Monday, March 18, 2013

Schäuble and the Blame Game

One of the favorite games of the German government is blaming outside entities (usually the EU) for decisions made even though the German government government is deeply involved. Here is how it is played. Schäuble answered questions about Cyprus on the State TV news (ARD Tagesthemen) yesterday evening:

He answered to the question: "was it Your idea to take money from the private deposits of the Cypriots?" (my translation)
No it was the position of the Bundesregierung and the IMF that the major part of the funds needed to stabilize the banks should be taken from the owners and creditors, those are the investors, of the banks. But of course we would have honoured the desposit insurance of up to 100,000 €. But those who did not want a bail in, the Cyprus government, the European Commission and the ECB chose this solution and now they have to explain it to the Cypriot people.
Yes if you have a deposit at a bank you are now an investor in the eyes of the German government it is your own fault that you trusted in the deposit insurance and Germany also pledges to uphold the law IF everybody does as we say. He then said, that to reach the needed amount he wanted to achieve a large base to not overburden the rich, so he might not have been the one who came up with the tax but he was deeply involved in how the plan was carried out.

The Merkel government has a bad habit of using language not to explain something but to defend the indefensible. They use words that sound similar to something which was proposed but mean something toally different. Thursday last week a bank customer was not an investor. The finance minister changed that now. It is extremely annoying that one has to listen to every word exactly because the phrases used just don't mean what one thinks when listening for the first time. The interviewer helped by asking the wrong question. Who cares if it was Schäuble's idea. What matters is was this a plan that the German government proposed? I think it was.

Schäuble was very much against  a "rescue" of Cyprus less than two months ago. Both the coalition and the oposition parties wanted to punish the depositors, since they feared the backlash of the German voters in case that "Russian oligarchs" would be bailed out. So the minister basically did not explain a thing. He just blames Cyprus for choosing the pest over cholera. Even if it wasn't the Merkel government who pushed for this plan, which I find unlikey,  we are at least in part responsible for the outcome. We could have just said that the deposit insurance has to be honoured. We didn't.

Just a reminder, due to the way the ESM is set up Germany can veto any bail-out decision. At least 80 % of the votes are necessary for such a move and Germany controls 27 %. If we actually wanted to, we could have forced the protection of deposits up to 100.000 €. 

How is a "bail-in" different from a deposit tax? Not very. Goldman is not sure if the action in Cyprus wasn't also the former. "Bail-in" describes using deposits to finance the banks, by forcing the bank customers into bank ownership. So instead of just outright losing money, the happy new investors would have had shares of a broken financial system. An actual journalist would have asked the finance minister why "out" was chosen over "in".  Instead German state TV just accepted that some one else is to blame. Also the interviewer did not even ask what the exact plan was that Schäuble claimed to favor. German Quality Journalism For The WIN.

What Schäuble also does not seem to understand is that no matter how the Cypriot parliament votes the banks will be insolvent. Once the confidence in the banks is destroyed it cannot be fixed easily, so when if the banks reopen, the customers will try to get their money out. Worse still is that of course spill over effects cannot be avoided even though Schäuble claims otherwise ("special case" "wont happen again" yadayadayada). As Krugman put it:

It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying “time to stage a run on your banks!”

I am looking forward to what the ECB has to say. In the end no one will be responsible. The deposit tax just happened. Every body wanted to uphold the law but other entities didn't. Sometimes I think they come up with "plans" by playing a drinking game and the proposal of the "winner" has to be accepted. That also explains why no one remembers his own involvement in bad solutions.

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