Beware of Greek-Cypriots bearing debt

Temporary Insanity and Permanent Loss

Του Γιώργου Καισάριου 

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

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

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

Όσον αφορά τα της Κύπρου...

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

Στα κουρέματα τώρα...

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

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

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

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

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

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

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

Επιπτώσεις στις αγορές

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

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

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

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

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

Cyprus - Oh The Irony!?

Mattresses now hold a 10 per cent premium

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

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

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

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

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

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

Cypriot Disputes and Levies

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

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

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

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

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

Cyprus Blight Could Spread

The Honey-Pot is drying up

By Doug Kass

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

                                       -- Queen, "Bohemian Rhapsody"

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

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

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

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

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

                                     -- David Kotok, Cumberland Advisors

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

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

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

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

Cyprus offers a scary economic lesson for America

Government guarantees and other Pipe Dreams 

By James Pethokoukis

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

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

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

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

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

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

The Canary Just Died

The End Of Systemic Trust

by Lucas Jackson

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

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

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

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

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

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

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

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

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

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

Cyprus: the world’s biggest “poker game”

Big picture, this is toxic and policy error

by Harvinder Sian and Michael Michaelides

While this kind of 'wealth tax' has been predicted, as we noted yesterday, this stunning move in Cyprus is likely only the beginning of this process (which seems only stoppable by social unrest now). To get a sense of both what just happened and what its implications are, RBS has put toegther an excellent summary of everything you need to know about what the Europeans did, why they did it, what the short- and medium-term market reaction is likely to be, and the big picture of this "toxic policy error." As RBS summarizes, "the deal to effectively haircut Cypriot deposits is an unprecedented move in the Euro crisis and highlights the limits of solidarity and the raw economics that somebody has to pay. It is also the most dangerous gambit that EMU leaders have made to date." And so we await Europe's open and what to expect as the rest of the PIIGSy Banks get plundered.

 The deal to effectively haircut Cypriot deposits is an unprecedented move in the Euro crisis and highlights the limits of solidarity and the raw economics that somebody has to pay. It is also the most dangerous gambit that EMU leaders have made to date.

• What did they do? Hit depositors.
• Why did they do it? Politics, economics, and because they think they can get away with it.
• Cyprus needs to vote on this and any delay of opening the banks on Tuesday is more risk-off.
• Short term market reaction: Risk-off. The situation is fluid but watch politics, Cyprus bank runs risk, weak periphery banks impact and rating agencies. Worst case scenario? EMU exit talk. The Best case scenario? Germany is correct and the ECB bridges the time to when this is clear.
• Big picture: This is toxic and a policy error.
• Long bunds, sell the euro, sell periphery, Spain could underperform Italy, but nobody in the periphery wins.

1. What did they do?

In the early hours of this weekend, the Troika decided to impose an effective haircut to both uninsured and even more interestingly insured (<€100k) Cypriot bank deposits. More precisely, the €10bn bank rescue in Cyprus will end up with a bail-in on junior bondholders and a one-time tax on depositors. Deposits below €100k will be taxed 6.75%, and those above at 9.9%, for a total contribution of €5.8bn. Depositors will receive bank equity as compensation and the Cypriot President has offered Gas-linked notes if deposits are kept in the country for two years.

In addition, the Eurogroup expects the Russian government to come to an agreement with Cyprus soon to make a contribution to the rescue.

The Eurogroup head, Dutchman Jeroen Dijsselbloem, has refused to rule out that Cyprus will be the last instance where deposit holders get hit. Olli Rehn however has ruled this out by saying Cyprus is unique. The difference is that Mr Dijsselbloem represents the views of national finance ministers and leaders.

2. Why did they do it?

There is an excess debt problem and somebody has to pay. The division of costs is a policy choice.

The typical choices beyond growth and inflation, are via (a) getting friendly foreigners to pay such as Germany/EFSF/ESM etc; (b) getting wealthy domestics to pay (c) forcing the debtor nation to make good the loans over time through austerity; and (d) force losses on creditors such as the expropriation of SNS Reaal subordinated bonds, losses on Anglo Irish senior bonds, OSI, and of course PSI.

The signal is on the limits of core solidarity

The haircut on the deposit base in Cyprus is unique in hitting the most secure ladder in bank capital, when Cypriot government bonds and senior bank paper are still planned to be made whole. That policy choice was unexpected. One key message is that the decision represents visible evidence of the limits of core EMU solidarity. In truth, this was already evident via the ESM’s seniority and the CACs in 1y+ new government bonds.

...and the limits of the economics

According to media reports (FT) the Cypriot leaders were felt to be left with little choice. We discuss this below but why should Germany, other core countries and even the ECB threaten to take down the Cyprus’ largest banks or threaten full bail-in of depositors? The answer is that resources are limited. Core EMU is not large enough to bailout the periphery risk and so default has to be part of the solution.

There May Be Only Painful Ways Out Of The Crisis

The "Muddle Through" Has Failed

By tyler drusden

Denial. Denial is safe. Comforting. Religiously and relentlessly abused by politicians who don't want nor can face reality. A word synonymous with "muddle through." Ah yes, that "muddle through" which so many C-grade economists and pundits believe is the long-term status quo for the US and the world just because it worked for Japan for the past three decades, or, said otherwise, "just because." Well, too bad. As the following absolutely must read report, which comes not from some trader of dubious credibility interviewed by BBC, nor even from an impassioned executive from a doomed Italian bank, but from consultancy powerhouse Boston Consulting Group confirms, the "muddle through" is dead. And now it is time to face the facts. What facts? The facts which state that between household, corporate and government debt, the developed world has $20 trillion in debt over and above the  sustainable threshold by the definition of "stable" debt to GDP of 180%. The facts according to which all attempts to eliminate the excess debt have failed, and for now even the Fed's relentless pursuit of inflating our way out this insurmountable debt load have been for nothing. The facts which state that the only way to resolve the massive debt load is through a global coordinated debt restructuring (which would, among other things, push all global banks into bankruptcy) which, when all is said and done, will have to be funded by the world's financial asset holders: the middle-and upper-class, which, if BCS is right, have a ~30% one-time tax on all their assets to look forward to as the great mean reversion finally arrives and the world is set back on a viable path. But not before the biggest episode of "transitory" pain, misery and suffering in the history of mankind. Good luck, politicians and holders of financial assets, you will need it because after Denial comes Anger, and only long after does Acceptance finally arrive.

First, let's recap why BCG thinks all the alternatives have been exhausted:

We believe that some politicians and central banks - in spite of protestations to the contrary - have been trying to solve the crisis by creating sizable inflation, largely because the alternatives are either not attractive or not feasible:

·         Austerity - essentially saving and paying back - is probably a recipe for a long, deep recession and social unrest

·         Higher growth is unachievable because of unfavorable demographic change and an inherent lack of competitiveness in some countries

·         Debt restructuring is out of reach because the banking sectors are not strong enough to absorb losses

·         Financial repression (holding interest rates below nominal GDP growth for many years) would be difficult to implement in a low-growth and low-inflation environment

Inflation will be the preferred option - in spite of the potential for social unrest and the difficult consequences for middle-class savers should it really take hold. However, boosting inflation has not worked so far because of the pressure to deleverage and because of the low demand for new credit. Moreover the inflation "solution" while becoming more tempting, may come to be seen as having economic and social implications that are too unpalatable. So what might the politicians and central banks do?

Since the publication of Stop Kicking The Can Down The Road, a number of readers have asked us what would happen if governments persisted in playing for time. To what measures might they have to resort? In this paper, we describe what might need to happen if the politicians muddle through for too much longer.

It is likely that wiping out the debt overhang will be at the heart of any solution. Such a course of action would not be new. In ancient Mesopotamia, debt was commonplace; individual debts were recorded on clay tablets. Periodically, upon the ascendancy of a new monarch, debts would be forgiven: in other news, the slate would be wiped clean. The challenge facing today's politicians is how clean to wipe the slates. In considering some of the potential measures likely to be required, the reader may be struck by the essential problem facing politicians: there may be only painful ways out of the crisis.

For Everyone Shocked By What Just Happened

And Why This Is Just The Beginning

by Harvinder Sian and Michael Michaelides

Today, lots of people woke up in shock and horror to what happened in Cyprus: a forced capital reallocation mandated by political elites under the guise of an "equity investment" in insolvent banks, which is really code for a "coercive, mandatory wealth tax." If less concerned about political correctness, one could say that what just happened was daylight robbery from savers to banks and the status quo. These same people may be even more shocked to learn that today's Cypriot "resolution" is merely the first of many such coercive interventions into personal wealth, first in Europe, and then everywhere else.

For the benefit of those people, we wish to point them to our article from September 2011, "The "Muddle Through" Has Failed: BCG Says "There May Be Only Painful Ways Out Of The Crisis", which predicted and explained all of this and much more. What else did the September BCG study conclude? Simply that such mandatory, coercive wealth tax is merely the beginning for a world in which there was some $21 trillion in excess debt as of 2009, a number which has since ballooned to over $30 trillion. And with inflation woefully late in appearing and "inflating away" said debt overhang, Europe first is finally moving to Plan B, and is using Cyrprus as its Guniea Pig.

For those who missed it the first time, here it is again. Somehow we think many more people will listen this time around:

Restructuring the debt overhang in the euro zone would require financing and would be a daunting task. In order to finance controlled restructuring, politicians could well conclude that it was necessary to tax the existing wealth of the private sector. Many politicians would see taxing financial assets as the fairest way of resolving the problem. Taxing existing financial assets would acknowledge one fact: these investments are not as valuable as their owners think, as the debtors (governments, households, and corporations) will be unable to meet their commitments. Exhibit 3 shows the one-time tax on financial assets required to provide the necessary funds for an orderly restructuring.

For most countries, a haircut of 11 to 30 percent would be sufficient to cover the costs of an orderly debt restructuring. Only in Greece, Spain, and Portugal would the burden for the private sector be significantly higher; in Ireland, it would be too high because the financial assets of the Irish people are smaller than the required adjustment of debt levels. This underscores the dimension of the Irish real estate and debt bubble.

In the overall context of the future of the euro zone, politicians would need to propose a broader sharing of the burden so that taxpayers in  such countries as Germany, France, and the Netherlands would contribute more than the share required to reduce their own debt load. This would be unpopular, but the banks and insurance companies in these countries would benefit. To ensure a socially acceptable sharing of the burden, politicians would no doubt decide to tax financial assets only above a certain threshold—€100,000, for example. Given that any such tax would be meant as a one-time correction of current debt levels, they would need to balance it by removing wealth taxes and capital-gains taxes. The drastic action of imposing a tax on assets would probably make it easier politically to lower income taxes in order to stimulate further growth. (See Exhibit 4.) 

Monsieur Unpopular

Hollande's Spectacular Fall from Grace

By Mathieu von Rohr
Never before has a French president fallen in public sentiment as quickly as François Hollande. Only 10 months after entering into office, his popularity rating is plummeting. An event aimed at getting closer to the people this week didn't help.

On a recent trip by French President François Hollande to the eastern city of Dijon, everything that could have gone wrong, went wrong. The visit earlier this week was intended to improve the president's miserable approval ratings and "renew direct contact with the French." Instead, Hollande found himself so clearly confronted with the wrath of the people as never before. He was visibly overwhelmed.

"Monsieur Hollande, where have your promises gone?" one young man hollered out to the president as he arrived in the working-class quarter of Les Grésilles. Two bodyguards immediately and violently carried the man out of the crowd. The image of the scene was too disastrous for the television news crews to pass up. Hollande's predecessor, Nicolas Sarkozy, once told a heckler to "get lost, you poor jerk!" He never lived the phrase down.

Before Hollande arrived, the police had already dispersed a group of unionists who were holding up a picture of early French Socialist leader Jean Jaurès, "to remind him that he's a Socialist." French newspaper Le Monde reported another resident was silenced after calling out to Hollande, "We're still waiting for your change, François!"

The 'President of Kisses'

After Hollande became the Socialists' candidate for president -- in the party's first-ever direct primary election -- he relished the public strolls that brought him closer to his supporters. They were scheduled at every campaign event, and Hollande was happy to take the time for them. So many elderly women wanted kisses on the cheek from him that, shortly after his election, he jokingly called himself le président des bisous, or "the president of kisses."

Since taking office 10 months ago, Hollande has experienced the fastest drop in popularity ever seen in French presidential politics. In June of last year, those who said they had confidence in him numbered between 51 and 63 percent, depending on the polling institute. That number is now 30 to 37 percent, nearing the lowest approval rating of any French president on record: Nicolas Sarkozy in May 2011, at 20 percent.

Something has changed among the people, evidenced by not just opinion polls, but also Hollande's two-day, meet-the-people trip to Dijon. A few hours after leaving behind the unhappy hecklers, Hollande asked a woman who was passing by if she wanted to take a photo with him. She answered coldly, "We see enough of you on TV."

Euro Zone Reaches Deal on Cyprus Bailout

Hitting the Savers

by Spiegel

After fraught negotiations, euro-zone finance ministers reached a deal early Saturday to provide up to €10 billion ($13 billion) bailout funds to Cyprus, which faces bankruptcy in May. For the first time, deposits at banks in a country are being seized to assist in the rescue.

Euro-zone finance ministers and the International Monetary Fund reached a deal with Cyprus early Saturday morning on a bailout package for the country that has been the subject of dispute for months now. It will mark the first time that savers in a country in the euro zone are required to participate in a bailout.

"The Euro Group was able to reach a political agreement with the Cypriot authorities on the cornerstones of this agreement," Euro Group President Jeroen Dijsselbloem said. "The assistance is warranted to safeguard stability in Cyprus and the euro zone as a whole," he said. Dijselbloem added that a letter of intent would be completed next week so that the deal could be approved by national parliaments.

International Monetary Fund chief Christine Lagarde said the fund would contribute to the bailout but did not specify the exact amount.

Initial reports suggest the bailout package, which will be provided by the long-term euro rescue fund, the European Stability Mechanism (ESM), will carry a total value of up to €10 billion ($13 billion). In return, Cyprus has pledged to recapitalize its ailing banks and clean up government spending. Without the bailout, the country would default in May.

Levy To Raise €5.8 Billion

The deal followed intense negotiations and the main sticking point during the 10-hours of talks had been the demand that savers at Cypriot banks also be required to contribute to the bailouts of the beleaguered financial institutions. Under the deal, any bank account holder in Cyprus with deposits exceeding €100,000 will be subjected to a one-off levy of 9.9 percent of their savings. Accounts with less than a €100,000 would be required to make a 6.75 percent payment. In total, the deposit tax is expected to generate around €5.8 billion.

Large sums of money have been deposited in Cypriot banks by foreign customers, particularly wealthy Russians and Brits. Russian oligarchs have billions in deposits in the banks, and almost half of the deposits in the country are believed to be from non-resident Russian citizens. Together, the country's banks hold close to €70 billion in deposits. Cyprus also agreed to raise the country's nominal corporate tax rate, the lowest in Europe, by 2.5 percentage points to 12.5 percent. But sources said the country would not be given a debt haircut.

Beppe Grillo Is the Most Dangerous Man in Europe

Green Facism

by Jan Fleischhauer

Beppe Grillo, leader of the populist Five Star Movement in Italy, prides himself on his ridicule of the parliamentary system. Yet while his anti-establishment rhetoric sounds appealing, at heart it's actually anti-democratic. And very similar to that of an infamous Italian from the past.

The man whom German center-left leader Peer Steinbrück called a "clown" does have entertainment value, that much we can agree on. Italy and the euro? "De facto, Italy is already out of the euro zone." Rome and the parliamentary system? "I give all the parties six more months, then it's over here." And these quotes are only the highlights from a recent interview with Beppe Grillo published by the German business daily Handeslblatt. When it comes to straight talking, even Steinbrück, reknowned for his lack of a filter, is surpassed by Grillo.

Steinbrück got a fair amount of flack for his clown comparison. If he had used the term to describe only Berlusconi, everyone would have simply nodded in agreement. But Grillo? The leader of the streets and hero of the youth, whose third-placed Five Star Movement demonstrated the degree to which Merkel's austerity diktat is pushing Italy to its limits? The advocate for shorter terms of office and a cleaner way of doing politics? Even within the ranks of Steinbrück's Social Democrats (SPD), people were calling for their candidate to be put in his place.

A part of the sympathy that Grillo enjoys in Germany is undoubtedly thanks to his proximity to the political left. Much of what the Five Star Movement espouses could easily be found in the platforms of the Attac movement or Germany's Green party: the passion for alternative sources of energy, the promise of more civic engagement, the protest against the "fat cats" of international finance and the calls to put them on a diet. But that's just the surface. Such fluff doesn't propel a party to the top in just a few short years, neither in Italy nor anywhere else.

Grillo derives his energy from resentment. The real key to his success lies in the exploitation of anger -- at Germany, at Brussels bureaucrats, at the whole system. That is what makes him great, not the appeal to reason or the love of democracy.

As with all other revolutionaries, Grillo's answer to the malaise of the present age is extremely simple. You just have to do away with the politicians or, better yet, jettison everything that smells of power and privilege. "We are young," it says on his blog. "We have no structure, heirarchy, leaders or secretaries. We take orders from no one." Grillo's comparison of his movement to the French Revolution, which took its ideas of equality with bloody seriousness, is no accident. He relativizes by saying, "without the guillotine," but the stipulation means little. When people are incited into rage, those who fueled their passions never take the blame.

An unstable truce with the Axis of Crazy

A business model that no longer makes any sense

By mark steyn
I greatly enjoy the new Hollywood genre in which dysfunctional American families fly to a foreign city and slaughter large numbers of the inhabitants as a kind of bonding experience. Liam Neeson takes his estranged wife and their teenage daughter for just such a vacation in "Taken 2," in which the spectacular mountain of corpses in Istanbul brings the family back together again and ends with them (spoiler alert) enjoying a chocolate malt back at the soda fountain in California and getting to know the daughter's new boyfriend. "Don't shoot this one, Dad," she cautions. "I really like him." And they all have a good chuckle over it. In "Die Hard 5" or whatever we're up to, Bruce Willis and his estranged son fly to Moscow and do to the Russians what Neeson does to the Turks and Albanians. I gather that in the forthcoming "Finding Nemo 2," Marlin and Dory's marriage is going through a rocky patch until Nemo is kidnapped by a Ukrainian sex cartel, and Marlin and Dory swim up the Dnieper River and gun down every pimp in Kiev.

Alas, outside Hollywood, foreigners are somewhat less pliable than the body count of Liam Neeson's and Bruce Willis' obliging extras would suggest. The funniest line in "Taken 2" was Neeson's advice to his daughter in an emergency: "Go to the U.S. Embassy. You'll be safe there." It opened a couple of weeks after Benghazi.

There are drones, of course, which offer the consolations of technological bad-assery, as if Liam Neeson could take out all the Albanians from the X-Box in his basement. But don't worry. According to Politico, at a recent meeting with Senate Democrats, President Obama assured them that they had no need to worry about his awesome power to rain down death from the skies because, as he put it, he's not Dick Cheney.

Meanwhile, back at the GOP, Sen. Rand Paul is no Dick Cheney, either: At CPAC this week, the narrow bounds of his smash-hit filibuster – questioning drone assassinations of Americans in America – broadened somewhat, not just to questioning drone assassinations of Americans anywhere, nor to questioning drone assassinations of anyone, nor even to questioning the "war on terror" or war in general, but to questioning the very assumptions of American global order, starting with our bankrolling of Mohamed Morsi in Cairo. The Egyptians send mobs to torch the U.S. embassy, the Saudis wage ideological warfare against Western civilization, the Turks call Israel a "crime against humanity" and threaten a cultural and demographic takeover of Europe, the Pakistanis are ramping up nuke production to sell to any loon in town – and those are just our "allies." With friends like these, who needs foreign policy? There are fewer and fewer takers for the burdens of global superpower, and whoever wins the nomination in 2016 will be considerably less Cheney and more Randy.

Iraq war 10 years on

At least 116,000 civilians killed

The war in Iraq claimed more than 116,000 civilian lives in the space of eight years and cost the US about £530 billion, according to new research.

By David Blair

A study in “The Lancet”, a specialist medical journal, lays bare the price of the Anglo-American invasion that began 10 years ago.

From the moment that the first air strikes took place on March 19 2003, Iraqi civilians began to die.

By the time the last US soldiers left in December 2011, “at least 116,903 Iraqi non-combatants” had been killed, according to Barry Levy and Victor Sidel, two American professors of public health from Tufts University and the Albert Einstein College of Medicine respectively.

^{Many Iraqi civilians were injured or became ill because of damage to the health-supporting infrastructure of the country}

In addition, 4,487 American and 179 British troops were also killed.

This calculation of civilian fatalities is significantly lower than other estimates. In 2006, “The Lancet” published a study comparing Iraq’s population growth rates before and after the invasion. This concluded that 655,000 “excess deaths” had taken place since the war began in 2003. However, the methodology of that survey was widely criticised.

Iraq Body Count, a website that totals the reported number of dead in each incident, has reached a similar conclusion to the latest study. It currently places the number of civilian deaths at between 111,687 and 122,108.

As for the financial cost, the new study makes conservative assumptions, omitting the interest payments on the higher US national debt caused by the Iraq war.

If those are included, the bill could eventually reach £2 trillion.