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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”

Dave Emory’s entire life­time of work is avail­able on a flash dri­ve that can be obtained here. (The flash dri­ve includes the anti-fas­cist books avail­able on this site.)

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.”


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.


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.


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.


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
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.



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.


    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:


    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.


    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.


    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.


    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
    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 euro­zone...except 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.


    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:

    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.”


    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:


    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.



    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:

    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

    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
    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.


    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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