Cyprus bailout the latest…. Now things percolate – and thanks to a debate forum – things are much clearer.
It seems like German Finance Minister Wolfgang Schäuble’s idea was that the minor depositors (below 100,000 EUR) would get off. He now points to the Cypriot government and the ECB, for not choosing that solution. Schäuble said to the German channel ARD: ”They had decided this solution, and will now have to answer to the Cypriot people”.
On the contrary the famous well informed source around the ECB says that Asmussen had specifically warned against touching accounts less than 100,000 EUR at all! But it was the Cypriot government that had to decide the precise structure.
The EU Currency Commissioner Olli Rehn to Financial Times: ”When the responsible in Cyprus wants arrange the depositors participation otherwise – then we will support it – as long as the amount remains the same.
The reason given for wanting to involve small depositors should have been that large deposits otherwise would flee the country. But the Cypriot President Anastasiades (a conservative wanting the reunification of Cyprus; Northern Cyprus is illegally occupied by Turkey) could not get an understanding for his original proposal that depositors should go free. This alternative would mean that the Cypriot banks would go bankrupt as Asmussen pointed out.
Comment: The last few days a lot of the large deposits have been spread out on smaller accounts. One may wonder where they got that idea from.
The reactions abroad regarding Cyprus:
The British chancellor, George Osborne, has announced the British government will compensate soldiers and civil servants. There are thought to be around 3,000 British military personnel and civil servants based in Cyprus.
Russia’s premier Vladimir Putin is absolutely livid!
Considering the agreement “unjust, unprofessional and dangerous”. And Russia will reconsider their loan to Cyprus of 2.4 bio. EUR. The deposits in question are about 70 bio. EUR, where about hal fare expatriate (mainly British and Russian). A ”back of envelope” calculation seem to indicate that the Cypriotes shouldn’t care to much one way or the other.
The Cypriot government has gotten a stay for deciding the distribution till tomorrow Tuesday: The current “thinking” is that below 100,000 EUR only 3% instead of 6.7% and those above with 12.5% instead of 9.9% – Again making a fast calculation: A “haircut” of 20% to the above 100,000 EUR would leave the small depositors clear. So let’s see if we don’t end there, as Asmussen said in the first place. The only difference is that there will be hard work to add those that have distributed their deposit on a number of accounts. But then the Cypriot banks are closed till Thursday. And why not: The large depositors are mad enough with at 10% haircut so the cat is out of the bag.
Comment on Cyprus:
The wider perspective on Cyprus is more interesting.
If the banks don’t open their books and repatriate tax evasion funds to the proper state, they will be declared bankrupt simply because the economies of the tax shelters cannot pay the losses the banks have suffered. There is a maximum to the debt that an economy can service and as each country ultimately guarantees its banks there is a maximum to what losses the nation can foot the bill of. Above that maximum the depositors will lose money.
This is particularly interesting with respect to Spain where depositors fled to the tune of 100 bio. EUR. Spain could be saved – for the time being – without losses to depositors. The only way back to stability is to tax deposits – once they have been repatriated. This means ultimately that pension funds will have to be taxed to cover the losses in the banks – in so far that downright tax-evaders can’t be ferreted out.
There is a limit as to how hard you can tax consumers, wage earners and businesses without actually bringing down tax revenue. Pensions and other savings above that limit will have to be removed one way or the other. We see that pension funds are jerking their discounting factor up way beyond any realistic investment yield – just so they on paper can claim they can meet their obligations – by kicking the can further down the road. But that is overlooking the basic fact that pensions and other social security’s have to be produced, and that production has a price. To think that the labour force will endure a lower standard of living than the pensioners is simply not realistic. We will hear this in the retirement homes: “So You want to go to the toilet? Well that is most certainly possible: But it will COST!”
It also means there is a strict limit to how much banks can be saved. Japan has converted the banks losses into sovereign debt for 25 years: But it helps very little, as they have to export their wares to a lower price than the imports (energy and food) going into that production. Japan is debasing its currency to help exports – always a dangerous proposition in a declining economy – because it automatically makes imports that much dearer. You end up like Enzo Ferrari that drove an ordinary Renault – he could not afford a Ferrari.