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Surprise! It’s not the Cyprus crisis anymore. Welcome to the EUrozone crisis: This is what a shakedown looks like

The Teutonic "Haircut"

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FYI, that hissing sound you heard following the announcement of Cyprus’s new “bailout” and the newly envisioned EU-wide banking sector restructuring program was the rest of the eurozone’s tiny nations (which tend to have outsized banking sectors relative to their GDP and filled with foreign cash) breathing a collective sigh of reliefinvoluntarily relieving themselves:

After Cyprus, euro zone faces tough bank regime: Eurogroup head

By Luke Baker

BRUSSELS | Mon Mar 25, 2013 10:42am EDT

(Reuters) – A rescue program 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, the head of the region’s finance ministers said.

“What we’ve done last night is what I call pushing back the risks,” Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times hours after the Cyprus deal was struck.

“If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalize yourself?’. If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders,” he said.

After 12 hours of talks with the EU and IMF, Cyprus agreed to shut down its second largest bank, with insured deposits – those below 100,000 euros – moved to the Bank of Cyprus, the country’s largest lender. Uninsured deposits, those accounts with more than 100,000 euros, face losses of 4.2 billion euros.

Uninsured depositors in the Bank of Cyprus will have their accounts frozen while the bank is restructured and recapitalized. Any capital that is needed to strengthen the bank will be drawn from accounts above 100,000 euros.

The agreement is what is known as a “bail-in”, with shareholders and bondholders in banks forced to bear the costs of the restructuring first, followed by uninsured depositors. Under EU rules, deposits up to 100,000 euros are guaranteed.

The approach marks a radical departure for euro zone policy after three years of crisis in which taxpayers across the region have effectively been on the hook for resolving problem banks and indebted governments via multiple rescue programs.

That process, with governments and taxpayers bearing the costs and providing the back stop, had to stop, Dijsselbloem said. Recent financial market calm meant now was the time to make the change, although he conceded there was some concern that it could unsettle markets again.

“If we want to have a healthy, sound financial sector, the only way is to say, ‘Look, there where you take on the risks, you must deal with them, and if you can’t deal with them, then you shouldn’t have taken them on,'” he said.

“The consequences may be that it’s the end of story, and that is an approach that I think, now that we are out of the heat of the crisis, we should take.”

If adopted by the euro zone, Dijsselbloem’s template could also sound a death knell for a plan hatched nine months ago when the euro zone debt crisis was threatening to blow the currency area apart.

Then, euro zone leaders agreed that the bloc’s future rescue fund should be allowed to recapitalize banks directly, thereby breaking the debilitating link between teetering banks and weak governments forced to bail them out. That may now never happen.

Asked what the new approach meant for euro zone countries with highly leveraged banking sectors, such as Luxembourg and Malta, and for other countries with banking problems such as Slovenia, Dijsselbloem said they would have to shrink banks down.

“It means deal with it before you get in trouble. Strengthen your banks, fix your balance sheets and realize that if a bank gets in trouble, the response will no longer automatically be that we’ll come and take away your problem. We’re going to push them back. That’s the first response we need. Push them back. You deal with them.”

ESM

The marked change in attitude, which Dijsselbloem agreed was a shift in strategy for EU policymakers, has consequences for how banks are recapitalized and for how financial markets react.

One of the major steps the euro zone has taken over the past three years has been to set up a rescue mechanism with guarantees and paid in capital totaling up to 700 billion euros – the European Stability Mechanism.

The expectation was that the ESM would be able to directly recapitalize euro zone banks that run into trouble from mid-2014, once the European Central Bank has full oversight of all the region’s banks.

The goal of the ESM and direct recapitalization was to break the so-called “doom loop” between indebted governments and their banking sectors. Now, Dijsselbloem says the aim is for the ESM never to have to be used.

“We should aim at a situation where we will never need to even consider direct recapitalization,” he said.

Apparently the definition of financial stability is if a financial crisis can be resolved without tapping the upcoming $700 billion “European Stability Mechanism” (ESM) fund. It’s an interesting long-term goal but perhaps it’s an idea that should be reconsidered before implementing in the midst of financial crisis where the current structure of the EU (and global) economy are not remotely close that financially equilibrated ideal. Predictable consequences might occur.

There was another question raised by the Eurogroup President’s comment regarding the need for countries with “highly leveraged” (i.e. lot’s of foreign cash) banking sectors like Malta and Luxembourg (a nation with has a banking sector 23 times its GDP) to shrink their banking sector down to a GDP-appropriate size. That leaves a lot of open questions about what’s going to happen to those countries in the immediate term now that the EU has told the world that the money it has stashed in those nations is highly vulnerable to a depositor “haircut” in the event of financial crisis. Part of the appeal of tiny financial havens like Malta and Luxembourg – from a financial stability standpoint – is that they don’t really have any other economy. It’s pretty much all banking. There aren’t any other sectors of the economy or consumer bubbles that can bubble up and threaten to take down the banking system and not enough. And they’re very very secret. It’s very unclear how these nations’s are supposed to maintain they’re super-secret financial haven micro-nation status in the future. Under the new EU banking union, all of these nations (minus the UK) are going to be facing some sort of collective banking regulatory union. In order to maintain viable highly-leveraged banking sectors, these tiny countries are going to have to be able to offer something “special” in order to continue attracting foreign capital given the new “leveraged haircut” risk that highly-leveraged banking micronations will now incur and that new “special” feature probably isn’t going to be secrecy. And they’re going to have to have some sort of extra-low-risk capital controls and general regulatory framework in order to meet the new Cyprus-inspired regulatory muster? It’s very unclear what these nations are going to do going forward. Money havens suck, but there should probably be a plan that doesn’t leave former finance hubs high and dry in the new EU. It’s kind of cruel otherwise (and speaking of cruelty…).

It’s somewhat more clear where the money in these nations are going to go now that they’ve been given the time to scadaddle. For deposits that can be maintained in any currency will probably scatter to financial-havens across the globe. For those that must remain euro-denominated and can safely exists in a heightened regulatory environment, it’s pretty obvious where the money is going to be going. And it’s not just money from the tiny nations that will be moving in that direction. Under the new EU vision, the bifurcation of the eurozone sovereign debt markets just got a little more bifurcated:

Bloomberg News
Spanish Bonds Slide on Cyprus Deal Concern as German Bunds Rise

By David Goodman and Lucy Meakin on March 25, 2013

Spain’s government bonds fell, with 10-year yields rising the most in almost four weeks, as a bailout agreement for Cyprus failed to convince investors that fallout from the nation’s banking crisis would be contained.

Italy’s securities dropped for the first time in four days as Reuters reported Dutch Finance Minister Jeroen Dijsselbloem as saying the Cypriot rescue plan, which included losses for some bondholders and depositors, may become a template for euro- area bank bailouts. Cypriot lawmaker Nicholas Papadopoulos, chairman of the parliamentary finance committee, said the nation must explore the benefits of exiting the euro area. German bonds advanced as investors sought the region’s safest securities.

“It’s a very blunt suggestion that uninsured depositors are likely to contribute to banking bail-ins in future,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “Spanish and Italian bonds are falling and bunds are rising because it suggests that Cyprus is not in fact a unique case.”

Spain’s 10-year yield climbed 10 basis points to 4.96 percent at 5 p.m. London time, the biggest increase on a closing basis since Feb. 26. The 5.4 percent bond maturing in January 2023 declined 0.82, or 8.20 euros per 1,000-euro ($1,286) face amount, to 103.35.

Italian 10-year yields climbed 10 basis points, or 0.1 percentage point, to 4.61 percent.

Disorderly Default

Cyprus avoided a disorderly default by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros of aid. President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc of creditors in night-time negotiations.

The accord spares bank accounts below the insured limit of 100,000 euros, while imposing losses that two European Union officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc (BOCY), the island’s largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl, the second largest.

“We wish to stay in the euro zone but leaving the euro zone now is a valid point that has to be explored because we are going to enter into a very deep recession, high unemployment with no prospect of growth and we need to examine if there are other ways to solve these hurdles,” Papadopoulos said in a Bloomberg Television interview with Ryan Chilcote in Nicosia.

‘Similar Fate’

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, wrote in a Twitter post that “Cyprus haircuts prove just 1 thing: without growth, highly indebted EU countries will eventually suffer a similar fate.”

German, Dutch and Austrian bonds rallied as investors sought the debt of so-called core nations. Ten-year bund yield dropped five basis points to 1.33 percent, the lowest level since Jan. 2.

Remember the last couple of years of one eurozone crisis after another, one blundered crisis-response after another, and one blundered call for austerity as the solution after another? All of that was for the purpose of showing the world that the sovereign debt of all those eurozone/EU ailing-nations, including the big ones like Spain and Italy (and maybe eventually France, etc) was just as safe as the safest eurzone debt. That was the point of all that. But lo and behold it turned out to be a deathly sharp point and a rather pointless one too thanks to today’s bail-in bailout bonanza in Cyprus. With the new “every investor for himself or herself” philosophy, the European economic community appears to starting to look a lot more like a jungle. A jungle with a lot of new laws written by its kings:

Business Insider
DIJSSELBOOM: Eurogroup President Spooks Markets By Saying Cyprus Deal Is A New Template
Matthew Boesler | Mar. 25, 2013, 11:02 AM

Cyprus finally got a deal done with the EU to bail out its troubled banking system last night.

Instead of levying a nationwide “tax” on bank deposits, the plan follows a more typical restructuring approach, seeing shareholders, bondholders, and uninsured depositors in the country’s two biggest banks take heavy losses in restructurings.

This way, Cyprus will avoid increasing its own public debt stock as much as it would have done if it were to take loans from the troika to finance the full amount of the bailout.

Officials at the IMF and German politicians like this approach because it is seen as a more sustainable approach to tackling the sovereign debt issues that plague many peripheral countries in the euro area.

Today, in an interview with Reuters and the Financial Times, Dutch Finance Minister and President of the Eurogroup of euro zone finance ministers Jeroen Dijsselbloem said that the Cyprus deal will serve as a template for future bank restructurings in the euro zone.

Reuters reporter Luke Bakery has the scoop:

“What we’ve done last night is what I call pushing back the risks,” Dutch Finance Minister Jeroen Dijsselbloem, who heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times hours after the Cyprus deal was struck.

“If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?’. If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders,” he said.

European bank stocks are extending their losses today on the news.

However, that appears to be somewhat by design.

FT correspondent Peter Spiegel published more comments from the interview with Dijsselbloem that seem to indicate this:

But he said that investor skittishness could ultimately make the financial sector healthier since it would raise the cost of financing for unsound banks.

“If I finance a bank and I know if the bank will get in trouble, I will be hit and I will lose money, I will put a price on that,” Mr Dijsselbloem said. “I think it is a sound economic principle. And having cheap money because the risk will be covered by the government, and I will always get my money back, is not leading to the right decisions in the financial sector.”

In short, though euro area leaders have stressed that the Cyprus deal was a special case, it’s becoming increasingly clear in the wake of negotiations that this is the new normal for euro zone bank restructurings.

In terms of market expectations and “new normal” economic paradigms, it’s difficult to say what particular lessons should be taken from the last few years of the EU/eurozone financial “experience” (for lack of a better term). There are just too many new “new normals” to predict at this point. Austerity will certainly be there in the future but other than that it’s hard to say what expect. Less national sovereignty too. If there’s a vision for the future of the EU, it’s not being shared. Why is that? There’s something kind of horrific about what’s going on in the EU right now. The world community should always be worried about what’s happening to each other and it’s very worrisome indeed. And it’s not even clear if the EU’s current identity/morality crisis going to bubble over further into the global economy too. Is this all a form of preemptive paced-bubble-bursting in order to prepare the EU for a climactic global bubble burst attempt? If so that’s a rather horrific thing to do given the global climatic challenges that sort of require our utmost attention at the moment and for the foreseeable future. At this point who knows. The warranted form of “confidence” to have in the EU/eurozone leadership at this point is confidence that the rules will keep changing to find some reason to impose more austerity on the momentarily vulnerable. Sounds awesome.

There is, however, one lesson we can probably take form all this: The ends especially justify the means when the means is some sort of regulatory enforcement of a vision of what the ends must look like. If someone is offering you such a means to a desired ends, they might have stumbled upon some sort of hitherto undiscovered method of socioeconomic reform that just happens to work in your particular socioeconomic circumstance. Or, who knows, maybe they’re just really confused. It’s possible. It also might be a shakedown.

A 4-1-2013 update
The 40% loss big depositors face in Cyprus’s banks has now been raised to 50% in the latest bold attempt to shore up investor and depositor “confidence” in the region.

April Fools!

It’s now 60%:

Big depositors in Cyprus to lose far more than feared

By Michele Kambas

NICOSIA | Fri Mar 29, 2013 4:16pm EDT

(Reuters) – Big depositors in Cyprus’s largest bank stand to lose far more than initially feared under a European Union rescue package to save the island from bankruptcy, a source with direct knowledge of the terms said on Friday.

Under conditions expected to be announced on Saturday, depositors in Bank of Cyprus will get shares in the bank worth 37.5 percent of their deposits over 100,000 euros, the source told Reuters, while the rest of their deposits may never be paid back.

FYI, those new terms were indeed released on Saturday.

Continuing…


The toughening of the terms will send a clear signal that the bailout means the end of Cyprus as a hub for offshore finance and could accelerate economic decline on the island and bring steeper job losses.

Officials had previously spoken of a loss to big depositors of 30 to 40 percent.

Cypriot President Nicos Anastasiades on Friday defended the 10-billion euro ($13 billion) bailout deal agreed with the EU five days ago, saying it had contained the risk of national bankruptcy.

“We have no intention of leaving the euro,” the conservative leader told a conference of civil servants in the capital, Nicosia.

“In no way will we experiment with the future of our country,” he said.

Cypriots, however, are angry at the price attached to the rescue – the winding down of the island’s second-largest bank, Cyprus Popular Bank, also known as Laiki, and an unprecedented raid on deposits over 100,000 euros.

Under the terms of the deal, the assets of Laiki bank will be transferred to Bank of Cyprus.

At Bank of Cyprus, about 22.5 percent of deposits over 100,000 euros will attract no interest, the source said. The remaining 40 percent will continue to attract interest, but will not be repaid unless the bank does well.

Those with deposits under 100,000 euros will continue to be protected under the state’s deposit guarantee.

Cyprus’s difficulties have sent jitters around the fragile single European currency zone, and led to the imposition of capital controls in Cyprus to prevent a run on banks by worried Cypriots and wealthy foreign depositors.

“CYPRUS EURO”

Banks reopened on Thursday after an almost two-week shutdown as Cyprus negotiated the rescue package. In the end, the reopening was largely quiet, with Cypriots queuing calmly for the 300 euros they were permitted to withdraw daily.

The imposition of capital controls has led economists to warn that a second-class “Cyprus euro” could emerge, with funds trapped on the island less valuable than euros that can be freely spent abroad.

European leaders have insisted the raid on big bank deposits in Cyprus is a one-off in their handling of a debt crisis that refuses to be contained.

MODEL

But policymakers are divided, and the waters were muddied a day after the deal was inked when the Dutch chair of the euro zone’s finance ministers, Jeroen Dijsselbloem, said it could serve as a model for future crises.

Faced with a market backlash, Dijsselbloem rowed back. But on Friday, European Central Bank Governing Council member Klaas Knot, a fellow Dutchman, said there was “little wrong” with his assessment.

“The content of his remarks comes down to an approach which has been on the table for a longer time in Europe,” Knot was quoted as saying by Dutch daily Het Financieele Dagblad. “This approach will be part of the European liquidation policy.”

The Cyprus rescue differs from those in other euro zone countries because bank depositors have had to take losses, although an initial plan to hit small deposits as well as big ones was abandoned and accounts under 100,000 euros were spared.

A 4-3-2013 update
And here we go, the details of the troika’s ‘bailout’ for Cyprus are starting to emerge. But don’t worry too much because While The head of the IMF said Cyprus “needed to make substantial spending cuts ‘to put debt on a firmly downward path,’ including in areas like social welfare programs” she also said “the plan sought to be even-handed”. So there’s nothing to worry about…although, in this context, the term “even-handed” should be interpreted as a double-fisted beatdown. So maybe worrying is appropriate:

The New York Times
I.M.F. and Europe Set Tough Terms for Cyprus Bailout
By JAMES KANTER
Published: April 3, 2013

BRUSSELS — The International Monetary Fund said Wednesday that it would contribute €1 billion, or about 10 percent, of a bailout package for Cyprus, but stipulated that the country would need to take tough measures to overhaul its beleaguered economy.

The other €9 billion, or $11.6 billion, of the bailout money is to come from the other 16 euro zone countries whose approval of the terms of the bailout deal are still required.

This is a challenging program that will require great efforts from the Cypriot population,” Christine Lagarde, the managing director of the I.M.F., said in a statement issued by the fund, which is based in Washington.

The I.M.F.’s commitment follows completion of a memorandum of understanding the organization has drafted with Cyprus and the other two international organizations involved in the bailout, the European Central Bank and the European Commission.

Though it has not yet been made public, officials say the document catalogs budget cuts, the privatization of state-owned assets and other conditions Cyprus must meet to receive its periodic allotments of bailout money, amounting to €10 billion.

The agreement is another strong dose of medicine for Cypriots, who last month agreed to restructure an outsize banking sector by forcing huge losses on bondholders and big depositors in the country’s two biggest lenders.

Officials from the Cypriot government, which still needs its Parliament’s approval of the terms of the memorandum, sought to put a positive spin on the deal.

“This is an important development which brings a long period of uncertainty to an end,” Christos Stylianides, a spokesman for the Cypriot government, said in a statement made available Wednesday.

The bailout agreement “should have taken place a lot sooner, under more favorable political and financial circumstances,” said Mr. Stylianides, who was apparently referring to infighting in Cyprus about responsibility for the debacle.

Even before the bailout deal, the Cypriot economy was expected to shrink 3.5 percent this year with unemployment hitting nearly 14 percent. Now, under the strict bailout measures, some experts predict the economy could contract 5 percent or more this year, sending unemployment even higher.

The memorandum will not be made public before euro zone governments review it, Olivier Bailly, a spokesman for the European Commission, said at a news conference on Wednesday. Euro finance ministers will hold an informal meeting next week in Dublin, where they might give their backing, Mr. Bailly said.

The Cypriot authorities on Tuesday described elements of the agreement that they saw as favorable.

Mr. Stylianides, the Cypriot spokesman, said the deal safeguarded important parts of the economy by keeping potentially valuable deposits of natural gas in offshore waters under Cypriot jurisdiction, and by winning two more years, until 2018, to hit deficit targets and carry out privatizations.

Mr. Stylianides also said the government saved the jobs of contract teachers and of 500 civil servants, and had overcome demands by the international lenders to tax dividends.

Over the course of the negotiations to reach a deal for Cyprus, the spotlight fell on whether the I.M.F. was being too forceful in pressing for the country to quickly reduce its debt and require losses on bank shareholders and big depositors. The I.M.F.’s approach strained relations with the European Commission, which had harbored concerns about the confidence-sapping effects that such aggressive measures might have on other economies within the euro area.

In an apparent show of unity on Wednesday, Ms. Lagarde jointly issued a second joint statement with Olli Rehn, the E.U. commissioner for economic and monetary affairs, pledging to “stand by Cyprus and the Cypriot people in helping to restore financial stability, fiscal sustainability and growth to the country and its people.”

The I.M.F. proportion of the package for Cyprus is smaller than in some previous arrangements for countries like Greece. But Mr. Bailly, the commission spokesman, said it did not signal a change in the I.M.F.’s policy in the euro area.

The sums given by the fund depend on the “specific situation” in each country, he said, adding that the €1 billion, three-year loan for Cyprus was unanimously agreed upon by the I.M.F., the European Commission and the European Central Bank, which collectively make up what is known as the troika.

Ms. Lagarde said Cyprus needed to make substantial spending cuts “to put debt on a firmly downward path,” including in areas like social welfare programs. But she said the plan sought to be even-handed.

“The fiscal and financial policies of the program seek to distribute the burden of the adjustment fairly among the various segments of the population and to protect the most vulnerable groups,” she said.

Discussion

20 comments for “Surprise! It’s not the Cyprus crisis anymore. Welcome to the EUrozone crisis: This is what a shakedown looks like”

  1. @Pterrafratyl–

    Very good work! In this context, your comments regarding the fact that the size of the banking sector in Cyprus was well known BEFORE it was admitted is front and center.

    In the same vein, the indebtedness of the Greek government was known BEFORE it was admitted.

    This places a sinister cast on the “Final Solution” to the Cyprus banking crisis!

    The Euro remains a weak currency, enhancing Germany’s export-based economy, while the thoroughly discredited “austerity” doctrine does to weak Eurozone economies what war does to societies.

    However, austerity is doing that damage “by other means,” as Von Clausewitz dictated.

    Keep up the good work!

    Dave Emory

    Posted by Dave Emory | March 25, 2013, 7:17 pm
  2. @Dave

    There was nothing wrong with the Cypriot banking system being bigger than the rest of the economy, much like Switzerland, which was one of their models.

    It was only after the forced haircut on Greek debt started the Cypriot contagion, that the problem really started.

    At which point of course, Cyprus could not devalue because of the one-size-fits-Germany Euro.

    Merkel has quite openly said that the banking industry of Cyprus could not be tolerated (so she killed it). She’s not even trying to hide that fact.

    What is alarming, is the BND propaganda that encouraged the German population to back this aggression – claiming Cypriots are all corrupt. Its the same racial propaganda they used when subjugating Greece. And they do the same with the Italians (Italy is next, a Merkel adviser is suggesting a 25% deposit raid accross the board).

    The thing is, Germany is forcing these policies not just to kill capitalism in the EU, but to get paid back herself!

    Forget their propaganda about British and American finance houses etc, and how they are so frugal – Germany is in another league.

    According to the Bank for International Settlements, Germany lent almost $1.5 trillion to Greece, Spain, Portugal, Ireland, and Italy. At the start of the crisis German banks had 30 percent of all loans made to these countries’ private and public sectors. Even today this one category of loans is equivalent to 15 percent of the size of the German economy.

    Add to that heavy German involvement in the credit binge in American real estate (half of America’s subprime assets were sold on to Europe), and in property speculation across Europe, and it is clear that wherever parties were taking place, German banks were supplying the drinks!

    As a result, Germany’s banks are today the most highly leveraged of any of the major advanced economies, a massive two and a half times more leveraged than their US banking peers, according to the International Monetary Fund.

    So, Germany is forcing depression, bankruptcy, socialisation of debts etc, on the entire of Europe, to ensure she gets paid! And all by stealth, whilst she propagandises this frugal ‘balanced chequebook’ image.

    Its all a lie.

    par·a·site
    Noun

    1.An organism that lives in or on another organism (its host) and benefits by deriving nutrients at the host’s expense.
    2.derogatory. A person who habitually relies on or exploits others and gives nothing in return.

    Germany is a pure parasite, feeding on Europe whilst she gains her strength again.

    Remember, during the last two wars, her game of invading Europe was to raid the banks! Hell, they were even taking people’s gold teeth!

    This is the same game – but using the markets, with added bonus of killing capitalism by blaming it for what its doing.

    Truth is stranger than fiction.

    Posted by GW | March 25, 2013, 8:22 pm
  3. @GW and All,

    I for one have no problem with the death of capitalism (which really should be capitalisms since there is more than one variant of this system from the farthest Right to just shy of Centrist).

    Posted by Jay | March 25, 2013, 9:51 pm
  4. The guys at Zerohedge see the writing on the wall:

    http://www.zerohedge.com/news/2013-03-26/mindset

    The Mindset
    Submitted by Tyler Durden on 03/26/2013 08:58 -0400

    Submitted by Mark J. Grant, author of Out of the Box,

    The Mindset

    In all of the tortuous moments that have taken place with the European Union the one thing that has become apparent is a radical change of mindset. In the beginning there was a kind of democratic viewpoint. All nations had a voice and while some were louder than others; all were heard. This is no longer the case.

    There is but one mindset now and it is decidedly German. It is not that this is good or bad or even someplace in between. That is not the real issue. The crux of the matter is that not all of the people in the EU are Germans and so they are not used to being treated in the German fashion, they do not live their lives like Germans and, quite importantly, they do not wish to be Germans.

    There is the problem.

    The Germans will do what is necessary to accomplish their goals. There is nothing inherently bad or evil about this but it is taking its toll on many nations in Europe. In the case of Greece they went back and retroactively changed the covenants of the bond contract. They did not actually admit this of course and they called it other names but that is what they forced on Greece. In doing so they got the bond holders to shoulder a good deal of the expense of the bailout of Greece. You can say, “Right,” you can say, “Wrong,” but that is what they did. They accomplished their goal.

    Always remember that the Germans are under severe financial pressure. They are still paying the bill for the East Germans. They support Target2 and their economy is just $3.6 trillion which is a fraction of the entire Eurozone. They are trying to support a house with less than desirable supports.

    Then we come to Cyprus and they make it complicated and put one bank with another bank and take money from depositors and call it a “Tax” and say that people and institutions are liable for where they keep their money when it is more than 100M Euros. All true of course but they do not allow for any “Rule of Law” or “Due Process” by the judicial system but just mandate that the money will be used to help pay Europe for a loan to the sovereign government. Then they also tagged senior bond holders reversing their position of the last years so now, so that it can now be said with accuracy; everyone is at risk. Consequently they have to pay less and they have accomplished several goals which are to punish a “Casino Economy,” to put Cyprus in the same position as Greece, which is not only bankrupt but a ward of the European Union, and finally to insist, by the use of money, that Cyprus succumbs to the German demands. Note that CDS in Europe (Markit iTraxx Financial Index) has jumped 22% in just one week.

    It is the occupation of Poland in a very real sense just accomplished without tanks or bloodshed as money is used instead of armaments to dominate and control a nation. Politically you may “Hiss” or you may “Applaud” but there are consequences here for investors that must be understood.

    First and foremost is that they will not stop. Nothing will be allowed to get in their way. It can be senior bond holders one day, bank depositors the next, the dismantling of some Parliament on the day after that, a wealth tax on corporations on Thursday, the disallowance of dividends on Friday; with every announcement to come on Saturday evening. The next week can be a cap on bank bonuses, a demand that the cap on bank bonus savings be returned to the State, a financial transaction tax that gets expanded and taxes all bond coupons and the list goes on. What might be, could be, and nothing, absolutely nothing, will be allowed between Germany and her desire to control all of Europe.

    I do not speak of motivation here. I am not bashing Germany in the furtherance of their desires. That is a useless and unnecessary exercise. However, what is profoundly necessary, if you invest in Europe, is to understand the risks that you are taking. If you place money in securities on the Continent then what is yours is theirs when they want it. I suggest you clearly understand that proposition and allow for that occurrence.

    You no longer have any excuse after Greece and Cyprus. Everything may be called “one-off” but nothing is “one-off” as Germany expands its power wherever they can and by any means necessary. If you believe the propaganda, if you believe what you are told every day by the Press then I can virtually assure you that you will suffer dire consequences at some point and you will now have no one to blame but yourself.

    There is also one “unintended consequence” of Cyprus and Greece. No one is going to invest in the local banks. Keeping money in the German banks, the Swiss banks or maybe even the French banks may go on but the local banks in each country are finished. In a clever move, the problems with Greece and Cyprus will drive the money from the local banking institutions in the troubled countries. Watch for capital flights in Spain, Portugal and Italy as their banks will be found unsafe and with good reason.

    It is unknown, as of yet, if Germany can win this game. What can be said though is that, nation or investor, you will put yourself at peril by getting in their way. The current risks, in my opinion, are dramatically more than imagined by many or generally thought to be the case. There is no more investing in Europe just gambling and speculating and suffering the consequence of either. Anything can be changed, anything can be modified, and when the forfeiture of people’s savings is trumpeted as a “Tax” then even the English language has lost some of its meaning.

    “Better to be safe than sorry,” has never had such important consequences as it does now in the European arena of the Great Game.

    Posted by Swamp | March 26, 2013, 9:05 am
  5. One of the things I heard was that the ECB stress tested the Cyprus banks and gave them a clean bill of health just 18 months ago. The ECB also did a survey of per capita wealth in the Eurozone that they’re trying to keep buried. Turns out Italians have twice the per capita wealth as Germans, Italians own their own homes, Germans rent. You don’t get to be a manufacturing export powerhouse without underpaid labour and all the wealth in the top 1%. So Germany bailing out S. Europe isn’t going to sell for Merkel.

    Posted by chris | March 26, 2013, 12:29 pm
  6. @GW:
    I’d agree that there isn’t anything inherently wrong with nations having banking systems far larger than their GDP. As is the case with quite a lot of things to do with economic systems, the rightness or wrongness of a particular policy or socioeconomic reality depends pretty heavily on the surrounding socioeconomic context. Moral relativism is more often the rule than the exception when it comes to economic policies because those policies are often about systemic rules and not the real-world systemic outcomes. Guestimates about arcane rules on things like “what is the allowable financial ‘risk’ that financial entities can take on in different socioeconomic situations?” to things like “what are the legally allowable financial-model assumptions about the future performance of things like interest rate returns, GDP growth, or general socioeconomic stability(i.e. anything involving bonds)?”. There are simply a large number of policies that that could be fine in one context and complete garbage in another.

    The micronation financial capitals like Luxembourg and Malta are rather questionable as entities given our current context since their business models appear to focused on enabling international tax-sheltering, but there’s no inherent reason that one couldn’t live in a multinational world where there are these tiny banker nations that have an intense finance-centric economy. It depends on the geo-socioeconomic context that these micro-“finance nations” operate in. Is it a financially-driven world that makes plenty of credit available for “microfinancing” the poor and really making everyone’s life better? And do those programs even work? And if the general financial system doesn’t work out as it was supposedly suppose to, is this phenomena taking place in a world run by a bunch of parasitic assholes (fascist assholes or other kinds) that believe that if you can’t succeed financially it’s because you suck? Or it a world that’s generally dictated by collective goodwill and imperfect folks trying their best? Overall systemic dynamics and and the general moral intent and impact of the global economic system that micro-“finance nations” are operating in – warts and all – are all part of the any sort of judgement call on determining whether or not a country has a banking system that’s “too big”.

    Finance havens as we have them today have always struck me as difficult to justify. But if there was a finance haven that was dedicated to financial stability AND transparency (i.e. it was run by people that thought “ewww…gross” at the prospect of accepting untaxed foreign cash) that might end up being a net boon to the larger international community. Who knows because it all depends on the larger context. One of the interesting to-be-decided outcomes of this Cyprus bailout and the upcoming EU banking union is that the world might end up getting a closer peak at the nature of the money stocked away in paces like Luxembourg. As Joachim Poss, the deputy leader of the SPD in Germany, puts it, “Of course Luxembourg belongs to the group of problem countries”:

    Luxembourg minister says Germany seeks euro zone “hegemony”

    By Andreas Rinke

    BERLIN | Tue Mar 26, 2013 5:55pm GMT

    (Reuters) – Luxembourg’s foreign minister accused Germany on Tuesday of “striving for hegemony” in the euro zone by telling Cyprus what business model it should pursue.

    Like Cyprus, Luxembourg has a large financial sector, whose comparatively light-touch tax and regulatory regime has long irked its much bigger neighbours Germany and France.

    Germany, the European Union’s biggest and most powerful economy, had insisted that wealthy depositors in Cyprus’s banks contribute to the island’s bailout and said the crisis has killed a “business model” based on low taxes and attracting large foreign deposits.

    “Germany does not have the right to decide on the business model for other countries in the EU,” Foreign Minister Jean Asselborn told Reuters. “It must not be the case that under the cover of financially technical issues other countries are choked.”

    “It cannot be that Germany, France and Britain say ‘we need financial centres in these three big countries and others must stop’.”

    That was against the internal market and European solidarity, and “striving for hegemony which is wrong and un-European,” he said.

    But criticism from core northern states such as Luxembourg – a founder member of the EU and euro zone – is less common.

    “PROBLEM COUNTRIES”

    Asselborn said it was crucial that smaller EU states in particular were allowed to develop certain economic niches.

    Germany should also keep in mind it was a prime beneficiary of the euro zone crisis because its borrowing costs have plunged as nervous investors seek safe havens, Asselborn added.

    The tough stance on the banking and taxation policies of countries such as Cyprus crosses Germany’s political divide.

    On Tuesday, Joachim Poss, deputy leader of the main opposition Social Democrats in parliament, said the EU must insist on reforms in other financial centres guilty of “tax dumping” in the euro zone such as Luxembourg, Malta and Ireland.

    Responding to Asselborn’s comments, Poss said: “In the long term no business model can be tolerated in a market economy that circumvents fair competition. Of course Luxembourg belongs to the group of problem countries.”

    German politicians have stepped up their attacks on tax evasion ahead of federal elections in September.

    The assertion by Luxembourg’s foreign minister that “smaller EU states in particular were allowed to develop certain economic niches” is one of those critical areas for the future the EU. The way we do things now, economies are compartentalized by various bounders, with the nation-state boundary being the most important (if you ignore the boundary of class). The eurozone has sort of broken that nation-state boundary down but it’s still there, and the question of what economic niches each nation can take on is going to be more and more critical as those boundaries continue to break down. Because one of the primary things that happen in a nation-state (the overall sharing of national wealth between richer and poorer regions) isn’t going to happen in the the EU. There will be sharing of currency and “sharing” of sovereignty, but not much sharing of the indirect costs and benefits that come with each country’s particular economic performance. There can only be so many high-tech manufacturing centers. It wouldn’t make sense to spread it out amongst all the various countries because businesses that work together to build stuff need to be next to each other. Should the indirect benefits that citizens get from living in a country with lot’s a high-tech manufacturing be the only one’s to share in those benefits? What would have happened to the US by now if the wealthy high-tech states didn’t send net wealth to the poorer regions of the country? That’s the scenario we’re looking at in the EU: shared proportional sovereignty (where the biggest countries get the biggest say) without shared benefits. What kind of paradigm is that for the smaller or poorer countries? Countries like Luxembourg, Malta, Cyprus, and Ireland have no clear future in the envisioned EU that doesn’t include second-class status because reality simply isn’t going to allow each of them to become little Germany’s. Even if they magically could transform themselves overnight into mini-Germanies overnight, there’s just no need for all that excess manufacturing capacity. How we deal with the reality that there may not really be a viable economic role for large numbers of the global populace is one of the socioeconomic meta-problems of the 21st. The question of what niche the smaller EU nations can inhabit in the future is an example of that conundrum but it’s a global problem and it’s growing.

    This whole issue and the way it’s being resolved is now typical for the never-ending EUrozone crisis: something non-ideal (high debt or tax-sheltering) gets addressed, thus giving the solution a veneer of respectability, but it’s done in the most punitive manner possible and on a national-scale. It’s weird, collective national punishment has always been a reality as a consequence of the fact that conflicts between nation-states tend to impact the lives of nearly everyone in a nation, but it’s never been something that’s officially endorsed as some sort of morally acceptable new template. That’s apparently changed.

    Posted by Pterrafractyl | March 27, 2013, 5:34 am
  7. @Jay:
    Something I’d love to see is a real exploration by society of what could make something like hard-core Ayn Rand-style deregulated free-market capitalism actually work. And by “work” I mean create a just world without mass poverty under a wide variety of circumstances. And those circumstances should include socioeconomic scenarios like what we see today: mass global poverty, changing weather patterns, and a collapsing ecosystem. What would be required for Ayn Rand style capitalism to work in our contemporary scenario? It’s a fun thought experiment. Since the rules of Ayn Rand-style capitalism are somewhat immutable, the real degrees of freedom in this model come down to the quality of the individual participants themselves. Would a “greed is good” profit-oriented culture work out well, where the individuals might have some charitable inclinations for their friends and families but otherwise are largely oblivious to the lives their other +7 billion neighbors and the other whatever-illions of other living things on the planet? Given out history, no, that would probably not work out well.

    But how about if the individuals in this Ayn Randian paradise where actually beautiful snowflakes of truth, love, kindness, forgiveness, mercy, and understanding? Imagine everyone is that annoying Ned Flanders except not out of a religious motive but just being an asshole is viscerally just “ewww”. Could that work? There would certainly be a helluva lot less of the problems associated with greed and corruption. Poverty would probably disappear. It’s hard to say what kind of financial system dynamics might emerge because everyone would have a running inner debate on whether or not they’re saving too much and would end up erring on the side on donating too much of their savings to charitable causes. And if you were some sort of retrograde profit-monger people would mostly feel sorry for you because, wow, that’s kind of messed up. Sort of OCD-ish but in an extra-negative way. If you viewed you’re personal monetary wealth stash outside of the context of the larger real world socioeconomic system that the monetary “wealth” was operating in you’d be viewed as kind of ‘simple’. Perhaps not bad-natured, but just not able to really see things outside of their direct, immediate meaning. The concept that “money = wealth” would be kind of laughed at in a world successfully run by money.

    And every time an unexpectedly massive disaster struck in this world of “greed is bad, good is good” anti-Ayn Randoids there might be a risk of bank run because everyone runs out to withdraw even more cash to donate to the victims than the really well-intentioned banking risk-advisers ever imagined would be needed to maintain the system. It’s pretty awesome reason for a bank run but I guess from a systemic standpoint in this thought-experiment it could be problematic because this is the Ayn Rand world where there’s no central bank to intervene and the raw financial math and property rights are still going to be completely enforced. Bank runs would suck, even in this world of annoyingly precious snowflakes. So there would be some problems.

    Of course, under this anti-Ayn Randoids scenario, at some point everyone would be like “oops, looks like we all freaked out and took out more money than was needed and crashed the banking system like we do every time a major disaster strikes. Let’s fix that” and everyone would return a proportion of the money they withdrew until the financial system is stabilized again.

    Natural monopolies like traffic-light coordination over a network of privately held roads could be a problem. But in the anti-Ayn Randoid scenario it might be that government-like services would be run by publicly-owned non-profit monopolies. Somethings really are natural monopolies…they just work better systemically with single coordinator. Sure, someone could develop their own separate private roads, but they would only do that if they thought they were somehow providing a better service at a cheaper price than the non-profit road monopoly or were just a road hobbyist using their personal profit stash or something. We’d all have personal profit stashes to use for relaxing because we’d all understand that part of the point of life is enjoying it so there wouldn’t be any begrudging personal profit stashes as long as they didn’t become too outrageous. Especially if the stash was used for hobbies like developing better road that helps everyone or some.

    The garage hobbyist entrepreneurs could really be that engine of the economy that free-marketeers all dream of in the anti-Ayn Randoid scenario because everyone would have plenty of time off to leisure with resources to spare. And where would we have the excess resources given our current global resource crunches and growing population? Well, first off, minimal pollution and minimal waste would be set as a top priority for any manufacturer. Being able to sell something for a profit would still be a systemic mandate given that we’re all using money – and only money – to coordinate transactions, but it would be a modest profit. If a new technology came around that made reducing pollution or waste an option – but it increased the cost of production – well that would be fine. The manufacturer would just increase the price to cover the cost of the new pollution/waste-reducing technology and all the consumers would be like “sweet, I’m psyched to pay more since it means we’re now polluting less and still accurately accounting for it using this ‘money’ widget we have! We have less money but the integrity of our financial system is intact and we’re wealthier in ‘real’ terms overall!” Wouldn’t that be sweet?

    There would, of course, also be the occasional real lazy “moochers” in the system, but they would certainly have much less of an excuse to mooch than they’ve ever had in the past. I mean, really, what kind of a psycho would overmooch when they’re surrounded by so much awesomeness. This wouldn’t mean that everyone would expect everyone else to adhere to some sort of superman-like dedication to non-stop charity, as that would also be pretty cruel and senseless to each other. We’d all recognize that life is meant to be enjoyed and explored but that requires work on all our parts and working together. There would be disagreements and so forth but that’s all part of the fun and no one would take it TOO seriously because it’s not we’d make the kinds of bad decisions that result in people going homeless or starving in the streets or whatever. That would be old-school cruel. It’s just harder be an asshole or mooch off of someone you think is nice so we’d probably just see a lot less moocher overall in niceness-maximizing/profit-minimizing societies…unless you’re some sort of psycho.

    The question of how robust such an anti-Ayn Randoid system would be again encroaching psycho-assholism would also be a really interesting question. Everything’s deregulated so there’s some risk of things like mass food poising or other more devious scenarios as technology progresses. Plus, I’m not sure if personal nuclear warheads are illegal in Ayn Rand’s world but stuff like that could certainly be an issue.

    But even with the immense power assholes might have at their disposal to destroy the anti-Ayn Randoids’ paradise of niceness, the individuals would also have pretty much no excuse for being assholes. I mean really, what would they have to complain about? Everyone being voluntarily nice to each other? Current “truisms” that are part of the underlying moral imperatives in our current “everyone for himself” paradigm that’s used to justify asshole behavior like “it’s tough world, you need to do what you” and “hey, someone is going to be the asshole, so it might as well be you” would no longer really apply. Being an asshole or psycho is just a much much bigger deal in the context of a world where almost no one is intentionally an asshole or psycho. Maybe they’re accidentally assholes, but hey, who would care in the anti-Ayn Randoid world that includes incredible capacities for forgiveness. It just wouldn’t be that be a deal. Except for the genuinely crazy people armed with bioweapons or nukes or some other society-destroying technology. They would still be scary.

    But it’s not like we don’t have to worry about technology and its ever growing capacity to blow shit up under virtually every paradigm we can imagine going forward…except for the paradigms where we’ve already blown ourselves up(just wait for the 3rd or 4th generation of “do-it-yourself black hole sun energy generator” hobby kits). Yeah, it might take a while to get there but at some point individuals and private groups are going to have just insane amounts power at their disposal and the primary tool for preventing that from leading to mass disaster is going to be the quality of the character of those individuals or groups. We’re already in the age of the suitcase nukes, so it’s not like the issue of immense technological power in the hands of crazy people isn’t an existing issue. That’s part of what’s made the post-Newtown debate-debacle over guns, video games and mental health so depressing…technological power in the hands of genuinely crazy psychos is legitimately scary so it’s a debate we can’t really afford to keep messing up for too much longer.

    But this is all why imagining how the Ayn Randoid system might work is such a useful topic to ponder…economic systems are all about empowering people to make real-world decisions using their material wealth. Money is a technology and we’ve been super-empowering small groups of people with this technology for millenia (the oligarch class of any society). And the general civilization philosophical thought we’ve applied towards “how should a decent being that’s been empowered with this ‘money’ power behave?” has generally tended towards “by maximizing personal profit and generally being an asshole”. That really needs to be reconsidered because as technology progress, the analogous power that used to be in the hands of the asshole king or dictator or oligarch or whomever of the past is going to be in the hands of Joe Schmoe-could-be-an-asshole in the future. If we can’t all be good to each other with money, collectively speaking, we’re probably not going to do a great job with other technologies either, collectively speaking. Money is an incredibly useful technology and the idea of a society that is so decentralized that it’s basically run by the collective actions of the individuals via money (to sort of account for things) is a really powerful concept. A world run in some sort of Ayn Randoid-financial system would also be an incredibly robust concept…as long as the participants aren’t a bunch of assholes to each other. Otherwise it’ll probably be a disaster. Still, disaster scenarios aside, capitalism as a general technological paradigm is something to keep thinking about and exploring. It’s decentralized power sharing at it’s best and that could be a pretty neat state of being for the human civilization to reach at the end of its long road towards eventually traveling the stars without being sort of of galactic mercenary asshole species.

    I’m not sure what the best “Means” are to reach that non-asshole anti-Ayn Randoid hyper-capitalist “End”. But implementing an Ayn Randoid system now, given pervasive global assholeness, seems like an unjustifiable mistake. Still, asking the question of what types of individuals would populate that anti-Ayn Randoid world would probably be useful so I don’t want to see the idea of “capitalism” die. Just selfish asshole capitalism.

    At the same time, while it may seem like an impossibly herculean task to create a world without assholes, it’s worth keeping in mind that all it would take is people thinking differently and people are changing their minds all the time. They may not be changing them in the best direction always, but it’s still always happening all over the globe non-stop. So, in that sense, reducing global assholeness could be a remarkably easy feat to do…we just have to do what we’re already doing (changing our minds), but do it better.

    Posted by Pterrafractyl | March 27, 2013, 3:26 pm
  8. @Dave:
    Some more things I left out: Part of the reason Cyprus got into financial difficulties in the first place was due to sequence of other “unique” decisions by the ECB/EU/IMF over the last couple of years that consistently made it harder and harder for the at-risk countries to avoid getting locked out the international debt markets (by raising capital requirements in the middle of a crisis to “improve confidence” and so forth). Countries frozen out the markets would then be forced into the troika’s loving “structural reform” programs. These decisions included a sudden change in bank asset-valuation rules and blocking Cyprus’s ability to use its own sovereign bonds as collateral for loans when such allowances were made for the prior ailing states (Greece, Portugal, Ireland). Apparently the troika REALLY wanted Cyprus to consider some form of “restructuring” (austerity programs). And once a Merkel-endorsed pro-austerity government was finally elected this year the troika forced Cyprus to do the depositor “haircuts” anyways:

    The Economist
    An interview with Athanasios Orphanides
    What happened in Cyprus

    Mar 28th 2013, 13:32 by G.I. | WASHINGTON, D.C.

    Though Cyprus only hit the front pages in the last month, its crisis has been years in the making. Athanasios Orphanides was governor of the Central Bank of Cyprus from 2007 to 2012, giving him a seat on the European Central Bank’s governing council and oversight of Cyprus’ banks. In an interview with The Economist, Mr Orphanides gives his views on how the crisis came about: exposure to Greece and the global financial crisis; decisions by the former communist government (with whom Mr Orphanides had a strained relationship); and flawed decisions by Europe’s governments. Mr Orphanides was raised in Cyprus, received his PhD in economics from the Massachusetts Institute of Technology and was an adviser at the Federal Reserve Board. He is now a lecturer at MIT and a fellow at the Center for Financial Studies at the Goethe University of Frankfurt. The following is an edited transcript of the interview, conducted over the telephone and in writing in the last week.

    Give us the political and historical background for how Cyprus ended up in the euro area.

    Cyprus joined the EU in 2004 and immediately wanted to get into the euro area for the express purpose of completing as quickly as possible the union with the core of Europe. It was done because the public thought that would be beneficial for political reasons, not economic reasons. The strategic location of the island has made it a target over the millennia of various powers, and the country is just too small and weak.

    How did it come to have such a large financial sector with such large Russian deposits?

    Cyprus had developed its financial center over three decades ago by having double taxation treaties with a number of countries, the Soviet Union for example. That means if profits are booked and earned and taxed in Cyprus, they are not taxed again in the other country. Russian deposits are there because Cyprus has a low corporate tax rate, much like Malta and Luxembourg, which annoys some people in Europe.

    In addition, Cyprus has a legal system based on English law and follows English accounting rules. It has a well-educated work force that can provide financial services, and a high concentration of lawyers and accountants. As a result of that a lot of foreign interests, including from Russia, have a number of corporations based in Cyprus and organize their international business globally from Cyprus. This model is similar to what you see in other countries: for example, there are even more Russian interests in the Netherlands and in Luxembourg.

    What was the role of decisions by Cyprus, decisions by Europe, and other factors in producing the crisis we see now?

    A number of factors played a role. The global financial crisis and exposure to Greece made Cyprus vulnerable. But the outcome was determined by decisions taken by the previous government in Cyprus as well as the broader malfunction of the euro area over the past three years.

    Two months after Cyprus joined the euro area [in January, 2008], there were presidential elections and the Cypriot public elected as president a communist, Demetris Christofias. The public was convinced he could solve the political problem we had with Turkey and reunify the island. The issue was not economic.

    If one thing has become clear over the last five years in Cyprus, it is that the euro area, which is not just a market economy but a currency union with strict rules, is not compatible with a communist government. Why is this important? This government took a country with excellent fiscal finances, a surplus in fiscal accounts, and a banking system that was in excellent health. They started overspending, not only for unproductive government expenditures but also they raised implicit liabilities by raising pension promises, and so forth.

    What precipitated Cyprus’ need for a bailout?

    Because of the fiscal policies the government pursued, it damaged the confidence of international investors and lost access to international capital markets in May of 2011. If the government had behaved as other governments did, they would have asked for assistance from the EU at that time, in May of 2011. The size of the banking sector and exposure to Greece were known risks but at that time there was no banking problem in Cyprus and the structural adjustments necessary to restore fiscal stability in the country were rather minor. As with any country with a large financial sector, a solid fiscal position was crucial to avoid creating doubts about the ability of the sovereign to serve as a temporary backstop, in case that became necessary. I was there at the time and as the central bank governor I was warning them all the time that not dealing with this issue in the context of the euro area crisis was extremely dangerous. Others had also warned the government, including ECB President Trichet. They were not willing to do anything because as a communist party they did not want to incur the political cost of adopting consolidation measures.

    Then on July 11, 2011 there was an explosion that destroyed the power station producing more than half the power supply of the island. It was triggered by 100 or so containers of ammunition stored in the sun for two years next to the power station. The containers were part of a shipment going from Iran to Syria that was intercepted in Cypriot waters after a tip from the U.S. The president took the decision to keep the ammunition. [NOTE: An independent prosecutor found that Christofias has ignored repeated warnings and pleas to destroy or safeguard the ammunition, apparently in hopes of one day returning it to Syria or Iran.] Cyprus did not have a severe recession in 2009 from the global crisis. The slowdown was fairly mild. But after the explosion, the economy was thrown into a recession. I recall that on July 18 I sent a confidential letter to the president and leaders of all parties calling for urgent measures to avert a crisis. Instead of heeding the warning, my letter was leaked to the press and my calls for action severely criticized by the government.

    The same month the European Banking Authority put the two largest Cypriot banks, which are being targeted now, through a stress test along other banks in the EU. The results were published on July 15, 2011. Both banks passed the stress tests. If the government had applied at that time for a reasonably small package from the troika, they could have fixed the fiscal problem fairly easily. Again, they didn’t, because they didn’t want to do structural adjustments. Instead, they started lobbying the Russian government to give them a loan that would help them finance the country for a couple more years, and Russia came through, unfortunately, in retrospect, with 2.5 billion euro which is a big chunk of money for a country with a 17 billion euro GDP. I say unfortunately because as a result the government could keep operating and accumulating deficits without taking corrective action.

    Note that when Athanasios Orphanides says “If the government had applied at that time for a reasonably small package from the troika, they could have fixed the fiscal problem fairly easily. Again, they didn’t, because they didn’t want to do structural adjustments,” what he’s saying is that Cyprus could have applied for financial help in 2011 before its finances worsened, but doing so would have come with economy-destroying austerity-strings attached. So, given the history of austerity, the notion that such a “bailout” would have fixed the fiscal problem “fairly easily” is somewhat debatable…especially when you factor in that the cost of that port explosion was estimated to be ~13% of Cyprus’s GDP.

    Continuing…


    What was the impact of the Greek debt writedown?

    The next important date was the October 26-27, 2011 meeting of the EU council in Brussels where European leaders decided to wipe out what ended up being about 80% of the value of Greek debt that the private sector held. Every bank operating in Greece, regardless of where it was headquartered, had a lot of Greek debt. There were subsidiaries of French banks operating in Greece, a Portuguese bank, that were wiped out. Our two largest banks had major operations in Greece and significant exposure, so the Greek part of the operation and the bond holdings suffered a lot of damage. For Cyprus, the writedown of Greek debt was between 4.5 and 5 billion euro, a substantial chunk of capital.

    The second element of the decision taken by heads of states was to instruct the EBA to do a so- called capital exercise that marked to market sovereign debt and effectively raised abruptly capital requirements. The exercise required banks to have a core tier-1 ratio of 9%, and on top of that a buffer to make up for differences in market and book value of government debt. That famous capital exercise created the capital crunch in the euro area which is the cause of the recession we’ve had in the euro area for the last 2 years.

    Also note that when Orphanides says “The second element of the decision taken by heads of states was to instruct the EBA to do a so- called capital exercise that marked to market sovereign debt and effectively raised abruptly capital requirement”, he’s referring to a decision in October 2011 by the European Banking Authority to change the rules for how banks value their assets to a new “mark-to-market” rules where the value of the assets are exactly what the market says it is at any given point. It’s not an inherently bad approach as such a judgment would depend on many other factors, but it’s a somewhat questionable approach to do in the middle of a financial crisis was shoring up market “confidence” is considered a core goal.

    Continuing…


    For Cyprus, the combination of haircut and stress test meant that after taking measures the two largest banks needed about 2 billion euro of additional capital to be recapitalized according to the guidelines of the EBA. That’s the first time someone could say: ‘Your banks require assistance.’ After losing more than 4.5 billion on the haircut on the Greek debt, this suggests how much capital they held before.

    The heads of states decision also said that if banks were not able to raise capital on their own, then the country is responsible for finding the capital and injecting it. The president of Cyprus agreed and did not ask for any provision to protect the country. Since all the holdings of Greek debt were public information (they had been published with the July EBA stress test), everyone could calculate what the haircut meant for the banks and since the Cypriot government was out of the markets the implications could be foreseen. You could say, well if they hadn’t entered a programme before, they should have considered it now. But again they did not want to ask for assistance, because the troika would have forced them to make structural adjustments which the government did not want to do.

    What did you, as central bank governor, do with respect to the prudential oversight of the banks?

    The Basle II framework that governments adopted internationally, and that the EU supervisory framework during this period also incorporated, specifies that holdings of government debt in a states’ own currency are a zero-risk-weight asset, that is they are assigned a weight of zero in calculating capital requirements. This is the reason why [ECB] President [Jean-Claude] Trichet and most central bankers and supervisors were so alarmed at the prospect of the governments introducing credit risk (as was done in Deauville in October 2010) and at the prospect of considering defaults (as was done starting in late July 2011) in euro area sovereigns. It turned the supervisory framework in place upside down.

    To mitigate risks, the supervisor can ask a bank to raise additional capital. In Cyprus this was done and the two large banks raised significant amounts in 2009, 2010 and even as late as early 2011. After the government lost access to markets in May 2011 this became much harder, virtually impossible.

    Still, by spring 2012, with an additional 2 billion the banks could have met the EBA 9% plus capital buffer core-tier 1 set for the capital exercise. That was roughly 11% of GDP and would not have been an issue if the government had not lost market access as in that case the government could have injected this amount in any bank that needed it by issuing public debt.

    Given the government’s lack of market access, was it inevitable that the stress tests, by exposing the banks’ capital shortfall, would put the country’s solvency in doubt?

    The ECB and the governors in general had been arguing before that capital exercise was done that the governments should have agreed to make the EFSF/ESM available for direct recapitalization of banks instead of asking each government to be responsible for the capitalization. That element created the adverse feedback loop between banks and sovereigns. They forced the stress test and recapitalization before they could reach an agreement on how to find resources for the recapitalization. Mario Draghi characterized the PSI [private sector involvement] on Greek debt, in association with these elements, as similar to a European Lehman in an FT interview.

    When my term ended on May 2, 2012, the recapitalization had not been completed. Instead of focusing on a solution, however, the government engaged on an assault on the banking system and started rallying on the slogan that the banks were responsible for all ills in the economy in preparation for the February 2013 election.

    What led to questions of debt sustainability and haircuts?

    Starting in July 2012, the press started reporting that the banking system needed 10 billion euro of capital, citing sources at the central bank. Some reports suggested the numbers were deliberately exaggerated as the issue had become part of the February 2013 presidential election campaign. When the press started reporting such unrealistically high numbers I became extremely concerned and warned in an interview that if the central bank was generating such high numbers it risked putting into question the sustainability of the country’s debt. Under standard IMF sustainability analysis, the country’s debt could be deemed unsustainable and the troika might ask for some form of a haircut. Indeed, the debt sustainability analysis created the debate over whether there should be some form of bail-in associated with the programme in Cyprus.

    How did the troika get involved?

    Following a downgrading in late June 2012, all three major rating agencies rated the sovereign paper Cyprus below investment grade. According to ECB rules, that made the government debt not eligible as collateral for borrowing from the eurosystem, unless the ECB suspended the rules, as it had done for the cases of Greece, Portugal and Ireland. In the case of Cyprus, the ECB decided not to suspend the eligibility rule. This was important because if Cyprus debt had remained eligible as collateral, Cyprus banks could continue to buy treasury bills and continue financing the needs of the country for some time. The ECB was trying to convince the Cyprus government that it had to make structural adjustments and fiscal adjustments and by that point in June, get into a programme.

    By triggering the loss of eligibility of the government debt as collateral, the ECB telegraphed to the government it had to go to the troika. The Cyprus government did formally ask for troika assistance in June of 2012, on the same day the Spanish government asked for assistance for its banking system. Even then, had the government accepted that they needed to make structural adjustments and negotiated a programme, which could have been done over two weeks, the government would have obtained financial assistance. If capital needs of banks had not been exaggerated, there would be no sustainability issue.

    Again, the government did not do that. They did not want to negotiate. According to press reports, the ECB communicated to the Cyprus government around November that if it did not engage in serious negotiations, it would consider cutting off liquidity. When that occurred the government agreed to bring the troika back and negotiate a programme. That programme and MOU was complete in December. Its elements included major reductions in pension benefits, major reductions in wages and salaries for the broader public sector and privatizations of government owned or semi-government owned corporations. It also included the suspension of cost of living adjustments, which were incompatible with being in the euro area.

    All these were agreed to in principle by an MOU. The government took them to parliament and the parliament immediately adopted them. What was not clear was what was negotiated about the banking system.

    The communist candidate was defeated in the February election and a conservative is now president. How did that affect the bailout?

    The new president, Nicos Anastasiades, took over on March 1 and wanted to complete the adjustment program that had been delayed so long as soon as possible in an honest manner. Cyprus expected a programme with similar terms to those faced by the other countries. Instead, he was effectively ambushed by the other governments at the very first meeting of the European council that he attended and the associated eurogroup meeting. On March 15-16, the other governments confronted the new president and new finance minister with blackmail: either you haircut deposits or we shut down the economy; the ECB would cut off liquidity to the banks.

    Why, in your view, was the March 16 plan flawed?

    The Cyprus parliament had passed a number of laws that influenced the current and future spending and pensions. And they were also in the process of finalizing how they would do privatizations of the semi public companies. So all the standard elements you’d expect in other programmes had been done or were being done.

    Why did they attack retail deposits in this manner? This had never before been a requirement of any other programme. And why did the German government insist in the last three days that there should be a bail-in? The only logical explanation I could see is that Angela Merkel’s government faces re-election in September of 2013 and the SPD [the Social Democratic party, the principal opposition to Ms Merkel’s Christian Democratic Union] has made it an issue: it does not want to support a loan by the German government to Cyprus because, they claim, that would be like bailing out the Russian oligarchs. This is how Cyprus got caught up in the German election.

    In the previous three programmes [Greece, Ireland and Portugal] the SPD supported Merkel’s government on making the loans, but they were not as close to the election as this one. The SPD, I believe was trying to differentiate its position. This presented a dilemma for Merkel’s government. If she suggested that a loan be given to Cyprus to bail out money from Russia, this would not go well with the debate in Germany. So it was incredibly convenient to say that all the depositors, including Russian depositors, be asked to be bailed in. To support this reasoning, unsubstantiated statements were being made in German press that deposits in Cypriot banks reflect money laundering and that the banking model of Cyprus could not be allowed to continue. The objective of the March 16 plan to confiscate part of deposits was none other than to damage irreparably the Cypriot banking system.

    The politics, in my mind, is what makes this episode so ugly, that some governments, to serve their own national or narrow political interests, arrived at a decision that inflicts irreparable damage to Cyprus.

    So after years of trying to get a pro-“structural reform” (austerity) government in Cyprus, one is actually elected in March and before the new government can even implement the “structural reforms” it gets “ambushed” by the troika/Berlin with the new “depositor haircut” demands. I guess this is supposed to be confidence-inducing.

    Also note that Anastasios Orphanides, Cyprus’s former central banker getting interviewed above, REALLY likes austerity too.

    Posted by Pterrafractyl | March 28, 2013, 2:48 pm
  9. See the April 1st update in the original post above. It’s a downer.

    Posted by Pterrafractyl | April 1, 2013, 11:50 am
  10. See the April 3rd update in the orig­i­nal post above. It’s actually some good news for a change.

    April Fools!*

    It sucks.

    *Every day is April Fools Day in the EUrozone crisis!

    Posted by Pterrafractyl | April 3, 2013, 1:28 pm
  11. MEDIA JITTERS
    The corporate media continues to worry that the people of Cyprus might overthrow Troika tyranny by forcing their “leaders” to dump the euro after all.

    Hugo Dixon built his little career by championing Wall Street and austerity. He was a former editor of the Financial Times, and now writes for Reuters. Dixon claims that if Cyprus regains its Monetary Sovereignty, then this will, “devastate wealth, fuel inflation, lead to default, and leave Cyprus friendless in a troubled neighborhood.”
    Dixon gives no proof for this garbage, but he doesn’t need to. The purpose of economics is to empower the 1%. If leeches cause anemia, then the cure is more leeches. The cure for austerity is more austerity. For the 99%, the way to prosperity is via ever-increasing poverty. We must kill the patient to save him. All this is “common sense.”
    The Troika just added €10 billion in debt to Cyprus (with compound interest). That is, the Troika added ten billion new leeches. Dixon calls this a “bailout.”
    Dixon continues, claiming that if Cyprus dumped the euro, then the world would end. It’s the standard line. “This death camp is your only protection! In order to survive, you must all die!”

    All nations in the euro-zone periphery will remain in a death spiral for as long as they keep the euro currency. When those nations have nothing left for the bankers to steal, French and German bankers will steal directly from their own people.

    That will make me VERY happy. Right now the average German is nauseatingly arrogant. He thinks his tax dollars “bail out” the “lazy” periphery. He thinks German bankers are “generous” when they crush Europe with debt and austerity. He loves Angela Merkel. And he is the most righteous person on earth, since he “learned” from the WW II “holocaust.”
    >>NY Times: “Quitting the Euro Wouldn’t Be a Good Choice for Cyprus.”

    Posted by bambi | April 8, 2013, 10:57 am
  12. With unemployment expected to reach 19.5% and the economy poised to fall 9% next year, it looks like everything is going as planned in Cyprus

    Cyprus on track with reforms, downside significant-IMF

    Sept 18 | Wed Sep 18, 2013 9:48am EDT

    (Reuters) – Financially-stricken Cyprus is on track with reforms to shore up its economy, the IMF said on Wednesday, but said downside risks lurked from the yet-unclear impact of a banking sector overhaul.

    Cyprus, one of the smallest countries in the euro zone, teetered on the brink of financial meltdown in March after a chaotic bid to hammer out a bailout with international lenders. It was eventually forced to shut down a major bank and seize savings in a second to qualify for 10 billion euros in aid, shattering confidence and forcing the imposition of capital controls to prevent a bank run.

    Cyprus’s president was quoted as saying on Wednesday that controls would end in January.

    In its first review of the bailout programme for the island, the International Monetary Fund said Cyprus had shown a better fiscal performance than anticipated, but it did not change any of its forecasts.

    It expected the island’s economy to contract by “about” 9 percent this year and 4 percent in 2014 before returning to mild growth.

    “Risks remain substantial and tilted to the downside,” the IMF said, adding that risk included the banking crisis having a larger-than-anticipated impact on households and corporates – even though the report states elsewhere that fewer Cypriots than initially thought bore the immediate brunt of a deposit-grab in the two banks.

    Public hostility to the bailout programme was also waning, said the IMF, which is providing $1.3 billion of the bailout money to the Mediterranean nation.

    It said however that authorities needed to stay vigilant because challenges such as rising unemployment and worsening social conditions could test its resolve. The IMF expects unemployment to reach 19.5 percent next year, from an average 17 percent in 2013.

    Structural reforms and privatisations planned for the coming years required political will in the face of strong vested interests, the IMF said.

    Posted by Pterrafractyl | September 18, 2013, 8:21 am
  13. This is some good satire:

    The Ledge
    Germany’s Bundesbank Wants Crisis Countries to Tax Rich First
    January 27, 2014

    It is a good thing HSBC stopped with its self-imposed capital controls, because expect some capital flight from the EU. The Bundesbank has a novel idea that it is borrowing from the IMF, that has already been used in Cyprus. If all else fails, just take the money from the citizenry.

    Go after the corporations and banks that got the countries into the fiscal mess? Nah, that’s not thinking dumb enough. The central bank of Germany is coining a new phrase. A ‘bail in’ by the country using one-time or recurring taxes on its rich citizens. That’s sure to go over quite well.

    A report out from the Bundesbank lays out its idea behind the bail in first, before turning to other states for a bailout.

    “(A capital levy) corresponds to the principle of national responsibility, according to which taxpayers are responsible for their government’s obligations before solidarity of other states is required.”

    The central bank said it would not recommend implementing such a program in Germany, as it would harm growth. You think? So, it would kickstart a period of record growth in France?

    It would be entertaining to see this one try to get passed. The working group at Bundesbank used a 250,000 euro threshold and a 10 percent levy. Not exactly the super rich. Talking the upper-middle class in the some of the major cities.

    LOL, yeah, the Bundesbank just proposed a beefed up version of the Cyprus treatment for the eurozoneexcept for Germany because it would harm growth. Uh huh. Sure

    Wait…that wasn’t satire? And wait…it’s not just bank deposits but also other assets like housing that would be used to calculate the 250k euro personal wealth “threshhold”? Uh oh

    The Wall Street Journal
    Bundesbank Floats Wealth Levy Idea for Future Crises
    Bank Says Governments Would Have to Legislate Quickly to Avoid Tax Evasion

    By Christopher Lawton

    Updated Jan. 27, 2014 10:52 a.m. ET

    FRANKFURT—Germany’s central bank Monday proposed a one-time wealth tax as an option for euro-zone countries facing bankruptcy, reviving a idea that has circled for years in Europe but has so far gained little traction.

    “The question arises whether in extraordinary national emergencies in addition to privatization and conventional consolidation efforts, private wealth can also contribute to avert a government insolvency,” the Deutsche Bundesbank said in its January monthly report.

    The idea of a one-time tax on private wealth isn’t new. Italy has flirted with the idea of a wealth tax over the past three years.

    The International Monetary Fund in October also floated the idea of a one-time “capital levy,” amid a sharp deterioration of public finances in many countries. A 10% tax would bring the debt levels of a sample of 15 euro-zone member countries back to pre-crisis levels of 2007, the IMF said.

    The Bundesbank’s monthly report is the latest salvo in a larger debate over whether taxpayers in Germany and other northern euro-zone countries should bail out governments whose citizens are wealthier than them at least in terms of the value of their assets.

    A European Central Bank study in April showed households in Europe’s fragile southern countries have far higher paper wealth than in Germany, exposing a dichotomy between cash-strapped governments and their citizens.

    A one-time levy on private assets such as property could even be cheaper than other options to cut sovereign debt, the Bundesbank said.

    Consumption- or income-related tax increases and further austerity might not be sufficient and be tough to push through in an exceptional situation of imminent bankruptcy, the central bank argued.

    Implementing such a tax could also strengthen incentives for future sound policy by signaling that such burdens cannot be shifted on to the backs of taxpayers in other countries during a crisis.

    “Under favorable conditions, the net wealth levy could reallocate assets between the private and public sectors within the country concerned, so that the government debt would fall relatively fast by a significant amount and trust in the sustainability of public debt would be restored quickly,” the Bundesbank wrote.

    But it is unclear whether a one-off wealth tax would have the effect its backers predict. The IMF noted that past experience in Germany and Japan after World War II suggested the main problem with wealth taxes was the delay in introducing them which “gave space for extensive avoidance and capital flight—in turn spurring inflation.”

    “The risk of future levies can be even more damaging; they discourage the saving and investment that generate future capital assets,” Michael Keen, deputy director of the IMF’s fiscal-affairs department, wrote in a blog post in November.

    The Bundesbank acknowledged that a one-off levy would be hard to implement and comes with “substantial risks.” To avoid tax evasion, governments would need to act quickly, the Bundesbank said. To limit capital flight and the negative impact on investment, governments would also have to credibly make the case that such a levy was a one-time measure in a national crisis.

    Meanwhile, the latest surveys indicate that there may be less wealth to tax.

    Private household wealth in Italy is more than four times larger than the country’s €2.1 trillion ($2.8 trillion) in sovereign debt. But doubts about that staggering sovereign debt burden have rocked the banking system and exacerbated a recession that has reduced Italians’ wealth by squelching the real-estate market and rationing loans to small firms.

    The Bundesbank and IMF are probably correct that a flat-tax on net wealth would be a politically difficult stunt to pull off especially because it’s going to be really hard to convince the public that this would just a one-off event. After all, if a bunch of government officials and their bankster buddies all told you that your nation needs to mortgage private homes to pay for this one last austerity policy, would anyone believe them at this point?

    Posted by Pterrafractyl | January 28, 2014, 1:44 pm
  14. It’s looking like some major questions over the future structure of the EU banking union have been answered. And those answers look a lot like the ol’ “Cyprus shakedown”:

    Europe strikes deal to complete banking union

    Thu Mar 20, 2014 8:33pm GMT

    (Reuters) – Europe took the final step to complete a banking union on Thursday with an agency to shut failing euro zone banks, but there will be no joint government back-up to pay the costs of closures.

    The breakthrough ends an impasse with the European Parliament, which persuaded euro zone countries to strengthen the scheme. It completes the second pillar of banking union, which starts at the end of the year when the European Central Bank takes over as watchdog.

    The accord means that the ECB has the means to shut banks it decides are too weak to survive, reinforcing its role as supervisor as it prepares to run health checks on the still fragile sector.

    Michel Barnier, the European commissioner in charge of regulation, said the scheme would help to bring “an end to the era of massive bailouts”.

    “The second pillar of banking union will allow bank crises to be managed more effectively,” he said.

    Thursday’s agreement makes it harder for EU countries to challenge the ECB if the central bank triggers bank closures, and establishes a common 55 billion euro back-up fund over eight years – quicker than planned but far longer than the ECB’s watchdog had hoped.

    But the new system, which Barnier conceded was not ‘perfect’, has shortcomings.

    For one, the ‘resolution’ fund is small and would, in the view of the ECB watchdog, be quickly spent. To remedy that the fund will be able to borrow to replenish spent money.

    Euro zone governments will not, however, club together to make it cheaper and easier for it to do so.

    The 18 euro zone countries do not intend to cover jointly the cost of dealing with individual bank failures, a central tenet of the original plan for banking union.

    Germany resisted pressure from Spain and France to make such a concession. Its finance minister Wolfgang Schaeuble welcomed new rules forcing bank creditors to take losses and that “the mutualised liability … remained ruled out” – a reference to sharing the burden of a bank collapse.

    Neither will there be any joint protection of deposits.

    DEADLY EMBRACE

    Almost seven years since German small business lender IKB became Europe’s first victim of the global financial crisis, the region is still struggling to lift its economy out of the doldrums and banks are taking much of the blame for not lending.

    The banking union, and the clean-up of banks’ books that will accompany it, is intended to restore their confidence in one another. It is also supposed to stop indebted states from shielding the banks that buy their bonds, treated in law as ‘risk-free’ despite Greece’s default in all but name.

    Under the deal reached, a fund made up by levies on banks will be built up over eight years, rather than 10 as originally foreseen. Forty percent of the fund will be shared among countries from the start and 60 percent after two years.

    It also envisages giving the European Central Bank the primary role in triggering the closure of a bank, limiting the scope for country ministers to challenge such a move.

    Mark Wall, Deutsche Bank’s chief euro zone economist, said new rules to impose losses on the bondholders of troubled banks would reduce the burden on the fund but warned that its size was too modest. “A cross-European fund of the size of 55 billion raises some eyebrows in terms of scale,” he said.

    The fund will be able to borrow against future bank levies but will not be able to rely on the euro zone bailout fund to raise credit. Critics say this means primary responsibility for problem lenders remained with their home countries and that the banking union will never live up to its name.

    “The key to the banking union is an authority with financial clout. They don’t have it so we don’t have a banking union,” said Paul De Grauwe of the London School of Economics.

    “The whole idea was to cut the deadly embrace between bank and sovereign. But if a banking crisis were to erupt again, it would be back to how it was in 2008 with every country on its own.”

    The fragility and politicized nature of Europe’s banks has been highlighted by ailing Austrian state lender Hypo Alpe Adria.

    Vienna will sponsor a bad bank to isolate roughly 18 billion euros of bad loans extended by the bank after Joerg Haider, the far-right politician who governed its home province, earlier ramped up its activities.

    Despite the bank’s impact on national debt, many politicians feel Austria has little choice. Were banking union in place, the situation would be little different.

    So let’s review for what’s being proposed:
    1. A 55 billion euro bailout fund is being created from levies on banks. The ECB Watchdog say this is much too small and could be spent quickly.

    2. It will take 8 years for the fund to be fully financed, less than the planned 10 years but much longer than the watchdog was hoping for.

    3. The 55 billion euro fund can borrow against future levy’s but it can’t rely on the eurozone bailout fund (which makes sense since this banking union includes eurozone and non-eurozone members).

    4. The proposal ends government giving ‘risk free’ status to their sovereign bonds for domestic banks. This proposal, championed by Bundesbank chief Jens Weidmann, is intended to avoid a concentration of national debt in that nation’s banking system (the dreaded ‘bank debt/sovereign debt nexus’). And it sort of does this, but at the cost of driving up the interest of governmental borrowing and implicitly taking a “we’re all in this separately!” approach to the EU. So it’s an implicitly austerity-friendly approach to ending that nexus and since it’s austerity-friendly it might actually do nothing or make this nexus even more dangerous.

    5. And, due primarily to German opposition, the 18 eurozone members states are not going to be jointly funding for the bailouts, even though joint funding was one of the original central tenets of the banking union. There will also be no joint protection of deposits. So the smaller nations or nations with weaker economies are going to have larger implied potential liabilities on bond holders and depositors.

    6. The recent ‘Bad Bank’ resolution being created by Austria to deal with the major losses of a bank associated with Joerg Haider would probably being required anyways under the new banking union deal.

    So, in other words, it’s the Cyprus model that with some pro-austerity bells and whistles attached getting formalized into EU law. And as we saw during the Cyprus meltdown, one of the big implications of this kind of bail-in structure, where there’s no joint pooling of national bailout funds, is that a the financial sector in for member states in the EU are now intimately tied to the size of the broader economy.

    In the case of Hypo Alpe Adria, the liabilities for this now-nationalized Austrian bank that Joerg Haider helped run into the ground will be primarily incurred by Austria.

    On some level, that’s clearly a fairer approaching than spreading those liabilities around the eurozone or EU. But keep in mind that the fairer solution may not be the better solution if the costs are an austerity-induced socioeconomic death-spiral. Austerity-induced death-spirals, even when compartmentalized at a nation-state level, are a very questionable way to create an ever closer union:

    Bloomberg
    Austria’s Hypo Alpe Dead Bank Walking Lifts Protest Party Votes
    By Jonathan Tirone Feb 24, 2014 7:04 AM CT

    Support for Austria’s ruling coalition is slipping five months after it won a narrow majority as inaction over the nationalized Hypo Alpe-Adria Bank International AG lifts backing for protest parties.

    Latest polls suggest voters are losing trust in Social Democratic Chancellor Werner Faymann and People’s Party Vice Chancellor Michael Spindelegger and warming to the euro-skeptic Freedom Party before May’s European Parliament elections. The Green and Neos parties also stand to gain, said Hubert Sickinger, a political scientist at the University of Vienna.

    “The ruling parties have a problem,” Sickinger said in an interview. “They postponed the Hypo Alpe ‘dead bank’ problem hoping that the economy would change but they’ve known since early 2013 that this wouldn’t help.”

    Klaus Liebscher, a former central bank governor, quit Hypo Alpe’s board in protest last week after the government said it was looking at making bank bondholders take losses. Such a move would roil financial markets and make Austria look like Cyprus, according to Liebscher, referring to the Mediterranean island nation whose banking crisis prompted it to seek a bailout.

    Liebscher’s resignation as chairman was “no surprise,” Spindelegger, who is also Austria’s finance minister, told reporters today, according to the state-run APA news agency. “I want what’s best for the taxpayer and I also want that the opposition is on board.”

    Haider’s Bank

    Fitch Ratings reiterated its stable outlook for Austria’s top AAA credit rating last week even as it said that Hypo Alpe’s restructuring “will likely cause gross general government debt to rise more than previously expected.” Spindelegger reiterated Feb. 21 that Austria’s budget will be balanced by 2016, a forecast disputed the same day by the state-backed Wifo economic-research institute.

    Austrian Freedom Party nationalists, who seek to restrict immigration, would finish first in the EU parliamentary election, according to a Feb. 14 Gallup poll commissioned by the Oesterreich newspaper. The Freedom Party under deceased leader Joerg Haider helped build Hypo Alpe from a regional lender into one of the biggest banks in the Balkans.

    “The European elections will be payback day” over the government’s handling of Hypo Alpe, said Franz Schellhorn, director of Agenda Austria, a Vienna-based research group.

    “Anger is growing,” Schellhorn said in an interview today. “This black box has to be opened to see what is going on inside.”

    Again:

    Klaus Liebscher, a former central bank governor, quit Hypo Alpe’s board in protest last week after the government said it was looking at making bank bondholders take losses. Such a move would roil financial markets and make Austria look like Cyprus, according to Liebscher, referring to the Mediterranean island nation whose banking crisis prompted it to seek a bailout.

    That move that “would roil financial markets and make Austria look like Cyprus” is now the EU’s official template going forward.

    So, since this is now the ‘bad bank’ resolution model going forward (where the costs are primarily paid by member states alone), it’s worth asking how well Haider’s Freedom Party be doing in the polls if Fitch was forced to actually downgrade Austria’s credit-rating. The long-term solution to the dangers of the ‘sovereign debt/banking nexus’ appears to be an attempt to force governments and banks to change their ways (and impose austerity) via a short-term exacerbation of those very same ‘sovereign debt/banking nexus’ dangers and that raises a lot of unpleasant questions.

    Posted by Pterrafractyl | March 23, 2014, 6:55 pm
  15. @Pterrafractyl–

    Joerg Haider hid millions in Liechtenstein accounts:

    http://spitfirelist.com/news/joerg-haider-hid-millions-in-liechtenstein-accounts/

    Wonder if that had anything to do with Hypo Alpe’s problems?

    Also: some close to Haider claim that he was murdered.

    IF there is anything to that, one can but wonder if that had anything to do with Hypo Alpe’s difficulties.

    Best,

    Dave

    Posted by Dave Emory | March 24, 2014, 2:29 pm
  16. Here’s something to watch: there’s apparently been a mob conspiracy in Bulgaria to start a bank run. A surpisingly successful, and politically convenient, bank run:

    Bloomberg
    EU Backs State Aid for Bulgarian Banks as Lender Targeted
    By Elizabeth Konstantinova Jun 30, 2014 11:25 AM CT

    The European Union gave Bulgaria authority to provide 3.3 billion lev ($2.3 billion) in state aid for lenders after police there arrested men they said triggered a run on deposits of the third-largest bank.

    The central bank overcame a run on deposits caused by an “organized criminal attack” against several banks, it said in a statement today. Earlier, queues formed outside some Sofia branches of First Investment Bank AD, which paid 800 million lev to clients on June 27. Bulgaria asked the European Commission to support the credit line a week after the central bank put fourth-largest Corporate Commercial Bank AD under administration after a big depositor withdrew funds.

    “Last week, it transpired that certain individuals have been targeting the third-largest bank, urging customers to withdraw their deposits,” the European Commission said in an e-mailed statement. “This created concerns about the liquidity of the bank in question and risked spilling over to some other institutions, despite the fact that the Bulgarian banking system is well capitalized and has high levels of liquidity.”

    Bulgaria’s ruling Socialists are under pressure to resign following a poor showing in European Parliament elections on May 25. The government, which took office a year ago, is fighting to keep the banking system stable as opposition politicians say the current leadership has brought the country to the brink of ruin. President Rosen Plevneliev called early elections yesterday for Oct. 5 and will dissolve Parliament Aug. 6.

    Stocks Rise

    “The scheme provides the necessary and proportionate liquidity in the wake of external, non-bank related events,” the Commission said of the state support.

    Bulgarian stocks climbed the most in the world, led by First Investment Bank. The bank jumped 27 percent, the most since July 2007, to 3.6 lev at the close in Sofia, recovering from a five-month low. The Sofix index rose 5.8 percent, the most in almost five years and the biggest gain among 93 benchmarks tracked by Bloomberg.

    The country of 7.5 million, which is the European Union’s poorest state by economic output per capita, joined the 28-nation bloc in 2007 along with neighboring Romania. The EU has repeatedly criticized both countries for failing to curb corruption among senior government officials and sever their links with organized crime.

    Crime, Realignment

    The two cases of bank runs “appear to fall into the same category, which evolved in the context of a larger realignment of political and business interests ahead of the early general elections,” Otilia Dhand, vice president of Teneo Intelligence in London, said today in an e-mail.

    While Bulgarian equities rebounded, investor sentiment toward sovereign debt has soured. The yield on the government’s euro-denominated bonds maturing in July 2017 rose five basis points, or 0.05 percentage point, to a more than four-month high of 1.72 percent.

    Bulgarian prosecutors started the pre-trial investigation of two of the seven men arrested last week on suspicion of spreading information aimed at destabilizing banks, the State Agency for National Security said on its website. The men used mobile phone messages, e-mail and social media to spread rumors prompting people to withdraw bank deposits, the agency said.

    Minister’s Plea

    The banking crisis has stoked tensions on the political scene. Speaking on National Television on June 28, Finance Minister Petar Chobanov accused former prime minister and opposition Gerb party leader Boiko Borissov of causing “panic” by making “uncontrollable and incompetent statements on such sensitive subjects as the financial security.”

    Chobanov was responding to a statement made by Borissov, who was toppled from power by street protests 14 months ago, in a June 28 television interview that Bulgaria’s “finances and bank system are in a catastrophic state as a result of this government’s rule.”

    While the credit line “should stabilize the situation in the short run,” questions remain over political stability, Peter Attard Montalto, an emerging-market economist at Nomura Holdings Plc, said by e-mail today.

    The central bank said it will use cash from the Bulgarian Development Bank and the Deposit Guarantee Fund, both state-owned, to recapitalize Corporate Bank. Corporate Bank and FIB account for 18.5 percent of assets held by lenders, according to the central bank.

    Bank Stability

    Bulgaria has built up a fiscal reserve that increased to 6 billion lev at the end of May, from 4 billion lev in May 2013, when Prime Minister Plamen Oresharski’s cabinet took office, according to the Finance Ministry. Bulgaria’s foreign reserves were 13.8 billion euros ($18.8 billion) at the end of May, according to the central bank.

    The banking system is 70 percent-owned by foreign lenders, including UniCredit SpA (UCG) and Raiffeisen Bank International AG. The share of non-performing loans was about 17 percent of the total, according to UniCredit. The banking system’s capital adequacy ratio was 20 percent on March 30, with a Tier 1 capital adequacy of 18 percent, according to central bank data.

    Plevneliev met yesterday with the leaders of the country’s biggest political parties and central bank Governor Ivan Iskrov, who agreed “to secure all necessary means and actions to guarantee banks’ stability.”

    Plevneliev reiterated Bulgaria’s intention to keep its currency board system, which pegs the lev at a fixed rate to the euro and requires all lev in circulation be covered by foreign exchange reserves.

    So “big depositors” withdrew funds for large Bulgarian after a bunch of politically-fuel rumors were spread about the state of Bulgaria’s finances. It’s entirely possible that the withdrawals were being done preemptively as a sort of financial/political attack of sorts. But following the Cyprus meltdown we can’t really be all that surprised by bank runs in the EU involving large depositors preemptively withdrawing their funds.

    Bulgaria isn’t in the eurozone yet after those plans were put on hold last year, but could the “too small to be useful” nature of the new EU banking union, combined with the precedent set by the “haircuts” paid by large foreign depositors in Cyprus, be part of what’s fueling this?

    Posted by Pterrafractyl | July 1, 2014, 8:59 am
  17. Either the ECB is hosting some extremely controversial conferences, or this is a seriously misguided attempt at blackmail:

    European Central Bank says it was victim to extortion attempt after database hacked

    Associated Press | July 24, 2014 11:53 AM ET

    BERLIN — The European Central Bank said Thursday that email addresses and other contact information have been stolen from a database that serves its public website, though it stressed that no internal systems or market-sensitive data were compromised.

    The security breach involved a database serving part of the website that gathers registrations for ECB conferences and other events, the Frankfurt-based central bank for the 18 nations that share the euro said in a statement.

    Although most of the information on the database was encrypted, email addresses and other contact information left by people who registered were stolen, the bank said.

    About 20,000 email addresses may have been compromised, along with a much smaller number of phone numbers and street addresses.

    The ECB discovered the theft when it received an anonymous email on Monday night seeking money for the data.

    It said it informed German police and an investigation has started, but could not say when the theft is believed to have happened or how much money was demanded.

    The targeted database is physically separate from the ECB’s internal systems, according to the bank. It is contacting people whose data might have been compromised.

    The bank’s data security experts “have addressed the vulnerability” and all passwords on the system have been changed as a precaution, the ECB said.

    The security violation comes less than four months before the ECB takes over a new role as the top banking supervisor for the euro area, a task that will involve managing more sensitive data than ever before. The breach is the first time hackers have succeeded in accessing non-public data at the central bank.

    Interestingly, there was another ECB story about improper database access, although it wasn’t a hacking attempt. Cyprus’s former deputy governor, Spyros Stavrinakis, was recently discovered to have retained access for months after leaving his post in April 2013 to the ECB’s internal database of ‘secret’ and ‘confidential’ documents. Not surprising, this discovery led to some raised eyebrows:

    Cyprus Mail
    Questions over data access for former CBC official

    By Elias Hazou
    July 27, 2014
    SEVERAL months after leaving the Central Bank of Cyprus (CBC), former deputy governor of the CBC Spyros Stavrinakis may still have had access to classified data of the European Central Bank (ECB), the Sunday Mail has learned.

    Documentation seen by the Sunday Mail shows that Stavrinakis was included on the list of CBC staff with access to the Darwin system – the ECB’s intranet.

    Darwin contains sensitive information, such as national banks’ interest rates, ECB policy and working documents, upcoming stress tests and quality reviews of balance sheets of banks under supervision.

    Despite having left the CBC in April 2013, Stavrinakis – among CBC officials with access to information tagged as ‘Secret’ and ‘Confidential’ – remained on this list until at least November of the same year, documents reveal.

    The Central Bank has denied that Stavrinakis had access to Darwin for months after he left the post.

    “According to the CBC IT department, Mr Spyros Stavrinakis’ access to CBC IT systems (including Darwin) was deactivated on 18 April 2013, a few days after … the President revoked his appointment as deputy governor,” CBC press officer Aliki Stylianou said on Friday.

    “The ECB has confirmed that the audit logs to the Darwin platform show that his last access to the platform was a few days before deactivation of his account, although his name might have remained visible in the system for some time after the revocation of his appointment.”

    But, according to information obtained by the Mail, it was not until early November 2013 that then-CBC governor Panicos Demetriades notified the ECB in writing that Stavrinakis – who had left the CBC some seven months earlier – was being taken off the list of officials with access to Darwin.

    Only the governor of the CBC can authorise persons’ access to Darwin. Additionally, the governor must notify the ECB as to which CBC staff members are added or removed from this list. Moreover, the ECB periodically and regularly requests national central banks to keep it updated on their lists.

    It’s also understood that the log-in passwords for Darwin users are updated every two months.

    In correspondence between the ECB and the CBC in late October 2013, the former provides the latter with the list of CBC officials entitled to access to Darwin at that point, and asks the CBC to confirm and/or update this list.

    In another twist, the Mail learns that despite Demetriades’ November notification to the ECB about removing Stavrinakis from the list, Stavrinakis’ account was not deleted until early December.

    This raises questions as to whether up to that point Stavrinakis had remote access to his Darwin account.

    It was not immediately clear whether Stavrinakis’ removal from the list automatically denied him access to the system as well.

    Another question that begs an answer is why other CBC staff who were users of Darwin – and must have therefore known that Stavrinakis was on the list and/or had access until November – did not take it upon themselves to notify either the CBC or ECB.

    The Mail contacted Stavrinakis, who said only that any questions on the matter should be referred to the CBC.

    It’s understood that in order to log in to Darwin, a person must first use a device that is a random-number generator. That random number is then used, along with a user’s password, to log in.

    CBC staff are required to relinquish any laptops, tablets, smartphones or any other devices once they stop working for the bank.

    Stavrinakis, a senior CBC director, was appointed deputy governor by former president Demetris Christofias just two weeks before the February 2013 presidential elections.

    President Nicos Anastasiades rescinded the appointment a month after winning the elections, effectively sacking Stavrinakis.

    Considering the kind of material that just might be sitting on some of those documents, you can imagine why there might be some concerns over unauthorized access.

    In related news, the ECB and the rest the Troika has a plan in mind for Cyprus. No new release of the next ‘bailout’ loan tranche, unless Cyprus’s parliament passes a law that allows for the speedy repossession of properties securing non-performing loans:

    ECB agrees to help Cypriot banking system to face problems

    by
    KG/XINHUA
    17.07.2014 – 09:54

    The European Central Bank (ECB) has agreed on measures to help the troubled Cypriot banking system to throw off shackles which prevent it to operate normally, according to a government statement issued here on Wednesday.

    Cypriot President Nicos Anastasiades traveled to Frankfurt to meet ECB President Mario Draghi ahead of a meeting of European Union (EU) leaders in Brussels, to set out problems Cypriot banks are faced with.

    The statement said they agreed on unspecified measures by the ECB to help the Cypriot banks.

    “They discussed ways to provide further support, with the ECB assuming a decisive role … and agreed to continue their dialogue on implementing everything that was agreed in the meeting,” said the government statement.

    No details of what has been agreed upon were made available.

    Anastasiades refused to talk about his requests to Draghi ahead of their meeting, saying public statements would not be helpful.

    But informed sources said that his main request to Draghi was to partly convert into a medium-term bond part of a heavy bank debt incurred out of receiving emergency liquidity assistance (ELA) from the ECB prior to last year’s shake up of the Cypriot banking system.

    The ECB pumped 9.1 billion euros (12.4 billion U.S. dollars) into a faltering bank during a 12-month period that preceded a messy bailout of Cyprus by the Eurogroup and the International Monetary Fund in March, 2013.

    The ELA debt amounted to almost two thirds of Cyprus’s GDP.

    International lenders offered Cyprus 10 billion euros in bailout assistance over a three-year period but forced the eastern Mediterranean island to accept an unprecedented bail-in, the recapitalization of Bank of Cyprus, the island’s main lender, by converting 47 percent of large deposits into bank stock.

    Bank of Cyprus, which had suffered heavy losses on account of its exposure to the Greek debt impaired by about 75 percent in 2012, was also forced to take on the assets and liabilities of the failed bank which was ultimately wound down by Cyprus’s creditors.

    The statement said Draghi acknowledged the significant progress made in the implementation of Cyprus’s adjustment program since the bailout was agreed upon and expressed his readiness to assist the Cypriot authorities in their effort to tackle remaining problems.

    Most prominent among these is securing bank liquidity to fund a recession-hit economy.

    Banks are shackled by a high proportion of non-performing loans which have reached 27.1 billion euros, or 45 percent of the total loan portfolios of the banks. They are also withholding new loans as they are expected to go through an EU-wide stress test in the few coming months.

    Technocrats of the Troika, the collective name the European Commission, the ECB and the IMF are known by, who are conducting their fifth survey of the Cypriot adjustment program, told lawmakers on Wednesday that they consider non-performing loans to be the biggest problem the Cypriot economy is faced with at the time.

    They were also reported as saying that they would not recommend releasing the next loan tranche unless parliament passed legislation empowering banks to speedily repossess properties securing non-performing loans.

    Oh boy. So let’s break this down:
    So Cypriot President Nicos Anastasiades recently had a meeting with ECB president Draghi over how to proceed with its ‘bailout’ and ‘reforms’ given the immense bad debt still sitting in Cyprus’s banking system following the meltdown last year. While the details of the meeting and what has been finally agreed upon has been public public, it’s largely believed that the ECB and larger Troika wants to focus on how to get rid of as many non-performing loans on banks’ balance sheets as possible. That’s the biggest hurdle facing the economy in their view. And the Troika’s method of choice for addressing this problem is to demand that Cyprus’s parliament pass a law that speeds up the repossession of properties that were used as collateral for what are now non-performing loans. Notice how the plan doesn’t include stimulating the economy to actually try to make non-performing loans performing again. Instead, the plan focuses on ensure that the banks are given a bigger share of a shrinking economy. And if Cyprus doesn’t pass that law, it doesn’t get next ‘bailout’ tranche. At least that’s what it sounds like the Troika is demanding. It’s a reminder that investigations into ‘ECB blackmailers’ should probably include investigations of the ECB:

    Lenders up pressure on Cyprus to call in bad loans
    AFP
    By Charlie Charalambous | AFP – Sat, Jul 26, 2014 8:18 AM AEST

    International lenders put new pressure on Cyprus politicians Friday to agree delayed legislation on foreclosure procedures for bad loans in the latest review of compliance over a multi-billion debt bailout.

    Legislation for the calling-in of non-performing loans contracted during the island’s credit boom and crash that prompted the international bailout of March 2013 is a pre-condition for the next instalment of emergency loans that are desperately needed to rescue state finances.

    The urgent call for its passage by parliament came as part of a fifth review of the debt-ridden island’s compliance with crippling bailout terms by the troika of lenders — the European Commission, European Central Bank and International Monetary Fund.

    “Reversing the rising trend of non-performing loans is critical to restoring credit, economic growth, and the creation of jobs,” the lenders said.

    “Putting in place without delay an effective legal framework for foreclosure and insolvency is essential to ensuring adequate incentives to borrowers and lenders to collaborate to reduce the level of non-performing loans.”

    Legislation on tightening up foreclosure procedures on unserviced loans has been held up both in cabinet and in parliament as politicians fret about the impact of a swift reining-in of consumer debt on an economy already ravaged by nearly 18 months of swingeing austerity.

    EU Commission officials who took part in the troika’s review say that more than 50 percent of domestic bank loans are considered non-performing.

    The International Monetary Fund has said that Cyprus’s level of non-performing loans is the highest in Europe at almost 140 percent of GDP.

    In previous reviews, the troika had praised Cyprus for sticking to bailout terms even at the cost of a sharp recession, but they are now insisting that the island accept more pain, even if it meant home repossessions and business closures.

    “The authorities have pursued a cautious fiscal policy, which helped allow them to over-achieve fiscal targets consistently. Such prudence should continue, in light of lingering risks,” the lenders said..

    In return for 10 billion euros (13 billion dollars) in aid from international lenders, the island in March 2013 agreed to wind down its second largest bank, Laiki, and impose losses on depositors in under-capitalised largest lender, Bank of Cyprus.

    Depositors in Bank of Cyprus were hit with a 47.5 percent “bail-in” as part of the bailout package

    Recession-hit Cyprus needs to pass the latest review by the troika to receive the next tranche of bailout cash scheduled for late September. It has so far received half the 10 billion euros in emergency loans agreed last year.

    The government concedes the biggest challenge facing the troubled banking sector following last year?s bailout “haircut” is clawing back bad debt.

    International lenders do not expect Cyprus — suffering record 17 percent unemployment and a credit squeeze — to exit recession before next year.

    Hmmm. Hopefully a wave of business closings and property foreclosure will lead to an economic renaissance because that’s the blackmail demand non-negotiable plan for Cyprus at this point.

    Posted by Pterrafractyl | July 27, 2014, 9:19 pm
  18. So this is fascinating: with the latest polls showing Scotland now on track to vote for independence in a couple of weeks the UK is starting to seriously consider the possibility that Scotland might secede, which would obviously have huge implication for both sides. But the specific implications aren’t clear because there are so many different scenarios under which Scottish independence could take place.

    For instance, one of the biggest questions is whether or not Scotland will continue to be use the pound. Key independence leaders are calling for a new monetary union between Scotland and the UK, while London appears to be rejecting the idea. The idea would be appealing to Scotland for a number of reasons including the fact that major Scottish banks are considering relocating to London should the “Yes” vote win (they could lose the Band of England’s backstop if they stay in Scotland without a monetary union). And yet, as the article points out below, the new monetary union would almost certainly involve some degree of political union with the UK (along the eurozone model), where Scotland would like be forced to lose some sovereignty over its fiscal policy to the UK as part of the new “shared liabilities” model. Other options involve just using the pound anyways but without the backing of the Bank of England, making or a new “Scottie” currency, or joining the euro. A recent FT piece looking at these four possibilities suggested joining the euro as the least likely option, but observers were mixed about the likelihood of the other options. It’s part of what makes the upcoming vote such a fascinating nail-biter: not only is it very unclear which side will win (51% ‘Yes’ ys 49% ‘No’ in the latest YouGov poll), it’s also unclear what people are even voting for since so much is ‘to be decided’: Good luck!

    The Guardian
    What would independence really mean for Scotland’s economy?
    Countries poorer than Scotland have thrived after independence, but it would not be a land flowing with milk and honey either

    Larry Elliott
    Sunday 7 September 2014 13.24 EDT

    Alistair Darling seems to be a sucker for punishment. He was chancellor of the exchequer on the blackest day of the global financial crisis in the autumn of 2008, when the Royal Bank of Scotland was forced to tell the government that its cash machines would run out of money within three hours. Six years on, Darling has another exceptionally tough job: fronting the campaign seeking to prevent Scotland voting for independence on 18 September as the polls show support for his side slipping.

    In a faint echo of those turbulent days after the collapse of Lehman Brothers, the City has woken up to the possibility that the Scots will decide to go it alone. Sunday’s YouGov poll for the Sunday Times showing the first ever lead for yes – albeit at 51% to 49% – should clarify thinking further. The Bank of England has begun to draw up contingency plans to cope with the potential fallout from the end of a union that has lasted for more than 300 years.

    The narrowing polls raise the prospect of a divorce that could be long, complex and bitter. The pound has been coming under pressure as it has become clear that the race is rapidly becoming a far closer call than anyone but diehard Scottish nationalists had ever envisaged. “In some ways it is a bigger challenge than 2008,” Darling says during a visit to Aberdeen. “This is about the future of the country in which I live. I don’t want to take a leap into the unknown.”

    Clearly not all Scots see it that way. Many say they are taking the leap with their eyes wide open. They have been told by George Osborne and Ed Balls that there is no possibility that an independent Scotland could forge a monetary union with the rest of the UK. They have been told by the country’s acknowledged oil expert, Sir Ian Wood, that the reserves of oil may not be as plentiful as previously thought. They have been served notice by some big employers that they will up sticks and leave in the event of a yes vote.

    But Dave Moxham, deputy general secretary of the Scottish TUC, says: “The direction is only one way. And that is from undecided voters to yes. Whether it will be enough to win I am not sure, but it is a noticeable trend.”

    John Swinney is the Scottish National party’s answer to Darling: calm, cautious, a safe pair of hands. Sitting in Yes Scotland’s HQ in Hope Street, Glasgow, he puts the case for independence in one short sentence. “I think we will make a better job of running the country ourselves rather than having decisions made by the UK government.”

    There are five reasons why this argument resonates. The first is that Scotland, like Wales and many of the northern regions of England, still bears deep scars from the deindustrialisation of the 1980s.

    A fourth factor is austerity, which rankles in a country where the real political fight is between the Scottish National party and Labour, and where there is only one Conservative MP. Darling accepts that this is a factor helping the yes camp. “There have been six years of austerity and people are looking for an escape. They think that with independence we won’t have any of these problems.”

    Westminster-dictated austerity will continue even if Ed Miliband emerges victorious in next year’s UK general election. Pat Rafferty, general secretary of the Unite union in Scotland, says: “Better Together shouldn’t underestimate how people are looking ahead to the 2015 election and thinking that even if Labour wins the austerity will go on.”

    “Better Together shouldn’t underestimate how people are looking ahead to the 2015 election and thinking that even if Labour wins the austerity will go on.” Yep! That’s something the rest of the UK should keep in mind while it’s trying to sweeten the deal. The UK’s austerity policies were always more self-imposed than elsewhere in the EU just as changing those policies is more of an option for the UK too. So a serious UK commitment tend the austerity might make for a rather compelling argument since an independent Scotland is presumably going to try to join the EU.

    Continuing…


    Finally, there is the economic state of modern Scotland, simultaneously a rich and a poor country. In terms of the UK regions it ranks third in terms of income per head after London and the south-east. Edinburgh is the heart of the biggest concentration of financial services firms outside London, and Aberdeen is the home of the oil industry. Scotland has a thriving biomedical sector, and a big defence, marine and aerospace presence. The food and drink industry has some strong global brands which have been helped by the attention on Scotland generated by the referendum. Much poorer countries than Scotland have gone it alone.

    On the other hand, the cost of deindustrialisation has been high, with concentrated pockets of joblessness and poverty. That’s why Yes Scotland is picking up support in what were once Labour fiefdoms, as the latest polls show.

    Better Together’s economic arguments tend to be about what Scotland stands to lose by going it alone. Privately, there is concern that the campaign has been negative. Publicly, the line is that there is a silent majority worried about the implications of independence.

    The list of concerns is headed by the currency question. There are really only four options: a currency union with the rest of the UK; using sterling without a currency union in the way that Panama uses the dollar; joining the euro; or an independent monetary policy with a new Scottish currency and interest rates set by a Scottish central bank.<

    Salmond and Swinney favour a currency union and insist that George Osborne and Ed Balls are bluffing when they rule it out. Successful negotiations will take place after the referendum, Swinney says. "It makes sense to have a currency union. The drivers behind it will become clearer the more we get out of the political space and into the practical space."

    Not so, says Danny Alexander, the Liberal Democrat chief secretary to the Treasury: "There isn't going to be a currency union. Do finance ministers go around bluffing? It is essential to the national interest that you don't bluff."

    Alexander says the opposition to a currency union in Westminster is economic, not political. “In a currency union you are asking the rest of the UK to expose itself to risks it isn’t able to control. As we have seen in Europe, monetary union requires political union.”

    The austerity debate also cuts both ways. Public spending is higher in Scotland than in the UK as a whole, and the population is ageing more quickly. Britain’s leading experts on tax and spending matters, the Institute for Fiscal Studies, have made a bleak assessment of what lies ahead after independence: “Despite the considerable uncertainty surrounding the future path of borrowing and debt in Scotland, the main conclusion of our analysis is that a significant further fiscal tightening would be required in Scotland, on top of that announced by the UK government, in order to put Scotland’s long-term public finances on to a sustainable footing.” Gordon Brown, the former prime minister, has been making this point more starkly. Pensions, he has said, will be at risk.

    Yes Scotland has said this is a scare story. It has said a better productivity performance and rising North Sea oil revenues will make the budgetary position less grim.

    But productivity improvements will take time and North Sea oil is not the cash cow it once was. There are plenty of reserves left in the waters round Scotland, including new fields to the west of Shetland. The difficulty is that the oil is expensive to get at. New technologies will help but the industry will demand, and almost certainly get, tax breaks in order to drill the crude from the sea. The tax take per barrel will go down.

    Then there’s Europe. Negotiations for Scotland to become a member state of the European Union will take place alongside talks with Westminster on the currency.

    Better Together says it is not a foregone conclusion that Scotland will be allowed in, particularly since countries such as Belgium and Spain have their own strong separatist movements. The former EU commissioner for economic and monetary affairs, Olli Rehn, has said Scotland would need its own central bank to be considered for membership.

    Finally, the rich and poor argument works for the no side as well. The swankier parts of Edinburgh look and feel like central London. The property market is as hot in Aberdeen as it is in the home counties. If you are doing well, the argument goes, why risk it?

    The industrial sector has its special concerns. Bryan Buchan, chief executive of Scottish Engineering, said some firms had been deferring investment in the runup to the referendum. Scotland’s economy is highly integrated with the rest of the UK and the high percentage of foreign ownership in finance, energy and food and drink makes it vulnerable to capital flight. The defence sector is worried that orders for the Royal Navy will dry up.

    As the referendum nears, Better Together will be stressing that the poor will become poorer if goods become more expensive, mortgages go up, and prices in the shops rise if firms relocate or the Scottish government has to pay higher interest rates to borrow money.

    Both sides promise the best of all worlds: higher public spending, cuts in corporation tax, better conditions for workers, less draconian welfare rules coupled with the pound and the Bank of England as the lender of last resort according to the yes camp; more devolved tax powers coupled with the security that comes from being part of a country of 60 million rather than 5 million people according to the Better Together camp.

    So what would life really be like after independence? Some businesses, particularly in the financial sector, would migrate south. Others would stay but would lobby hard for the sort of business-friendly conditions (low tax, light-touch regulation) that would infuriate some independence supporters. If a deal on a currency can be achieved, the Bank of England and the Treasury will insist on terms that tie Swinney’s hands.

    In its assessment, the Scottish TUC notes: “The extent to which a future Scottish government would be permitted (by fiscal agreements and currency choice) to pursue markedly different policy on tax is a question which requires further examination, and honesty, from both sides of the debate.”

    It will also become clear from the continuation of austerity and of Bank of England control over interest rates that what Scotland has actually got is independence lite.

    As Brown puts it in his book My Scotland Our Britain, “it has now become clear that one power that the nationalists have always demanded – full control over the economy – is now one the Scottish government says it doesn’t want”.

    The new government would use business-friendly policies to prevent companies leaving, and be accused of selling out when it does so.

    Equally clearly, Scotland would not face economic collapse or ruin. Countries much poorer than Scotland have thrived after independence. But it would not be a land flowing with milk and honey either. Gavin McCrone, author of a book on the pros and cons of independence (Scottish Independence: Weighing Up the Economics), says: “Scotland could survive but it would be tough in the early years. The fiscal position would be pretty tight.”

    Part of what makes the threat of a financial firm flight south to London so unique in the modern EU context is that the precedent set by the Cyprus “bailout” makes it difficult for tiny countries like Scotland to have an outsized banking sector, with a constant threat of the Troika-treatment if one of the big banks implode. So, in a way, shrinking the banking sector isn’t necessarily the worst thing for Scotland in the long run because at least it won’t be nearly as vulnerable to a financial shock if we see a repeat of 2008 and big banks start defaulting. At the same time, one of the other rules of the new EU is that a member state can only have the social safety-net that its internal economy can finance. So the scenarios that don’t involve a currency union are likely to include a big hit to Scotland’s financial sector, and that economic hit pretty much translates into more austerity for Scotland, at least in the short to medium term (and maybe long term). This is how the EU works now, where prosperity and pain is compartmentalized.

    But that economic hit can be more than offset from the increased proceeds from the oil revenues. And then there’s the possibility of offshore fracking in the future.

    So Scotland’s economy and government revenues are about to become much more oil-dependent (good luck!) and probably a lot less dependent on the financial sector while it’s planning on joining into a monetary union with the rest of the UK that will have an economy that is suddenly much less oil-focused and more finance-focused. That means we might be looking at a second monetary union started by two increasingly diverging economies with disputes over how to share sovereignty. In addition to being a rather stunning possible end to the contemporary UK, the ingredients for a bizarre new mini-eurozone crisis are already in place. That was unexpected.

    Still, supposing the monetary union option does come to fruition, it also raises a fascinating possibility: could other EU countries join the new euro-pound?

    Posted by Pterrafractyl | September 7, 2014, 10:27 pm
  19. Scotland’s independence bid just boggled Paul Krugman’s mind:

    The New York Times

    Scots, What the Heck?

    September 7, 2014
    Paul Krugman

    Next week Scotland will hold a referendum on whether to leave the United Kingdom. And polling suggests that support for independence has surged over the past few months, largely because pro-independence campaigners have managed to reduce the “fear factor” — that is, concern about the economic risks of going it alone. At this point the outcome looks like a tossup.

    Well, I have a message for the Scots: Be afraid, be very afraid. The risks of going it alone are huge. You may think that Scotland can become another Canada, but it’s all too likely that it would end up becoming Spain without the sunshine.

    But Canada has its own currency, which means that its government can’t run out of money, that it can bail out its own banks if necessary, and more. An independent Scotland wouldn’t. And that makes a huge difference.

    Could Scotland have its own currency? Maybe, although Scotland’s economy is even more tightly integrated with that of the rest of Britain than Canada’s is with the United States, so that trying to maintain a separate currency would be hard. It’s a moot point, however: The Scottish independence movement has been very clear that it intends to keep the pound as the national currency. And the combination of political independence with a shared currency is a recipe for disaster. Which is where the cautionary tale of Spain comes in.

    If Spain and the other countries that gave up their own currencies to adopt the euro were part of a true federal system, with shared institutions of government, the recent economic history of Spain would have looked a lot like that of Florida. Both economies experienced a huge housing boom between 2000 and 2007. Both saw that boom turn into a spectacular bust. Both suffered a sharp downturn as a result of that bust. In both places the slump meant a plunge in tax receipts and a surge in spending on unemployment benefits and other forms of aid.

    Then, however, the paths diverged. In Florida’s case, most of the fiscal burden of the slump fell not on the local government but on Washington, which continued to pay for the state’s Social Security and Medicare benefits, as well as for much of the increased aid to the unemployed. There were large losses on housing loans, and many Florida banks failed, but many of the losses fell on federal lending agencies, while bank depositors were protected by federal insurance. You get the picture. In effect, Florida received large-scale aid in its time of distress.

    Spain, by contrast, bore all the costs of the housing bust on its own. The result was a fiscal crisis, made much worse by fears of a banking crisis that the Spanish government would be unable to manage, because it might literally run out of cash. Spanish borrowing costs soared, and the government was forced into brutal austerity measures. The result was a horrific depression — including youth unemployment above 50 percent — from which Spain has barely begun to recover.

    And it wasn’t just Spain, it was all of southern Europe and more. Even euro-area countries with sound finances, like Finland and the Netherlands, have suffered deep and prolonged slumps.

    In short, everything that has happened in Europe since 2009 or so has demonstrated that sharing a currency without sharing a government is very dangerous. In economics jargon, fiscal and banking integration are essential elements of an optimum currency area. And an independent Scotland using Britain’s pound would be in even worse shape than euro countries, which at least have some say in how the European Central Bank is run.

    I find it mind-boggling that Scotland would consider going down this path after all that has happened in the last few years. If Scottish voters really believe that it’s safe to become a country without a currency, they have been badly misled.

    Another interesting fun-fact if Scotland goes through with the deal: it probably gets kicked out of NATO and has to reapply, so Scotland might want to be on the lookout for Argentinian armadas for the next few years or so (revenge!!!!).

    Posted by Pterrafractyl | September 8, 2014, 11:40 am
  20. ECB chief Mario Draghi pledged that the central bank “is ready to do its part” to make the eurozone more resilient on Monday, reiterating his famous 2012 call to do what it takes to hold the eurozone together. Let’s hope so. And while Mario Draghi’s original 2012 comments were in relation to a sovereign bond market that was threatening to bifurcate and explode, today’s comments are probably more a reference to growing concerns over the health of Europe’s banks. Still, as the article below points out, if a new ‘bail-in’ plant for sovereign bonds get put in place, the ECB is probably going to be doing ‘whatever it takes’ to prevent a sovereign bond market implosion again:

    The Telegraph
    German ‘bail-in’ plan for government bonds risks blowing up the euro
    ‘If I were a politician in Italy, I’d want my own currency as fast as possible: that is the only way to avoid going bankrupt,’ said German ‘Wise Man’

    By Ambrose Evans-Pritchard

    7:27PM GMT 15 Feb 2016

    A new German plan to impose “haircuts” on holders of eurozone sovereign debt risks igniting an unstoppable European bond crisis and could force Italy and Spain to restore their own currencies, a top adviser to the German government has warned.

    “It is the fastest way to break up the eurozone,” said Professor Peter Bofinger, one of the five “Wise Men” on the German Council of Economic Advisers.

    “A speculative attack could come very fast. If I were a politician in Italy and I was confronted by this sort of insolvency risk I would want to go back to my own currency as fast as possible, because that is the only way to avoid going bankrupt,” he told The Telegraph.

    The German Council has called for a “sovereign insolvency mechanism” even though this overturns the financial principles of the post-war order in Europe, deeming such a move necessary to restore the credibility of the “no-bailout” clause in the Maastricht Treaty. Prof Bofinger issued a vehement dissent.

    The plan has the backing of the Bundesbank and most recently the German finance minister, Wolfgang Schauble, who usually succeeds in imposing his will in the eurozone. Sensitive talks are under way in key European capitals, causing shudders in Rome, Madrid and Lisbon.

    Under the scheme, bondholders would suffer losses in any future sovereign debt crisis before there can be any rescue by the eurozone bail-out fund (ESM). “It is asking for trouble,” said Lorenzo Codogno, former chief economist for the Italian Treasury and now at LC Macro Advisors.

    This sovereign “bail-in” matches the contentious “bail-in” rule for bank bondholders, which came into force in January and has contributed to the drastic sell-off in eurozone bank assets this year.

    Prof Bofinger wrote a separate opinion warning that the plan could become self-fulfilling all too quickly, setting off a “bond run” as investors dump their holdings to avoid a haircut.

    Italy, Portugal and Spain would be powerless to defend themselves since they no longer have their own monetary instruments. “These countries risk being hit by a dangerous confidence crisis,” he said.

    The German Council says the first step would be a higher “risk-weighting” for sovereign debt held by banks, and a limit on how much they can buy, with the explicit aim of forcing banks to divest €604bn. They would have to raise €35bn in fresh capital, deemed “manageable”.

    It is a neuralgic issue in Italy, where the banks own €400bn of government debt and have effectively used cheap finds from the European Central Bank to prop up the Italian treasury.

    Mario Draghi, the ECB’s president, deflected a question on the issue from an Italian euro-MP on Monday. “It is an issue that we do have to deal with. But we have to take a very considered and phased-in approach,” he said.

    The move is courting fate at a time when Portugal is already in the eye of the storm, facing a slowing economy and a clash with Brussels over austerity.

    The risk spread on Portugal’s 10-year debt surged to 410 basis points over German Bunds last week, pushing borrowing costs back to unsustainable levels in real terms. Portugal’s public debt is 132pc of GDP. Total debt is 341pc, the highest in Europe. The country is in a debt-deflation trap and requires years of high growth to escape.

    “Portugal is close to losing market access,” said Mark Dowding, from bond manager Blue Bay. “We saw very ugly conditions last week, and large US managers invested in Portugal have been looking to exit those positions. With fund redemptions going on, it is a perfect storm.”

    Mr Dowding said the saving grace for Portugal is that it has “pre-funded” most of its needs for 2016 and can weather the tempest for a while. If the crisis endures, worries about a fresh Troika rescue for Portugal – and what the terms for debt-holders might be – could take hold quickly. There was no haircut on sovereign bonds when Portugal was bailed out in 2010.

    The German Council says the “regulatory privileges” of sovereign debt held on bank books should be phased out. It should no longer be treated as “entirely safe and liquid” under the banks’ liquidity coverage ratios, or be exempt from capital requirements. “The greatest risks are for banks in Greece, Portugal, Spain, Ireland and Italy,” it said.

    In theory, the aim is to “reduce the sovereign-bank nexus” by partially separating the two, preventing government debt crises spreading and taking down national banking systems.

    Prof Bofinger said the real problem is that Germany and the EMU creditor states still refuse to accept the implications of monetary union: that some level of debt-pooling and fiscal union is imperative to hold the experiment together.

    He described the whole notion of a sovereign insolvency mechanism as misconceived, perpetuating the canard that fiscal abuse by governments is the root of the crisis. In reality, (with the exception of Greece) public debt exploded after 2008 because crisis states had to take emergency action to prevent their economies from collapsing.

    Moreover, the new plan empowers private investors to act as judge and jury on the solvency of states. “We can’t allow a regime where markets are masters of governments,” he said.

    The German Council is defiant. It swats aside any talk of an EU treasury or shared fiscal authority. The only way to uphold monetary union is to impose strict control – it said – and “reinforce existing rules”.

    Well, it’s looking like Bundesbank president Jens Weidmann’s long-held goal of adding risk premiums to government bonds in order to ‘reduce the sovereign-banking nexus’ (while also reducing the incentives of banks to invest in public debt) about on track to become a reality. And right when the austerity showdown with Portugal is playing out, so the eurozone’s new ‘haircuts for sovereign bonds’ scheme might be about to get an early trial run. That should be interesting.

    Also keep in mind that Peter Bofinger is the lone non-crazy person on the German ‘Council of Wise Men’. So when Bofinger is issuing warnings like…


    “It is the fastest way to break up the eurozone,” said Professor Peter Bofinger, one of the five “Wise Men” on the German Council of Economic Advisers.

    “A speculative attack could come very fast. If I were a politician in Italy and I was confronted by this sort of insolvency risk I would want to go back to my own currency as fast as possible, because that is the only way to avoid going bankrupt,” he told The Telegraph.

    Prof Bofinger wrote a separate opinion warning that the plan could become self-fulfilling all too quickly, setting off a “bond run” as investors dump their holdings to avoid a haircut.

    Italy, Portugal and Spain would be powerless to defend themselves since they no longer have their own monetary instruments. “These countries risk being hit by a dangerous confidence crisis,” he said.

    Prof Bofinger said the real problem is that Germany and the EMU creditor states still refuse to accept the implications of monetary union: that some level of debt-pooling and fiscal union is imperative to hold the experiment together.

    He described the whole notion of a sovereign insolvency mechanism as misconceived, perpetuating the canard that fiscal abuse by governments is the root of the crisis. In reality, (with the exception of Greece) public debt exploded after 2008 because crisis states had to take emergency action to prevent their economies from collapsing.

    Moreover, the new plan empowers private investors to act as judge and jury on the solvency of states. “We can’t allow a regime where markets are masters of governments,” he said.

    …those are warnings worth heeding. So let’s hope the ECB is really ready and able to do ‘whatever it takes’, regardless of the nature of the next eurozone mega-crisis.

    Let’s also hope that the option of doing ‘whatever it takes’ for the ECB isn’t taken off the table:

    Bloomberg Business
    ECB’s ‘Whatever It Takes’ May Be Too Much for German Top Court

    Karin Matussek

    February 14, 2016 — 8:00 PM CST
    Updated on February 15, 2016 — 4:47 AM CST

    * ECB’s OMT bond-buying program returns to German top tribunal
    * Case exposes German judges’ struggles with EU rulings

    Germany’s top judges this week will once again ask whether Mario Draghi’s 2012 promise to do “whatever it takes” to save the euro can exist alongside the nation’s constitution.

    Eight months after the region’s highest court backed European Central Bank president Draghi’s bond-buying program, the Federal Constitutional Court will again hear arguments over Germany’s role in the Outright Monetary Transactions program, or OMT.

    Tuesday’s hearing comes as the EU faces stress from an influx of refugees, a weak euro and an upcoming British vote on membership. While the OMT wasn’t implemented, an adverse ruling by Germany’s top judges could restrict the ECB’s options during the next crisis. National courts are expected to follow the EU tribunal’s guidance, although the German panel expressed independence in the past. A ruling last month in another case read as if the German judges were signaling a willingness to challenge parts of the EU court’s decisions, some lawyers say.

    “The constitutional court wants to show that it’s a dog that can also bite and not just bark,” Christoph Ohler, a law professor at Jena University, said. “I still hope it will follow the ECJ on the OMT. We can’t allow two important courts to be at war with one another.”

    Earlier Hearing

    The court in Karlsruhe is rehearing lawsuits that attack the OMT in the next step in a long national dispute over the program. In early 2014, the judges sent the case to the European Union’s highest tribunal with a list of demands to curb the program. The German court will now look at the guidelines and test them under the constitution.

    ECB is overstepping its mandate, Mehr Demokratie, a group representing 37,000 people supporting the case, said on its website this week. Germany’s finance ministry didn’t return a call seeking comment.

    When the German court asked the European judges in Luxembourg for guidance, it argued that Draghi’s proposal should be only cleared if its volume was limited to be in line with the ECB’s mandated monetary policy. A clear-cut limit would have stopped the ECB president from buying as much as he deemed fit, which he promised to do to prevent the currency’s breakup.

    In its June ruling, the ECJ required the central bank not to buy bonds too soon after issuance nor disclose its strategy beforehand. It ruled that the program was tailored to ensure that its scope wasn’t broader than needed.

    Skillful Juggling

    These concessions may have been too small to soothe the concerns of the German judges, according to Jan Klement, a law professor at Saarbrücken University. The Luxembourg court didn’t respond to all of the questions submitted and rejected an absolute cap. As to the ECB mandate, it simply copied the central bank’s arguments, he said.

    “That may make it difficult for Karlsruhe to back away from its own position and not to intervene,” Klement said. “To defuse the confrontation, the ECJ could have juggled the issues a bit more skillfully.”

    The German court can’t rule on ECB action directly, but it can issue orders to the nation’s authorities, including the Bundesbank. To find a way to limit the program, the court may stress the constitution’s demand that the people must have a say, Klement said.

    Court Compromise

    “They could ask the German parliament to adopt a resolution legitimizing the ECB policy,” he said. “And they could rule that the German participation in the program could be stopped by parliament at any time if certain limits of financial burdens are exceeded.”

    Even harsh critics of the ECB warned the German court from escalating the dispute. The Kronberger Kreis, a group including economist Lars Feld and law professor Heike Schweitzer, in a recent study criticized the EU judges for freeing Draghi from all restraints but warned that conflict between the top tribunals could trigger a constitutional crisis — additional stress when “aid for Greece and the handling of refugee migration reveal deep splits in the European structure.”

    The ruling is likely to outline principles that will guide four new cases pending at the court that target the Quantative Easing program the ECB put into action last year.

    “Eight months after the region’s highest court backed European Central Bank president Draghi’s bond-buying program, the Federal Constitutional Court will again hear arguments over Germany’s role in the Outright Monetary Transactions program, or OMT.”
    Yep, so the Germany’s constitutional court is once again set to rule on whether or not the ECB doing ‘whatever it takes’ is constitutional under Germany’s constitution. And if not, the Germany may be prevented from participating in any future ‘whatever it takes’ ECB actions. And this is at the same time new rules for sovereign bonds are getting pushed by Berlin which would limited the shared sovereign debt liabilities between eurozone members but could also make such crises basically self-fulfilling prophecies.

    So it’s looking like Berlin it trying to tie the ECB’s crisis-management hands behind its back while the bifurcation of the sovereign bond market is made into an official self-fulfilling policy. It’s quite a union we have here.

    Posted by Pterrafractyl | February 15, 2016, 2:27 pm

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