Cyprus Solution Sealed on Feb 10th 2013

Radical rescue proposed for Cyprus

By Peter Spiegel and Quentin Peel, Financial Times, February 10, 2013

A radical new option for the financial rescue of Cyprus would force losses on uninsured depositors in Cypriot banks, as well as investors in the country’s sovereign bonds, according to a confidential memorandum prepared ahead of Monday’s meeting of eurozone finance ministers.

The proposal for a “bail-in” of investors and depositors, and drastic shrinking of the Cypriot banking sector, is one of three options put forward as alternatives to a full-scale bailout. The ministers are trying to agree a rescue plan by March, to follow the presidential elections in Cyprus later this month.

The new plan has not been endorsed by its authors in the European Commission or by individual eurozone members. The memo warns that “the risks associated with this option are significant”, including a renewed danger of contagion in eurozone financial markets, and premature collapse in the Cypriot banking sector.

The radical proposal is intended to produce a more sustainable debt solution for the country, cutting the size of Cyprus’s bailout by two-thirds – from €16.7bn to only €5.5bn – by involving more foreign depositors and bond holders.

It would reduce Cyprus’s outstanding debt to just 77 per cent of economic output, compared with 140 per cent in the current full bailout plan.

By “bailing in” uninsured bank depositors, it would also involve more foreign investors, especially from Russia, some of whom have used Cyprus as a tax haven in recent years. That would answer criticism from Berlin in particular, where politicians are calling for more drastic action to stop the island being used for money laundering and tax evasion.

Senior EU officials who have seen the document cautioned that imposing losses on bank depositors and a sovereign debt restructuring remain unlikely. Underlining the dissuasive language in the memo, they said that bailing in depositors was never considered in previous eurozone bailouts because of concern that it could lead to bank runs in other financially fragile countries.

But the document also makes clear that both options remain on the table despite public insistence by eurozone leaders that Greece was “unique” and would be the only country to default on sovereign debts.

Labelled “strictly confidential” and distributed to eurozone officials last week, the memo says the radical version of the plan – including a “haircut” of 50 per cent on sovereign bonds – would shrink the Cypriot financial sector, now nearly eight times larger than the island’s economy, by about one-third by 2015.

But the authors warn such drastic action could restart contagion in eurozone financial markets, and put forward two more cautious alternatives.

One more moderate “bail-in” option would involve junior debt holders, but not bank depositors, and would aim to shrink the size of the banking sector by half over 10 years. It would seek to raise corporate income tax to 12.5 per cent (from the current 10 per cent), and increase withholding tax on capital income to 28 per cent. It would also seek to extend the maturities on the €2.5bn loan that Cyprus received from Russia last year.

A third option would allow Cyprus to sell the shares it acquires in its ailing banks to the European Stability Mechanism, once that eurozone rescue fund is allowed to provide direct recapitalisation for banks.

Cyprus’s bailout, while small compared to Ireland, Portugal and Greece, has proven unexpectedly difficult because its size relative to the country’s gross domestic product would increase debt to levels considered unsustainable both by the International Monetary Fund and the German government.

The memo says that without any relief, the bailout would stand at €16.7bn and increase the country’s debt to 140 per cent of GDP by 2015, the end of the three-year programme. That would make it the highest in the eurozone except for Greece.

The document says that the ministers must decide what should be the appropriate debt-to-GDP level for Cyprus. Some have argued for 100 per cent by the end of the programme period (2015), while others believe it would be sufficient to hit that target by 2020, it says.

The Deeper Meanings of Cyprus

Eurozone's neocolonial, neofeudal structure

by Charles Hugh-Smith

At long last, Europe's flimsy facades of State sovereignty, democracy and free-market capitalism have collapsed, and we see the real machinery laid bare: the Eurozone's political-financial Aristocracy will stripmine every nation's citizenry to preserve their power and protect the banks and bondholders from absorbing losses.

The deposit-confiscation "bailout" of Cyprus confirms the Eurozone's fundamental neocolonial, neofeudal structure and the region's political surrender to financialization.

The E.U., Neofeudalism and the Neocolonial-Financialization Model(May 24, 2012)

Let's list what Cyprus reveals about the true state of financial-political power in Europe:

1. The Core-Periphery terminology masks the real structure: the E.U. operates on a neocolonial model. In the old Colonialism 1.0 model, the colonizing power conquered or co-opted the Power Elites of the periphery regions, and proceeded to exploit the new colonies' resources and labor to enrich the Imperial core.

In Neocolonialism, the forces of financialization (debt and leverage controlled by State-enforced banking cartels) are used to indenture the local Elites and populace to the financial core: the peripheral "colonials" borrow money to buy the finished goods manufactured in the core economies, enriching the Imperial Elites with A) the profits made selling goods to the debtors B) interest on credit extended to the peripheral colonies to buy the core economies' goods and "live large", and C) the transactional skim of financializing peripheral assets such as real estate and State debt.

In essence, the core banks of the E.U. colonized the peripheral nations via the financializing euro, which enabled a massive expansion of debt and consumption in the periphery. The banks and exporters of the core exacted enormous profits from this expansion of debt and consumption.

Now that the financialization scheme of the euro has run its course, the periphery's neocolonial standing is starkly revealed: the assets and income of the periphery are flowing to the core as interest on the private and sovereign debts that are owed to the core's central bank and its crony money-center private banks.

This is not just the perfection of neocolonialism but of neofeudalism as well. The peripheral nations of the E.U. are effectively neocolonial debtors of the core (quasi-Imperial) banks, and the taxpayers of the core nations (now reduced to Germany and The Netherlands) are now feudal serfs whose labor is devoted to making good on any bank loans to the periphery that go bad.

Though we can term the E.U. a plutocracy or oligarchy, the neofeudal structure compels us to distinguish a class of those holding wealth and political power that is not limited to national border: this is an Aristocracy.

Serving the Aristocracy is a well-paid technocrat class of factotums, lackeys, toadies and enforcers. Below this well-compensated caste of technocrats is the larger class of debt-serfs, enslaved to interest payments on either their own debts or the debts of others, and bound by their class powerlessness to protecting banks and bondholders from losses.

Cyprus merely adds an expropriation twist to this well-oiled plunder: deposits will be expropriated directly to insure no Imperial (core) banks or bond holders lose money on their absurdly risky loans to periphery nations and serfs.

2. This is a supranational plunder. While commentators can wile away years debating how much Germany benefited from the euro, the real core is not national, it is supranational banks and the political machinery of the E.U. the banks have effectively captured.

The citizenry of Germany may approve or disapprove of the Cyprus expropriation, but it doesn't matter either way: their own serfdom to banks and bondholders is simply being masked: the bailouts of periphery nations are transparently bailouts of core banks and bondholders.

The nation-states of the neocolonial periphery are simply convenient propaganda placeholders, useful misdirections aimed at the naive and sentimental, hollowed-out national structures propped up to mask the ugly neocolonial reality of servitude and plunder.

The Death of the Family

Real 'modern family' not so funny

By mark steyn

Gay marriage? It came up at dinner Down Under this time last year, and the prominent Aussie politician on my right said matter-of-factly, "It's not about expanding marriage, it's about destroying marriage."

That would be the most obvious explanation as to why the same societal groups who assured us in the Seventies that marriage was either (a) a "meaningless piece of paper" or (b) institutionalized rape are now insisting it's a universal human right. They've figured out what, say, terrorist-turned-educator Bill Ayers did – that, when it comes to destroying core civilizational institutions, trying to blow them up is less effective than hollowing them out from within.

On the other hand, there are those who argue it's a victory for the powerful undertow of bourgeois values over the surface ripples of sexual transgressiveness: gays will now be as drearily suburban as the rest of us. A couple of years back, I saw a picture in the paper of two chubby old queens tying the knot at City Hall in Vancouver, and the thought occurred that Western liberalism had finally succeeded in boring all the fun out of homosexuality.

Which of these alternative scenarios – the demolition of marriage or the taming of the gay – will come to pass? Most likely, both. In the upper echelons of society, our elites practice what they don't preach. Scrupulously nonjudgmental about everything except traditional Christian morality, they nevertheless lead lives in which, as Charles Murray documents in his book "Coming Apart," marriage is still expected to be a lifelong commitment. It is easy to see moneyed gay newlyweds moving into such enclaves, and making a go of it. As the Most Reverend Justin Welby, the new Archbishop of Canterbury and head of the worldwide Anglican Communion, said just before his enthronement the other day, "You see gay relationships that are just stunning in the quality of the relationship." "Stunning": what a fabulous endorsement! But, amongst the type of gay couple that gets to dine with the Archbishop of Canterbury, he's probably right.

Lower down the socioeconomic scale, the quality gets more variable. One reason why conservative appeals to protect the sacred procreative essence of marriage have gone nowhere is because Americans are rapidly joining the Scandinavians in doing most of their procreating without benefit of clergy. Seventy percent of black babies are born out of wedlock, so are 53 percent of Hispanics (the "natural conservative constituency" du jour, according to every lavishly remunerated Republican consultant), and 70 percent of the offspring of poor white women. Over half the babies born to mothers under 30 are now "illegitimate" (to use a quaintly judgmental formulation). For the first three-and-a-half centuries of American settlement the bastardy rate (to be even quainter) was a flat line in the basement of the graph, stuck at 2 or 3 percent all the way to the eve of the Sixties. Today over 40 percent of American births are "nonmarital," which is significantly higher than in Canada or Germany. "Stunning" upscale gays will join what's left of the American family, holed up in a chichi Green Zone, while, beyond the perimeter, the vast mounds of human rubble pile up remorselessly. The conservative defense of marriage rings hollow because for millions of families across this land the American marriage is hollow.

Five Principles of Urban Economics

Things we know and things we don’t

By Mario Polese
Scholarly journals have published hundreds of articles about urban economies. The questions are always the same: Why do some cities grow faster than others? Why do some generate more wealth? Why do some decline? No simple answers exist, and much remains open to speculation. However, the accumulated wisdom of more than 50 years of research does allow us to state certain principles about the economies of cities. I propose five.

Before getting to them, a word on the nature of cities is in order. Cities are first and foremost places—agglomerations of people—rather than economic and political units. That fact complicates the study of urban economies. For starters, delineating urban areas can be done in a variety of ways. Exactly where does New York begin, and where does it end? We might opt to study the entire New York metropolitan area, figuring (correctly) that such a definition is more economically significant than merely the area of New York City proper. But even then, we have to remember that a metropolitan area’s borders can expand or shrink over time. The boundaries of the New York metro area aren’t the same today as they were 50 years ago, so one can easily draw mistaken conclusions from the statement that it has grown from 12 million people in 1960 to 20 million today.

Also, cities’ power to make economic policy is limited. (City-states like Singapore are an exception.) The policies that most significantly affect urban economies usually come from higher levels of government. This doesn’t mean that local policies don’t matter, but it does mean that their ability to affect broad economic and geographic trends is sharply circumscribed. It also explains why the scholarly literature focuses on determinants that urban policy can do little about, such as location and “agglomeration economies” (essentially, the beneficial effects of urban size and diversity).

Sharks in the Water and Out

On the abuses of “work-related stress”

BY THEODORE DALRYMPLE
Earlier this month, British newspapers reported the story of Paul Marshallsea, a Welshman who, while on a two-month Australian holiday with his wife, wrestled a six-foot shark to prevent it from attacking children in the water. Marshallsea happened to be filmed while doing so, and the pictures went around the world. He was proclaimed a hero.

Unfortunately for him, the pictures also reached Wales. He and his wife were supposed to be on sick leave at the time with “work-related stress,” and his heroics didn’t impress his employers: they sacked him, on the not-unreasonable grounds that if he could travel to Australia and wrestle with a shark, he could probably have made it into work. Moreover, photographs of the couple suggested that they were having the holiday of a lifetime, rather than merely recuperating from serious illness.

Under the best circumstances, “work-related stress” is a slippery concept, almost an invitation to fraud. And here the context is important. Marshallsea lives in Merthyr Tydfil, long known as the sick-note capital of Britain. Up to a fifth of its people of working age receive a certificate of sickness from doctors sympathetic to the plight of the unemployed. (The sick get higher state benefits than the merely unemployed.) There is thus almost a presumption of sickness in Merthyr, once a prosperous industrial town. Unemployment is virtually a hereditary condition, having been passed down to the third generation. Were it not for the public sector, unemployment in Merthyr would be nearly 100 percent.

The work that caused the Marshallseas so much stress was with a so-called charity—the Pant and Dowlais Boys & Girls Club, for whom they had worked for ten years. The object of the club is to help Merthyr Tydfil’s boys and girls develop their physical, mental, and spiritual capacities through leisure activities. This included providing them with a disco.

The largest single donor to the “charity” last year was the Welsh government (more than 20 percent); the year before, it was the Merthyr Tydfil Council (more than 40 percent). In Britain, the distinction between charity and government has been blurred to the point of eradication by the fact that government, local or national, is often the largest contributor to charities—sometimes, indeed, almost the only one. And he who pays the piper calls the tune.

The principal beneficiaries of charities often seem to be their employees. Staff costs of the Pant and Dowlais Boys & Girls Club last year amounted to 63 percent of the club’s income. It is likely that the Marshallseas were well-paid; Australia is one of the most expensive countries in the world, and two-month holidays there, even when staying with friends, as were the Marshallseas, don’t come cheap. Sick leave is fully paid, so the charity funded the couple’s holiday.

The story illustrates a fundamental truth about contemporary Britain: it is now a sink of corruption, moral, intellectual, and financial, all of it perfectly legal.

The First Victim of Cyprus Contagion

Slovenia faces contagion from Cyprus as banking crisis deepens

Slovenia’s borrowing costs have rocketed over recent days as it grapples with a festering financial crisis, becoming the first victim of contagion from Cyprus.

By Ambrose Evans-Pritchard

 “Banks are under severe distress,” said International Monetary Fund in its annual health check on the country. Non-performing loans of the Slovenia’s three largest banks reached 20.5pc last year, with a third of all corporate loans turning bad.

Yields on two-year debt in the Alpine state have tripled over the past week, jumping from 1.2pc to 4.26pc before falling back slightly on Thursday. Ten-year yields have reached a post-EMU high of 6.25pc.

“The country has lost competitiveness since joining the euro and it’s lead to slow economic collapse. Markets have been very complacent, but it has been clear for a long time that the banks need recapitalisation, and it is not easy to raise money in this climate,” said Lars Christensen from Danske Bank.

The IMF expects the economy to contract by 2pc this year, following a fall of 2.3pc in 2012. “A negative loop between financial distress, fiscal consolidation and weak corporate balance sheets is prolonging the recession. A credible plan to address these issues is essential to restore confidence and access markets,” it said.

The new prime minister Alenka Bratusek told the Slovene parliament on Wednesday that the fears are overblown. “Our banking system is stable and safe. Comparisons with Cyprus aren’t valid. Deposits are safe and the government is guaranteeing them.”

Slovenia’s bank assets equal 130pc of GDP compared with 700pc for Cyprus, though the Cypriot figure is misleading since a large part of its banking system is made of “brass plate” subsidiaries of foreign lenders such as Barclays or Russia’s VTB.

Tim Ash from Standard Bank said the events of the past two weeks had pushed the country over the edge. “Slovenia is now inevitably heading towards a bail-out. The eurozone shot itself completely in the foot in Cyprus,” he said.

The Slav-speaking state - a Baroque jewel with historic ties to Austria - has a population of just 2m and is too small to pose a financial threat.

However, analysts say a crisis in Slovenia would further complicate EMU politics, forcing the northern creditor states to define their rescue strategy yet again. Austerity fatigue in Germany and Holland has already caused policy to harden.

Stopping the Keynesian Death March

The shadow of Keynes unfortunately still darkens policy debate to the detriment of long-run prosperity

by John P. Cochran

Marray Rothbard recommended two ways for reducing deficits.

1. “While deficits are often inflationary and always pernicious, curing them by raising taxes is equivalent to curing an illness by shooting the patient.”

2. “Deficits, then, should be eliminated, but only by cutting government spending.”

In “Escape From Spending Hell” (Wall Street Journal,March 14, 2013), Daniel Henninger discusses recent work on austerity programs by Harvard economist Alberto Alesina (with Carlo Favero and Francesco Giavazzi) that provides strong historical support for Rothbard’s points.

Henniger summarizes the current problem and possible policy options as follows:

Ever since Ronald Reagan legitimized the efficacy of tax cuts, Democrats have sought to discredit his idea and restore the New Deal theory of a Keynesian multiplier, which dates to 1931. It holds that more public spending will revive a struggling economy.

No president has believed more in the miracle of the multiplier than Barack Obama. Across four years he has led the country on a kind of Keynesian death march, pushing federal spending to 25% of GDP and producing weak growth. We’re looking at four more years before the Keynesian mast unless the Republicans can offer an intellectually respectable alternative.

Mr. Alesina has identified the alternative. His work the past decade with how struggling economies revive suggests that the Obama spend-more solution is the opposite of what the U.S. should be doing.

The work on which Mr. Henniger’s commentary is based is “The output effect of fiscal consolidations” (August 2012 for the National Bureau of Economic Research). Henniger argues that there is a general consensus on two things:

(1) The U.S. economy is emerging from the deepest recession (depression) since the Great Depression followed by, I would add, the most anemic recovery since the Depression.

(2) The public “debt level is unsustainable.”

What are the relevant results highlighted in the paper? From the abstract:

This paper studies whether fiscal corrections cause large output losses. We find that it matters crucially how the fiscal correction occurs. Adjustments based upon spending cuts are much less costly in terms of output losses than tax-based ones. Spending-based adjustments have been associated with mild and short-lived recessions, in many cases with no recession at all. Tax-based adjustments have been associated with prolonged and deep recessions. [Emphasis mine]

Texas oil - an amazing success story

‘Saudi Texas’ produces almost one-third of America’s crude oil, and as a separate country would rank #13 in the world

By Mark J. Perry

The Energy Information Administration released new data today for US oil production by state for the month of January, and its report showed that “Saudi Texas” produced an average of 2.26 million barrels per day (bpd) in January, the highest average daily output in the state in any month since May 1986, almost 27 years ago (see chart above). Texas oil production increased by 30% in January from a year earlier, and by 75% from two years ago.

Amazingly, oil production in the Lone Star State has more than doubled in only three years, from 1.10 million bpd in January 2010 to 2.26 million bpd in January 2013, which has to be one of the most significant increases in oil output ever recorded in the history of the US over such a short period. The exponential increase in Texas oil output over just the last three years has completely reversed the previous 23-year decline in the state’s oil production that took place from 1986 to 2009. Just a little more than three years ago, Texas was producing less than 20% of America’s domestic oil. The recent gusher of unconventional oil being produced in the Eagle Ford Shale area of Texas, thanks to breakthrough drilling technologies, has pushed the Lone Star State’s share of domestic crude oil above 30% in each of the last ten months, and up to 32.2% in January.

Further, Texas oil output in January at an average of 2.26 million bpd was 25.7% greater than the US oil imports that month from all of the Persian Gulf countries (Saudi Arabia, Iraq, Kuwait and Qatar) combined at 1.79 million bpd. In fact, Texas oil output has exceeded Persian Gulf imports in each of the last five months starting in September, and that has never happened before in the history of the monthly EIA data for Persian Gulf imports back to January 1993.

Remarkably, oil output has increased so significantly in Texas in recent years, that if it was considered as a separate country, Texas would have been the 13th largest oil-producing nation in the world for crude oil output in November (most recent month available forinternational oil production data). At the current rate of increase in oil output, Texas is on pace to possibly produce 2.74 million bpd by the end of this year, which could move the state all the way up to No. 9 in the world for oil output by December.

Cuprus : The Last Minute Inside Job

And the Answer is Uniastrum

by Mark J. Grant

It's funny how things are done in Europe. Nothing is as it seems. Then everything is orchestrated to try to get you to believe what they want you to believe. The Cyprus fiasco is one good example. The Dutch Finance Minister and Chairman of the Eurogroup broke ranks and spoke the truth; there is now a template in Europe for financial bail-outs which include losses for bond holders and depositors. The ECB had almost all of its members deny that there was any template.Then Spain denied, Portugal was on the tape so many times yesterday denying that you thought it was the newest Cadillac commercial and then virtually every other country in Europe had somebody in the Press with their own denials. "One-off" was the word of the day and the giant European propaganda machine worked well into the night.

The problem is the way these things work. The reporters, from any news agency, are handed out stuff from the government. They have to publish it. There is no choice. So it appears as official jargon that they hope we will all believe. Then the members of the Press cannot be too critical or say too much or they will be shut off and ostracized by Brussels or Berlin or wherever they reside. Consequently much of what we read in or from the European Press is less than forthcoming. Not lies necessarily; but not exactly all of the truth. I do not fault the Press one iota here because there is nothing else they can do but I caution you not to believe too much of what you read. America has much more, significantly more, freedom of the Press than Europe allows.

Greek Bets Sank Top Lenders

Banks at Heart of Cyprus Mess Were Bullish on Athens as Other Investors Fled

By DAVID ENRICH and CHARLES FORELLE

In August 2010, Greece's economy was tumbling into depression amid angry street protests and a €110 billion bailout. Dimitris Spanodimos, the chief risk officer of Cyprus's second-largest bank, remained bullish.

Mr. Spanodimos boasted on an Aug. 31, 2010, conference call with analysts that the bank was expanding faster than rivals in Greece and bulking up on residential mortgages. "We have used our group's comfortable liquidity and capital position to deepen selectively some highly profitable and highly promising client relationships," he said.

His bank, Cyprus Popular Bank PCL, is now ruined. Its destruction—and the near-failure of its larger peer, Bank of Cyprus PCL—was the result of poor choices by bank managers and of a European regulatory system that gave both banks a clean bill of health as their infections festered. The collapse of Cyprus's two largest banks forced the tiny country to seek an international bailout and impose an unprecedented lockdown on its financial system, bringing it to the edge of leaving the euro.

An examination of regulatory documents, conference-call transcripts and financial filings shows that both banks gorged on Greece while nearly everyone else was purging.

In late 2010, even after German and French leaders had openly agreed that creditors of fiscally weak governments should take losses on future bailouts, the two Cypriot banks appeared nonchalant about their exposure to Greek government bonds.

By the end of the year, according to European regulators, the two banks had a combined €5.8 billion ($7.5 billion) of Greek government bonds—€1 billion more than they had held just nine months earlier, and a sum equivalent to about one-third of Cyprus's annual economic output. By comparison, over the same period, Barclays PLC cut its Greek government exposure by more than half.

Both Cypriot banks passed Europe-wide stress tests in 2010, relieving them of pressure to change course. They passed again in 2011.

"Their regulator was clearly signaling it was OK to go on" expanding in Greece, said Christine Johnson, a bond-fund manager at Old Mutual Global Investors in London, referring to Cyprus's central bank and European banking regulators.

Spain Believes Dijsselbloem

Reality check in Spain

Jeroen Dijsselbloem, Dutch Finance Minister and head of the Eurogroup of euro zone finance ministers

By David Roman

As Spanish stocks, led by banking shares, stay in the red for the third consecutive day after Cyprus secured a European Union bailout, it’s clear that a certain Dutch Finance minister has made his mark on the mind of Iberian investors.
Eurogroup President Jeroen Dijsselbloem Monday said measures like the levy agreed on big depositors in Cyprus may be one way to go forward to fix future banking crises in the euro zone.
Other EU officials have been correcting him since, to little avail—Spain’s Prime Minister Mariano Rajoy and French President Francois Hollande did it late Tuesday; then, an internal document crafted by the influential Eurogroup Working Group, and seen by The Wall Street Journal Wednesday, states that Cyprus isn’t a “template” on how to deal with future crises.
Cue to Spain’s stock market, last down 1.7% Wednesday. Systemic banks Banco Popular SA and Banco Santander SA , the largest euro-zone bank by market value, are among the worst performers.
There’s a reason why Mr. Dijsselbloem’s threat is credible in Spain and elsewhere in Europe, says George Friedman, the founder and chairman of Stratfor, the U.S.-based private global intelligence firm.
Mr. Friedman notes the Cyprus fix overturns a basic principle of European banking in place since the 1920s—that deposits are, in practice, close to untouchable. In addition, it goes against another basic principle in a monetary union, that one’s savings are as safe in Nebraska as in Hawaii. In brief, nobody believes that EU bailouts are one-offs anymore.
“If Russian deposits can be seized in Nicosia, why not American deposits in Luxembourg?” Mr. Friedman writes in its weekly Stratfor commentary. “At the very least, every reasonable CFO will now assume that the risk in Europe has risen and that an eye needs to be kept on the financial health of institutions where they have deposits.”
Not coincidentally, Banco Popular is the weakest of all Spain’s banks that are not planning to request EU bailout money under last year’s deal with Madrid. At a time when Spanish banks are being pushed to increase their deposits, as a percentage of loans, these concerns don’t help.
The response to this criticism, some have noted, is that deposits under €100,000, those affected by the Cyprus deal, have never been insured and thus always vulnerable to insolvency crises.
The response to that response, scared investors can say, is that in Cyprus depositors are taking a hit without any legal proceedings and no recourse to appeal, rather than as a part of due process. Albert Edwards, a veteran strategist for Société Générale, adds a reminder: that, under the original EU plan, the one rejected last week by Cyprus’ parliament, smaller, insured deposits would have also taken a hit.
“The fact that this plan was originally sanctioned, despite deposit insurance, will have shaken saver confidence to the bone,” Mr. Edwards writes. “It certainly has shaken my confidence.”

Amid Crisis, Cypriots Look Inward

A History of Self-Reliance

By JOE PARKINSON and JAMES ANGELOS

NICOSIA, Cyprus—Over the past week, as Cyprus concluded chaotic talks on an international bailout, relief workers at St. Barbara's church readied bags of food, cooking oil and other essentials.

Donations flowed into the parish in Nicosia during the high-stakes tug of war between Cyprus and its European partners over the terms of the bailout. Giving by individuals and companies rose in line with an anticipated jump in demand for aid, said Panagiotis Panagiotou, the director of the church's food bank.

By Tuesday, locals' requests for aid had risen, according to a second church worker.

Many people "call us and ask, 'Will you be able to give us food?' " said Mr. Panagiotou. "It's obvious people are really frustrated and worried." 

The bailout that Cyprus secured early Monday called for a shake-up of Cyprus's two largest banks, the pillars of a financial sector that brought prosperity in recent decades. By Tuesday, many Cypriots were bracing for a contraction in the banking sector and a jump in unemployment.

Several economists are already predicting a double-digit percentage decline in gross domestic product this year, and a recession that could stretch for at least two or three years. The pace of developments in Cyprus make more precise forecasts difficult, they say.

But the aid negotiations appeared to have spurred a turn to self-reliance here. On Nicosia's streets, Cypriots said community solidarity will see them through. They liken their troubles to the Turkish invasion in 1974 that created a separate enclave in the country's north—and was followed by the economic surge in the south as Cypriots built an international banking haven.

"Europe should know that when our backs are to the wall, we band together, tight, like a clenched fist," said Efychios Odysseos, an employee of Cyprus Popular Bank PCL, also known as Laiki, who participated in a protest march outside the presidential palace on Saturday.

Cypriot groups that provide aid to the needy say the uptick in donations started around the beginning of last year, when Greece's financial woes began to affect Cyprus's economy. One worry now is how long embattled Cypriot companies will be able to continue their donations.

The giving impulse emerged when some Cypriots entertained pooling their own money to help fund the government's share of their country's bailout, rather than agreeing to levy a tax on depositors as international parties had sought.

In a television interview last week, Archbishop Chrysostomos II, the leader of the Cypriot Orthodox Church, said: "All of us without exception should put our hands in our pockets so that the state, the banks will be saved." He volunteered to use the assets of the wealthy church to help, and said Cyprus would be better off outside the euro zone.

The Cyprus Deal And The Unraveling Of Fractional-Reserve Banking

The Real Deal Behind the “Cyprus deal” 

by Joseph Salerno

The “Cyprus deal” as it has been widely referred to in the media may mark the next to last act in the the slow motion collapse of fractional-reserve banking that began with the implosion of the savings-and-loan industry in the U.S. in the late 1980s. This trend continued with the currency crises in Russia, Mexico, East Asia and Argentina in the 1990s in which fractional-reserve banking played a decisive role. The unraveling of fractional-reserve banking became visible even to the average depositor during the financial meltdown of 2008 that ignited bank runs on some of the largest and most venerable financial institutions in the world. The final collapse was only averted by the multi-trillion dollar bailout of U.S. and foreign banks by the Federal Reserve.

Even more than the unprecedented financial crisis of 2008, however, recent events in Cyprus may have struck the mortal blow to fractional-reserve banking. For fractional reserve banking can only exist for as long as the depositors have complete confidence that regardless of the financial woes that befall the bank entrusted with their “deposits,” they will always be able to withdraw them on demand at par in currency, the ultimate cash of any banking system. Ever since World War Two governmental deposit insurance, backed up by the money-creating powers of the central bank, was seen as the unshakable guarantee that warranted such confidence. In effect, fractional-reserve banking was perceived as 100-percent banking by depositors, who acted as if their money was always “in the bank” thanks to the ability of central banks to conjure up money out of thin air (or in cyberspace). Perversely the various crises involving fractional-reserve banking that struck time and again since the late 1980s only reinforced this belief among depositors, because troubled banks and thrift institutions were always bailed out with alacrity–especially the largest and least stable.

Thus arose the “too-big-to-fail doctrine.” Under this doctrine, uninsured bank depositors and bondholders were generally made whole when large banks failed, because it was widely understood that the confidence in the entire banking system was a frail and evanescent thing that would break and completely dissipate as a result of the failure of even a single large institution.

Good riddance to deposit ‘insurance’

The risk of the occasional run on an individual bank has now been replaced with the acute and rising risk of a run on the entire system

by DETLEV SCHLICHTER

Once the public furor and shrill media coverage have died down it will become clear that events in Cyprus did not mark the death of democracy or the end of the euro but potentially the beginning of the end of deposit ‘insurance’. If so, then three cheers to that. It may herald a return to honesty, transparency and responsibility in banking.

Let us start by looking at some of the facts of deposit banking: When you deposit money in a bank you forfeit ownership of money and gain ownership of a claim against the bank – a claim for instant repayment of money but a claim nonetheless. In 1848 the House of Lords stated it thus:

“Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to an equivalent by paying a similar sum to that deposited with him when he is asked for it…The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in hazardous speculation; he is not bound to keep it or deal with it as the property of his principal; but he is, of course, answerable for the amount, because he has contracted.”

This is not legal pedantry or just a matter of opinion but logical necessity that follows inescapably from how deposit banking has developed, how it was practiced in 1848 and how it is still practiced today. If ownership of the money had not passed from depositor to banker than the banker could not lend the money to a third party against interest and he could not pay interest to the depositor. If the depositor had retained full ownership of the deposited money, the banker would only be allowed to store it safely and to probably charge the depositor for the safe-keeping of his property. Money stored in a bank’s vault earns as little interest as money kept under a mattress. It is evidently not what bank depositors contract for. If interest is being paid – or ‘free’ banking services are being provided – the depositor must have agreed –at least implicitly – that the banker can ‘invest’ the money, i.e. put it at risk.

For more than 300 years banks have been in the business of funding loans that are risky and illiquid with deposits that are supposed to be safe and instantly redeemable. When banks fail depositors lose money, although in former times, sturdier and more honest, no rational person claimed that the depositors were unfairly ‘bailed in’ or were the victims of ‘theft’.

Although the mechanics of fractional-reserve banking have not changed in 300 years the public’s expectations have evidently changed greatly.  Today banks are expected to lend ever more generously while depositors are supposed to not incur any risk of loss at all. This means squaring the circle but it has not stopped politicians from promising just such a feat: Enter deposit insurance. State deposit “insurance” is not insurance at all. Insurance companies calculate and calibrate risks, charge the insured party and set aside capital for when the insured event occurs. A state deposit ‘guarantee’, by contrast, is simply another unfunded government promise, extended in the hope that things won’t get that bad. When they finally do the state does what it always does: it will take from Peter to pay Paul. Cyprus is a case in point: Private insurance companies would have pulled the plug on a ballooning banking sector long ago while the Cypriot state, still the local monopolist of bank licensing and bank regulation, evidently looked on as the banks amassed deposits of four times GDP. In the end Cyprus’ government ran out of ‘Pauls’ to stick the bill to – and ‘Hans’ in Germany refused to get ‘bailed in’ completely (although he is still providing the lion’s share of the bailout).

Cyprus is just an extreme example of what the institutionalized obfuscation of risk and accountability that comes with state-protected banking can lead to. Deposit ‘insurance’ masks the risks and socializes the costs of fractional-reserve banking. Unlimited state paper money and central banks that assume the role of  “lenders of last resort” have the same effect. If the original idea behind these innovations was to make banking safer, it has not worked, as banks have become bigger and riskier than ever before, although I suspect that the real purpose of these ‘safety nets’ has always been to provide cover for more generous bank credit expansion.

Under present arrangements there is little incentive for banks to position themselves in the marketplace as particularly conservative. Depositors have been largely desensitized to the risks inherent in banking. They no longer reward prudent banks with inflows and punish overtly risky banks with the withdrawal of funds, and even if they do, the banks can now obtain almost unlimited funds from the central bank, at least as long as they have any asset that the central bank is willing to ‘monetize’. This is a low hurdle indeed as banks have become conduits for the never-ending policy of ‘stimulus’ and are thus being fattened further for the sake of more growth. Once a bank has ‘ticked the boxes’ and meets the minimum criteria of regulatory supervision, any additional probity would only subtract from potential shareholder returns. Our modern financial infrastructure has created an illusion of safety coupled with an illusion of prosperity thanks to artificially cheapened credit. The risk of the occasional run on an individual bank has now been replaced with the acute and rising risk of a run on the entire system.

This would change radically if we reintroduced free market principles into banking. Bankers would again be answerable to all their lenders, including small depositors, who would no longer be lulled into a false sense of security but, in their correctly understood role as creditors to the banks, would become ‘deposit vigilantes’ and would help keep the banks in check. The banks would again have to communicate balance sheet strategy and risk management to the wider public in order to gain and maintain the public’s trust, and not just to a handful of highly specialized bureaucrats at the central bank or the state’s bank regulator. Banking would become less complex, more transparent and less leveraged. Conservative banking would again be a viable business model. And the wider public would begin to appreciate how dangerous the populist policies of cheap credit and naïve demands for ‘getting banks lending again’ ultimately are. The depositors are underwriting these policies and carry a lot of their risks. 

Cyprus: dwarfs in a strategic geopolitical game

Is the abandonment of Cyprus part of strategy at play?

by Lenos Trigeorgis

Throughout history, economics drove politics. In Cyprus it seems the other way around. Are the world leaders going economically crazy? Or might it be grand strategy at play?

The CEO of PIMCO, El-Erian, argues that the harsh position of northern Europeans imposed through the Eurogroup and an intensification of the current crisis may push Cyprus to turn closer to Russia, just as Egypt turned to the Soviet Union when turned down by the West in the 1950s.  The greater the disappointment of the Cypriots with their European partners and the growing sense of desperation among Cypriots, the greater the pressure to turn to Russia for help. Such help would not be granted complementary, but would come with concessions on key strategic Cypriot assets, such as bank assets (Cyprus banks have successful operations in Russia and the Ukraine), gas reserves, strategic access to the Russian fleet etc. Naturally, Russia should be very willing and able to step in to fill the void and increase its strategic role in Cyprus and the Mediterranean region. Various links between the two nations make this attraction quite logical. Russia has a sizeable loan of €2.5 Billion to Cyprus that it hopes will be serviced; its own government agencies in addition to Russian oligarchs have sizeable bank deposits (estimated at about €24 Billion) -€2 Billion of which would be lost if the proposed haircut on bank deposits went through or Cyprus went bankrupt. There is significant real estate and tourism business, as well as interest in Cyprus’s undeveloped gas fields. Russia’s total economic interest in Cyprus is about €45 Billion.

So the European partners should be more careful, one would think, not to push things too extreme with Cyprus, as they might risk pushing Cyprus out of the euro zone and into the arms of Russia. That would not be in the interest of Europe, not least because Russia has monopoly control of the gas supply to Europe.

Many Cypriots’ hopes turned to Russian help following parliament’s rejection of the troika’s hard measures to ‘rescue’ Cyprus. But news of a helping Russian hand was nowhere to be found. After one week of pleading and desperate discussions, nothing came out! The Cypriot Finance Minister Michael Sarris said on March 20 that he would stay in Moscow for talks “as long as it takes.” But some days later: “I think we aren’t able to get the support that we wanted to get,” he said after checking out of hotel Lotte in Moscow. As Sarris was leaving, the “Russia and EU: potential for partnership” conference was starting in the same hotel, including meetings with EU’s Mr. Barozzo, Putin and Medvedev. Meanwhile, Cypriot Foreign Minister Kassoulides was still waiting to hear about his request to see his Russian counterpart. Ironically, they could all have met in the same hotel and easily sort out this trivial €5.8 Billion business. Except if they did not really want to help Cyprus, but to weaken it.

It’s not that Russia does not have the ability to help. One month ago, on February 22, in an official working meeting of a delegation led by Prime Minister Dmitry Medvedev to Cuba, it was announced that Russia would write off about $30 billion (€23 Billion) of Cuba’s debt. Russian Minister for Industry and Trade, Denis Manturov, told reporters after the Russian-Cuban talks: “More than $30 billion – this is the total amount of debt that will be partially written off and partially refinanced.”

Sorry No More

The old English politeness is harder to find today

by Peter Whittle

The queue—that is, standing in line—has long been valued as a characteristic of English manners, both by outsiders and by the English themselves. As an example of social cohesion, an illustration of that much-celebrated (and much-satirized) English sense of fair play, it’s pretty much unimpeachable. It’s been said that one Englishman standing alone is enough to constitute a queue.

That was then. Anybody visiting London today will wonder where the queue has gone. It might still exist in provincial towns and rural communities, but here in London, the once jealously enforced public tradition of “waiting your turn” is on life support. One can see this especially at bus stops, where the crocodile line of patient passengers has given way to a slow-motion scramble. And nobody seems to mind much.

Queuing gets only a cursory mention in Henry Hitchings’s new book, Sorry! The English and Their Manners, which aims to tell how the residents of the British Isles wound up with the civil codes and courtesies that govern—or once governed—the way we live. Perhaps he didn’t want to dwell too much on the negative, leaving it to those conservative commentators who, as he puts it, make a living out of mourning the death of our way of life, particularly the decline of day-to-day civility. Yet the disappearance of the voluntary queue (it thrives where enforced, such as in banks and supermarkets) perfectly encapsulates how much the English have changed in recent decades.

Hitchings provides an elegant, well-researched history of the influences that have shaped the English sense of what was right and proper. Covering everything from the Italian Renaissance and Castiglione’s Book of the Courtier to postwar America and Emily Post’s Etiquette, he explains the importance of outside influences on England’s sense of itself as a civil society. He’s cool-headed, but not so detached that he can’t share examples of his own experience of rudeness and socially crossed wires. He recounts how, when helping an elderly woman with her heavy groceries, he was surprised by the remark of a woman cycling past: “Don’t think you’re something you’re not, you sexist prick.”