EUCOM Economic Analysis - Part I

[Firn]

Link:http://www.reuters.com/article/2013/...r&dlvrit=56943

A Reuters article citing at length the German Social Democrat who sits as President of the European Parliament, without doubt he is trying to make a mark as an EU summit approaches later this week. If there is one EU institution that is irrelevant in policy-making and democratic accountability it is this parliament - a very comfortable place to to sit and pontificate.

The European Parliament certainly go merkelanized to some degree in the last years but it is quite relevant and busy in many areas if you go a little deeper. No wonder that those pesky Americans, not alone of course, offer help in shaping those key laws. I also voted for an guy there, if I'm not mistaken.

While I share certainly not all ideas of the center-left faction in the European parliament he is pretty much spot on. So much potential, so much productivity vasted by a mostly cyclical problem made worse by the wrong policies.

In any case that Austrian student showed excellent initiative and with others he brought attention some serious issues.

[Firn]

Quite a day in Europe and a rather rough one mostly for the people of Cyprus and a fair amount of Russian&Co. Who would have imagined that such a little island not even reaching 0,5% of EU's GDP could have cause such troubles. I bet that more money was 'burned' in stocks today then was necessary to keep the gray&bad banks of the Cybrian banking sector running. But wait, if memory serves right, there was a similar colder island, with very similar problems some years ago. Another green island, part of the EU, had also a massive financial sector which was blowing up.

The Icelandic raiders refused to give anything back to those who willingly lend to get a higher return on their money while the Irish burdened with some help the heavy load. In Cyprus we have seen a mix proposed, although far less bloody then in Iceland. Once again people brought partly black money there to wash it white while earning a handy return, far above the European norm. Still it was stupid and immoral to hit those who have little, especially after up to 100.000 were guaranteed a day before.

While the EU and the ECB handled the issue badly I'm honestly disgusted by the way the powers in Cyprus treated their people. From a variety of sources it emerges that key player of the ruling coalition wanted to have the burden shifted more 'equally'. To take less from the rich and tax evaders they wanted to take a good deal from the poor. Not only did they try to protect the former but also their personal wealth. I would be not surprised at all if there were lots of last-minute transfers from the politcal caste and the well-connected. Disgraceful.

[davidbfpo]

It was odd to listen to a German politician being interviewed on the BBC radio yesterday about Cyprus. Best bit was when he mentioned all the work to guarantee EU-wide bank deposits up to 'X' level and along comes Cyprus - which has ruined any public faith in secure banking.

What is more interesting is the exposure of Russian deposits and the potential for questions about "dirty" money and money laundering. Whatever the pretence of much anti-money laundering regulation, it is clear that for (some) governments "dirty" money is a source of income, albeit at a price sometimes.

[Firn]

From the left-leaning liberal Zeit

Nach Angaben aus Teilnehmerkreisen hatten EZB-Ratsmitglied Jrg Asmussen und die Euro-Gruppenchef Jeroen Dijsselbloem genau einen solchen Plan ausgearbeitet, der Kleinanleger verschonte. Als der Vorschlag dem zyprischen Prsidenten Nikos Anastasiades vorgestellt worden sei, habe dieser jedoch kategorisch abgelehnt. Um das ntige Geld zusammen zu bekommen, htten die Vermgen ber 100.000 Euro mit einer Zwangsabgabe von deutlich mehr als zehn Prozent belastet werden mssen. Das habe Anastasiades abgelehnt.

Danach soll es im Brsseler Sitzungssaal hoch her gegangen sein. Schuble, Dijsselbloem und Vertreter von EU, EZB und IWF unterbrachen die Sitzung mehrmals, um sich die Zyprer im Einzelgesprch vorzunehmen. Samstagfrh habe der Niederlnder Dijsselbloem dann vorgeschlagen, dass die Einlagen ber 100.000 Euro mit 12,5 Prozent belastet werden.

Daraufhin strmte Zyperns Prsident Anastasiades laut Teilnehmern wutentbrannt aus dem Saal. Er kehrte erst zurck, nachdem ihm ranghohe Unterhndler unmissverstndlich klargemacht hatten, wenn er nicht an den Verhandlungstisch zurckkehre, wren der Staatsbankrott und die Schlieung der Banken unabwendbar. Schlielich stimmte er der Abgabenregelung zu, bestand aber auf eine Hchstgrenze von 9,9 Prozent fr die Vermgen ber 100.000 Euro. Damit war klar, dass alle anderen Guthaben belastet wrden und zwar mit 6,75 Prozent.

This fits pretty much what I had in my mind yesterday. Of course we have to treat every information with care but it fits pretty nicely. One has also to keep in mind Cyprus hard and in hindsight harmful stance on it's banking system and dirty money against European institutions. It is highly likely that many could not stomach the fact that the rich tax evaders would get away while the European taxpayer would have to foot the bill. After Cyprus was told and told again that it had to act on those issues.

Mr. Anastasiades&Co would have know what the game was about and maybe tried to save some face - by coming up with a more 'even' burden for all. It is quite telling how quickly and easily the journalists seem have to got many details. Looks like many are not quite happy how things were depicted earlier...

It is just disgraceful that poorer and less financially sophisticated citziens of Cyprus seem have to pay a considerable amount. It is not like they moved their money to the banks of their island to get a higher return but they just put it into the institution around the corner...

[Firn]

The Telegraph live-blogs the events following the Guardian model.

18.23 Apparently they voted with a show of hands.

18.16 So they voted after all. And surprise surprise, the bank levy bill has been defeated. There were 36 votes against, and 19 abstentions. One MP didn't even show up. Cyprus's parliament has 56 seats.

So they said no. Very bad news indeed, especially for the man on the street, may he or may he not carry a shield crying murder. The banks should not open anytime soon.

I appreciate that things are hectic and if many twitter and talk there must be some pretty idiotic stuff among it:

Germany might be telling the world not to blame it for Cyprus' bailout plan, but one analyst told CNBC that Russia could avenge the loss of billions of dollars it has invested and deposited on the island by cutting Germany's energy supply.
...

On the other hand it is different if you hear something like that:

15.05 Former governor of the Cypriot central bank, Anthanasios Orphanides has launched an powerful rebuke towards Cyprus's European creditors, branding their actions tantamount to blackmail. Speaking to Bloomberg TV, he said:

Decisions like this, much like the decision to haircut Greek debt in October 2011, actually benefit some countries. For example as we’ve seen from markets yesterday a decision like this reduces the financing costs for the German government so the German government can now borrow at negative rates as a result while it inflicts pain on other countries. Not everybody is equal under the law the way European governments are behaving these days.

Such talk is quite dangerous and during the last years I would have been quite glad if some would have said not a single word. He was the fromer top guy of the CCB when the bank secto got out of control and dirty money was pouring in. It happened on his watch and just like terrible governments at home brought us into a mess with few good alternative the Cypriotic leader did shovel their island their own hole. They made themselves dependent on help and goodwill of others which they squandered by doing nada of what they had asked them.

Let us see the offical stance of France:

"The rates could be different and could protect deposits under 100,000 euros, we are waiting for that and we are ready for that," French Finance Minister Pierre Moscovici told CNBC on Tuesday.

"There was a huge problem in Cyprus, nobody can deny that - with a banking sector which was absolutely enormous, with some advantages which were huge too and a lack of transparency- we had to address that, that's what we're doing,"

In short so far: Do what you want but you have to collect enough money to pay your part of the bailout.

[Firn]

Big news indeed from the ECB, seems that my take on the situation was not that far off..

PRESS RELEASE

21 March 2013 - Governing Council decision on Emergency Liquidity Assistance requested by the Central Bank of Cyprus

The Governing Council of the European Central Bank decided to maintain the current level of Emergency Liquidity Assistance (ELA) until Monday, 25 March 2013.

Thereafter, Emergency Liquidity Assistance (ELA) could only be considered if an EU/IMF programme is in place that would ensure the solvency of the concerned banks.

In short. Get a deal done with the EU/IMF or your whole banking sector goes bust.

...

--

I had yesterday time to look at some annual reports and stock movements, and look at the performace of what I bought in the last year. Seethe original post

E.ON went down from ~15 to ~13€, a brilliant investment in a strong market
H.P did not too badly from ~ 10 to 12,8€ not too shabby.
Xerox gain some from 5 to 6€

So if one invested 30 € in each stock one has now (with fees but without dividends) roughly 100€ compared to 90€ you had a quarter ago. Not too bad especially if we consider that the € roughly gained 10% on the $. An U.S American could have got a nice return with those three combined.


E.ON from 15 down to ~ 13,5€ - so far so good
HP from 10 to ~ 17,5 € - 75% are quite a decent return in a couple of months
Xerox from 5 to ~ 6,75 - somewhat over 30% gain in the same timeframe

So the orignal 90 have become 120 € in less then half a year. Not so bad. I never understood in good times and bad ones why stocks have to be per se riskier then cash in bank. It all depends on the value you get and the price you pay. It is surprising to what lengths some persons go to get a slightly higher return on bonds and cash while shunning equity out of prinicple because of the volatility...

P.S: Today I sold my considerable investment in HP and Xerox. I invested additional capital in E.ON very recently. The government can be happy as it earned roughly 25% of the return. No taxes were evaded.

[Firn]

Krugman seems to have a rather similar take on part how the levy was shaped up. But he does a neat summary of what seems to be 'The Sum of All FUBAR':

Cyprus: The Sum of All FUBAR

At this point the Cyprus situation is pretty clear — and clarity does not bring reassurance. In fact, it looks as if Cyprus has managed to combine in one place everything that has gone wrong elsewhere.

1. Runaway banking. Cyprus has a huge banking system — assets around 8 times GDP — based on a business model of attracting offshore money with high rates and good opportunities for tax avoidance/evasion.

I’ve done some asking around, and cleared up something that was puzzling me. Officially, only about 40 percent of the deposits in Cypriot banks are from nonresidents, which would imply resident deposits of almost 500 percent of GDP, which is crazy. But the answer is that I do not think that word “resident” means what you think it means. Some of the money is from wealthy expats living in Cyprus; much of it is from rich people who have resident status without, you know, actually living there. So we should think of Cypriot deposits as mainly coming from non-Cypriots, attracted by that business model.

And the business model only works until there’s a big loss somewhere; since Cypriot banks were investing in Greece and in their own domestic real estate bubble, doom was inevitable. Which brings me to:

2. Big domestic real estate bubble, Spain or Ireland-sized. Not yet fully deflated, which means lots more losses to come. And the combination of the real estate bubble and the income from dodgy banking also led to:

3. Massive overvaluation, with Cypriot prices and costs having risen much more than in the rest of the euro area. In 2008 the current account deficit was more than 15 percent of GDP!

What can be done? First off, Cypriot banks cannot honor their debts, which unfortunately overwhelmingly take the form of deposits. So a default on deposits is inevitable.

As I now understand it, the initial screwup was a joint error of the Europeans and the Cypriots. Europe didn’t want an explicit bank resolution, which would among other things have given clear seniority to small insured deposits; instead, it wanted this essentially fictitious tax scheme. Meanwhile, the Cypriot government still has the illusion that its banking model can survive, and wanted to limit the hit to the big overseas depositors. Hence the debacle of the small-deposit tax.

In the end this probably comes, in some version, to what it should have been from the start — a big haircut on deposits over 100,000.

But even then the situation is by no means under control. There’s still a real estate bubble to implode, there’s still a huge problem of competitiveness (made worse because one major export industry, banking, has just gone to meet its maker), and the bailout will leave Cyprus with Greek-level sovereign debt.

So then what? As a number of people have pointed out, Cyprus is arguably better positioned than Iceland to do an Iceland, because devaluing a reintroduced Cypriot currency could bring in a lot of tourism. But will the Cypriots — who haven’t even reconciled themselves to the end of their round-tripping business — be willing to go there?

Truly awesome stuff

Number 1: The sheer amount of 'foreign' resident accounts has only partly been covered by the media. The 40% number does of course greatly underestimated the foreign, partly dirty money parked in Cyprus.

Number 2: I did not follow the housing sector there but it is quite likely that a huge financial boom, with huge inflows and lots of new residents in search of a nice house with a proper washing machine did greatly inflate the prices. I will take his word on that.

Number 3: The perfect fusion, the labor was getting payed better and better, everybody was buying and happy, things were going well almost too well to be good and now it seems they were.

Cyprus must act or it might wake up next week with just the beaches remaining*.

The excellent Guardian coverage shows the all too understandable reactions, ATM by ATM.



*'In Cyprus they have only a financial sector and beaches, now that the financial sector is heading for closure nothing but the beaches will remain'
The Swedish Finance Minister, Mr. Borg.