Yoani Sánchez: An effective voice against the Castro dictatorship

A just principle from the bottom of a cave is more powerful than an army

BY CARLOS ALBERTO MONTANER

Yoani Sánchez visits Miami. It is the most difficult stop in her long tour. Everywhere, like a bullfighter hailed after a good afternoon, she has been carried on the shoulders of the crowd. She will also triumph in Miami, but her task will be a bit harder.

I get the impression that a huge majority of Cubans like her and respect her — I count myself among them — but there’s no shortage of those who oppose her for various reasons, often totally irrational.

Yoani has made dozens of appearances, granted hundreds of interviews and has successfully confronted the mobs of supporters sent by the Cuban dictatorship in every city where she has been invited to speak.

In more than half a century of tyranny, nobody has been more effective in the task of dismantling the regime’s myths and exposing Cubans’ miserable living conditions.

It is a paradox of life that, somehow, the rude and vociferous attitude toward Yoani shown by these aggressive bullies — though unpleasant during the incidents themselves— has served to feed the interest of the communications media and foster the support of notable political and social sectors.

These maniacs, accustomed to the Cuban environment, where no vestiges of freedom exist, don’t understand that trying to silence Yoani, insulting and slandering an independent journalist, a fragile young woman shielded only by her words and her valor, is counterproductive.

Short On Credit And Long On Faith

The Puppet Master - Government

by Bill Buckler

It has been well and often said that only two types of “paper” money have ever existed in history - those that are already worthless and those that are going to be. Eventually, the physical pieces of paper or plastic which have been given a function as a medium of exchange by government order may remain - but their purchasing power on the market does not. The transition point always comes when the “promises to pay” on which the fiat money depends are exposed beyond the possibility of denial to be the LIES which they always were. History is replete with examples, yet very few ask the obvious question: “Pay? - WITH WHAT??” One of the great wonders of the twentieth century was the lengths to which the economics “profession” proved willing to go to avoid even facing that question let alone trying to answer it.

For hundreds if not thousands of years of human history, the vast majority were all too well aware that the government “lives” on the backs of the people. Today, that long-held knowledge has been astonishingly successfully reversed. Today, the perceived “wisdom” is that the people live on the back of the government. In the realm of the history of ideas, it took many centuries to bring forward the idea that a life might be lived without constant kowtowing to government. It has only taken one century - the time since WW I - to all but totally submerge that legacy in a new wave of government dependency.

The old and tired phrase - “I’m from the government and I’m here to help you” - is met by as much derision as it has ever been when people bemoan the impositions of their rulers. But those same people rely on the government to insulate them from the consequences of any action they may choose to undertake.

The Last Capitalist Standing

In the new normal, the USA socializes losses but the ex-USSR sticks to its new capitalist roots?

by Tyler Durden 

While most of the western developed economies become more and more centrally planned and creative destruction is avoided at all costs (for fear it will be the straw that breaks the fractionally-reserved, rehypothecated camel's back of the financial system - and therefore sovereign financing); it appears ironic that Russia is playing capitalist hardball with the losers from the Cyprus 'solution'. Russia's First Deputy Prime Minister Igor Shuvalov, announced this weekend, that"if someone gets stuck and loses money in those two biggest banks, that’s really too bad, but the Russian government isn’t planning to do anything in this case."

As Bloomberg reports, Shuvalov told reporters last month that Russia may ultimately benefit from Europe’s decision to target deposit holders. By setting that precedent, Europe has cast doubt on the reliability of its banks and makes Russia’s financial system look comparatively more attractive - but is "closely monitoring"  the situation around Russian Commercial Bank, a Cypriot unit of state-run lender VTB Group, adding that VTB's exposure in Cyprus is "absolutely manageable.

So, in the new normal, the USA socializes losses but the ex-USSR sticks to its new capitalist roots?

Via Bloomberg,

Russia won’t bail out people or companies that stand to lose money held at Cyprus’s two largest banks, First Deputy Prime Minister Igor Shuvalov said.

“If someone gets stuck and loses money in those two biggest banks, that’s really too bad,” Shuvalov said in an interview late yesterday on Russian state television. “But the Russian government isn’t planning to do anything in this case.”

Russia turned away requests from Cyprus for additional financial assistance last month after criticizing plans that would have forced losses on insured deposits.   ...

Up in smoke

The bill comes in for investors in bankrupt cajas

By The Economist

CYPRIOT depositors are not the only ones suffering the aftermath of a banking bust. People who bought shares or subordinated debt in Spain’s dodgiest cajas, or savings banks, have either been all but wiped out or forced to take hefty losses. Many small Spanish investors are among them.

Four months after Spain requested a €40 billion ($51 billion) chunk of its banking bail-out funds from its euro-zone partners, on March 22nd it delivered the blow that hundreds of thousands of retail investors feared. The FROB, Spain’s restructuring fund, imposed haircuts of up to 61% as it turned junior debt and preference shares in four nationalised banks—Bankia, Catalunya Banc, Banco Gallego and NCG Banco—into equity.

The New Despotism

In the name of education, welfare, taxation, safety, health, the environment, and other laudable ends, the new despotism confronts us at every turn

"The greatest single revolution of the last century in the political sphere has been the transfer of effective power over human lives from the constitutionally visible offices of government, the nominally sovereign offices, to the vast network that has been brought into being in the name of protection of the people from their exploiters"

by Robert A. Nisbet

When the modern political community was being shaped at the end of the 18th century, its founders thought that the consequences of republican or representative institutions in government would be the reduction of political power in individual lives.

Nothing seems to have mattered more to such minds as Montesquieu, Turgot, and Burke in Europe and to Adams, Jefferson, and Franklin in the United States than the expansion of freedom in the day-to-day existence of human beings, irrespective of class, occupation, or belief.

Hence the elaborate, carefully contrived provisions of constitution or law whereby formal government would be checked, limited, and given root in the smallest possible assemblies of the people.

The kind of arbitrary power Burke so detested and referred to almost constantly in his attacks upon the British government in its relation to the American colonists and the people of India and Ireland, and upon the French government during the revolution, was foremost in the minds of all the architects of the political community, and they thought it could be eliminated, or reduced to insignificance, by ample use of legislative and judicial machinery.

Accelerated Learning Would Add Trillions of Dollars in Wealth

In politics — as in business and private life — bankruptcy, or fear thereof, is the mother of invention

If students could complete their education a year faster, the many benefits would include increased personal wealth, decreased government spending, and more sustainable entitlement programs.

By Reuven Brenner

Political discussion today is dominated by a pessimistic tone about government deficits, taxes, and our aging population. But, surprising as it may seem, a drastic overhaul of the nation’s education system could fix many of our problems. Such changes would create a variety of benefits: decreased government spending; more sustainable entitlement programs; greater equality; and a better-disciplined younger generation; not to mention an end to the mumbo jumbo that dominates academia and policy debates today.

Some much-debated solutions to our country’s problems include increasing the retirement age, raising taxes, diminishing Social Security benefits and other entitlements, and attracting qualified immigrants. But what if students could complete their education, including undergraduate study, in less time by a year or even two? Or, in the case of community colleges, three or four fewer years? Consider first a “Fermi” calculation about the monetary consequences of such a change:

There are at least 16 million youngsters enrolled in post-secondary education, with approximately 4 million graduating every year. Assume that from now on, each year, 4 million students join the labor force a year earlier. Each generation would stay one year longer in the labor force. How much annual income and how much wealth would this generate?

It’s payback time for our insane energy policy

An obsession with CO2 has left us dangerously short of power as coal-powered stations are forced to close

Wind farms deliver a tiny percentage of the power that we need

By Christopher Booker

As the snow of the coldest March since 1963 continues to fall, we learn that we have barely 48 hours’ worth of stored gas left to keep us warm, and that the head of our second-largest electricity company, SSE, has warned that our generating capacity has fallen so low that we can expect power cuts to begin at any time. It seems the perfect storm is upon us.

The grotesque mishandling of Britain’s energy policy by the politicians of all parties, as they chase their childish chimeras of CO2-induced global warming and windmills, has been arguably the greatest act of political irresponsibility in our history.

Three more events last week brought home again just what a mad bubble of make-believe these people are living in. Under the EU’s Large Combustion Plants Directive, we lost two more major coal-fired power stations, Didcot A and Cockenzie, capable of contributing no less than a tenth to our average electricity demands. We saw a French state-owned company, EDF, being given planning permission to spend £14 billion on two new nuclear reactors in Somerset, but which it says it will only build, for completion in 10 years’ time, if it is guaranteed a subsidy that will double the price of its electricity. Then, hidden in the small print of the Budget, were new figures for the fast-escalating tax the Government introduces next week on every ton of CO2 emitted by fossil-fuel-powered stations, which will soon be adding billions of pounds more to our electricity bills every year.

Latins Rally to Restore Human Rights Panel

Hope for Latin America is on the Rise

By Roger F. Noriega

Latin American countries have finally rallied and rejected a bid by leftist regimes to silence the region’s human rights watchdog. Now regional democracies must restore the organization’s credibility after years of yielding to Chavistas.

In what might be remembered as the end of the line for Chavismo as a regional political force, last week key Latin American countries soundly rejected a bid by leftist regimes to silence the region’s human rights watchdog. Those democratic nations – along with the United States – must now retake some of the momentum that they ceded to Venezuelan caudillo Hugo Chávez’s destructive agenda.

Left-wing leaders – principally Chávez and Ecuador’s Rafael Correa – spent much of the last decade waging a bitter feud with the Inter-American Commission on Human Rights (IACHR) because it dared to criticize brazen and systematic rights abuses in countries governed by authoritarian populists.

Chávez hurled personal insults at the commission’s members and staff, and even engineered the election of a panel member who brought the regime’s thuggish tactics into the commission’s chambers. The secretary general of the Organization of American States (OAS), Chilean socialist Jose Miguel Insulza, ran for cover rather than defend a body that championed human rights in the Pinochet era.

The latest assault on the commission came as Ecuador, Venezuela, and like-minded states proposed “reforms” that would have severely restricted the IACHR’s budget and taken away tools that it has long used to hold governments accountable for rights violations. Many democratic governments sat on the sidelines rather than be bullied by Chávez’s rabid rabble, but human rights groups and free press advocates resisted valiantly. Members of the U.S. Congress from both parties weighed in forcefully to defend the commission, and the Washington Post helped ensure that the attack received prominent attention in the U.S. print media.

State-Wrecked: The Corruption of Capitalism in America

The American machinery of monetary and fiscal stimulus has reached its limits

By DAVID A. STOCKMAN

The Dow Jones and Standard & Poor’s 500 indexes reached record highs on Thursday, having completely erased the losses since the stock market’s last peak, in 2007. But instead of cheering, we should be very afraid.

Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later — within a few years, I predict — this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.

Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.

So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.

When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.

THIS dyspeptic prospect results from the fact that we are now state-wrecked. With only brief interruptions, we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy.

As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another — smoothing out the business cycle, minimizing inflation and unemployment at the same time, rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care, propping up old industries (agriculture, automobiles) and fostering new ones (“clean” energy, biotechnology) and, above all, bailing out Wall Street — they have now succumbed to overload, overreach and outside capture by powerful interests. The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating “demand,” even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls.

The Next Real Estate Bubble: Farmland

Farmers have been taking on mounting debt, risking a crash that would ripple through our economy

by Blake Hurst

Eeyore should have been a farmer. It’s almost impossible to find a farmer happy about his situation. The weather’s too hot, cold, wet, or dry, and prices are too low or too high, depending on whether we’re buying or selling. We can’t, at least in front of our peers, admit to prosperity or even the chance of prosperity. Although we’d never admit it at the local coffee shop, the last few years have been good, at least for Midwestern grain farmers. Prices have been strong — strong enough to make up for much of the production lost to last year’s drought. That’s terrible news for livestock producers, who’ve been faced with drought-damaged pastures and high feed costs, but for farmers producing corn and soybeans, it has been a profitable few years.

Farmers have cash, and nowhere to invest it but farmland. Farmers largely ignore equities, as they tend to balance the inherent risk in farming by investing in what they perceive as less risky places. We aren’t dumb, however, and have figured out that it's a losing game to invest in bonds or CDs at rates less than inflation while we’re in tax brackets we never even knew existed.

So, farmland prices are booming. Land prices in the heart of the Corn Belt have increased at a double-digit rate in six of the last seven years. According to Federal Reserve studies, farmland prices were up 15 percent last year in the most productive part of the Corn Belt, and 26 percent in the western Corn Belt and high plains. Closer to home, a neighbor planning his estate had an appraisal done in 2010 and again in late 2012. In that two-year period, the value of his farm had doubled. According to Iowa State economist Mike Duffy, Iowa land selling for $2,275 per acre a decade ago is now at $8,700 per acre. A farm recently sold in Iowa for $21,900 per acre.

Welcome to blackout Britain

With the bad weather causing long-term power cuts, the fragility of our energy infrastructure is becoming frighteningly apparent

The spring freeze has been a timely reminder of the need to secure Britain's energy needs

By Tom Rowley, and Auslan Cramb

Just before midnight last night, the world’s biggest gas tanker was due to dock at the Welsh port of Milford Haven. The Zarga, from Qatar, is more than a fifth of a mile long and carries up to 266,000 cubic metres of liquefied natural gas. Earlier in the day, on the other side of Britain, another Qatari tanker carrying natural gas, the Mekaines, docked at Thamesport on the Isle of Grain. Both come bearing energy supplies that Britain badly needs as winter is forecast to continue well into Easter.

Five hundred miles north, the arrival of another, rather smaller, ship was greeted even more warmly. The MV Hebridean Isles, just 85m long and usually used as a passenger ferry, docked at Campbeltown on the Kintyre Peninsula on Saturday. It carried a cargo of emergency power generators to residents suffering a power cut that has now lasted four days.

Though their size and purpose differed greatly, all three vessels were responding to aspects of the same problem: a vicious blast of winter that has revealed the fragility of Britain’s energy supplies. The Met Office predicted yesterday that we will suffer the coldest March since 1983, with average temperatures of 2.9C. This weather left a combination of snow and ice on power lines that brought down two steel pylons on Kintyre on Friday, blacking out thousands of homes and the entire Isle of Arran.

The weather has also increased demand for gas, while domestic supplies from the North Sea have continued to dwindle. The latest delivery from Qatar will top up reserves, which currently last only a few days. A further supply from the Gulf state will arrive on Friday, while a tanker from Trinidad is due next week. This ought to allay immediate fears of a crisis, but energy experts predict that our reliance on imports will only increase over the next few years as domestic production falls further. This dependence could see price rises and, as we rely more on bargaining with unstable countries, it could increase the risk of supplies being cut off entirely.

Canada Discusses Forced Depositor Bail-In Procedures for "Too Big To Fail" Banks in 2013 Budget

A plan that would turn "certain bank liabilities" into regulatory capital is a plan to confiscate deposits

by Mike "Mish" Shedlock

Inquiring minds in Canada managed to slog through a massive 433 page budget proposal and discovered Depositor Haircut Bail-In Provisions For Systemically Important Banks.

Sure enough. Right on page 145 (PDF page 155) of the Canada Economic Action Plan for 2013 we see ...

"The Government proposes to implement a bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail- in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants."

In case you are unfamiliar with bank parlance, deposits are not "assets" they are "liabilities". A plan that would turn "certain bank liabilities" into regulatory capital is a plan to confiscate deposits.

As noted in Fraudulent Guarantees; Fictional Reserve Lending; Comparison of US to Cyprus; What About New Zealand? 

I believe guarantees on deposits are inherently fraudulent. But at least the Reserve bank of New Zealand is upfrnot about the situation. Canada is not.

Turkey Cracks the Whip

If Netanyahu wants rapprochement with Ankara, he must do more than apologize for the Mavi Marmara killings

By PHILIP GIRALDI 

One of the surprise results of President Barack Obama’s recent trip to the Middle East was the last-minute phone call between Prime Minister Benjamin Netanyahu of Israel and Prime Minister Recep Tayyip Erdogan of Turkey that took place from a hastily set-up trailer near the Tel Aviv airport as Obama was about to leave.

The two nations had once cooperated closely and were generally viewed as strategic partners, but the Turks had begun to distance themselves from Israeli policies in early 2009 when the Turkish prime minister confronted Israel’s President Shimon Peres at a January international meeting in Davos. Referring to the slaughter of Gazan civilians earlier that month during Operation Cast Lead, Erdogan told Peres, “you know well how to kill.” In the one-hour discussion of Gaza that was moderated by David Ignatius of the Washington Post, Peres was allowed 25 minutes to speak in defense of the Israeli attack. Erdogan was given 12 minutes. During the debate, Peres pointed accusingly at Erdogan and raised his voice. When Erdogan sought time to respond, Ignatius granted him a minute and then cut him off, claiming it was time to go to dinner. Erdogan complained about the treatment and left Davos, vowing never to return. Back in Turkey, he received a hero’s welcome.

The bilateral relationship then hit zero when, in June 2010, the Israelis boarded the Turkish ferry Mavi Marmara in international waters. The Mavi Marmara had only humanitarian supplies on board, but the Israeli naval commandos from the elite Shayetet 13 unit were met by a number of Turks wielding improvised weapons made from the ship’s rails and deck chairs. The Israelis killed nine Turks, one of whom was also an American citizen; most were shot execution-style. Israel could have defused the crisis by admitting it had erred, apologizing, and offering to pay reparations, but refused to do so. Prime Minister Benjamin Netanyahu, who had personally directed the operation, claimed that the Israelis were acting in self-defense.

"We know we will be slaughtered anyway.”

Limassol fears for life after Russians

By Courtney Weaver 
For more than a decade, the Cypriot city of Limassol has marketed itself as a haven not just for Russian money but for Russians. Fur shops line the palm-fringed streets and an entire expat community has sprung up catering to Russian tourists and residents with special beauty salons, tour agencies and restaurants.

Yet during the past week the Mediterranean island’s beachfront party resort of some 100,000 residents has had the feel of a ghost town.

While a collective sigh of relief echoed across Cyprus on Thursday as calm prevailed when the banks reopened after being closed for almost two weeks as the island’s bailout was finalised, for Limassol the future is less certain than ever.

The beachfront hotels favoured by Russians saw an influx of guests last week but restaurants and shops in the city centre were largely deserted, a rare sight even for the off-season, residents say.

With four weeks to go until tourists typically begin descending on the city en masse, locals are starting to wonder if Russians will continue to view Limassol as a second home or holiday destination if they have given up on it as a financial centre.

At the post office across the street from Limassol’s Four Seasons hotel, Mikhalis Gavrialidis was jovial with the few customers who came in, jokingly charging foreigners a bailout worth €5.8bn in exchange for the price of postage. However, when pressed on the future of Limassol, he turned grave.

“Limassol will possibly be affected the worst in Cyprus – because of the Russians,” he said. “It’s not just the billionaires who are based in Limassol, there are normal businessmen. I wouldn’t be surprised if they took their money and disappeared. Wouldn’t you do the same?”

Limassol has not seen protests like the ones that broke out briefly in Nicosia, because the people are resigned to their fate, Mr Gavrialidis added.

“Things are calm because we are civilised. It’s not in our hands. We know we will be slaughtered anyway.”

While some Russians initially worried that locals would turn on them and question why the island’s foreign billionaires or the Kremlin had not paid a larger share of the bailout, most locals’ anger has been directed towards the EU and Germany for refusing to pay the full €15.8bn-bailout bill, when they had happily thrown billions of dollars at Greece, and for the manner of the rescue itself.

In a poll this month, one Cypriot television station asked viewers whether the country should become further integrated into the EU or lean towards Russia instead. Over two-thirds of respondents chose the latter.

“People hate [Angela] Merkel,” said Paris Antoniou, who was tending an empty bar in Limassol’s old town one recent evening, referring to the German chancellor. Few blamed the country’s big foreign depositors, he said.

“The Russians have the right to react the way they have. You can’t have your millions invested in a bank and then simply taken away from you,” said Mr Antoniou. “It doesn’t matter how they made their money, money laundering or whatever. It is the Russians who are keeping our economy going.”

The Knowledge Economy's Two Classes of Workers

The knowledge economy has important implications for both workers and organizations

By Charles Smith

Setting aside that our economy is by and large organized to benefit a State-financial Elite and the technocrat Caste that serves them, let's consider the two classes of worker in what Peter Drucker labeled the Knowledge Economy in his 1993 book Post-Capitalist Society.

At the risk of simplifying Drucker's nuanced account, here is a précis:

The Marxist class division of labor vs. capitalist/management no longer adequately describes the new economy, as knowledge workers own "the means of production" which is first and foremost knowledge. Corporations and government offer an organization within which workers can apply their knowledge (i.e. the means of production in a knowledge economy).

Since the new economy is no longer characterized by capital vs. labor, it is a post-capitalist economy.

Knowledge workers are a minority of the workforce; the majority are service workers, either skilled or low-skilled.

Economist Robert B. Reich divides the workforce into similar categories: "symbolic analysts" (knowledge workers) and two classes of service workers: "routine producers" and "in-person servers."

Since the service workers own and leverage less capital (knowledge), their ability to create surplus value and thereby demand high wages is intrinsically lower than the knowledge workers.

This creates a structural tension, as society has to establish a way to maintain the wages of the service workers in an economy where the value and income they can generate by their labor is capped.

Let's be clear about one thing: it is misplaced nostalgia to pine for the "good old days" of high-paying but soul-deadening factory jobs. Fully 40 years ago, workers were already rebelling against the yoke of rigid machine-driven production: 1970-1972: General Motors, the Lordstown struggle and the real crisis in production:

The other root cause of our present difficulties with the workforce might be termed a general lowering of employees' frustration tolerance. Many employees, particularly the younger ones, are increasingly reluctant to put up with factory conditions. Despite the significant improvements we've made in the physical environment of our plants. Because they are unfamiliar with the harsh economic facts of earlier years, they have little regard for the consequences if they take a day or two off.

For many, the traditional motivations of job security, money rewards, and opportunity for personal advancement are proving insufficient.

Large numbers of those we hire find factory life so distasteful they quit after only brief exposure to it. The general increase in real wage levels in our economy has afforded more alternatives for satisfying economic needs.

Jeroen Dijsselbloem, eurozone reformer

The Dutch finance minister is shaking up crisis policy

By Matt Steinglass and Peter Spiegel

No one expected the new Dutch finance minister to be a source of excitement. “Boring and responsible” was the prescription offered by one senior Labour party MP during coalition negotiations late last year – and he was the person who ended up getting the job: Jeroen Dijsselbloem.

The reality has been somewhat different. Five months on Mr Dijsselbloem has ignored his job description in some style. With a few ill-considered comments about who should take losses when banks fail, the man who also heads the eurogroup – the political body of Europe’s single currency – killed his reputation for being boring.

His remarks signalled a sea change. Whereas earlier in the eurozone crisis it was largely government money that paid for rescues in countries such as Ireland and Spain, the approach in the latest trouble-spot – Cyprus – was a sign of things to come, Mr Dijsselbloem said. Now private investors, including senior bond holders and even uninsured depositors, would foot the bill in what would be the new norm in eurozone crisis management. “Now that the crisis seems to fade out,” he argued, “I think we have to dare a little more in dealing with this.”

His words spooked markets. But for those who had watched his career, such bluntness is no surprise. The former agricultural economist with tight-pressed lips and a sharp, forbidding manner – he once received a text message from his party leader ordering him to smile more in interviews – has always been most comfortable playing the stern reformer.

“The Dutch have a long reputation for being blunt and open, and Dijsselbloem is a classic example,” says Boris van der Ham, a former MP from the D66 party. “With him in Brussels, it’s a bit of a culture clash, as if you have a room full of people drinking wine and suddenly here comes somebody who drinks milk.”

Mr Dijsselbloem’s steadfast manner was nurtured in Eindhoven, an industrial city in the southern Netherlands where he was born 47 years ago to an apolitical teacher couple. His interest in politics began in 1983, spurred by the mass protests against US cruise missiles that drew hundreds of thousands of Dutch youth into leftwing movements.

After his studies at the university of Wageningen, a small town in the central Netherlands where he still lives with his partner and their two teenage children, he had a series of jobs in agricultural policy before moving into politics.

His first term in parliament in 2000 was unremarkable, but he started to show an unorthodox streak in his second term, when he joined the so-called “red engineers” campaign. Along with two other MPs, including Diederik Samsom, now Labour’s leader, he donned scarlet overalls to criticise their party for having lost touch with its base.

He later led a parliamentary commission that issued a report blasting educational reforms, mostly designed by Labour governments. “He didn’t try to soften the report at all,” said Mr van der Ham, who worked on the report. “He prefers to rip off the bandage all at once.”

Europe gets real – not before time

The right plan for Cyprus after dreadful unforced errors

by FT editorial

Europe has arrived at the best available remedy for Cyprus’s woes – but not without first trying every other option and nearly letting a tiny peripheral economy shatter the monetary union. The deal agreed early on Monday, especially the tortuous route by which it was secured, sets profound precedents for eurozone banking and finance, in some ways for the worse, in others for the better.

Few in Cyprus may agree, but the island state has got the best deal it was entitled to expect. This was not the morality play rolling across media bulletins that paint the country as an innocent victim of European highhandedness. It chose a high-risk strategy of living off a banking system far bigger than the state could support. Two years after Nicosia lost market access, the banks still have books seven times Cyprus’s annual economic output. Even proportionately small losses are unaffordable for the state to make good.

A metastasised banking system sucked in more funds than it could usefully deploy at home. Beyond fuelling a housing bubble, Cypriot banks recycled funds to Russia and other origins, and made a big bet on Greek sovereign bonds. In the event, Athens’s restructuring killed the Cypriot banking sector. But the choice to hitch the economy to offshore banking was made with the complicity of leaders and the acquiescence of a population content to live beyond its means.

Other countries made clear that their taxpayers would not pay for a model Cyprus itself cannot afford with loans it could never pay back – from their public treasuries or the European Central Bank. They kept a €10bn rescue loan to meet the government’s financing gap – but not cover banks’ losses – on the table throughout. Even ignoring claims (not all frivolous) that the banks also serviced tax avoiders and money launderers, the idea cannot be sustained that European solidarity entitled Cyprus to more, flattering as this is to Nicosia. The perception of Cypriots and others that Europe “forced” the island to ruin depositors only testifies to abysmally bad communication by the rest of the currency union.

Cyprus will suffer. The banking meltdown will worsen a contraction some forecast at 25 per cent. But no other package of policies would be better than this – as orderly a restructuring as could be hoped for. Rather than a tax on small depositors that keeps zombie banks alive, both big banks will be sacrificed. Laiki will be closed; its insured deposits and central bank debt moved to Bank of Cyprus. It, too, will be restructured with noninsured deposit-for-equity swaps. The relative victors are small depositors, who faced an unconscionable haircut, and non-financial business which was spared much worse chaos in a euro exit.

Much work remains. Jobs and profits in offshore banking will not return; banking itself will not return without good policy. Cyprus must chart a new economic course, probably by accelerating natural gas exploitation. Restructuring holds the best prospect for quickly re-establishing a functioning banking system. But the crucifixion of Cypriots’ trust in banks – a casualty of the original tax on insured deposits – means any “good” bank rising from the ashes will struggle to win their confidence. Hence the introduction of capital controls. While necessary to guard against an immediate run when banks reopen, they are incompatible with monetary union in the long run.

Cyprus and the rest of Europe must work together to ensure capital controls are lifted as soon as possible. If they can be limited to the two problem banks, it will send a very positive signal. It will focus punitive actions on where the rot resides and teach uninsured investors – including depositors – to monitor the institutions to which they entrust their money.

A contemplated deposit raid and actual capital controls will weigh on the European economy. Against that, some healthy precedents are set by the deal. Broke banks can be resolved and not kept alive by the taxpayers of their own or other countries. The hierarchy of claims will be respected: the bail-in of senior bonds is a big improvement on earlier “rescues”. The quiescence of markets prove they can tell solvent debtors from insolvent ones.

The political fallout has no such redeeming features. Somehow, politicians did not foresee a backlash from Nicosia’s attempt to place the burden on small savers. Berlin did not understand it would (wrongly) be blamed. Russia never had much to offer, but defter European diplomacy would have left relations less damaged. Most worryingly, hopes of the euro navigating the debt crisis successfully were hit badly by its leaders’ breathtaking amateurishness in the Cyprus case. 

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.