Monday, March 25, 2013

Today's links

"Cyprus is now very overvalued — not only have the big capital inflows of yore dried up, a major export industry — offshore banking — has just died." Paul Krugman, NYT

1---Cyprus on the ropes, Daeth by bailout, Merkel gets her pound of flesh, naked capitalism

Here is the Prodigal Greek‘s summary of the major provisions of the legislation (hat tip David P):
Restrictions in daily withdrawals
Ban on premature termination of time savings deposits
Compulsory renewal of all time savings deposits upon maturity
Conversion of current accounts to time deposits
Ban or restrictions on non cash transactions
Restrictions on use of debit, credit or prepaid debit cards
Ban or restriction on cashing in checks
Restrictions on domestic interbank transfers or transfers within the same bank
Restrictions on the interactions/transactions of the public with credit institutions
Restrictions on movements of capital, payments, transfers
Any other measure which the Finance Minister or the Governor of Cyprus Central Bank see necessary for reasons of public order and safety...
First, confiscating bank deposits is now on the table in any future crisis. That’s toothpaste that’s not going back in the tube. Commerzbank chief economist Jörg Krämer has already suggested (Google translates) “a one-time property tax levy” for Italy and “a tax rate of 15 percent on financial assets.” And adding fuel to the fire, the Leader of the UK Independence Party has urged expats in the periphery countries, in particular the 750,000 British in Spain to “Get your money out of there while you’ve still got a chance.”
Second, capital controls in Cyprus mean that there are now two Euros in effect: The Euro that you can use only in Cyprus, and the Euro you can use elsewhere in the so-called “monetary union.” So from the perspective of people in Cyprus, the results are in some ways worst that a breakup: rather than having depreciated dough, you have dough that has been impounded, particularly in terms of using it outside Cyprus....

As if it was not clear before, it is perfectly clear now that the EU has no real institutional processes for this topics and basically makes things up as it goes along, based on what 4-5 people in a room decide at 3am. It is quite unbecoming for a serious Western super-power.
1. Laiki is resolved via good bank / bad bank, with uninsured depositors (4.2B) most likely losing everything (along with shareholders and bond holders).
2. Bank of Cyprus will have a bail-in of uninsured depositors, with them losing between 30-40% most likely. Shareholders and bond holders will be wiped out.
3. Troika will lend 10B to the Cyprus government, solely for fiscal purposes and based on a memorandum to be determined. None of the troika funds will be used for the bank bailout.
4. Insured depositors will be protected (sub 100K euros....

1. This will have an immediate negative effect on the local real economy through two mechanisms: (a) loss of savings of consumers hitting consumption and (b) partial or full loss of operating accounts of local businesses, some of which will never recover. The small and medium businesses in Cyprus will face a wave of bankruptcies unfortunately.
3. Net net, we should expect a drop in GDP over the next 2 years in the 20-30% range. This will inevitably lead to significant social and business disruptions and hardship and greater need for fiscal consolidation (as certainly tax revenue will shrink and automatic stabilizers will increase). Government employees, take note…
4. Overall, this will be a very severe recession / depression....

The early estimates (not official, just based on a look at the balance sheet and knowledge of what was on it) was that the Laiki depositors >€100,000 would be very lucky to get anything back, and the Bank of Cyprus losses for the over €100,000 depositors had been 22% to 25%, and that may not include the ELA transfer, which would presumably increase the losses considerably.
Admittedly, at this point, the inertial course would be to approve the agreement. However, the influential Archbishop of Cyprus advocated leaving the Eurozone over the weekend. That plus a show of outrage from the population could undo what seems to be a settled deal. And that would have more immediate, unexpected ramifications

MoU must be approved by Parliament

2---The Broken Euro, copola comment

Imagine you live in a prosperous country, with a lovely climate, beautiful beaches, blue seas. But there's something funny about this country. It doesn't have a functioning banking system.

You can put money into your bank, but you can't get it out again. At least you can, through ATMs, but only in very small amounts.

If you have money on deposit, you can't take the money out and close the account. And if it's a time deposit, when it reaches the end of its life, you can't have the money to spend. You have to roll it over into a new deposit.

You can't cash a cheque in a high street bank. You can't pay bills in a high street bank, either. And no high street bank is lending any money, so if you want a loan, forget it. In fact high street banks are not much use.

Your employer pays you in cash, because there are no electronic payments. Which is just as well, really, because you need cash. There are no automated payments such as direct debits, so you pay all your household bills in cash. Credit and debit cards are no longer accepted anywhere, so you buy all your shopping and petrol for your car with cash. You can't make phone or internet purchases

3---  If housing is booming, why are mortgage originations so low?, Dr Housing Bubble

California home sales are down 3 percent on a year-over-year basis for the last month of data.  When we look at US purchase loan originations we find the volume and amount being pushed out to be at levels last seen in the 1990s.  What gives?

The non-existent home buyers
The housing market is largely being driven by investors.  The noise that we are seeing is large money from both Wall Street and foreign money clogging up real estate across the US.  Foreign money is more concentrated in targeted niche markets while big money is dominating places like the Inland Empire, Arizona, Nevada, and Florida.  One interesting chart shows how distorted this current market is:
Bloomberg) With all the real estate investment action, you’d expect the number of new mortgage loans to be shooting upwards. No such luck. Look at the chart below, which shows new purchase mortgages through the 3rd quarter of 2012, using data from the Mortgage Bankers Association. For that quarter, buyers took out $129 billion in purchase loans. Not only is that much lower than the numbers from the boom, but it’s less the post-crash levels of 2009. You need to go back to the mid-1990s to get back to numbers like those (and they’re not adjusted for inflation).”
 The obvious reason for this is that the volume of all cash buying form investors is off the charts.  We’re not talking about a handful of buyers but billions upon billions of dollars flowing into the housing market from sources outside of your traditional buyer.  Couple this with Fed and government regulations that now allow banks to rent homes out plus the fact that many of these investors are buying to hold for a few years and then sell, you end up simply removing inventory from an already depleted market.
 The hunger for rentals is high but there seems to be some market saturation that is now occurring.  In California, we have become an even larger renter state since the housing market peaked in 2007...

We noted that last month we had the largest amount of all cash sales in the history of SoCal (some 35.6 percent of all sales).  Cash buyers paid a median price of $260,000 in SoCal so this is likely to be a larger pool of investment properties for rent versus foreign money that is bidding properties up in niche markets

4---QE loses its punch, oc housing

Each round of quantitative easing has less impact on the economy.

Nolte noted that “economic growth, erratic as it is, is likely to impact the bond market well in advance of the Fed deciding to pull liquidity from the system and begin a campaign of raising rates.”
5---Men live in Guantanamo animal cages, will never get trials’, RT

6---No money down mortgages return, Housingwire

NASA Federal Credit Union and Navy Federal Credit Union are offering members mortgages that do not require a down payment or mortgage insurance.
This type of loan contributed to the burst of the housing market in 2008, but both banks said they believe their underwriting standards and member relationships will protect everyone from loan losses, Credit Union Times reported.
Bill White, vice president of residential lending at NASA Federal Credit Union, said the bank focuses on members' ability to repay the loan instead of what might happen to the value of the underlying asset.
White added, "It really is all about our members. They understand how the credit union seeks to help them and they want to help the credit union too."

7----Hot money blues, NYT

the truth, hard as it may be for ideologues to accept, is that unrestricted movement of capital is looking more and more like a failed experiment.
It’s hard to imagine now, but for more than three decades after World War II financial crises of the kind we’ve lately become so familiar with hardly ever happened. Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course...: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.
What’s the common theme...? Conventional wisdom blames fiscal profligacy — but ... that story fits only one country, Greece. Runaway bankers are a better story... But the best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out. ...
Now what? I don’t expect to see a wholesale, sudden rejection of the idea that money should be free to go wherever it wants, whenever it wants. There may well, however, be a process of erosion, as governments intervene to limit both the pace at which money comes in and the rate at which it goes out. Global capitalism is, arguably, on track to become substantially less global.

8---Real wages decline, nobody notices, middle class economist

Your read it here first: Real wages fell 0.2% in 2012, down from $295.49 (1982-84 dollars) to $294.83 per week, according to the 2013 Economic Report of the President. Thus, a 1.9% increase in nominal wages was  more than wiped out by inflation, marking the 40th consecutive year that real wages have remained below their 1972 peak.

Yet no one in the media noticed, or at least none thought it newsworthy. I searched the web and the subscription-only Nexis news database, and there are literally 0 stories on this. So I meant it when I said you read it here first. In fact, there was little press coverage of the report at all, in sharp contrast to last year.
...if you've been paying attention, you know the drill: higher productivity plus lower wages = greater inequality. The question is, why aren't our media paying attention when real wages fall, yet again?

9---And the Darwin Award goes to..., IFR

WE ARE APPROACHING the sixth anniversary of BNP Paribas’ notorious announcement that it could no longer apply proper valuations to some of its funds containing structured products, the first indication that not all was well with an economic model based on borrowing to spend.

Many trillions of dollars, pounds and euros of rescue funds later, it appears to me as though underlying attitudes to what one can take out of the system relative to what one has put in have not really changed. One might be able to temporarily suspend Darwin but one cannot make him go away

10---Learning from Cyprus, IFR

Cyprus is struggling under the weight of a bloated and dangerously shaky banking sector which has grown to more than seven times the size of its economy, largely on the back of taking in off-shore deposits from wealthy Russians. While this is a risky business model for an economy under the best of conditions, it becomes a disaster when that huge banking sector invests heavily in domestic real estate and Greek debt, both of which have plunged in value.
A member of the euro currency, Cyprus first struck a deal with the EU and the International Monetary Fund for a bailout which included an involuntary contribution, called a levy, from bank depositors. This deal, now in flux, called for accounts under €100,000 to be snipped by 6.75% and larger accounts, many off-shore money, by 9.9%. Cyprus has been on an extended bank holiday since the bailout was first mooted, effectively trapping deposits.

Feeling repressed

Financial repression, which takes many forms, has historically been a popular way for governments to dig themselves out of debt holes. A prime way to do this is to keep interest rates artificially low – quantitative easing anyone? As well, governments can and do try to capture pools of capital by, if not confiscating it, then at least channeling it in ways which will be useful to the government in addressing its debt problems.
A great example of this is forcing pension funds to invest in government debt, or, as is being considered in Cyprus, in a kind of national fund.
Any roadblock to the free movement of capital is a form of financial repression. Cyprus, where depositors are likely to receive either shares or bonds issued by the banks in which they hold money, is a perfect example.
More of this is coming. My guess is you are better off at home than abroad, as it is harder to do voters out of their capital than honored guests, as the Russians have learned.
Bottom line on Cyprus is: don’t over-react, but don’t be surprised if more of this kind of thing happens

11---From hedge
Depression for Cyprus: Our Cypriot GDP forecast entails a drop of just over 20% in real GDP by 2017. This forecast had already factored in much what was agreed, but did not account for the additional uncertainty shock generated by the past week’s appalling political mess. Risks are clearly on the downside and Cyprus will in all likelihood require additional financial assistance further down the road. Accounting for less than 0.3% of euro area GDP, any downward revision to Cyprus will be barely visible on the euro area aggregate.
12---Mortgage rates near all-time low, WSJ

Mortgage rates continue to plumb historically low levels, on the threshold of the industry’s key spring home-sales season. The rate on a 30-year fixed-rate mortgage ticked down to an average of 3.54% in the week ended on March 21 from 3.63% the previous week. That also is down from 4.08% — the average rate for a 30-year fixed-rate mortgage a year ago.
13---Tyler Cowen:
What to look for in the Cyprus deal: The capital controls will have to be strict. What will the price of a Cypriot euro be, relative to a German euro? 50%? I call this Cyprus leaving the euro but keeping the word “euro” to save face

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