Cyprus Deal

A deal seems was reached between Cyprus, the troika, and the financial ministers of the Eurogroup. According to Bloomberg the deal

which is not yet final, calls for Cyprus Popular Bank Pcl (CPB) to be shut down and split. The Bank of Cyprus Plc would take over the viable assets of the failed bank along with 9 billion euros in central bank-provided emergency liquidity aid, according to three EU officials who asked not to be named because talks are ongoing.

The haircut for deposits above € 100.000 will be 40 % at Bank of Cyprus, while Laiki will see most of the deposits above that level wiped out.  There will be no vote in the Cyprus parliament.

I do not see how this alone solves anything at all. With capital controls now in place Cyprus will suffer economically. A lot of people will be unemployed after the shut down of Laiki. Even more will be affected indirectly. The message that deposits in other banks are not save is out there and it will slowly whittle down the bank deposits. Cyprus will now have a much higher debt to GDP ratio. At the same time it will face at least a heavy recession.

Mad world?

Currently, two different political patterns can be oserved in the western world. On one hand, the inability to make any decision at all and on the other a willingness to not only carry on with failed plans but to ever increase the damage inflicted.

Cyprus last government is a perfect example of the latter. Its banks were heavily invested in Greece, so when the hair cut happened, they were hit hard. The goverment then decided that the state should take over a bank and help others. Which, whith a banking sector 8 times its GDP lead to large increases to it's own debt.

Ireland experiencing a seemingly similar situation, let the government at that time assume, that Cyprus would recieve a comparable bail-out. So it chose a plan, that already had not worked out well for the other devided European island. Still, it would have been acceptable.
Germany, sick and tired of rescues, with a Euro-sceptic party forming, and elections around a corner; just could not tolerate the fact that the bail-out would help Russian oligarchs.So it decided to force a levy on the deposits.

Cyprus new Government is a perfect example of the former. The newly elected government first agreed to the demands, then found out it could not get enough votes in the parliament. So it just could not come to any decision anymore. Then Friday night decided on something, which will likely not be accepted.
 There are only two options (a bank run will happen in either case - capital controls never help):
1) accept the plan, loose large parts of the banking sector, face a depression, stay in the Euro, don't recover
2) decide against it, loose large parts of the banking sector, face a depression, leave the Euro, recover

It is binary and simple, with one comparable example each. Ireland for number one and Iceland for two. The Irish debt to GDP ratio will pass 120 %, its economy can be described with the letter L, unemployment is at 14 %. Iceland will approach full employment in a year, its debt will stay under 100 %, the GDP is growing. The economy, banking sector, and government debt will have to be restructured anyways, either under the German plan to cause pain or on Cyprus' own terms. Still Cyprus is unable to decide.

The US managed to both with the sequester mess. "Hey, let's come up with a plan that is so damaging, that neither party can accept it."And then, of course, they were unable to make any other decision.

But we aren't any better. Germany needs the Euro for the export focussed economy, still the country is unable to decide on anything until it is almost already to late. The decisions taken then seem designed to bring an end of the Euro closer every time. The circle of stupidity, that has taken over Europe.

How is this even possible? Have we all gone mad?

So Cyprus did present other plans

Well, as was to be expected: Cyprus did offer several other plans, how to reach the needed amount without gutting deposits at all. As Spiegel online reports none of those were even considered by the finance ministers and the Troika. Also with Russian help Cyprus expects to come up with a plan to leave deposits below 100.000 € unaffected. Sometimes it pays off to be a cynic.

Cypriots don't seem to like Mondays, next week there will be another holiday. All banks being closed until Tuesday will affect companys. It won't affect confidence in banks though, since it just cannot get worse. The people can get some money so they won't be all cash-strapped.

Still, there are only rumors over a Russian involvement as of now, so we don't know if there is a viable plan B. I think some of the banks will not survive this though. Cyprus has to take steps to regain some confidence in the banking system. Mergers and a bad bank might help. Also the current owners have to be wiped out. A new bank under new management will have the chance to survive. The FDIC can handle this in such a short timeframe. So I hope this could be a first case where the ECB steps up to that.

Sadly a disorderly bankruptcy of the country is not off the table just yet. Tomorrow will bring some clarity as the president Anastasiades will then announce if he has a new plan and how it should work.

Contradicing press releases

Dear IMF,

in the press release 13/79  is stated that:

"Further progress towards a full embrace of a Union-wide approach to financial stability— crisis management, deposit insurance, supervision and resolution, with a common backstop for the banking system, especially for the monetary union is needed to strengthen the ability of the system to avert and withstand shocks."

In the press release 13/80  Christine Lagarde welcomes an agreement which has shown that there is no trustworthy deposit insurance in Cyprus and many think it reduced confidence in deposit insurance in other countries.

So I have four question I would really like answered:

1) Was the IMF aware that the IMF believes deposit insurance "is needed to strengthen the ability of the system to avert and withstand shocks"?

2) If so, why did the IMF welcome an agreement which clearly contradicts the advice of the IMF?

3) Since, the IMF is one of the parties, which showed that it lacks necessary crisis management skills concerning the Cyprus banking situation and caused a deepening of the crisis there, will the IMF advice against participation of IMF officials in future talks to avert shocks?

4) If so, does the IMF believe IMF officials care at all about IMF advice?

Yours Sicerely.


P.S.: I am sorry that these questions seem rather strange. But one must admit, that an institution which needs less than 24 hours to contradict itself is a pretty unique beast so it deserves special questions.

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.

German Politics at the Core of Cyprus Decision

The excellent blog Wonkbook has a post about the "bail out" of Cyprus. I mostly agree but one thing caught my eye:

Those are the reasons the IMF has insisted on losses for depositors — those, and the fact that rescuing Cyprus’s finances without the 5.8 billion-euro contribution represented by depositors’ losses would have meant a bailout approximately equivalent to the country’s annual economic output, too much for the fund to stomach.

I disagree with this passage. The IMF is not the responsible party in this mess it has at least last year called to stand behind the deposit insurance, which is now being guttet. The decision to "tax" depositors was made due to German politics. Merkel has problems keeping her coalition together when votes are called for on "rescues". There are at several (up to 23) so called "Abweichler"  ("deviators")  primarily in the two smaller partners (CSU and FDP), who will vote against such packages. So Merkel needs the opposition to vote yes.

The Greens and the SPD, just like the coalition, said (for example SPD "expert" Carsten Schneider on Friday) that they would only vote for a rescue of Cyprus if the bank customers would be involved in the bail out. The only other party in the Bundestag- the left wing Die Linke - will most likely just say no to the rescue. All German "rescue" parties are scared that money will bail out Russian oligarchs. That is the primary reason why they want a tax on bank deposits.

Here is why the situation in Germany matters so much: the Constitutional Court made a vote on such packages mandatory, so Merkel's "governor" cannot agree to ESM money being pledged unless the parliament agrees. Here's the catch: Germany is one of two countries which always has a defacto veto in the ESM. Even if the ECB says a rescue is necessary at least 80 % must agree within the Board of Directors. The German "governor" controls 27 % of the votes, which equals the share of money Germany has contributed to the ESM. Making it impossible to "help" any country without Germany agreeing.


The party responsible for the unimaginably stupid "bail out" is Germany not the IMF.  What makes this even worse is that no matter who is elected in September, the next German government will consist of the very people who caused the already happening and the ensuing mess. Specifically, the destruction of the European deposit guarantee might just prove the last drop necessary to cause a breakup of the Euro area.