Cyprus: What Were They Thinking? and some other notes

17 Mar

some supplementary thoughts at the end of a tumultuous weekend.

After a surprisingly long gap, the verdicts from the Investment Bank research departments are dripping in. In short if you can sell euros at Friday’s close you probably should (you can’t – pre-pre-market at 6pm London or 7am Auckland is about a percent off) but the tone is one of wariness rather than panic. The absence of Street research interest probably tells a bigger story than what they actually say. Only Barclays bothered with the Sunday conference call, but we’ll probably get more chances to dial in and be told that the research houses don’t really know what’s going on. We can also enjoy the spectacle of people who right now couldn’t name him interpret the importance of the intervention of Archbishop Chrysostomos. Not for the first time, Twitter was ahead of expensive analysts in concern about deposit haircuts.

Thoughts:

  • This is not going quite as smoothly as planned. The Cypriot parliamentary vote has been postponed and a Bank Holiday announced for Tuesday (following the usual one tomorrow). Basically inconceivable that the levy will be revoked, but there may be some noise around finally getting it through. A la TARP or EU referendum, the question will be asked until an acceptable answer is received.
  • The central mystery boils down to “WHAT THE HELL WERE THEY THINKING?”. Haircutting Taxing small depositors doesn’t only violate the principle of social equity, it hurts a lot of people and creates political and logistical difficulties without playing a central part in raising the cash.
    Some metrics around deposit distribution: poor people have very little cash. I haven’t managed to track down statistics on Cypriot deposits (if they exist) but: in the UK 2% of depositors account for 49% of deposits. The median savings of the bottom half by income of the population is £400. Cyprus is an only marginally more equal society than the UK (Gini of 0.3 vs UK 0.33), a somewhat poorer one, so it doesn’t seem unlikely that a floor of say EUR50,000 would massively reduce the number of people captured but not hugely impact the amount of deposits. Update: can’t find the original source, but Table B here makes point even better.
  • In terms of risk, my own best guess is that this increases the risk of wider European bank runs from vanishing to miniscule. That risk is all the bigger because more depositors are drawn into the net. But Cyprus clearly is different, with bank assets 8x GDP and foriegn deposits of dubious origins alone over 100% of GDP. At 0.2% of the Eurozone economy it can get a “take it or leave it” ultimatum.Spain or Italy won’t.
  • In this context it may be worth bearing in mind the German view: “Take it or leave it” is still a choice. ‘Don’t need a European bailout in a German election year’ is sound advice, and – small savers aside – this plan has a lot to commend it, with the burden of debt relief for once falling on creditors (unlike Ireland) – newsflash: when you deposit money in a bank you’re making a loan) – being clearly sustainable in debt:GDP terms (unlike Greece).
  • Probably of more lasting importance is the latest bout of rule-changing by the authorities. Debt unwindings are generally well-defined in law. First equity, then sub debt, then deposits and senior bonds together, and all treated equally. Most of these principles have been tweaked over the last few years, but the tweaks are getting steadily more aggressive. The ECB, holders of Athens-law and foreign law Greek debt all got different treatment; the Dutch didn’t restructure SNS Reaal paper, they confiscated it; the Irish banned lawsuits against the ultimate wind-down of Anglo Irish. This is scratching the surface compared with the rule-changes of the past but it’s getting steadily more creative.The referee has gone from being quasi-neutral arbiter, to pulling off his black shirt to reveal a Manchester United one underneath and awarding himself a series of penalties. While there’s clearly no point in market participants playing the shocked blushing virgin in the face of a situation where the consequences of following the legally-logical steps are socially unacceptable, the uncertainty generated creates costs too.

It’s going to be an interesting week. I think it’s unlikely to be a traumatic one, but I’d feel more comfortable if there weren’t quite so many journalists gagging for a bank run.

Update: journalists or Nobel prize winners

Update: Thanks Joe, but was really just pulling chains on the sell-side. Some phenomenally smart people there, shame sell-side social media policies so short-sighted

24 Responses to “Cyprus: What Were They Thinking? and some other notes”

  1. Me March 18, 2013 at 1:30 am #

    The euro is dead. No one is leaving their money inside, to be confiscated at will.

  2. crimsonbey March 18, 2013 at 5:27 am #

    Scapegoating foreign deposits as dubious and creating a divide and conquer mentality is absurd. Were there legitimate Russian capital in Cyprus using it as safety of working capital, certainly. Were there lots of Uk expats living from military bases there, Yep. What makes them being robbed better than Cypriots? foreigners so its OK?

    apparently property rights don’t enter the equation. Social equity bs, when everyone is robbed everyone knows what went wrong the gov’t and bankers were without repurcussions that is it. End of story.

  3. NK March 18, 2013 at 9:59 am #

    > but I’d feel more comfortable if there weren’t quite so many journalists gagging for a bank run.

    I am on the other side. Why not put an end to this circus?
    Unfortunatley I can’t lead by example as I haven’t saved in fiat since 2009.

  4. Alanson March 18, 2013 at 1:44 pm #

    Basic flaw in the Euro: national sovereigns are made responsible for their nations’ bank deposit liabilities but lender-of-last-resort is an international entity (European Central Bank). In the Eurozone, banks have been internationalized with no corresponding extension of the ECB regulatory process. The precedent of Ireland was a mistake. The Irish government should have been willing to let its banks fail – along with their German creditors. EU and ECB would have been forced to step in as a proper lender of last resort. Central bank intervention to maintain banking system reserves during a bank run is never inflationary and intervention must occur even (especially) in cases of bank insolvency. Didn’t the failure of the U.S. banking system illustrate this on a grand scale? Or, closer to home, but outside the Eurozone, the successful Icelandic repudiation of national responsibility for privately incurred international deposit liabilities? Contrary to the German hardliners’ instincts, this is a monetary issue not a moral issue. Ever so grudgingly, the Germans are accepting this point of view because it shows the way to the only possible resolution of the Euro’s fundamental problem. The Cyprus “bail in” will be the exception that proves the rule. But it’s funny how in Cyprus they’ve gotten it absolutely backward thus far by protecting the owners of bank capital, but giving a haircut to the depositors.

  5. Ari March 18, 2013 at 2:51 pm #

    When decisions don’t make any economic/financial sense then politics are involved.

    Read this for another angle on the Cyprus decision to tax bank deposits to raise a mere 5 billion euros at the risk of creating a major bank run not only Cyprus but at all the other euro countries.

    The risks involved in taking such a move significantly out way the benefits. If the Russians have over 20 billion in Cyprus banks then their short term reaction to such a deposit haircut will be to

    transfer their funds out of Cyprus to other bank safe heavens. Then the ECB will be forced to provide liquidity to Cyprus banks and bailout costs will skyrocket to 60 billion.

    This then will give Germany the opportunity to take over and control politically and financially another country in the east Mediterranean region, Greece and Cyprus, and therefore acquire and

    control with the help of Turkey all of Greece’s and Cyprus’s oil/gas reserves and at the same time control Israel in the process. This German strategy also effectively creates a schism in Cyprus-

    Russian relationships and in the long term effectively keeps Russian interests from investing in the oil/gas industries of Greece, Cyprus and Israel. So when decisions don’t make any

    economic/financial sense one has to look at potential reasons why decisions were made.

    Sincerely,

    Ari

    atsipour@ChicagoBooth.edu

    Turkish Vote May Decide German Elections
    From the desk of Thomas Landen on Fri, 2009-09-25 08:47
    It has become a pattern in several European countries: The Muslim electorate tips the balance towards the Left. In Germany, too, Turkish
    immigrants are likely to play the pivotal role in the general elections next Sunday. All the parties are hoping to attract their votes.
    The regional elections in a number of German states in late August did not go as expected for Chancellor Angela Merkel. Her Christian-
    Democrats had hoped for clear victories over their Socialist coalition partner. This would allow the Christian-Democrats to swap the Social-
    Democrat SPD of the uncharismatic Frank-Walter Steinmeier, Germany’s Minister of Foreign Affairs, for the Liberal FDP after the elections.
    Unfortunately for Mrs. Merkel, the Left did well in the state elections, so that next Sunday’s general elections have suddenly become a very close
    race. If the Christian-Democrats of CDU/CSU and the FDP are able to form a majority in Parliament, they will undoubtedly do so. Four years
    ago, Merkel already had such a center-right coalition in mind, but the 2005 election forced her into a centrist, so-called “Grand Coalition” with
    the SPD. If, next Sunday, Merkel’s party and the Liberals again fail to win 50% of the seats in the Bundestag, Germany is in for difficult and
    frustrating coalition talks in the following weeks.
    As in many countries, the German electoral system is complicated. Being Germany, the system is extraordinarily complicated. The country has
    an electoral threshold of 5%. However, in every district only half of the seats are directly elected, the other half of the seats are proportionally
    assigned to the parties. Suppose that a district has 60 seats. Party A, with 33% of the votes, wins 15 of the 30 directly elected seats – which is
    possible when the other votes go to small parties unable to obtain 5%. The other 30 seats are proportionally assigned. Having won 33% of the
    votes, party A is entitled to 33 % of the 60 seats in the district, hence to 20 seats. Since it already won 15 seats in the direct elections, it gets an
    additional 5 seats.
    Suppose, however, that party A with 33% won 25 of the 30 district seats – which, again, is possible when the other votes go to a lot of small
    parties that failed to obtain 5%. Then the party has won 25 seats where it is theoretically entitled to only 20 mandates. In this case, the party is
    allowed to keep its additional seats. These mandates are called “overhang seats” (Uberhangmandate).
    Since it is unknown beforehand how many “overhang seats” there will be, it is unknown before the elections what the number of seats in the
    Bundestag will be. This varies in every legislature. In the present parliament, there were 16 “overhang seats” – nine for the SPD and seven for
    the CDU/CSU. In the final analysis, in a closely fought election, the Uberhangmandate can decide who has the majority in parliament.
    If Merkel and the FDP fail to win half the seats in the Bundestag, the only viable government is likely to be a repetition of the current “Grand
    Coalition,” unless Mr. Steinmeier succeeds in becoming Chancellor by putting together a coalition with a combination of the FDP, the Greens
    and the Left Party (Die Linke). The latter is the party of the former East-German Communists and the West-German far-Left. Die Linke did very
    well in the state elections, both in the East and in the West. In Thuringia it obtained 27.6% of the vote, coming second to the CDU with 31%; in
    the Western state of Saarland it got 21.3%.
    In tightly fought elections, every vote becomes important. The Turkish newspaper Hürriyet remarked earlier this week that the migrant voters
    have become “the focal point of the German elections.” Hürriyet is particularly interested because Turks form the largest group of immigrants in
    Germany. Next Sunday, almost 800,000 German voters of Turkish origin are expected to vote. This has not only forced all the major parties to
    put Turkish candidates on their lists, but has also led them to outcompete each other in catering to their demands. The parties of the Left,
    however, go further in this respect than those of the Right.
    “The dark-haired voters [sic] will show themselves. The Turkish community is the majority of the up to 5 million migrants in Germany [which
    has a total of 82 million inhabitants], and it is a great chance to voice their basic demands,” says Safter Çınar, the spokesman of the Turkish
    Association in Berlin. Çınar is very critical, however, of Chancellor Merkel. “The CDU firmly rejects our main demands, such as double
    citizenship and local election rights for long-term residents. They are also not supportive of mother-tongue education rights.”
    The parties on the Left enjoy large Turkish support. “Socialists grow stronger as migrants gain ground,” says Bekir Alboğa of the Turkish
    Islamic Union DITIB in Cologne. DITIB is the Cologne branch of Diyanet, the department of religious affairs of Turkey, which reports directly
    to the Turkish Prime Minister, Tayyip Erdoğan. In February 2008, during a visit to Cologne, Mr. Erdoğan denounced assimilation of migrants as
    a “crime against humanity” and exhorted Turkish immigrants not to become Germans.
    Lale Akgün, an SPD candidate in Cologne, told Hürriyet: “Merkel has introduced regulations to make family reunion difficult. […] Meetings
    took place to deceive us. She will go further if she wins.” Aydan Özoğuz, an SPD candidate in Hamburg, says: “The SPD, Greens and even
    liberal Free Democrats have been paying more attention to migrant-related issues. We are rethinking double citizenship, for example. We are also
    defending that long-time residents can vote in the local elections even if they are not citizens.”
    If the SPD can prevent Chancellor Merkel from forming a center-right coalition with the Free Democrats next Sunday, it is likely that a political
    price will have to be paid to the immigrants who made this possible. Earlier, voters of Muslim origin also tipped the electoral balance in major
    European cities such as Antwerp and Rotterdam. The beneficiaries of this have always been the Socialists, who are now running these cities,

  6. legaltrex2013 March 19, 2013 at 1:14 am #

    Reblogged this on legaltrexblog.

Trackbacks/Pingbacks

  1. Cyprus deposit tax reading [updated] | Macro Exposure - March 17, 2013

    [...] Pawel Morski: Cyprus: What Were They Thinking? and some other notes. [...]

  2. Twitter Just Crushed Wall Street After The Cyprus Bailout | Business Insider Australia - March 17, 2013

    [...] The man everyone is reading is the pseudonymous twitterer @pawelmorski, who has written two must-read posts already on the Cypriot bailout. The first is here, and the second is here. [...]

  3. Twitter Just Crushed Wall Street After The Cyprus Bailout - Filmspot.lv - March 17, 2013

    [...] The man everyone is reading is the pseudonymous twitterer @pawelmorski, who has written two must-read posts already on the Cypriot bailout. The first is here, and the second is here. [...]

  4. Twitter Just Crushed Wall Street After The Cyprus Bailout | My Blog - March 17, 2013

    [...] The man everyone is reading is the pseudonymous twitterer @pawelmorski, who has written two must-read posts already on the Cypriot bailout. The first is here, and the second is here. [...]

  5. Twitter Just Crushed Wall Street After The Cyprus Bailout | This Is Jah Smith DOT com - March 17, 2013

    [...] The man everyone is reading is the pseudonymous twitterer @pawelmorski, who has written two must-read posts already on the Cypriot bailout. The first is here, and the second is here. [...]

  6. Twitter Just Crushed Wall Street After The Cyprus BailoutDon't Call Me Tony | Don't Call Me Tony - March 17, 2013

    [...] The man everyone is reading is the pseudonymous twitterer @pawelmorski, who has written two must-read posts already on the Cypriot bailout. The first is here, and the second is here. [...]

  7. Twitter Just Crushed Wall Street After The Cyprus Bailout - Business Insider - TWITTEROO.NET - March 17, 2013

    [...] The man everyone is reading is the pseudonymous twitterer @pawelmorski, who has written two must-read posts already on the Cypriot bailout. The first is here, and the second is here. [...]

  8. Assorted links - March 17, 2013

    [...] 4. More from Pawel Morski on Cyprus. [...]

  9. Twitter Just Crushed Wall Street After The Cyprus Bailout | Elexonic.com | Breaking News - March 17, 2013

    [...] The man everyone is reading is the pseudonymous twitterer @pawelmorski, who has written two must-read posts already on the Cypriot bailout. The first is here, and the second is here. [...]

  10. F*ckin’ Europe. Again. | The Reformed Broker - March 18, 2013

    [...] The Financial Blogger Mafia is not to be taken lightly when news breaks over the weekend – props to Pawel Morski, Felix Salmon, Joe Weisenthal, Frances Coppola and anyone else I [...]

  11. what-happened-in-cyprus-yesterday - March 18, 2013

    [...]  http://pawelmorski.wordpress.com/2013/03/17/cyprus-what-were-they-thinking-and-some-other-notes/#c… [...]

  12. Twitter Just Crushed Wall Street After The Cyprus Bailout | Bamboo Innovator - March 18, 2013

    [...] The man everyone is reading is the pseudonymous twitterer @pawelmorski, who has written two must-read posts already on the Cypriot bailout. The first is here, and the second is here. [...]

  13. El (potencial) desastre de Chipre | Politikon - March 18, 2013

    [...] dinero se va a paseo. El impuesto es, de forma inexplicable, totalmente indiscriminado; limitar la tasa a depósitos por encima de 50.000 euros hubiera sido mucho más justo. Pero hablamos de un [...]

  14. A collection of info and blogs/articles on the Cyprus bailout – updated* – and a Monday morning update** at Sigrún Davíðsdóttir's Icelog - March 18, 2013

    [...] Pavelmorski writes another blog – after his first one found below – along these lines, what were they thinking. [...]

  15. Cyprus | Open Thinking - March 18, 2013

    [...] on 18/03/2013 by admin Plenty of good commentary out here. See here and here especially. Cyprus’ EU partners are saying: “Not me — we didn’t insist on [...]

  16. Chipre | Maven Trap - March 18, 2013

    [...] Y otra más de Pawel: “Cyprus: What Were They Thinking? and some other notes“. [...]

  17. Cyprus banks shut till Thursday as government scrambles to amend levy - March 18, 2013

    [...] Sunday night: Cyprus: What Were They Thinking? and some other notes [...]

  18. Cyprus: What Were They Thinking? and some other notes | legaltrexblog - March 19, 2013

    [...] Cyprus: What Were They Thinking? and some other notes. [...]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Flip Chart Fairy Tales

Business Bullshit, Corporate Crap and other stuff from the World of Work

The Prodigal Greek

The Greek crisis through a different prism

Classe éco

Un site utilisant Plateforme de blogs de francetv info

Dealbreaker

Wall Street Insider – Financial News, Headlines, Commentary and Analysis - Hedge Funds, Private Equity, Banks

Follow

Get every new post delivered to your Inbox.

Join 213 other followers

%d bloggers like this: