Monday, March 18, 2013

Today's links

1--Cypriot Outrage Over Tax Could Derail Euro-Area Bailout, Bloomberg

If the government wants to change the structure of the solidarity levy for the banking sector, the government can decide as such,” European Central Bank Executive Board member Joerg Asmussen said today in Berlin. “What’s important is that the planned revenue of 5.8 billion euros remain.”

While Cyprus accounts for less than half a percent of the 17-nation euro economy, the raid on bank accounts risks triggering new convulsions in the financial crisis that began in 2009 in Greece. Moody’s Investors Service said that the move is a significant step toward limiting support for bank creditors across Europe and shows that policy makers will risk financial- market disruptions to avoid sovereign defaults.

The tax is “a worrying precedent with potentially systemic consequences if depositors in other periphery countries fear a similar treatment in the future,” Joachim Fels, chief international economist at Morgan Stanley (MS) in London, wrote in a client note....

Cypriot banks had 68.4 billion euros in deposits from clients other than banks at the end of January. Of that, 21 billion euros, or 31 percent, were from clients outside the euro area, 63 percent were from domestic depositors, and 7 percent were from other nations within the euro region, according to data from the Central Bank of Cyprus
Cypriot President Nicos Anastasiades exhorted political factions to support the deposit levy, which he pledged is a one- off measure that will avert a collapse of the financial system that in turn would have led to the country’s exit from the euro.
“A bank collapse would cause indescribable misery,” Anastasiades said in a televised address yesterday. He called the crisis the country’s worst moment since the 1974 Turkish invasion that has left the island divided...

The potential changes include taxing deposits less than 100,000 euros at a 3 percent rate, while setting the levy at 10 percent between 100,000 euros and 500,000 euros and at 12 percent for deposits greater than that, Antenna TV reported, without saying how it got the information.
The levy -- as of now 6.75 percent of all deposits up to 100,000 euros and 9.9 percent above that -- whittled the euro- area’s bailout of Cyprus to 10 billion euros, down from an original figure of about 17 billion euros, near the size of the nation’s 18 billion-euro economy. ...

The bank tax was the alternative to imposing losses on bondholders in a so-called bail-in. That step was opposed by the Cypriot government, the European Commission and the ECB, German Finance Minister Wolfgang Schaeuble said on ARD television last night. ...

Given the fragile state of the banking systems, especially in Greece and Spain, anything that can impede the needed rebuilding of confidence in these banking systems can potentially cause financial and economic damage,” he said.

2---Cyprus: The Next Blunder, naked capitalism

All the Conditions for a Total Disaster are in Place
The really worrisome scenario is that the Cypriot bailout becomes euro-systemic – in which case the collapse of the Cypriot economy will be a sideshow. This will happen when and if depositors in troubled countries, say Italy or Spain, take notice of how fellow depositors were treated in Cyprus.
All the ingredients of a self-fulfilling crisis are now in place:
• It will be individually rational to withdraw deposits from local banks to avoid the remote probability of a confiscatory tax.
• As depositors learn what others do and proceed to withdraw funds, a bank run will occur.
• The banking system will collapse, requiring a Cyprus-style programme that will tax whatever is left in deposits, thus justifying the withdrawals.
This would probably be the end of the euro

3---Euro , stocks slump on Cyprus, Bloomberg

The euro weakened to its lowest level this year, while stocks and commodities slumped, as an unprecedented levy on Cyprus’s bank savings threatened to throwEurope back into crisis. German two-year note yields dropped below zero as Spanish and Italian borrowing costs jumped.
The 17-nation shared currency sank 1 percent to $1.2945 at 8:05 a.m. in New York. The MSCI All-Country World Index lost 0.9 percent, retreating from the highest level since June 2008. The Stoxx Europe 600 Index slid 0.7 percent and Standard & Poor’s 500 Index futures dropped 0.8 percent. Copper tumbled 2 percent and gold rose 0.7 percent. Germany’s note yields fell to as low as minus 0.003 percent. Spain’s 10-year rate climbed nine basis points to 5.01 percent and the yield on similar-maturity Portuguese bonds rose 20 basis points to 6.16 percent.

Finance ministers in the euro area reached an agreement on March 16 forcing depositors in Cypriot banks to share in the cost of the latest bailout. Bank creditworthiness deteriorated the most since inconclusive Italian elections three weeks ago as Moody’s Investors Service said today the Cypriot levy is negative for bank depositors across Europe. Bill Gross at Pacific Investment Management Co. said it moves “risk-on”trades to the back seat.
“This creates a precedent and is a bit scary,” said Matthieu Giuliani, who helps oversee $5.3 billion as a fund manager at Banque Palatine SA in Paris. “It hurts the market. But this is case specific to Cyprus. I don’t see Germany or the EU imposing such a thing on Spain or Italy. It would create panic in the banking system

4----Cyprus reworks divisive bank tax, delays vote, Reuters

The euro zone has indicated that changes would be acceptable as long as the return of around six billion euros is maintained. If the Cypriot parliament votes the deal down, the euro zone would face a risk of being dragged back into crisis.
"It is up to the government alone to decide if it wants to change the structure of the ... contribution (from) the banking sector," European Central Bank policymaker Joerg Asmussen, who was pivotal in the weekend negotiations, told reporters on the sidelines of a Berlin conference.
"The important thing is that the financial contribution of 5.8 billion euros remains," he said.
Residents on the island emptied cash machines to get their funds over the weekend. The move also unnerved depositors in the euro zone's weaker economies. Investors feared a precedent that could reignite market turmoil that the European Central Bank has calmed in recent months with its pledge to do whatever it takes to save the euro

5---German Finance Minister Wanted 40% Haircuts, mish
Also from Ekathimerini: "Cyprus state broadcaster CyBC reported on Saturday that German Finance Minister actually entered the Eurogroup meeting on Friday proposing a 40 percent haircut on Cypriot bank accounts. Sarris stated on Saturday that this had also been the proposal of the International Monetary Fund."

6---From the WSJ: Cyprus Postpones Debate on Deposit-Tax Proposal
The Cypriot parliament is now scheduled to meet Tuesday at 1600 GMT ... The government is also in discussion with its creditors to ease the burden on small depositors. ... The new proposal will see smaller depositors, those with up to €100,000, taxed at 3%; savers with €100,000 to €500,000 taxed at 10%; and those with over €500,000 taxed at 15%, one official said
7---Tim Duy: Cyprus, economists view

Frances Coppola,in a must read piece, explains the economic consequences:
The effect of large and small depositors removing funds on that scale will be a brutal economic downturn as the money supply collapses. In particular, the dominant financial sector will suffer a severe contraction, putting thousands of jobs at risk and paralysing lending to Cypriot households and businesses. And that is IN ADDITION to the estimated 4.5% economic contraction that is already happening due to austerity measures imposed on Cyprus in 2012 to reduce its fiscal deficit, and the further measures required in this bailout.
Yes, exactly how will this help Cyprus emerge from their recesssion? If you guessed "it won't," you are correct. But expect European policymakerst to drone on about how their plan will restore confidence in the economy of Cyprus. Coppola also bemoans the culpability in the ECB:
The FT confirms the ECB's role in forcing through the deal. It says the ECB threatened to stop providing liquidity to Laiki, Cyprus's second-biggest bank, which would have caused an immediate disorderly collapse. I have written previously about the ECB's disgraceful behaviour. This is the worst example yet. ...

Peter Siegel at the FTplaces the blame on the Germans:
Unbeknown to the Cypriot delegation members as they entered the hulking Justus Lipsius summit building in Brussels on Friday night, their fate was already sealed: their German counterparts wanted about €7bn for the estimated €17bn bailout of their country to come from deposits in the country’s banks.“They were hand in hand with Finns, who were much more dogmatic,” said one senior eurozone official involved in the 10-hour marathon talks that stretched until 3am on Saturday morning. “Had that not happened, full bail-in,” the official added, using the terminology for wiping out nearly all Cypriot bank accounts.
8---Will Cyprus Become Creditanstalt 2.0?, naked capitalism

The cheery view that Europe had moves past its crisis now looks to have been a tad premature. The astonishing weekend revelation that Cyprus had struck a deal for a Eurozone rescue of the island nation’s banks that hinged on a deposit grab, um, tax, of 6.75% of deposits below €100,000 and 9.9% for those above €100,000, sends a message that anyone in a weak bank in a periphery country, particularly a large deposit holder, is at risk. The one thing that America learned in the Great Depression is that to prevent debilitating bank runs, depositors need to be sure their holdings are safe. And if you need to extend government guarantees to provide that reassurance, then government bloody well better keep the banks on a short leash to make sure you don’t have to pay out on those guarantees all that often. The recklessness of letting financiers talk governments out of constraining bank activities is coming home to roost.
Creditanstalt, an Austrian bank that collapsed in 1931, precipitated a financial panic that led to a series of bank failures and a currency crisis, a classic combination of contagion worsened by poor official responses. The Cyprus deposit-seizure scheme has the potential to kick off a similar broad-based financial unraveling, but whether it does depends on both customer and official reactions

9---Echoes of 1933; The Cyprus Heist, macromarket musing

Bank depositors in Cyprus learned today of a planned heist on their funds. It was a well organized one that will take 6.75% of all small deposit accounts and 9.90% of all large depositor accounts. What is truly shocking about this heist is that it was planned by the EU and IMF and applied to funds, at least for the small depositors, that were supposedly government insured (i.e. risk free). This is what we call a major shock to expectations.

Now the depositors do get bank equity in exchange and some observers note this heist is not as bad it could be--the alternative could have been a complete financial collapse--but from a broader perspective these excuses miss the mark. The very reason the crisis has got to the point that bailouts or "bail-ins" are needed is because the Eurozone was a flawed monetary union from the start. It never met the criteria of an optimum currency area and its monetary policy has effectively been geared toward Germany. Thus, at the advent of the Euro, the ECB policy interest rate was close to what a Taylor rule would predict for Germany, but far too low for the periphery. Likewise, since the crisis the policy rate has been close to what a Taylor rule would predict for Germany, but too high for the periphery. In both cases, ECB policy has been destabilizing to the periphery. That is why, despite being in the midst of a crisis, the ECB explicitly tightened monetary policy in 2011 by twice raising its policy rate. It is also why the ECB has implicitly (or passively) tightened policy over the past few years as evidenced by the flatlining of the broad money supply and nominal GDP. In short, the boom-bust cycle of the Eurozone periphery that helped make the Cyprus financial crisis is largely the result of a flawed monetary system biased toward Germany.

But that part is not new. What is new is the unexpected seizing of depositors funds. As Lars Seier Christensen, Ed Conway, Felix Salmon, and Frances Coppola note, this sets a dangerous precedent for all Eurozone bank deposits. Here is Coppola:

[T]he fact is that deposit insurance everywhere in the EU has now been undermined. The precedent has been set for insured depositors to suffer losses in order to protect Russian oligarchs and reckless banks. If the Eurogroup can impose this on Cyprus, it can do so elsewhere too.

Yes, EU leadership promised this action was a one-off event, but the fact that they had to make this promise is a sign that they no longer can be trusted
One day after being named Detroit’s emergency manager, Kevyn Orr threatened to use the bankruptcy courts to impose drastic cuts on workers in the nation’s poorest large city...
According to the Free Press, Orr acknowledged “that the threat of such a bankruptcy is a tool he can use to force cooperation on creditors and retiree and employee benefits groups, even those whose leaders would have a difficult time convincing the people they represent to accept losses or benefits cuts.”
The threat of bankruptcy also provides a tool to union executives to push through concessions on the grounds that even worse cuts would be imposed by a budget.
While presented as “equal sacrifice” of all those involved, including bondholders, the principal target of a bankruptcy would be the city’s working class. The political establishment and media are particularly eager to slash pensions for current retirees, which under state law cannot be done except through bankruptcy.

13---JPMorgan and the criminalization of the US ruling class, wsws

14---The Russians are coming, NYT

the global crisis of 2008 was in a fundamental sense made possible by the erosion of effective bank regulation. As Gary Gorton (pdf) has documented, we had a 70-year “quiet period” after the Great Depression in which advanced countries had very few major financial flare-ups; Gorton argues, and most of us agree, that the key to this quietness was a constrained, regulated financial system that also limited the opportunities for excessive non-bank leverage.

But this regulation in turn depended, to an important extent, on limited international capital flows; otherwise regulations made in Washington or elsewhere would have been bypassed via havens like, well, Cyprus. And once capital controls began to be lifted in the 1970s we entered an era of ever-bigger financial crises, starting in Latin America, then moving to Asia, and finally striking the whole world.
So what are we going to do about this? Cyprus, as a euro-zone country, should really be part of a euro-wide safety net buttressed by appropriate regulation; it’s insane to imagine that the euro can be run indefinitely with merely national deposit insurance. But euro-area deposit insurance doesn’t seem to be in the cards — and anyway, there are plenty of other potential Cypruses out there.
All of which raises the question, is the era of free capital movement just a bubble, fated to end one of these years, maybe soon?

15---Island Nightmares, NYT

What is it about islands around Europe’s periphery? Is there some peculiar psychological thing about proximity plus the illusion of isolation that makes them turn themselves into havens for runaway banks? Inquiring minds want to know.

Anyway, the Cyprus story has obvious parallels with both Iceland and Ireland, with RMML — Russian mobster money laundering — as an extra ingredient. All three island nations had a run of rapid growth as banking havens that left them with banking systems that were too big to save. Iceland, at peak, had banks with assets that were 980 percent of GDP, more than 10 times the US number; Ireland was at 440 percent. Cyprus, at around 800 percent, was closer to Iceland in this respect. For a good summary, read this.
In all three, runaway banking was the source of the crisis

16---Europe’s defences against bank runs have limits that may be about to be tested, IFR

 Europe’s defences against bank runs have limits that may be about to be tested. The decision to force insured depositors to fund part of Cyprus’ bailout has sparked fears that their counterparts in Italy and Spain will try to head off hypothetical losses of their own by withdrawing their holdings. If they do so in bulk, the European Central Bank would struggle to hold the line

17---Legalised bank robbery, IFR

In total, Cyprus requires 17 billion euros – almost 100 percent of GDP – to rescue its banks and deal with the government’s own bills. If Nicosia had borrowed all that cash on top of its existing debt, it would have been carrying an unsustainable burden. It would have only been a matter of time before the debt needed restructuring.

Cyprus’ euro zone partners and the International Monetary Fund rightly decided not to lend it so much money, limiting the bailout to 10 billion euros. This means Nicosia should end up with debt equal to a manageable 100 percent of GDP in 2020.

The problem was where to find the extra 7 billion euros. Given that Germany and other northern European countries weren’t prepared to give a handout, there were two options: haircut the government’s own bondholders or hit bank creditors. The option of haircutting government debt - as Greece did last year - was rejected. Many bonds are held by Cypriot banks, so a haircut would just have increased the size of the hole in their balance sheets, meaning they would have needed an even bigger bailout. The Cypriot government’s credit would have been destroyed for little benefit.
So, by default, the banks’ creditors had to be tapped. Ideally, bank bondholders would have taken the strain. But Cypriot banks have hardly any bonds. So there wasn’t much money that could be grabbed there.

This, incidentally, rams home the importance of requiring all banks to have fat capital cushions - consisting either of equity or bonds that can be bailed in during a crisis. The sooner international regulators come up with a minimum standard for so-called “bail-in” debt, the better.Given that Cypriot banks didn’t have such a cushion, the remaining option was to hit depositors - for 5.8 billion euros.

There was even some rough justice in the policy. After all, up to half of the country’s 68 billion euros of deposits is held by Russians and Ukrainians - and some of this money is thought to be black money laundered through Cyprus.What’s more, the country’s banks have been paying high interest rates in recent months - in some cases up to 7 percent on euro deposits. That is clearly danger money. Depositors should have known there were risks attached to such high rewards.


No comments:

Post a Comment