest possible chain reaction when operating at full power, the SFR’s chain reaction is capable of further acceleration than its equipment is designed to handle. This puts such reactors at greater risk of a runaway reaction that could cause a core meltdown or breach its steel containment vessel.

Many technical presentations at last week’s meeting focused on improved materials and designs intended to protect SFRs from the most extreme accidents imaginable. But alternative core designs were also well represented, and some countries are hedging their bets by testing the alternatives. A U.S. company, Transatomic Power, recently revealed designs for a new kind of molten salt reactor, which has different safety characteristics than a reactor cooled by molten sodium metal and should be compact and cheap to manufacture (see “Safer Nuclear Power at Half the Price”).

A bailout for Cyprus, a geopolitical failure for Russia

Nothing succeeds (optional comma) as planned

By Max Fisher

Cyprus and the European Union have reached a bailout deal for the tiny and troubled euro-zone economy. That’s good news for Cyprus (even if the deal turns out to be bad, at least it’s an end to the uncertainty) and good news for the European Union. But the resolution of the entire Cyprus bailout saga, in the terms described, would be bad news for Russia: it would signal a failed bid by Moscow to reassert some of its once-vast power in Europe and to stand up as an alternative to the European Union.

Russia has a few interests at stake in the European Union bailout for Cyprus. The first and most obvious is that Russian citizens stand to lose billions of dollars worth of savings in Cyprus’s banking sector, which serves as a low-tax haven for Russian oligarchs. Those oligarchs, remember, wield outsize political power within Russia. The second is that Cyprus is a political client state of Moscow’s, a helpful little ally on such matters as sending arms to Syria. The third is symbolic, and doesn’t actually have that much to do with Cyprus itself, but with Russia’s standing in Europe.

The bailout deal-making was a sort of stand-off between Moscow and the European Union. Which of Cyprus’s two major benefactors could get a better deal?

Last week, as Cypriot lawmakers tried to hash out the bailout with the E.U., they also tried to negotiate for a loan extension and line of credit from Russia. The idea was that the more they got from Russia, the less they’d need from the E.U., and the less painful the bailout would be. Cyprus wanted this so badly that it even offered Russia stakes in its recently discovered natural gas reserves.

This was an opportunity for Russia to make a client state even more loyal and to present itself as the alternative to the E.U., part of a decades-old effort to pull Eastern Europe into Moscow’s orbit and thus lessen the relative power of the West. During negotiations, Russian Prime Minister Dmitri Medvedev publicly criticized the E.U., calling it “an elephant in a china shop.”

Cypriots Mourn Collapse of Livelihoods as Banks Crash

Cypriots are now looking ahead to a less distinguished period of their intertwined history

By Tom Stoukas

For Cypriots trying to make sense of the past 10 days, the worst is yet to come.

While they may be staying in the euro for now, people on the island are lamenting the demise of an economy built on the banks that ended up sinking it. Cyprus sealed an agreement with creditors overnight that will shut one of its largest lenders in return for 10 billion euros ($13 billion) of aid.

“The problem is not solved and some bad things are going to happen in the next six months,” said Maria Philippou, 45, a civil servant in Nicosia and a mother of three. “The leaders are to blame in Cyprus and the European Union. They let the bankers do whatever they wanted.”

Cyprus is the fifth country to tap international aid since the European debt crisis erupted in Greece in 2009. The accord, revised after a March 16 deal was rejected in the Cypriot Parliament because of a tax on smaller depositors, exempts bank accounts below the insured limit of 100,000 euros. It doesn’t spare people’s livelihoods, locals said.

“We will have even more people unemployed,” said Epifanos Epifaniou, 50, who used to drive a delivery truck in Nicosia and has been jobless for six months. “It’s a huge problem. Nobody knows where we are heading.”

Cypriot President Nicos Anastasiades agreed to shut Cyprus Popular Bank Pcl, the second biggest, under pressure from his euro partners and the International Monetary Fund as negotiations stretched into the night.

Protesting

Hundreds of protesters massed outside the floodlit presidential palace in Nicosia late yesterday, shouting for the bailout “troika” of the EU, European Central Bank and IMF to leave Cyprus, a country of 862,000 people.

The streets in Nicosia were quieter today because of a national holiday to celebrate Greek independence, with school children parading to the Greek embassy. Lines remained at Popular Bank’s cash machines after the daily limit was lowered to 100 euros yesterday from 260 euros.

Anastasiades was running out of options after failing to get help from the Russians, whose holdings in Cypriot banks Moody’s Investors Service estimated at $31 billion.

The deal imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank (CPB) as it’s wound down.

Destruction

“I’m not happy with the agreement because it will be a destroyer for the Cyprus economy,” said Yannis Emmanouilidis, 50, a chemist. “Because if our bank system is destroyed, the whole economy will be destroyed.”

Bank assets in Cyprus swelled to 126.4 billion euros at the end of January, seven times the size of the 18 billion-euro economy, from 78 billion euros in 2007, data from the ECB and the EU’s statistics office show.

The Great Recession Has Been Followed by the Grand Illusion

Don't be fooled by the latest jobs numbers. The unemployment situation in the U.S. is still dire

By MORTIMER ZUCKERMAN

The Great Recession is an apt name for America's current stagnation, but the present phase might also be called the Grand Illusion—because the happy talk and statistics that go with it, especially regarding jobs, give a rosier picture than the facts justify.

The country isn't really advancing. By comparison with earlier recessions, it is going backward. Despite the most stimulative fiscal policy in American history and a trillion-dollar expansion to the money supply, the economy over the last three years has been declining. After 2.4% annual growth rates in gross domestic product in 2010 and 2011, the economy slowed to 1.5% growth in 2012. Cumulative growth for the past 12 quarters was just 6.3%, the slowest of all 11 recessions since World War II.

And last year's anemic growth looks likely to continue. Sequestration will take $600 billion of government expenditures out of the economy over the next 10 years, including $85 billion this year alone. The 2% increase in payroll taxes will hit about 160 million workers and drain $110 billion from their disposable incomes. The Obama health-care tax will be a drag of more than $30 billion. The recent 50-cent surge in gasoline prices represents another $65 billion drag on consumer cash flow.

February's headline unemployment rate was portrayed as 7.7%, down from 7.9% in January. The dip was accompanied by huzzahs in the news media claiming the improvement to be "outstanding" and "amazing." But if you account for the people who are excluded from that number—such as "discouraged workers" no longer looking for a job, involuntary part-time workers and others who are "marginally attached" to the labor force—then the real unemployment rate is somewhere between 14% and 15%.

Other numbers reported by the Bureau of Labor Statistics have deteriorated. The 236,000 net new jobs added to the economy in February is misleading—the gross number of new jobs included 340,000 in the part-time, low wage category. Many of the so-called net new jobs are second or third jobs going to people who are already working, rather than going to those who are unemployed.

The number of Americans unemployed for six months or longer went up by 89,000 in February to a total of 4.8 million. The average duration of unemployment rose to 36.9 weeks, up from 35.3 weeks in January. The labor-force participation rate, which measures the percentage of working-age people in the workforce, also dropped to 63.5%, the lowest in 30 years. The average workweek is a low 34.5 hours thanks to employers shortening workers' hours or asking employees to take unpaid leave.

Since World War II, it has typically taken 24 months to reach a new peak in employment after the onset of a recession. Yet the country is more than 60 months away from its previous high in 2007, and the economy is still down 3.2 million jobs from that year.

Bailout Strains European Ties

Cyprus Deal Preserves Euro but Sows Mistrust Between Continent's Haves, Have-Nots

A deal reached Monday in Brussels may have saved Cyprus from becoming the first country to crash out of the euro, but it came at the cost of widening the political mistrust between the strong economies of Europe's north and the weaklings of the south.

By GABRIELE STEINHAUSER , MARCUS WALKER,MATINA STEVIS 

Several officials familiar with talks in Nicosia and Brussels over the €10 billion ($13 billion) rescue for the island described more than a week of chaotic negotiations. European officials cited Cypriot foot-dragging, reversals and dropped communications, a situation one European Union official called "terrifying." Cypriot officials described their European opposites as demanding and inflexible.

The fresh bitterness over the Cyprus mess—which appears deeper than at similar points during Greece's extended financial turmoil—could hamper future attempts to fix the bloc's flaws. Germany, the euro zone's biggest economy, prevailed as it typically has in the negotiations, but at the price of growing resentment over what some Europeans saw as its bullying of a tiny nation.

The accord will see big depositors and other creditors lose large sums following the radical downsizing of the country's biggest bank and the shuttering of its second largest—the first time such a "bail-in" has been seen in the three-year euro-zone crisis.

On Monday, Cypriots waited nervously for banks to reopen after their March 15 closure, wondering whether there would be further deposit flight. The country's central bank said late in the day that all of the country's lenders would remain closed until Thursday, after saying earlier that all but the two largest would reopen Tuesday.

Markets greeted the deal with an optimism that quickly faded when Dutch finance minister Jeroen Dijsselbloem suggested in an interview that big bank depositors and senior creditors may be expected to contribute to future euro-zone bailout packages. Later, after bank shares and other euro-based assets fell on the remarks, he appeared to backtrack in a message from his Twitter account: "Cyprus [is a] specific case. Programmes tailor-made to situation, no models or templates used."

A Better Cyprus Deal

The discipline of failure and loss makes a comeback

by WSJ

Practice still makes imperfect, but Sunday's overnight deal to save Cyprus is a big improvement over the last attempt. Brussels and Nicosia have finally agreed to try an orderly, market-based solution to the country's financial mess—even if it did first have to exhaust every bad idea.

Under Sunday's deal, Laiki Bank, the country's second largest, will go bust immediately. All of its creditors will be wiped out, though insured deposits of less than €100,000 will be protected. Larger depositors will be given equity shares in a "bad bank" that will hold Laiki's more dubious assets. The bank's viable assets will be transferred to Bank of Cyprus, the less troubled of the country's terrible two.

Meanwhile, Bank of Cyprus's uninsured depositors and other creditors will take haircuts sufficient to ensure a 9% capital ratio, likely in the neighborhood of 35%. Not a cent of the EU and IMF's €10 billion rescue will go toward recapitalizing a Cypriot bank. The Cyprus government will be left with debt of 140% of GDP—worrisomely high, but lower than originally envisioned.

All of this doesn't go as far as our suggestion last week that both Bank of Cyprus and Laiki be put into resolution and that uninsured deposits be swapped for bank shares. But Sunday's deal gets most of the way there, while eliminating the worst features of the earlier deal.

By protecting insured depositors, the deal honors a government promise that is an implicit contract. The forced transfer of large deposits into equity is unfortunate, but then it is also a reminder that banks fail and that uninsured deposits are, well, uninsured. This is a useful lesson in the limits of government guarantees and a welcome blow against moral hazard.

The survival of Bank of Cyprus is a political sop to protect Cypriot jobs, though it also means the bank might eventually need another restructuring down the road. Bank of Cyprus will assume Laiki's €9 billion in emergency debt to the European Central Bank, and more borrowers are likely to default as property prices continue to fall. Don't be surprised if Bank of Cyprus needs to take another bite from creditors.

Can It Happen in US?

It already has

By Thomas Sowell

The decision of the government in Cyprus to simply take money out of people's bank accounts there sent shock waves around the world. People far removed from that small island nation had to wonder: "Can this happen here?"

The economic repercussions of having people feel that their money is not safe in banks can be catastrophic. Banks are not just warehouses where money can be stored. They are crucial institutions for gathering individually modest amounts of money from millions of people and transferring that money to strangers whom those people would not directly entrust it to.

Multi-billion dollar corporations, whose economies of scale can bring down the prices of goods and services -- thereby raising our standard of living -- are seldom financed by a few billionaires.

Far more often they are financed by millions of people, who have neither the specific knowledge nor the economic expertise to risk their savings by investing directly in those enterprises. Banks are crucial intermediaries, which provide the financial expertise without which these transfers of money are too risky.

There are poor nations with rich natural resources, which are not developed because they lack either the sophisticated financial institutions necessary to make these key transfers of money or because their legal or political systems are too unreliable for people to put their money into these financial intermediaries.

Whether in Cyprus or in other countries, politicians tend to think in short run terms, if only because elections are held in the short run. Therefore, there is always a temptation to do reckless and short-sighted things to get over some current problem, even if that creates far worse problems in the long run.

Seizing money that people put in the bank would be a classic example of such short-sighted policies.
After thousands of American banks failed during the Great Depression of the 1930s, there were people who would never put their money in a bank again, even after the Federal Deposit Insurance Corporation was created, to have the federal government guarantee individual bank accounts when the bank itself failed.

For years after the Great Depression, stories appeared in the press from time to time about some older person who died and was found to have substantial sums of money stored under a mattress or in some other hiding place, because they never trusted banks again.

After going back and forth, the government of Cyprus ultimately decided, under international pressure, to go ahead with its plan to raid people's bank accounts. But could similar policies be imposed in other countries, including the United States?

One of the big differences between the United States and Cyprus is that the U.S. government can simply print more money to get out of a financial crisis. But Cyprus cannot print more euros, which are controlled by international institutions.

Does that mean that Americans' money is safe in banks? Yes and no.

Cyprus: It’s not over yet

The price of “bailout fatigue”

By Felix Salmon

This was not a good weekend for Russian billionaires. First, Boris Berezovsky was found dead at his English country estate. Now, all the uninsured depositors (read: Russian plutocrats) at Cyprus’s two largest banks are going to be hit much, much harder than they feared they might be when the Cyprus crisis first erupted last week.

Back then — a long, long week ago — Cypriot president Nicos Anastasiades stood firm: there was no way he would allow uninsured depositors to lose more than 10% of their money. What a difference a week makes: now, if your uninsured deposits are at the Bank of Cyprus, you’re probably going to lose about 40% And if they’re at Laiki, you’re going to lose everything.

The agreement between the Cypriot government and the Troika of the EU, IMF, and ECB is a bold and brutal geopolitical power-play. There might be language in the official communiqué about how “The Eurogroup looks forward to an agreement between Cyprus and the Russian Federation on a financial contribution”, but given the billions of euros that Russians are being forced to contribute unwillingly, the chances that they’ll happily throw a bit more money into the pot have to be tiny.

In the Europe vs Russia poker game, the Europeans have played the most aggressive move they can, essentially forcing Russian depositors to contribute maximally to the bailout against their will. If this is how the game ends, it’s an unambiguous loss for Russia, and a win for the EU. For one thing, there won’t be any capital controls: that’s a good thing. (Some deposits at Bank of Cyprus will be frozen, which is a kind of capital control, but there aren’t corralito-style barriers on the general movement of euros in and out of the country.) On top of that, public markets have been left unruffled: there’s been no panic on Europe’s bolsas, partly because the biggest hit has been taken by private Russian citizens.

Who Killed the New Majority?

The GOP sealed its own fate with decades of support for war and immigration

By PATRICK J. BUCHANAN

The Republican National Committee has produced an “autopsy” on what went wrong in 2012, when the party failed to win the White House and lost seats in Congress.

Yet, the crisis of the Grand Old Party goes back much further.

First, some history. The Frank Lloyd Wright of the New Majority was Richard Nixon, who picked up the pieces of the party after Goldwater’s defeat had left Republicans with just a third of the House and Senate.

In 1966, Nixon led the GOP back to a stunning victory, picking up 47 House seats. In 1968, he united the Rockefeller and Reagan wings and held off an October surge by Hubert Humphrey, which cut a 13-point Nixon lead to less than a point in four weeks.

In 1972, Nixon swept 49 states. The New Majority was born. How did he do it?

Nixon sliced off from FDR’s New Deal coalition Northern Catholics and ethnics—Irish, Italians, Poles, East Europeans—and Southern Christian conservatives. Where FDR and Woodrow Wilson had won all 11 Southern States six times, Nixon swept them all in ’72. And where Nixon won only 22 percent of the Catholic vote against JFK, he won 55 percent against George McGovern in 1972.

What killed the New Majority?

First, there was mass immigration, which brought in 40 to 50 million people, legal and illegal, poor and working class, and almost all from the Third World. The GOP agreed to the importation of a vast new constituency that is now kicking the GOP into an early grave.

When some implored the party in 1992 to secure the border and declare a “timeout” on legal immigration to assimilate the millions already here, the party establishment repudiated any such ideas.

“We are a nation of immigrants!” it huffed. Well, we sure are now.

And when amnesty is granted to the 12 million illegals, as GOP senators are preparing to do, that should advance the death of the GOP as a national party by turning Colorado, Nevada and Arizona blue, and putting even Texas in play.

Have politicians had a mental blackout?

There’s a real risk of energy shortages in Britain, yet still the political class is obsessed with cutting fossil fuel use

by Rob Lyons 

‘Britain faces gas supply crisis as storage runs dry’, warned Reuters last week. Unseasonably cold weather has meant that demand for gas has shot up just as it should be going down with the arrival of spring. Just to add a little spice to the warnings, tens of thousands of homes were left without power as blizzards knocked out power lines in Northern Ireland and Scotland. A taste of things to come?

As it goes, the claim that gas supplies could run out by 8 April is very much a worst-case scenario. There is normally plenty of supply, from a combination of the North Sea, Europe and shipments of liquefied gas coming from countries further afield, particularly Qatar. Nonetheless, it is daft that a modern, highly developed economy like the UK should even be discussing such things. That we are is the product of years of inertia in central government and an obsession with self-imposed greenhouse-gas emissions targets.

So perversely, just as a set of circumstances was emerging that showed how close to the wind the UK is sailing on energy security, Britain has been closing power stations. For example, on Friday, Didcot A power station in Oxfordshire was disconnected from the National Grid after 43 years. The 2,000-megawatt plant got the chop because it burns coal. Older coal plants are being phased out under EU regulations. Indeed, according to Alistair Buchanan, the boss of energy regulator Ofgem, 10 per cent of the UK’s electricity generating capacity is due to be switched off this month.

Buchanan notes the speed at which plant closures will now kick in: ‘If you can imagine a ride on a rollercoaster at a fairground, then this winter, we are at the top of the circuit and we head downhill – fast. Within three years, we will see the reserve margin of generation fall from about 14 per cent to less than five per cent. That is uncomfortably tight.’ In fact, some of those coal plants are closing ahead of schedule because their remaining operating hours have been used up quickly to take advantage of low coal prices. At a time when complaints about domestic energy costs are getting louder and louder, we are turning our back on the cheapest form of power available.

We’ve known for quite some time that there was the potential for a major shortfall in energy supplies. Coal and nuclear stations have been shutting but alternatives have fallen short. Wind is expensive to build and intermittent in operation. At some of the coldest periods of the year, wind supply can fall to nearly zero. Renewable UK celebrated the fact that wind produced a record proportion of UK electricity in 2012 - but it was still just 5.5 per cent of the total. New nuclear stations should be being built now, but years of political indecision mean that not a single new plant has actually got agreement yet. Even now, suppliers are haggling with government over guaranteed prices, though planning permission for Hinkley Point C - a new station on the site of two older nuclear reactors - has at least been approved. Nonetheless, it will still take eight to 10 years to build the plant.

In Instanbul: The Rise & Fall of Society

Since the State thrives on what it expropriates the general decline in production which it induces by its avarice foretells its own doom

by Chris Mayer

It’s Istanbul, not Constantinople, as the song goes. In this history is an omen for any powerful state (read: the U.S.). A somewhat obscure essayist knew all about it back in 1959. His little book deserves wider circulation. Below, we’ll take a look.

Constantinople was once the seat of a vast, rich empire. The successor to Rome, it ruled over a land that stretched from the Caucasus to the Adriatic, from the Danube to the Sahara. The Dark Ages were dark only if you ignore the flourishing civilization on the Bosporus.

Historian Merle Severy writes: “Medieval visitors from the rural West, where Rome had shrunk to a cow town, were struck dumb by this resplendent metropolis.” There were half a million people here. Its harbors full of ships, “its markets filled with silks, spices, furs, precious stones, perfumed woods, carved ivory, gold and silver and enameled jewelry.”

This civilization lasted for a thousand years.

Actually, it lasted for 1,123 years and 18 days after Constantine the Great made the city his new Christian Rome. On May 29, 1453, Constantinople fell to the Turks.

Renamed Istanbul, the city would serve as the seat of yet another great empire, the Ottoman. And this one would last nearly five centuries. In the 16th and 17th centuries, the Ottoman Empire was perhaps the most powerful state on Earth. It was on one heck of a roll. After Constantinople, the Ottomans took Athens in 1458. Then it was on to Tabriz (1514), Damascus (1516), Cairo (1517), Belgrade (1521), Rhodes (1522), Baghdad (1534), Buda (1541), Tripoli (1551) and Cyprus (1571).

They almost took Vienna. The powers of Western Europe drew the line in the sand there. Interesting to think what would’ve happened if the Turks took Vienna. All of Western Europe would be at their feet. If they had succeeded, perhaps the majority of Europeans would be answering the call to prayer, echoing from the minarets of cathedrals-turned-mosques…

Yet the Ottoman Empire, too, would crumble. It was constantly at war. By one historian’s reckoning, the longest period of peace was just 24 years in nearly six centuries of reign.

In 1923, with the founding of the Republic of Turkey, Ankara became the seat of government. As historian John Freely notes: “For the first time in 16 centuries, the ancient city on the Golden Horn was no longer reigning over a world empire with only the presence of the monuments to remind one of its imperial past.”

It is not hard to think of the U.S. in the context of these great powers.

*** Enter Chodorov

One of the books I had tucked in my bag that I read while in Turkey was Frank Chodorov’sThe Rise & Fall of Society. This is a slender 168-page book by a great, if somewhat forgotten, essayist and editor. It gives a tightly reasoned answer to the question “Why do societies rise and fall?”

Chodorov’s thesis is that “every collapse of which we have sufficient evidence was preceded by the same course of events.”

The course of events goes like this: “The State, in its insatiable lust for power, increasingly intensified its encroachments on the economy of the nation…” and finally gets to the point where the economy can no longer support the state at the level it is accustomed to. Society can’t meet the strain, so “society collapsed and drew the State down with it.”

The pattern is always the same, regardless of size or ideology. The state can grow only by taking. “Since the State thrives on what it expropriates,” Chodorov writes, “the general decline in production which it induces by its avarice foretells its own doom.”

Chodorov bases much of his thesis on what he calls “the law of parsimony.” In essence, it is simply that people try to get the most satisfaction with the least amount of effort. It is a natural law of human behavior.

Anatomy of the Bank Run

Fractional reserve banks, being inherently insolvent, are uninsurable

[This article is featured in chapter 79 of Making Economic Sense by Murray Rothbard and originally appeared in the September, 1985 edition of The Free Market]

by Murray N. Rothbard
It was a scene familiar to any nostalgia buff: all-night lines waiting for the banks (first in Ohio, then in Maryland) to open; pompous but mendacious assurances by the bankers that all is well and that the people should go home; a stubborn insistence by depositors to get their money out; and the consequent closing of the banks by government, while at the same time the banks were permitted to stay in existence and collect the debts due them by their borrowers.

In other words, instead of government protecting private property and enforcing voluntary contracts, it deliberately violated the property of the depositors by barring them from retrieving their own money from the banks.

All this was, of course, a replay of the early 1930s: the last era of massive runs on banks. On the surface the weakness was the fact that the failed banks were insured by private or state deposit insurance agencies, whereas the banks that easily withstood the storm were insured by the federal government (FDIC for commercial banks; FSLIC for savings and loan banks).

But why? What is the magic elixir possessed by the federal government that neither private firms nor states can muster? The defenders of the private insurance agencies noted that they were technically in better financial shape than FSLIC or FDIC, since they had greater reserves per deposit dollar insured. How is it that private firms, so far superior to government in all other operations, should be so defective in this one area? Is there something unique about money that requires federal control?

Why Cyprus 2013 is worse than the KreditAnstalt (1931) and Argentina 2001 crises

The Cyprus 2013, like any other event, can be thought in political and economic terms

by Martin Sibileau 

Political analysis: Two dimensions

Politically, I can see two dimensions. The first dimension belongs to the geopolitical history of the region, with the addition of the recently discovered natural gas reserves. The historical relevance goes as far back as 1853, the year the Crimean War began. The Crimean War took place in the adjacent Black Sea, but the political interest was the same: To avoid the expansion of Russia into the Mediterranean. The relevance of this episode was the break-up of the balance of power established after the Napoleonic Wars, with the Congress of Vienna, in 1815. From then on, a whole new series of unexpected events would lead to a weaker France, a stronger Prussia, new alliances and a final resolution sixty years later: World War I.  It is within this same framework that I see Cyprus 2013 as a very relevant political event: Should Russia eventually obtain a bailout of Cyprus (as I write, this does not seem likely) against a pledge on the natural gas reserves or a naval base, a new balance of power will have been drafted in the region, with Israel as the biggest loser.

The second political dimension refers to a point I made exactly a year ago, precisely inspired in the KreditAnstalt event of 1931. In an article titled: “On gold, stocks, financial repression and the KreditAnstalt of 1931” I wrote:

“(The KreditAnstalt event) was triggered because France, a public sector creditor,introduced a political condition to Austria, in exchange for a bailout of the KreditAnstalt. Today, like in 1931, in the Euro zone, the public sector is increasingly the creditor of the public sector. In 1931, England and France were creditors of Austria and demanded conditions that no private investor would have demanded.

Private investors live and die by their profits and losses. Politicians live and die by the votes they get. Private investors worry about the sustainability and capital structure of the borrower, the collateralization and the funding profile of their credits. Politicians worry about the sustainability of their power. It’s a fact and we must learn to live with it.

In 2012, Greece and increasingly other peripheral EU countries owe to other governments, the IMF and the European Central Bank. Private investors have been wiped out and will not return any moment soon. We fear that just like in 1931, when the next bailout is due either for Greece again or Portugal or Spain, political conditions will be demanded that no private investor in his/her right mind would ever have demanded.

Think of it... What in the world had the customs union between Austria and Germany in 1931 had to do with the capitalization ratio of the KreditAnstalt??? Nothing! Yet, millions and millions of people worldwide were condemned to misery in only a matter of days as their savings evaporated! Ladies and gentlemen, welcome to the world of fiat currencies! You have been warned! If months from now you read in the papers that the EU Council irresponsibly demands strange things from a peripheral country in need of a bailout, remember the KreditAnstalt. Remember 1931.

Europe's Cyprus Crisis Has a Familiar Look

When will we learn?

By Peter Coy 

To most of the world, the banking crisis that broke out in Cyprus in mid-March was as abrupt and unexpected as an outbreak of Ebola. For Cypriots, it wasn’t sudden at all. Many opportunities to steer the country in a better direction came along over the years but were missed or never tried. Now the misbegotten decision by European finance ministers to tax the accounts of ordinary depositors to help pay for a bailout of the country’s biggest banks has become a source of continentwide embarrassment.

The bailout mess roiling the capital of Nicosia and the financial hub of Limassol has plenty of only-in-Cyprus color: Russian oligarchs doing biznes in the sunny Mediterranean, a simmering conflict with Turkey, a former president who was educated in Soviet-era Moscow. Underneath the details, though, is a frustratingly familiar pattern. A small country cleans up its act and joins the international financial community. Money pours in from abroad. The cash is spent or lent unwisely under the noses of inattentive or ineffectual regulators. When losses mount, the money flows out as quickly as it came in. In the end, it’s the little guys who lose the most.

Only five years ago, Cyprus seemed to be in a sweet spot. The country had teetered on the edge since a war in 1974 that left the northern third of the island under Turkish control. For years it also had shaky government finances and a reputation as a haven for foreign money launderers and tax evaders. But successive governments worked hard to lose those bad habits as the price for admission to the European club. Cyprus balanced its budget (for two years, anyway). And it tightened banking regulations so successfully that today it’s in better compliance with the 36-nation Financial Action Task Force’s rules on money laundering than Germany, France, or the Netherlands.

Cyprus was the richest of the 10 countries that joined the European Union in 2004. Just four years later it dropped its currency, the pound, in favor of the euro. There was a brief episode of capital flight after the Lehman Brothers failure in 2008, but it was soon reversed.

For a time, being inside the EU and the euro zone benefited both Cyprus and foreigners eager to invest there. It made the country—whose population of 800,000 or so is no bigger than that of Jacksonville, Fla.—more attractive as a place to do business. It particularly lured wealthy Russians, who appreciated the country’s strong protection of property rights beyond Moscow’s reach and its 10 percent corporate income tax rate (Europe’s lowest), not to mention the balmy weather and a shared Orthodox faith. The storefronts of Limassol are plastered with signs in Cyrillic. Roman Abramovich, the oligarch whose properties include London’s Chelsea Football Club, operates Evraz (EVR), his steel, mining, and vanadium business, through a limited liability company called Lanebrook in downtown Nicosia. There’s no evidence to support German parliamentarians’ allegations that Cyprus is a haven for tax evaders. In January even Russian tax authorities gave Cyprus a clean bill of health.

When Do We Call It A Solvency Crisis?

Don't pop the champagne corks yet

by Michael Pettis

I got back last week from a two-day trip to London, where I spoke at an interesting event organized by the Carnegie Endowment. The attendees were for the most part senior bankers and investors, and I got the impression that several, though maybe not all, shared with me a certain amount of surprise that European bond markets were up this year. We were even a little shocked that the buoyant markets were being interpreted as suggesting that the worst of the European crisis was behind us. The euro, the market seems to be telling us, has been saved, and peripheral Europe is widely seen as being out of the woods.

I cannot name any of the attendees at the Carnegie event because it was off the record, but one of them who seemed most strongly to share my skepticism is a very senior and experienced banker whose name is likely to be recognized by anyone in the industry. After I finished explaining why I thought the euro crisis was far from over, and that I still expected that absent a serious effort from Germany to boost domestic spending – an effort likely to leave the country with rapidly rising debt – at least one or more countries would eventually be forced off the currency, he told the group that he hadn’t made as gloomy a presentation only because he considered it impolitic to sound as pessimistic as I did.

Neither of us, in other words, (and few in the meeting) felt that the recent market enthusiasm was justified. Never mind that the Spanish economy, to return to the country I know best, contracted again in the fourth quarter of last year, that it is expected to contract again this year, that unemployment is still rising, and that the ruling party is involved in yet another scandal that has driven its popularity down to 20%. Never mind that young Spaniards are emigrating (20,000 a month net), that the real estate market continues to drop, that businesses are still disinvesting and popular anger is extraordinarily high. The ECB, it seems, is willing to pump as much liquidity into the markets as it needs, so rising debt levels, greater political fragmentation, and a worsening economy somehow don’t really matter. This crisis continues to be just a liquidity crisis as far as policymakers are concerned – and not caused by problems in the “real” economy – and the solution of course to a liquidity crisis is more liquidity.

Forget Spain and Italy. It’s France that’s Greece-ifying before our very eyes

The French Economy is Going Down the Drain

By Gwynn Guilford 

France has so far dodged the “problem child” reputations that Spain and Italy have earned. But it looks like that will be increasingly hard to keep up. Data today on France’s business output hinted not just that its economy is decaying—but that it’s doing so rapidly.

Markit’s preliminary March purchasing managers’ index—which measures monthly changes in private-sector output—came in at 42.1 (pdf), down from 43.1 in February. (Anything lower than 50 reflects a drop in output.) That’s the fastest slowdown in business activity France has seen since March 2009. And Jack Kennedy, economist at Markit, says this likely augurs a larger crumbling of the French economy.

“My take is it’s really a continuation of the sharp weakening pattern we’ve seen in recent months—so very much a trend rather than a blip,” Kennedy tells Quartz. “Most of the anecdotal feedback from the survey panel points to a general lack of confidence and clients reining in spending accordingly.”

To frame it in another horrifying perspective, the PMI of the euro zone’s second-largest economy was lower than that of Spain and Italy—and almost down to Greek levels (video), as Reuters’ Jamie McGeever explains.

What’s most worrying is when you look at how France’s data stacked up against the euro zone’s as a whole, which were also published today. While the euro zone’s PMI (blue line) and its GDP growth (orange line) have moved pretty closely in sync, France’s PMI has become unhinged in the last couple of years. And that’s bad because, as PMI reflects business confidence, it’s typically a leading indicator of GDP growth:

One of the biggest sources of concern: France’s service sector, which contributes something like four-fifths of France’s GDP. Even as the pace of decline for France’s manufacturing output slowed, the services PMI hit 41.9, indicating the steepest drop since February 2009.

“Notably in the latest survey we saw service sector future expectations plunging to [their] lowest since [December 2008,] in the wake of the Lehman collapse which really underlines the scale of the worries at the moment,” says Markit’s Kennedy, adding that that “in turn seems to be feeding back into lower activity.”

But even if PMI continues to fall, the chart above shows that France’s GDP has proven fairly resilient—especially compared with the euro zone’s trend. So things should be okay, right?

Probably not. Kennedy chalks this ”puzzling” gap in GDP and PMI up to the difficulty in accurately measuring service-sector output in the official data. The recent blindsiding slump in French industrial production may show official data finally falling back in line with PMI, he says.

That means that the gap you see in the above chart could be about to close. GDP growth for the first quarter of this year could come in surprisingly low. If so the country’s chances for a near-term recovery are receding faster than its leaders may be willing to admit.