Euro Crisis Returns

Here's Yuri Yukuv's main man Paul on the Cyprus issue:

Pauly K wrote:Still trying to wrap my head around the Cyprus situation; what makes it so interesting (as in “may you live in interesting times”) is the role of the island as a tax, regulation, and law enforcement haven.

It’s not just about the Russian connection, but that connection is really huge. Here’s another metric: Cyprus is, according to official figures, the largest single foreign direct investor in Russia — this from an economy roughly the same size as metropolitan Scranton PA. What’s that about? The FT explained it a while back:

This link occurs through CIS [Commonwealth of Independent States] commodity-based shell companies that deposit transactional balances of their CIS-based legal subsidiaries engaged in oil, mineral, and metals exports, often involving transfer pricing and other tax minimization strategies. The Central Bank of Russia classifies Cyprus as the largest single source of FDI in the Russian Federation, with a total of $41.7 billion in cumulative inbound FDI into Russia’s non-financial sector between 2007 and 2010 (over 2.7x German levels)… Cyprus is also counted among the top FDI investing nations in several Central Asian countries (likely Russian capital reinvested via Cyprus, a process known informally as “round-tripping”).

And a key aspect of the current mess is that the Cypriot government isn’t willing to give up this business. That’s why solutions like converting large deposits into CDs haven’t been on the table; once round-tripping Russians know that they can find their money trapped for long periods, they’ll go find another treasure island.

My guess is that in the end Cyprus can’t reclaim the round-tripping business — and once it decides that it can’t, a resolution will become much easier. But they’re not there yet.

Note: Scranton PA has a population of roughly 80,000

Swanhends wrote:Here's Yuri Yukuv's main man Paul on the Cyprus issue:

Note: Scranton PA has a population of roughly 80,000

This is true, however the krugmaister only focuses on deposits and equity holdings and not loans by the banks here is more by Quarts, showing how this is very much tied to the greek haircut which Frau Merkel has supervised. Also it seems that Germany is actively trying to destroy Cyprus's economy after its revealed that banking is the economy back bone (which the deposit levy will tarnish forever)

Quartz wrote:Cyprus’s over-stretched banks are at a breaking point. The IMF estimates that they need some €10 billion ($12.9 billion) in capital to stay on their feet, even after a €1.9 billion recapitalization by the Cypriot government in July 2012. Although the government has been doing its darnedest to keep Cyprus’s financial sector afloat, overburdened banks are still sinking into oblivion. But because Cyprus is widely considered an offshore tax haven for the Russian wealthy, European policymakers are unwilling to bail them out.

They should really reconsider that assessment, however. Although they may hold significant Russian deposits, a deeper dive shows that Cypriot banks really look a lot more like Greek banks, a few hundred miles across the Mediterranean.

Sovereigns in Europe still depend on domestic banks to fund them even when the banks are in trouble. The ECB extended cheap credit to Italian and Spanish banks in late 2011 and early 2012 specifically so they’d buy more of their government’s debt. (It worked.) Because of the close historical ties between Cyprus and Greece, Cyprus’s banks remained heavily invested in Greek government debt, too. With some €4.7 billion in Greek bonds at the end of 2011, Cyprus’s two largest banks—the Bank of Cyprus and Popular Bank (Laiki)—came in as some of the Greek government’s largest creditors. So when Greece went through its managed default they took the full brunt and lost €3.5 billion, equal to 20% of Cyprus’s GDP.

What’s more, Cypriot banks increased that exposure steadily, probably with the intention of helping out their pseudo-sovereign. A major Cypriot bank even purchased a large chunk of the last private placement (essentially, a private offering of bonds) Greece conducted before it defaulted, according to a market maker with knowledge of the deal.

The connection seeps through into the banks’ balance sheets: 27.8% of loans on the Cypriot banking system’s balance sheet—amounting to €18.9 billion—are actually extended to Greek residents. As it happens, 27% of all the loans issued by Cypriot banks—a total of €23 billion—are non-performing, a number that has spiked sharply since Greece defaulted. Greeks also account for 18.7% of total deposits in Cypriot banks. Although non-EU (read: Russian and eastern European) deposits account for slightly more, they take up only 9.7% of the loans.

“By June 2011, the exposure of domestic [Cypriot] banks to Greece amounted to €28 billion, or one-third of total assets and 170% of GDP. Of the €28 billion, government bonds amounted to €4.7 billion; the rest were loans to Greek residents,” the Institute of International Finance, which advises the ECB, IMF, and EU on international bailouts, found in a study.

And here’s what really crowns the problem: The bailout for Greece recapitalized Greek banks with €18 billion in funds from the ECB last May. But Cyprus’s banks, not being in Greece, got no similar aid.

So although it’s understandable why policymakers would want to try to tax Russian depositors, it’s clear they’re not the only cause of the trouble. Yes, the Cypriot banking system is too big because of all that Russian money. But the Russians weren’t the ones that hit it with huge losses. If EU leaders were able to understand Cyprus as a tiny offshoot of the Greek economy, however, it might be easier for them to arrive at a viable solution to its not so tiny problems.

Here are some comments by Ex Central Bank Governer of Cyprus



some more of interview

Orphanides on Cyprus bailout:
"We are witnessing historic times. What we are witnessing is the slow death of the European Project. We are in a situation that some European governments are essentially taking actions that are telling citizens of other member states that they are not equal under the law."

"What we have seen in the last few days is a very serious blunder by European governments that are essentially blackmailing the government of Cyprus to confiscate the money that belongs rightfully to depositors in the banking sector in Cyprus. It is not clear how this can affect in a positive matter the European project going forward."


On EU making a mockery of Banking Union
"Cyprus did not have a problem before earlier blunders that were made by European governments."

"We have had decisions taken by the strongest government in Europe that is spreading misery sequentially to citizens in Greece, Ireland, Portugal, in Spain, in Italy and this is not going to end the way that European governments are handling this. We need to have a decision making process where governments are asked to care for citizens in other states."

"In order for the EU area to stay together they needed to form a banking union which meant, they needed to have a common credible deposit insurance guarantee for everybody in the EU area. Indeed by making a mockery of that right now, the governments who pushed for this measure are sending a message that they want no part of a banking union."

On the possibility of bank runs across Europe
"I would hope not… we have finance ministers from a number of countries who should have known better and they have taken a decision that has encouraged bank runs across Europe."

zizzle wrote:

Yohan Modric wrote:If the crisis gets worse, can the government print out more money from the money machines to make everything alright again?

Well the US has been doing that for the last decade and we all know how that turned out

The average american is doing much much better than the average european since crisis

Lines outside of Cyrpus ATMS, Coming to a European City near You!!!







In other news, Mevdev has serious balls and tells it how it is

Mr Medvedev said the EU and Cyprus had acted “like an elephant in a China shop”.

“All possible mistakes that could be made have been made by them,” he added.

"We are living in the 21st century, under market economic conditions. Everybody has been insisting that ownership rights should be respected.”

Mr Medvedev also criticised the decision to freeze the Cypriot banking system, and not just withdrawals from troubled banks, warning that if this continued for any length of time it could “result in losses . . . even bury the whole banking sector of Cyprus. It will cease to exist,” he said.
...

The proposed bank levy, rejected by the Cypriot parliament on Tuesday, had a "clearly confiscatory, expropriating character," RIA quoted him as saying - remarks that echo earlier criticism by Russian President Vladimir Putin.

It was, Medvedev said, "absolutely unprecedented".

"I can only compare it some of the decisions taken ... by Soviet authorities, who did not give a thought to the savings of the population."

Yuri Yukuv wrote:

zizzle wrote:

Yohan Modric wrote:If the crisis gets worse, can the government print out more money from the money machines to make everything alright again?

Well the US has been doing that for the last decade and we all know how that turned out

The average american is doing much much better than the average european since crisis

that doesnt mean the US is doing great. Remember the days of the Surplus? me neither. Btw What's your opinion on creating deficit (which is basically printing money) to stimulate the economy ?

Yuri Yukuv wrote:Lines outside of Cyrpus ATMS, Coming to a European City near You!!!







In other news, Mevdev has serious balls and tells it how it is

Mr Medvedev said the EU and Cyprus had acted “like an elephant in a China shop”.

“All possible mistakes that could be made have been made by them,” he added.

"We are living in the 21st century, under market economic conditions. Everybody has been insisting that ownership rights should be respected.”

Mr Medvedev also criticised the decision to freeze the Cypriot banking system, and not just withdrawals from troubled banks, warning that if this continued for any length of time it could “result in losses . . . even bury the whole banking sector of Cyprus. It will cease to exist,” he said.
...

The proposed bank levy, rejected by the Cypriot parliament on Tuesday, had a "clearly confiscatory, expropriating character," RIA quoted him as saying - remarks that echo earlier criticism by Russian President Vladimir Putin.

It was, Medvedev said, "absolutely unprecedented".

"I can only compare it some of the decisions taken ... by Soviet authorities, who did not give a thought to the savings of the population."

I dont know about but i smell conspiracy. The biggest economists in the EU sure saw it coming, didnt they ? even us "regular folks" did

Yuri Yukuv wrote:after its revealed that banking is the economy back bone (which the deposit levy will tarnish forever)

Isn't that kind of the point, though?

Having such a huge banking sector leads to instability. Any country THAT reliant on banking needs to have the government as a last-resort lender...But how can the government do that when the banks are too large relative to the country's overall economy?

You mentioned in your post that Cypriot banks would need 10bil in capital just to stay afloat (in addition to the 2 billion already injected). But Cyprus' GDP is only around 20 billion - how are you gonna come up with a bailout equal to 1/2 of GDP? Well that's where the EU comes in

Cyprus looks just like a smaller version of Ireland/Iceland...Too much reliance on banking leads to instability

Here is Cyprus' most famous Economist on the bailout:

Christopher Pissarides, who shared a Nobel Prize in economics in 2010, told Bloomberg Businessweek in an e-mail today that he is “appalled” by Europe’s plan to impose a tax on deposits in Cypriot banks to help pay for a $13 billion bailout. Pissarides was born and raised in Cyprus. As a child, he recalled in his Nobel biography, “I used to spend the time with my cousins, fishing in Kyrenia (mostly unsuccessfully) or playing in the riverbeds and springs of Agros.” He has professorships at both the London School of Economics and the University of Cyprus. Last month he was named to head an economic policy council that will advise President Nicos Anastasiades. He is traveling in China and provided the following responses to questions e-mailed to him by Bloomberg Businessweek Economics Editor Peter Coy.

As a native of Cyprus, how does this episode make you feel?

I am appalled by the decision of the euro group. The idea of the single currency and monetary union was that we had a union of equal partners helping each other in difficult times. Here we have a big partner (Germany) bullying a small one, for what is perceived by the small one to be political reasons. And the Cypriot depositors caught in the fire are an unfortunate collateral damage.

Do you favor or oppose taxes on bank depositors?

I am totally against it. First, deposits under 100,000 are insured. What happened to that insurance? How could the euro group agree to taxing deposits as small as one euro? What is the meaning of deposit insurance in the euro zone? Second, deposits include the savings of honest people who have paid their taxes and saved for retirement, to buy a home, educate their children or whatever. Why pay a hefty additional tax? And how would these people feel when they woke up on Saturday morning to be told, “Sorry guys, we are not letting you withdraw your money anymore, until we sort out how to take a big chunk away from you.” And why? Because two banks out of the tens operating in Cyprus made bad investment decisions three years ago to help Greece out of its crisis, and got hit by the troika. What’s the incentive that banks now have in the European Union to treat risky investments with caution? If one of them takes bad risks the others will pay for it; if it works well for it, it will keep the profits. A classic scenario for market breakdown.

Was it a good or a bad idea for Cyprus to join the EU and the euro zone?

Small countries be warned when joining the euro zone. You could be bullied any time by your big brothers if it suits their political objectives.

Did the EU, ECB, and IMF inadequately monitor the Cypriot banking system?

No! They seem to think that all big depositors are Russians with dirty money. But after months of searching they couldn’t find a single one. In a large system two banks misbehaved and the troika solution is [to] destroy half the system. There are other ways of monitoring and regulating large banking systems, not through destruction and massive unemployment.

Is Cyprus overly dependent on financial activities—and if so, what can be done?

Cyprus is dependent on them just like Luxembourg, the Channel Islands, Hong Kong and Singapore are. Every mature small nation has a large financial system. Malta is building its own now, after joining the Eurozone, and is benefiting from the Cyprus fallout. Financial services is what Cypriots are trained to do. The system could be regulated more adequately and kept to its present size. Regulation in Cyprus followed the principles recommended by the ECB to the letter. The ECB needs to realise that there are members in the Union with different needs from those of Germany and devise rules that regulate the system, not try and make everyone like Germany.

Meanwhile Macedonian government:

"Everyone in Eurozone is in deep crises
And we are just sitting here building statues"

And the most interesting fact is that Germany will conquer Europe again with no bullets fired.

BarrileteCosmico wrote:

Would be so much better if we all could return to EEC. Free trade between the European countries and free travel for tourism. That's it.

But that's not what is happen is it? What's going to happen is that if the UK leaves the EU then it would have to renegotiate all trade agreements (and Europe would have much higher leverage) or join the EEA like Norway in which it would enjoy some benefits but have no decision making power, which the british people would loathe.

I know, that was just what i personally wanted but know will never happen. Uk will be better off without the EU, much better. We will probably have to re-negotiate with other countries on trade and other benefits but if it works out without having to join another organisation then great, and if it doesn't then oh well.

Atm Britain trades more with the Non-EU countries than with the EU countries. Our links with the commonwealth nations are extremely healthy and in long term trade between the likes of Canada/Australia/India would be more beneficial than it has been with the EU where it is one way traffic.

Of course it's all in theory and i am not even sure if Tories wants to go out of the EU but if UKIP comes into power then it will probably be end of EU for England

zizzle wrote:

Yuri Yukuv wrote:

zizzle wrote:


Well the US has been doing that for the last decade and we all know how that turned out

The average american is doing much much better than the average european since crisis

that doesnt mean the US is doing great. Remember the days of the Surplus? me neither. Btw What's your opinion on creating deficit (which is basically printing money) to stimulate the economy ?

The US is actually doing pretty good right now, growth is accelerating and we are seeing renewed consumer strength. All numbers came in better than expectation for the last month, the stock market is up 10% just for the first three months of 2013.

Surplus or deficit doesnt matter as long as it results in growth, btw surplus was in late 1990s its not that long ago. I dont understand who you are comparing the US situation to; because if it is compared to Japanese, European or Chinese situation it is evidently much more efficient and balanced.

Pay out, bitches. We gots to builds our Empire.

"John Cassidy says the David and Goliath story of Cyprus versus Germany has just one problem—the Germans are basically right.

I think that's true. The basic German view that the German taxpayer should bear less than 100% of the burden of rescuing the Cypriot banking system, and the creditors of the Cypriot banking system should bear more than 0% of the burden is very sensible. The decision of the Cyprus' president to organize a version of that principle that involved haircutting small depositors in order to protect the interests of Russian tax dodgers was perverse, but that's on him. If the Germans made a mistake here it was by being too deferential to President Anastasiades horribly flawed judgment. The Cypriots have been flailing aorund trying to find a solution that allows them to keep operating as an offshore banking sector, but the German government is correct to but zero (or even negative) weight on this as a policy priority.

The reason it's sometimes difficult to see that the Germans are right about Cyprus is that their political consensus is so wrong about Europe. Having the European Central Bank run an excessively German-focused monetary policy (indeed one that's arguably even too tight for Germany) is greatly exacerbating all these fiscal problems. Then Germany, as the party with the fiscal capacity, needs to pay some of the price at which point German voters lash out at peripheral citizens whose economies have been put in a situation where failure is inevitable. Indeed, contemplating the question of why Germany let a tiny offshore banking hub that had already lost de facto control over 40 percent of its small landmass into the eurozone in the first place underscores the generally low quality of thinking about how this whole operation is supposed to work.

But on Cyprus, they've got it right." - Matt Yglesias

http://www.slate.com/blogs/moneybox/2013/03/23/germany_s_right_about_cyprus_german_s_wrong_about_europe.html

Yuri Yukuv wrote:

zizzle wrote:

Yuri Yukuv wrote:

The average american is doing much much better than the average european since crisis

that doesnt mean the US is doing great. Remember the days of the Surplus? me neither. Btw What's your opinion on creating deficit (which is basically printing money) to stimulate the economy ?

The US is actually doing pretty good right now, growth is accelerating and we are seeing renewed consumer strength. All numbers came in better than expectation for the last month, the stock market is up 10% just for the first three months of 2013.

Surplus or deficit doesnt matter as long as it results in growth, btw surplus was in late 1990s its not that long ago. I dont understand who you are comparing the US situation to; because if it is compared to Japanese, European or Chinese situation it is evidently much more efficient and balanced.

An anual GDP increase of 1.64 is hardly a spectacle. The stock market is up thanks to the feds flooding the market with liquidity, and with a federal fund rate of 0.25% there isnt much left they can do in case the economy takes a wrong turn. Of course the US is doing better than all the parties you mentioned, but that's the reason for my concern. If the situation in europe deteriorates even more it will drag the US economy down with it.

What are you on about? There's tons of stuff the fed can do. They can decrease the interest on reserves, build upon their QE3 program, state a 3% inflation target (or better yet NGDP). Just because we're at the zero lower bound (ZLB) doesn't mean the fed is out of ammunition. The worst case scenario is that the fed ends up owning the world.

decreasing the interest on reserves will do nothing to the liquidity when the banks excess reserves are at an all time high. Controlling inflation means controlling economic growth and that's not something you wanna do while rebounding from a recession. If the feds continue with the QE they will risk creating more inflation, that if, like you said, they didn't end up owning everything.

The reason banks have such high excess reserves is because the fed is paying them a .25% interest for them to keep it there. This is called interest on reserves. If the fed were to make that 0% the banks would earn no interest on their reserves at the fed and would in all likelihood move it out elsewhere.

Inflation (in the short term) is positive because it will decrease the real interest rate which will increase investment.

I'd argue you do want to control growth when rebounding from a recession, or any time really, it would allow you to ease boom and bust cycles which could see future recessions of this magnitude decreased.

BarrileteCosmico wrote:The reason banks have such high excess reserves is because the fed is paying them a .25% interest for them to keep it there. This is called interest on reserves. If the fed were to make that 0% the banks would earn no interest on their reserves at the fed and would in all likelihood move it out elsewhere.

But why would banks should keep their reserves with the fed for 0.25% when they can lend them out for a prime rate that is 300 basis points higher? is it the lack of trustworthy investors ? well that is not a very positive sign.

BarrileteCosmico wrote:Inflation (in the short term) is positive because it will decrease the real interest rate which will increase investment.

I'd argue you do want to control growth when rebounding from a recession, or any time really, it would allow you to ease boom and bust cycles which could see future recessions of this magnitude decreased.

From the investors view inflation will reduce real returns and thus reduce the incentive for investment. At a boom period its wise to control growth and inflation through higher interest rates but i cant see the wisdom in in slowing down growth when the economy is not fully recovered.

BarrileteCosmico wrote:"John Cassidy says the David and Goliath story of Cyprus versus Germany has just one problem—the Germans are basically right.

I think that's true. The basic German view that the German taxpayer should bear less than 100% of the burden of rescuing the Cypriot banking system, and the creditors of the Cypriot banking system should bear more than 0% of the burden is very sensible. The decision of the Cyprus' president to organize a version of that principle that involved haircutting small depositors in order to protect the interests of Russian tax dodgers was perverse, but that's on him. If the Germans made a mistake here it was by being too deferential to President Anastasiades horribly flawed judgment. The Cypriots have been flailing aorund trying to find a solution that allows them to keep operating as an offshore banking sector, but the German government is correct to but zero (or even negative) weight on this as a policy priority.

The reason it's sometimes difficult to see that the Germans are right about Cyprus is that their political consensus is so wrong about Europe. Having the European Central Bank run an excessively German-focused monetary policy (indeed one that's arguably even too tight for Germany) is greatly exacerbating all these fiscal problems. Then Germany, as the party with the fiscal capacity, needs to pay some of the price at which point German voters lash out at peripheral citizens whose economies have been put in a situation where failure is inevitable. Indeed, contemplating the question of why Germany let a tiny offshore banking hub that had already lost de facto control over 40 percent of its small landmass into the eurozone in the first place underscores the generally low quality of thinking about how this whole operation is supposed to work.

But on Cyprus, they've got it right." - Matt Yglesias

http://www.slate.com/blogs/moneybox/2013/03/23/germany_s_right_about_cyprus_german_s_wrong_about_europe.html

How liberals can both agree with Germany and Obama baffles me, it seems to be more of a love for the status quo and top down management than coherent economical ideology

zizzle wrote: An anual GDP increase of 1.64 is hardly a spectacle. The stock market is up thanks to the feds flooding the market with liquidity, and with a federal fund rate of 0.25% there isnt much left they can do in case the economy takes a wrong turn. Of course the US is doing better than all the parties you mentioned, but that's the reason for my concern. If the situation in europe deteriorates even more it will drag the US economy down with it.

An annual GDP growth of 2.2% as compared to the soft landing in China, the contraction in the EU and rapid decline in Japanese exports is more than great news. Beneath the numbers the story looks even greater. Unemployment among the civilian population has decreased dramatically, we are seeing delevraging of the US consumer and increase in income of consumers. All this while there is alot of exciting technology coming from the Untied States such as Shale Gas and 3D Printing, which should both decrease reliance on manufacturing countries such as China & Germany as well as Energy Exporters like VZ and Saudi Arabia.

Yuri Yukuv wrote:
How liberals can both agree with Germany and Obama baffles me, it seems to be more of a love for the status quo and top down management than coherent economical ideology

Especially considering Germany has had a massively incompetent chancellor for over 7 years now... Well, what are you gonna do about it. Not like anyone in the EU can stop our trollery, plus, our government is even half-right most of the time in the crisis. They just acted way too slowly.

"A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors..." - Dutch Finance Minister

BRB moving my rich talented and good looking funds out of Spain, Italy and Portugal and into Germany

VivaStPauli wrote:

Yuri Yukuv wrote:
How liberals can both agree with Germany and Obama baffles me, it seems to be more of a love for the status quo and top down management than coherent economical ideology

Especially considering Germany has had a massively incompetent chancellor for over 7 years now... Well, what are you gonna do about it. Not like anyone in the EU can stop our trollery, plus, our government is even half-right most of the time in the crisis. They just acted way too slowly.

Thats not my point, my point is that economically what the German government has been doing and preaching is pretty right wing while what Obama has been doing has been pretty left wing in an economical sense. Most beef that Right wingers like myself have with Germany is actually not the economic policy but the centralization of power and increasing influence of officials not elected by a population to change laws around. With Obama the beef is mostly about Economic policy but also decrease in transparency of government and increased size of state. I just dont understand how the same talking heads and liberal class across continents can be both FOR Germany and Obama, their policies are polar opposites.

BarrileteCosmico wrote:"A rescue programme agreed for Cyprus on Monday represents a new template for resolving euro zone banking problems and other countries may have to restructure their banking sectors..." - Dutch Finance Minister

BRB moving my rich talented and good looking funds out of Spain, Italy and Portugal and into Germany

This new precedent will prolly move money to switzerland and the city of london more than within the EU, the increasing arbitrary decision making and blatant targeting of foreigners/investors in general is a turn off to alot of people.

Having been to Italy many times I can tell you there's many restrictions and outright bans on the ability of Italian residents to open Swiss accounts, at least legally. Of course many Swiss banks encourage them to take alternative routes, but it might just be easier (and definitely faster) to stay within the euro-zone.

Not sure if Spain and Portugal have something similar.

BarrileteCosmico wrote:Having been to Italy many times I can tell you there's many restrictions and outright bans on the ability of Italian residents to open Swiss accounts, at least legally. Of course many Swiss banks encourage them to take alternative routes, but it might just be easier (and definitely faster) to stay within the euro-zone.

Not sure if Spain and Portugal have something similar.

Yeah Im guessing you are talking about middle class europeans and small to meduim sized corporations, in which you are probably correct.Im rather talking about large capital owned by institutions, super wealthy and large corporations which provide important incremental deposits.